UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

[ ]        REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
           SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                                       OR

[X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
           EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED
           DECEMBER 31, 2002

                                       OR

[ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
           EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

             FOR THE TRANSITION PERIOD FROM __________ TO __________


                          COMMISSION FILE NUMBER 1-9274


                         CARMEL CONTAINER SYSTEMS, LTD.
                         ------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                                     ISRAEL
                                     ------
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)


           2 CHALAMISH STREET, CAESAREA INDUSTRIAL PARK 38900, 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                                               NONE


SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                  ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
                  --------------------------------------------
                                (TITLE OF CLASS)

          SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT
                          TO SECTION 15(D) OF THE ACT:

                                      NONE
                                      ----
                                (TITLE OF CLASS)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
             2,400,187 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE


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.
                                                      [X] Yes     [ ] No

Indicate by check mark which financial statement item the registrant has elected
to follow.
                                               [ ] Item 17   [X] Item 18

<PAGE>
                                  INTRODUCTION

           We design and manufacture paper-based packaging and related products.
We manufacture a varied line of products, including corrugated shipping
containers, moisture-resistant packaging, consumer packaging, triple-wall
packaging, and wooden pallets and boxes. We were incorporated in 1983 under the
laws of the State of Israel. In 1986, we completed the initial public offering
of our ordinary shares, which are traded on the American Stock Exchange under
the symbol "KML."

           Except for the historical information contained in this annual
report, the statements contained in this annual report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 with respect to our business, financial condition and results of
operations. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including all
the risks discussed in "Item 3 -- Key Information -- Risk Factors" and elsewhere
in this annual report.

           We urge you to consider that statements which use the terms
"believe," "do not believe," "expect," "plan," "intend," "estimate,"
"anticipate" and similar expressions are intended to identify forward-looking
statements. These statements reflect our current views with respect to future
events and are based on assumptions and are subject to risks and uncertainties.
Except as required by applicable law, including the securities laws of the
United States, we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

           Our consolidated financial statements appearing in this annual report
are prepared in New Israeli Shekels, or NIS, and in accordance with accounting
principles generally accepted in Israel, or Israeli GAAP. All references in this
annual report to dollars or "$" are to U.S. dollars. In accordance with Israeli
GAAP, all financial information presented in this annual report in NIS is
presented in adjusted NIS, together with a convenience translation of the
adjusted amounts to dollars. The representative exchange rate between the NIS
and the dollar, as published by the Bank of Israel for December 31, 2002, was
NIS 4.737 per $1.00.

           As used in this annual report, the terms "we," "us," "our" and "our
company" mean Carmel Container Systems Ltd. and its subsidiaries, unless
otherwise indicated.




                                       i
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                         PAGE
<S>                                                                                                                     <C>
PART I               .....................................................................................................1

           ITEM 1.             IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS......................................1

           ITEM 2.             OFFER STATISTICS AND EXPECTED TIMETABLE....................................................1

           ITEM 3.             KEY INFORMATION............................................................................1

                     A.        SELECTED FINANCIAL DATA....................................................................1

                     B.        CAPITALIZATION AND INDEBTEDNESS............................................................3

                     C.        REASONS FOR THE OFFER AND USE OF PROCEEDS..................................................3

                     D.        RISK FACTORS...............................................................................3

           ITEM 4.             INFORMATION ON OUR COMPANY.................................................................5

                     A.        HISTORY AND DEVELOPMENT OF OUR COMPANY.....................................................5

                     B.        BUSINESS OVERVIEW..........................................................................5

                     C.        ORGANIZATIONAL STRUCTURE..................................................................11

                     D.        PROPERTY, PLANTS AND EQUIPMENT............................................................11

           ITEM 5.             OPERATING AND FINANCIAL REVIEW AND PROSPECTS..............................................13

                     A.        OPERATING RESULTS.........................................................................13

                     B.        LIQUIDITY AND CAPITAL RESOURCES...........................................................18

                     C.        RESEARCH AND DEVELOPMENT..................................................................21

                     D.        TREND INFORMATION.........................................................................21

           ITEM 6.             DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................................................21

                     A.        DIRECTORS AND SENIOR MANAGEMENT...........................................................21

                     B.        COMPENSATION..............................................................................26

                     C.        BOARD PRACTICES...........................................................................26

                     D.        EMPLOYEES.................................................................................28

                     E.        SHARE OWNERSHIP...........................................................................29

           ITEM 7.             MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.........................................30

                     A.        MAJOR SHAREHOLDERS........................................................................30

                     B.        RELATED PARTY TRANSACTIONS................................................................31



                                       ii
<PAGE>
                     C.        INTERESTS OF EXPERTS AND COUNSEL..........................................................32

           ITEM 8.             FINANCIAL INFORMATION.....................................................................32

                     A.        CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION...................................32

                     B.        SIGNIFICANT CHANGES.......................................................................33

           ITEM 9.             THE OFFER AND LISTING.....................................................................34

                     A.        OFFER AND LISTING DETAILS.................................................................34

                     B.        PLAN OF DISTRIBUTION......................................................................35

                     C.        MARKETS...................................................................................35

                     D.        SELLING SHAREHOLDERS......................................................................35

                     E.        DILUTION..................................................................................35

                     F.        EXPENSES OF THE ISSUE.....................................................................35

           ITEM 10.            ADDITIONAL INFORMATION....................................................................35

                     A.        SHARE CAPITAL.............................................................................35

                     B.        MEMORANDUM AND ARTICLES OF ASSOCIATION....................................................35

                     C.        MATERIAL CONTRACTS........................................................................38

                     D.        EXCHANGE CONTROLS.........................................................................39

                     E.        TAXATION..................................................................................39

                     F.        DIVIDENDS AND PAYING AGENTS...............................................................49

                     G.        STATEMENTS BY EXPERTS.....................................................................49

                     H.        DOCUMENTS ON DISPLAY......................................................................49

                     I.        SUBSIDIARY INFORMATION....................................................................50

           ITEM 11.            QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................50

           ITEM 12.            DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES....................................51

PART II              ....................................................................................................51

           ITEM 13.            DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...........................................51

           ITEM 14.            MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS..............51



                                      iii
<PAGE>
           ITEM 15.            CONTROLS AND PROCEDURES...................................................................51

           ITEM 16.            [RESERVED]................................................................................51

PART III             ....................................................................................................52

           ITEM 17.            FINANCIAL STATEMENTS......................................................................52

           ITEM 18.            FINANCIAL STATEMENTS......................................................................52

           ITEM 19.            EXHIBITS..................................................................................52

</TABLE>

























                                       iv
<PAGE>
                                     PART I

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

           Not applicable.

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

           Not applicable.

ITEM 3.    KEY INFORMATION

A.         SELECTED FINANCIAL DATA.

           The selected consolidated statement of income data set forth below
with respect to the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and
the consolidated balance sheet data as of December 31, 1998, 1999, 2000, 2001
and 2002 have been derived from our audited consolidated financial statements
that have been prepared in accordance with Israeli GAAP, which differ in certain
respects from accounting principles generally accepted in the United States, or
U.S. GAAP. No reconciliation between Israeli GAAP and U.S. GAAP is necessary
with regard to our Consolidated Financial Statements as there are no material
differences between the quantitative numbers prepared in compliance with Israeli
GAAP and U.S. GAAP. See note 21 to consolidated financial statements. The
selected consolidated financial data set forth below should be read in
conjunction with "Item 5. Operating and Financial Review and Prospectus"
contained herein, the consolidated financial statements which have been audited
by Kost, Forer & Gabbay, a member of Ernst & Young Global, independent auditors,
and the notes to those statements included elsewhere in this document.

                      Selected Consolidated Financial Data

                                  Adjusted NIS(1)
                      (In thousands, except per share data)
                             Year Ended December 31,

<TABLE>
<CAPTION>
                                                                                ($U.S.)
                                              -------------------------------------------------------------------------
                                               1998         1999         2000          2001         2002         2002
                                               ----         ----         ----          ----         ----         ----
<S>                                          <C>          <C>          <C>          <C>          <C>           <C>
INCOME STATEMENT DATA:
Revenues from sales, net....................  432,606      426,751      412,577       356,722      344,086       72,637
Cost of sales...............................  361,553      353,086      357,399       322,375      317,187       66,960
Gross profit................................   71,053       73,665       55,178        34,347       26,899        5,677
Selling, general and administrative expenses   41,240       41,188       46,328        38,248       35,105        7,411



---------------------------------------
(1) We maintain our accounting records in nominal NIS. All amounts are presented
in adjusted NIS, which have a constant purchasing power. The purchasing power of
adjusted NIS reflects the average price level in December 2002, according to the
Israeli Consumer Price Index, or CPI, published on January 15, 2003. See note 2
(b) to consolidated financial statements.

<PAGE>
                                                                                ($U.S.)
                                              -------------------------------------------------------------------------
                                               1998         1999         2000          2001         2002         2002
                                               ----         ----         ----          ----         ----         ----

Operating income (loss).....................   29,814       32,477        8,850        (3,901)      (8,206)      (1,734)
Financial expenses, net.....................   19,195       11,857        8,662        11,069        6,193        1,307
Other income (expenses), net................      154           48          750           155       (1,177)        (248)
Income (loss) before taxes on income........   10,773       20,667          938       (14,815)     (15,576)      (3,289)
Taxes on income (tax benefit)...............    4,121        7,460         (643)       (5,673)      (6,039)      (1,275)
Minority interest in losses (earnings) of a
subsidiary..................................      730         (234)        (555)          236          822          174
Net income (loss) for the year..............    7,382       12,973        1,026        (8,906)      (8,715)      (1,840)
Basic earnings (loss) per share.............    2.94         5.17         0.41          (3.71)       (3.63)       (0.76)
Weighted average number of shares
outstanding.................................    2,509        2,509        2,491         2,400        2,400        2,400

BALANCE SHEET DATA:
Working capital.............................   19,072       51,169       68,941        58,991       42,593        8,992
Total assets................................  394,983      396,820      367,937       322,307      306,556       64,715
Long-term debt, including current maturities   96,088       95,137       92,749        86,268       68,930       14,551
Shareholders' equity........................  123,171      136,252      133,244       124,338      115,623       24,408

</TABLE>

           The following table sets forth, for the periods and dates indicated,
certain information with respect to the exchange rate between the NIS and the
dollar, based on the exchange rate published by the Bank of Israel for the
periods indicated:

<TABLE>
<CAPTION>
                                                           NIS per Dollar
                              --------------------------------------------------------------------------
               Calendar
                 Year         Average(1)              High                  Low              December 31
                 ----         ----------              ----                  ---              -----------
<S>                          <C>                  <C>                   <C>                 <C>
                 1998           3.7900               4.3670               3.5480               4.1600
                 1999           4.1340               4.2760               4.0340               4.1530
                 2000           4.0745               4.1980               3.9670               4.0410
                 2001           4.2050               4.4160               4.0410               4.4160
                 2002           4.7490               4.9940               4.4370               4.7370

</TABLE>

----------------------------------------------------------------
(1) Based on the average exchange rate between the NIS and the dollar each month
during the period.


           The following table sets forth, for the periods indicated, the high
and low exchange rates for NIS to dollars. These exchange rates are high and low
exchange rates, as quoted by the Bank of Israel, for each month during the
applicable period.


                                       2
<PAGE>

                                           NIS PER DOLLAR
                                -----------------------------------
MONTH/YEAR                       HIGH                         LOW
----------                       ----                         ---

December 2002                   4.7910                       4.6320
January 2003                    4.8980                       4.7690
February 2003                   4.9240                       4.8370
March 2003                      4.8580                       4.7100
April 2003                      4.6870                       4.5640
May 2003                        4.5770                       4.3730


B.         CAPITALIZATION AND INDEBTEDNESS.

           Not applicable.

C.         REASONS FOR THE OFFER AND USE OF PROCEEDS.

           Not applicable.

D.         RISK FACTORS.

           OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE
SERIOUSLY HARMED DUE TO ANY OF THE FOLLOWING RISKS, AMONG OTHERS. IF WE DO NOT
SUCCESSFULLY ADDRESS THE RISKS TO WHICH WE ARE SUBJECT, WE COULD EXPERIENCE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION AND OUR SHARE PRICE MAY DECLINE. WE CANNOT ASSURE YOU THAT WE WILL
SUCCESSFULLY ADDRESS ANY OF THESE RISKS.

           WE INCURRED OPERATING AND NET LOSS IN THE YEAR ENDED DECEMBER 31,
2002. WE MAY NOT BE ABLE TO RETURN TO PROFITABLY IN THE NEAR FUTURE.

           We reported net loss of NIS 8.7 million ($1.8 million) for the year
2002. If our volume of sales and the prices at which we sell our products do not
increase, or if our expenses increase at a greater pace than our revenues, we
will not return to profitability. Even if we return to profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis.

           OUR MARKETS ARE HIGHLY COMPETITIVE; WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY.

           We compete directly with a number of manufacturers of paper-based
packaging products. Increased competition, direct or indirect, have adversely
affected, and could adversely affect, our revenues and profitability through
pricing pressure, loss of market share and other factors. We cannot assure that
we will be able to compete successfully against existing or new competitors, as
the market for our products evolves. Moreover, our existing and prospective
competitors may have established, or may in the future establish, relationships
with our existing and potential customers, which could have a material adverse


                                       3
<PAGE>
effect on our ability to compete. In addition, we cannot assure that our
customers will not seek to manufacture our products through alternative sources
and thereby eliminate the need to purchase our products. See "Item 4.
Information on the Company - B. Business Overview - Competition."

           WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

           The principal raw materials used in the manufacture of our products,
kraftliner paper and recycled paper, are purchased in highly competitive, price
sensitive markets. These raw materials have historically exhibited price and
demand cycles. The supply and price of kraftliner paper in particular is
dependent upon a variety of factors over which we have no control, including
environmental and conservation regulations, natural disasters, such as forest
fires and hurricanes, and weather.

           WE MAY BE ADVERSELY AFFECTED IF THE RATE OF DEVALUATION OF THE NIS
AGAINST THE DOLLAR EXCEEDS THE RATE OF INFLATION IN ISRAEL.

           While payments for our products are made in NIS, we incur a
significant portion of our expenses in dollars. As a result, we are exposed to
the risk that the rate of devaluation of the NIS in relation to the dollar will
exceed the rate of inflation in Israel. In the years 1998, 2001, 2002 and in the
three month period ending March 31, 2003, the rate of devaluation of the NIS
against the dollar exceeded the rate of inflation in Israel (contrary to the
circumstances in the years 1999 and 2000). We cannot predict any future trends.
See "Item 5. Operating and Financial Review and Prospects - Impact of Inflation
and Currency Fluctuations."

           WE ARE SUBJECT TO VARIOUS RISKS RELATING TO OPERATIONS IN ISRAEL.

           We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are directly
influenced by the political, economic and military conditions in Israel. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors, and the continued state
of hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since October 2000, there has been a significant escalation
in violence between Israel and the Palestinians. Israel has experienced
terrorist incidents within its borders, including in the West Bank and Gaza
Strip. As a result, as of June 2003, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. We could be adversely affected by hostilities involving
Israel, the interruption or curtailment of trade between Israel and its trading
partners, or a continuous downturn in the economic or financial condition of
Israel. In addition, several countries continue to restrict business with Israel
and with companies having operations in Israel. We could be negatively affected
by adverse developments in the peace process, including the recent violence, or
by restrictive laws or practices directed towards Israel or Israeli exporters.


                                       4
<PAGE>
           All male adult citizens and permanent residents of Israel under the
age of 48 are, unless exempt, obligated to perform up to 39 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
officers and employees are currently obligated to perform annual reserve duty.
No assessment can be made as to the full impact of such requirements on our
workforce or business if conditions in Israel should change, and no prediction
can be made as to the effect of any expansion or reduction of such military
obligations on us. See "Item 4. Information on the Company - B. Business
Overview - Conditions in Israel."

ITEM 4.    INFORMATION ON OUR COMPANY

A.         HISTORY AND DEVELOPMENT OF OUR COMPANY.

           In January 1983, Carmel-Plaro Ltd., a private holding company, was
organized under the laws of the State of Israel following the merger of Carmel
Container Ltd. and Plaro Industries Ltd. In September, 1986, Carmel-Plaro Ltd.
merged with its two wholly-owned subsidiaries to form Carmel Container Systems,
Ltd. In October 1986, we completed an initial public offering of our ordinary
shares, par value NIS 1.0 per share, which are traded on the American Stock
Exchange under the symbol "KML."

           Our registered office in Israel is located at 2 Chalamish Street,
Caesarea Industrial Park 38900, Israel and our telephone number is
972-4-623-9350.

B.         BUSINESS OVERVIEW.

GENERAL

           We are a leading Israeli designer and manufacturer of paper-based
packaging and related products. We manufacture a varied line of products,
including corrugated shipping containers, moisture-resistant packaging, consumer
packaging, triple-wall packaging and wooden pallets, and boxes. Our subsidiaries
are: C.D. Packaging Systems Ltd., or C.D., a leading manufacturer of corrugated
board-based and other consumer packaging in Israel, and Tri-Wall Containers
(Israel) Limited, or Tri-Wall, a manufacturer of heavy duty and bulk packaging
made of triple-wall corrugated board and wooden pallets, and boxes for
agricultural exports and other uses. In December 1995, C.D., together with Kappa
Packaging International BV, a Dutch company, or KPI, formed Solid Packaging
Board Ltd. which markets products manufactured by C.D., using the expertise and
materials supplied by KPI.

           Most of our products are made from corrugated board that we produce.
We manufacture additional products made from duplex carton and wood. See "Item
4. Information on the Company - B. Business Overview - Sources of Raw
Materials." In 2002, we sold approximately 73,800 metric tons of paper-based
corrugated packaging, compared to approximately 64,600 metric tons in 2001. One
metric ton equals approximately 2,205 pounds.


                                       5
<PAGE>
           Our products are marketed to a wide variety of customers in Israel
for diverse uses. Our sales to Israeli exporters amounted to approximately 11.7%
and 17.9% of total sales in 2002 and 2001, respectively. The decline in sales to
Israeli exporters in 2002 resulted from the overall decline in citrus exports
from Israel.

SHIPPING CONTAINERS

           We manufacture and market a broad range of shipping containers
utilizing corrugated board that we produce. We operate two plants in Israel: a
plant in Caesarea and a plant in Carmiel. See "Item 4. Information on the
Company - D. Property, Plants and Equipment."

           Corrugated board containers conserve shipping and storage space
because they are delivered knocked-down, unitized and can be adapted to modern
material handling systems. Sales of corrugated board containers in 2002 were NIS
255.9 million ($54.0 million), compared to NIS 258.4 million in 2001. Despite
the increase in quantative sales, revenues from sales of corrugated board and
corrugated board containers in 2002, decreased by 1% as compared to 2001 due to
an increase in competition and a decrease in selling prices.

AUTOMATIC PACKAGING SYSTEMS

           Our modern manufacturing process utilizes fully automated, box-making
machinery that allows the corrugated trays to be created within our customers'
own production facilities or in our regional facilities. The machinery utilized
in this manufacturing process is imported from various manufacturers for our own
use as well as for the use of our customers.

PAPER-BASED CONSUMER PACKAGING

           Through C.D., we manufacture and market folding cartons and
Micro-Fine corrugated board packaging, formerly known as E Flute, for use as
packaging by manufacturers of consumer products. Sales of consumer packaging
products in 2002 amounted to NIS 30.7 million ($6.5 million) (approximately 8.9%
of our consolidated sales), compared to NIS 30.7 million (approximately 8.6% of
our consolidated sales) in 2001.

OUR SUBSIDIARIES

C.D. PACKAGING SYSTEM LTD.

           C.D. is a leading Israeli manufacturer of the Micro-Fine brand of
fine corrugated board, the primary type of corrugated board used in consumer
packaging. C.D. has developed an extensive range of graphics and printing
techniques. Many of its Micro-Fine products are made with pre-printed
litho-laminated sheets. This has enabled C.D. to respond to increased demand for


                                       6
<PAGE>
easy-to-handle, sophisticated, promotional packaging containers, which are used
primarily for the export of consumer goods.

           C.D. was established in 1986 pursuant to a joint venture agreement
between us and American Israeli Paper Mills Ltd., or AIPM, which since August
1992, has been one of our principal shareholders (see "Item 7. Major
Shareholders and Related Party Transactions"). We control 50.1% of C.D. and AIPM
controls the remaining 49.9% of C.D.'s shares. C.D. was established for the
purpose of consolidating our paper-based consumer packaging operations with
those of AIPM. Other than the production of Micro-Fine boards, all of our
paper-based consumer packaging activity is conducted by C.D., which operates a
state-of-the-art facility in Migdal Haemek, Israel.

           Pursuant to the joint venture agreement between us and AIPM, C.D.
must purchase, and we must supply, all of C.D.'s requirements for Micro Fine
board at prices acceptable to both parties, subject to certain limitations. We
continue to sell Micro Fine board to various customers in addition to C.D., and
C.D. purchases raw materials from other suppliers. In 2002, C.D. purchased
approximately 830 metric tons of Micro-Fine board from us for an aggregate sum
of NIS 3.3 million ($0.7 million), compared to 1,000 metric tons of Micro-Fine
board that they purchased from us in 2001 for an aggregate sum of NIS 4.7
million.

           In December 1992, C.D. was granted approved enterprise status,
pursuant to the Israeli Law for the Encouragement of Capital Investments (1959),
or the Investment Law, with respect to its expansion program at its
manufacturing facility. The program related to the acquisition of equipment
utilized in the manufacture of C.D.'s board packaging in an aggregate amount of
approximately $4.4 million, 38% of which was to be funded by a state grant. In
1997, C.D. completed its expansion program following the installation of new
equipment costing approximately $4.3 million, of which approximately $1.7
million was funded by a state grant.

           In December 1999, C.D. submitted the approved enterprise final report
to the Investment Center of the Ministry of Industry and Commerce of Israel, or
the Investment Center. In October 2001, the head of the audit department in the
Investments Center informed C.D. that he may recommend that the Investments
Center cancel the approval that was granted in 1992 because of C.D.'s
non-compliance with the terms and conditions required by the approval. On
December 8, 2002, the Investment Center retroactively cancelled the 1992
approval granting C.D. approved enterprise status. As a result C.D. is required
to refund certain investment grants in the amount of $400,000 which are to be
paid in 36 equal monthly installments commencing August 2002. Further, C.D. has
committed to continue to employ a fixed number of employees, as determined by
the Investment Center, until July 2005.

           In December 1995, C.D. together with KPI formed Solid Packaging Board
Ltd., a company that markets products manufactured by C.D. using the expertise
and materials supplied by KPI. KPI's sales in 2002 totaled approximately NIS 1.3
million ($274,000), compared to sales of NIS 1.6 million in 2001.


                                       7
<PAGE>
TRIPLE-WALL PACKAGING AND WOODEN PALLETS AND BOXES

           Tri-Wall, our wholly-owned subsidiary, is a leading Israeli
manufacturer of heavy-duty and bulk packaging made of triple-wall corrugated
board, and of wooden pallets and boxes for agricultural exports and other uses.
Tri-Wall manufactures triple-wall packaging in its Netanya, Israel plant. The
wooden pallets and boxes are manufactured in Tri-Wall's plant in Netivot,
Israel. Tri-Wall's sales in 2002 were NIS 57.5 million ($12.1 million)
(approximately 16.7% of our consolidated sales), compared to NIS 67.6 million
(approximately 18.9% of our consolidated sales) in 2001. We manufacture the
triple-wall board utilized by Tri-Wall and sell the board to Tri-Wall at current
market rates. In 2002, Tri-Wall purchased 1,720 tons of triple-wall board from
us, at an aggregate sum of NIS 6.8 million ($1.4 million), compared to the 1,950
tons of triple-wall board purchased by Tri-Wall at an aggregate sum of NIS 9.2
million in 2001.

           In May 1991, pursuant to the Investment Law, Tri-Wall was granted
approved enterprise status with respect to an expansion program at its
manufacturing facility in Netivot, Israel. The cost of the program was an
aggregate amount of approximately $550,000. In 1995, Tri-Wall invested
approximately $461,000 and received approximately $175,000 of state grants with
respect to such approved enterprise. In February 1997, Tri-Wall received
approval for an investment of $576,000 to be used for further expansion, of
which 34% ($195,840) is to be funded by the Government of Israel in the form of
grants. As of December 31, 2000, Tri-Wall invested approximately NIS 2.1 million
($474,000) with respect to such approved enterprise, of which NIS 663,000
($150,000) was funded by a state grant. Tri-Wall did not invest with respect to
such approved enterprise in the years ended December 31, 2001 and 2002.

           We provide certain management services and license certain technology
relating to the manufacture of triple-wall corrugated board to Tri-Wall. In
2002, Tri-Wall paid us management fees and royalties amounting to approximately
NIS 2.3 million ($486,000), compared to NIS 2.2 million in 2001.

SALES AND MARKETING

           We sell our shipping containers directly to customers in Israel
principally through the efforts of our management, in-house sales force and
agents. C.D. and Tri-wall market their products directly to customers as well.

           Our products are sold to over 500 customers in Israel. In 2002,
approximately 60 of our customers accounted for approximately 77% of our net
sales, in the aggregate. In 2002, we sold approximately 73,800 metric tons of
paper-based corrugated packaging, compared to approximately 64,600 metric tons
in 2001, an increase of 14.3% as compared to 2001.

           Packaging for exported agricultural products constitutes a
significant portion of our sales. Total sales of containers for export decreased
by approximately 25% in 2002, as compared to 2001. This decrease was primarily
caused by a 44% decrease in sales of containers used for the export of citrus


                                       8
<PAGE>
fruit and a decrease of 11% of sales to Tri-Wall of containers used for the
export of hi-tech products, as compared to 2001. The sale of containers for
non-citrus agricultural exports remained the same as in 2001. Sales of
containers to be used for domestic agricultural products increased by
approximately 47%, compared to 2001. In 2002, sales of containers for use in the
food industry increased by 3%, compared to 2001. Sales of containers for the
beverage industry increased by 5% in 2002, compared to 2001. Sales of containers
for other industries increased by 14% in 2002, compared to 2001. Sales of boards
for miscellaneous use increased by 86%, compared to 2001. In 2002, the average
price of our products decreased by 14.6%, compared to 2001. This decrease was
caused primarily by the increase of competition in our industry, as well as the
continued slow-down in the Israeli economy in 2002.

SEASONALITY

           Some of our containers are used to transport agricultural products
including citrus fruits. As a result, sales of some of our products are
influenced by the agricultural harvest in Israel, which occurs in autumn and
winter.

SOURCES OF RAW MATERIALS

           Our principal raw material is paper, mainly kraft linerboard,
semi-chemical paper and recycled paper. In 2002, we purchased approximately 53%
of our paper supplies, in terms of value, from domestic suppliers in Israel and
imported 47% of our paper supplies. Of our imported paper supply, 26% is
imported from the United States and 21% is imported from Europe and other
countries. In 2002, we purchased all of our domestic paper supply from AIPM, and
49% of our imported paper supply, in terms of value, from International Forest
Products Corporation (see "Item 7. Major Shareholders and Related Party
Transactions"). We obtain our supply of recycled paper from Israeli sources, and
all other types of paper from import sources.

           Prices of imported paper were stable through 1998 and until the end
of the third quarter of 1999. Prices increased slightly in the fourth quarter of
1999 and continued to increase until the third quarter of 2000. Prices began to
decrease in the fourth quarter of 2000 and continued to decrease through 2001
and the first quarter of 2002. Prices stabilized in the second quarter of 2002
and remained stable through the third quarter of 2002. In the fourth quarter of
2002, prices began to increase and continued to increase through the first
quarter of 2003. Prices began to decrease in the second quarter of 2003.

           Prices of recycled domestic paper were stable in 1999 and through the
third quarter of 2000, but slightly decreased in the fourth quarter of 2000,
throughout the year 2001 and the first quarter of 2002. Prices stabilized in the
second quarter of 2002 through the fourth quarter of 2002. Prices began to
decrease slightly in the first quarter of 2003.


                                       9
<PAGE>
           The raw materials that we require for the manufacture of our other
products are readily available both from Israeli producers and from import
sources.

COMPETITION

           In addition to our company, there are three manufacturers of
corrugated board and corrugated board shipping containers in Israel. Our
strongest competitor in the manufacture and marketing of corrugated board and
corrugated board shipping containers is Cargal Ltd., or Cargal.

           We estimate that in 2002, we and Cargal accounted for approximately
27% and 26%, respectively, of the total Israeli market for corrugated board and
corrugated board shipping containers. We, Cargal and a third company, I.M.A.
Itzur Mutzarei Ariza, collectively, manufacture approximately 75% of the
corrugated board and approximately 80% of the corrugated board packaging in
Israel. Our competitive strategy is based principally on customer service and
the diversity of our products. The fourth manufacturer of corrugated board and
containers in Israel is Best Carton Ltd., which entered the market in 1998. The
entry of Best Carton Ltd., which manufactures approximately 20% of the
corrugated board packaging in Israel, has contributed to the erosion of prices
in the market, particularly in the market for packaging agricultural goods. See
"Item 10C. Material Contracts". During the year 2002 we experienced increased
competition from Turkish importers of packaging products for agricultural goods.
Imported packaging products from Turkey are significantly cheaper than domestic
products and accounted for approximately 5% of the total Israeli market. The
entry of imported packaging products from Turkey in 2001 significantly
contributed to the decrease of prices in the market.

           We, through C.D., are the leading manufacturer of corrugated
board-based consumer packaging in Israel. There are four major manufacturers of
corrugated board-based consumer packaging in Israel, including C.D., as well as
a number of smaller manufacturers. Of the four major Israeli producers of
corrugated board packaging, we are the only producer of consumer packaging. We
compete in the consumer packaging field with three other companies, as well as
with direct and indirect imports amounting to approximately 19% of the market.

           Tri-Wall supplies over 65% of the Israeli market for triple-wall
board packaging. Cargal's introduction of a triple-wall board packaging product
to the market in 2001 has resulted in increased competition and has contributed
to the decrease of Tri-Wall's market share for these products. Tri-Wall is one
of the leaders in the field of wood shipping pallets. However, Tri-Wall has
several competitors in that field, including a subsidiary of Cargal.


                                       10
<PAGE>
C.         ORGANIZATIONAL STRUCTURE.

           The following is a list of our subsidiaries and our percentage
ownership:

       Name of Company                              Percentage of Ownership
       ---------------                              -----------------------

(Operating Subsidiaries)

Tri-Wall Containers (Israel) Ltd.                            100
C.D. Packaging Systems Ltd.                                   50(1)
Solid Packaging Board Ltd.(2)                                 50

(Inactive Subsidiaries)

Plaro Container Systems (1989) Ltd.                          100
Tri-Wall Pallets (1973) Ltd.                                 100

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

(1)        As a result of our joint venture agreement with AIPM, we control 50.1
           percent of C.D. Packaging Systems, Ltd.

(2)        C.D. Packaging Systems Ltd. holds 50% of Solid Packaging Board,
           Ltd.'s equity interest.


D.         PROPERTY, PLANTS AND EQUIPMENT.

           Our Caesarea plant began partial-capacity operations at the end of
1996 and became fully operational in 1997. The plant consists of approximately
377,000 square feet and is leased through our wholly-owned subsidiary, Plaro
Container Systems (1989) Ltd., or Plaro. Plaro entered into a 20-year lease
agreement that commenced in June 1996 with Gev-Yam High-Tech Ltd., or Gev Yam,
for the lease of approximately 935,000 square feet of land, or the Site, on
which Gev Yam built the plant. We installed newly-purchased equipment and
relocated equipment from our Tirat HaCarmel and Holon facilities. In 2002, we
paid NIS 9.3 million ($2.0 million) in rent with respect to the Site.

           Plaro provided guarantees to Gev Yam in the aggregate of $4.0 million
from AIPM, Ampal Enterprises Ltd., or AMPAL and Rand-Whitney Group LLC (a
wholly-owned subsidiary of Kraft Group LLC), our principal shareholders. See
"Item 7. Major Shareholders and Related Party Transactions." In addition, Plaro
entered into a management agreement with Caesarea Edmond Benjamin de Rothschild
Development Company Ltd., the original owner and lessor of the Site, pursuant to
which Plaro is required to pay various municipal charges. Pursuant to an option
agreement between Plaro and Gev Yam, dated May 25, 1994, Plaro was granted an
option to buy the Site commencing as of the 13th year of the lease, at a price


                                       11
<PAGE>
to be determined by an independent appraiser in accordance with a mechanism set
forth in such option agreement.

           We lease a building in Carmiel, with an area of approximately 85,700
square feet, pursuant to a lease that commenced in June 1994. Since 1994, we
expanded the plant at a cost of approximately $730,000, which was paid by the
landlord. Following the above-mentioned expansion of the plant, the lease
agreement was extended until May 31, 2007. The annual rent for our Carmiel
facility in 2002 was NIS 996,000 ($210,000). This facility principally produces
Micro-Fine boards for consumer packaging as well as other corrugated board
products. In June 1998, we began to lease 13,000 square feet of storage in a
nearby building and in May 2000, we began to lease an additional 7,300 square
feet of storage in this same building. Recently, we amended the two lease
agreements in order to synchronize the agreement terms and options. The term for
both agreements terminates on June 30, 2003, with an option to renew for two
additional years. We intend to renew both agreements for a term of at least one
year. The annual rent for the two additional leases, which is linked to the
Israeli consumer price index, or CPI, amounted in 2002 to NIS 288,000 ($60,800).

           C.D. leases approximately 81,000 square feet of industrial building
space in Migdal Haemek near Haifa. The lease expires in January 2004. C.D. has
an option to extend this lease on the same terms until December 2006. In 2002,
the annual rent payment for C.D.'s Migdal Haemek facility, which is linked to
the dollar and the CPI, was approximately NIS 1.3 million ($280,000).

           Tri-Wall owns land (with an area of approximately 53,000 square feet)
and an industrial building (with an area of approximately 30,000 square feet)
located in Netanya's industrial area. Tri-Wall entered into an agreement with an
unaffiliated third party to lease a portion of the Netanya facility for a term
of three years beginning June 1, 1999 at an annual rent of $78,000. This lease
was amended in 2000 to include the entire Netanya Facility. In 2002, the total
income generated from this lease amounted to NIS 513,000 ($107,000). Tri-Wall
has extended the term of this lease until 2004.

           Tri-Wall also owns land and an industrial building in Netivot, where
Tri-Wall's wooden pallet and box manufacturing facility is located. The area of
the plot is approximately 160,000 square feet.

           Tri-Wall's container manufacturing plant consists of approximately
56,000 square feet on a plot of approximately 135,000 square feet. This plant is
located in a facility in Netanya which Tri-Wall sub-leased from Rav Kol-Bo Tagar
(Wechselman) Ltd. The term of the sub-lease expired in November 1997. Tri-Wall
has not entered into any formal agreement to extend the sub-lease, but continues
to make monthly payments in accordance with the terms set forth in the expired
sub-lease agreement. The annual rent reserved by Tri-Wall for this plant in 2002
was approximately NIS 1.0 million ($216,000).


                                       12
<PAGE>
           In 2002, Tri-Wall was notified by the municipality of Netanya of the
municipality's intention to expropriate, without consideration, approximately
24, 000 square feet of the property on which Tri-Wall's factory is situated, in
order to construct a public road. See "Item 8. Financial Information - Legal
Proceedings."

ENVIRONMENTAL REGULATION MATTERS

           Certain of our manufacturing operations are subject to Israeli
environmental and pollution control laws. In order to comply with these laws, we
have installed scrap paper recovery systems and we sell balled scrap for
recycling. We have also installed a system to prevent pollution from liquid
wastes at our plant in Caesarea. In addition, we use printing inks made of
organic materials rather than of metallic printing inks.


ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.         OPERATING RESULTS.

GENERAL

           We maintain our accounts and present our financial statements in NIS
adjusted for changes in the general purchasing power of the Israeli currency. In
accordance with Israeli GAAP, all financial information presented in this Report
in NIS is presented in adjusted NIS. This presentation permits the financial
information to be set forth in constant terms as measured by changes in the CPI
with a convenience translation of the adjusted amounts to dollars. See note 2(b)
to consolidated financial statements.

           The preparation of our financial statements requires our management
to make estimates and assumptions that affect our reported amounts of assets and
liabilities at the date of the financial statements and our reported amounts of
revenues and expenses during the reporting period. On an on-going basis, our
management evaluates its own estimates and judgments, including allowance for
doubtful accounts and inventory valuation. Our Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Under different assumptions or
conditions, actual results may differ from these estimates.

           Our management believes that the following critical accounting
policies, among others, affect its more significant judgments and estimates used
in the preparation of our consolidated financial statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

           We maintain an allowance for doubtful accounts for estimated losses
resulting from the failure of our customers to make required payments, which
is included in bad debt expense. Our management determines the adequacy of this
allowance by regularly reviewing the complexion of our accounts receivable aging


                                       13
<PAGE>
and evaluating individual customer receivables, considering such customer's
financial condition, credit history and current economic conditions. If the
financial condition of our customers were to deteriorate, resulting in the
impairment of our customers' ability to make payments, additional allowances may
be required in future periods.

INVENTORY

           The Company's inventories are valued at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method for raw materials
and materials in transit. Cost for supply and materials inventories is
determined on the basis of moving-average cost. Cost for work in progress and
finished products is determined on the basis of computed direct manufacturing
costs with allocable indirect manufacturing costs.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

SALES

           Our consolidated sales in 2002 were NIS 344.1 million, ($72.6
Million), as compared to NIS 356.7 million for 2001. The decrease in sales in
2002, despite an increase in the amount of goods we sold, reflected
significantly eroded selling prices, resulting from the continuing recession and
competition in the market, which were then offset by the increased amount of
goods sold.

COST OF SALES

           Cost of sales in 2002 amounted to NIS 317.2 million ($67.0 million),
compared to NIS 322.4 million in 2001, a decrease of 1.6%. The cost of sales
percentage of sales was 92.1% of sales, compared to 90.4% of sales in 2001. This
decrease in the cost of sales resulted primarily from a reduction in our cost of
materials and a decrease in salaries and wages.

           Gross profit for 2002 was NIS 26.9 million, ($5.7 Million),
representing 7.8% of sales, as compared to NIS 34.3 million representing 9.6% of
sales for 2001. The decrease in gross profit resulted from the significant
erosion of sale prices, with a quantitative increase and slight decrease in
prices of raw materials, during 2002.

SELLING EXPENSES

           Selling expenses in 2002 totaled NIS 17.1 million ($3.6 million),
compared to NIS 18.4 million in 2001. This decrease in selling expenses resulted
primarily from a decrease in salary expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

           General and administrative expenses in 2002 decreased by 9.1% and
were NIS 18.0 million ($3.8 million) or 5.2% of sales, compared to NIS 19.8
million in 2001, representing 5.6% of sales in 2001. This decrease in general
and administrative expenses resulted primarily from a decrease in management


                                       14
<PAGE>
salaries, office expenses and a decrease in the reserve for unpaid debts.

OPERATING INCOME (LOSS)

           Operating loss before financial expenses was NIS 8.2 million, ($1.7
million), representing 2.4% of sales, for 2002, as compared to operating loss
before financial expenses of NIS 3.9 million, representing 1.1% of sales, for
2001.

FINANCIAL EXPENSES

           Financial expenses net for 2002 were NIS 6.2 million, ($1.3 million),
representing 1.8% of sales, as compared to NIS 11.1 million, representing 3.1%
of sales, for 2001.

           The decrease in actual financial expenses in 2002, as compared to
2001, resulted from the significant decrease in financial liabilities to banks
during 2002, as compared to 2001, and the decrease in actual interest as the
result of the ratio between the rate of inflation and the rate of devaluation of
the Shekel against the U.S. Dollar, as compared to this ratio in 2001.

OTHER INCOME (EXPENSES)

           Other income, net for 2002 was net of expenses of NIS 1.2 million,
($0.25 million), representing 0.3% of sales, as compared to net income of NIS
0.2 million in 2001. These expenses include NIS 1.3 million, ($0.3 million),
that the Company incurred in the last nine months of 2002 for a project designed
to increase the efficiency of the Company's operating and production systems and
to reduce the costs of such operating systems.

INCOME BEFORE TAXES ON INCOME (LOSSES)

           Loss before taxes for 2002 was NIS 15.6 million, ($3.3 million),
representing 4.5% of sales, as compared to loss before taxes of NIS 14.8 million
for 2001, representing 4.2% of sales during that period.

TAXES

           Tax benefit on income for 2002 was NIS 6.0 million, ($1.3 million),
as compared with a tax benefit on income of NIS 5.7 million, for 2001.

MINORITY INTEREST IN NET INCOME (LOSS) OF C.D. PACKAGING SYSTEMS LTD.

           The minority interest in the net loss of C.D. amounted to NIS 0.8
million ($0.2) in 2002, compared to interest in net loss of NIS 0.2 million in
2001.

                                       15
<PAGE>
NET INCOME (LOSS)

           Net loss for 2002 was NIS 8.7 million, ($1.8 million), representing
2.5% of sales, as compared to a loss of NIS 8.9 million, ($1.9 million),
representing 2.5% of sales of 2001.

WEIGHTED INCOME (LOSS) PER SHARE

           Weighted loss per share for 2002 was NIS 3.63 ($0.76), as compared to
net loss per share of NIS 3.71 ($0.78), for 2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

SALES

           Our consolidated sales in 2001 amounted to NIS 356.7 million,
compared to NIS 412.6 million in 2000, a decrease of 13.5%. The majority of this
decrease was due to the continuing economic slow-down in Israel and the
increased competition in our industry, which caused erosion in sales prices and
a decrease in quantities of products sold compared to the previous year.

COST OF SALES

           Cost of sales in 2001 amounted to NIS 322.4 million, compared to NIS
357.4 million in 2000, a decrease of 9.8%. The cost of sales as a percentage of
sales were 90.4% of sales, compared to 86.6% of sales in 2000. This decrease in
the cost of sales resulted primarily from a reduction in production quantities
and the decreased cost of raw materials, salaries and wages.

GROSS PROFIT

           Gross profit in 2001 totaled NIS 34.3 million, compared to NIS 55.2
million in 2000, a decrease of 37.8%. The gross profit margins for 2001 were
9.6% of sales, compared to 13.3% of sales in 2000.

SELLING EXPENSES

           Selling expenses in 2001 totaled NIS 18.4 million, compared to NIS
18.9 million in 2000. This decrease in selling expenses resulted primarily from
a decrease in salary expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

           General and administrative expenses in 2001 decreased by 27.8% and
were NIS 19.8 million or 5.6% of sales, compared to NIS 27.5 million in 2000,
representing 6.6% of sales in 2000. This decrease in general and administrative


                                       16
<PAGE>
expenses resulted primarily from the decrease in reserve for unpaid debts and a
decrease in management salaries.

OPERATING INCOME(LOSS)

           Operating loss in 2001 amounted to NIS 3.9 million, or 1.1% of sales,
compared to an operating income of NIS 8.8 million or 2.1% of sales in 2000.
FINANCIAL EXPENSES

           Financial expenses in 2001 amounted to NIS 11.1 million, or 3.1% of
sales, compared to NIS 8.7 million in 2000, or 2.1%. This increase in financial
expenses of 27.6% was due primarily to the devaluation of the NIS compared to
the dollar in the fourth quarter of the year. The rate of inflation was 1.4% in
2001, compared to 0% in 2000. The devaluation of the NIS compared to the dollar
was 9.3% in 2001, compared to an increase in value of 2.7% in 2000. As a result,
the financial expenses resulting from our liabilities in dollars increased. Such
increase was partially offset by the decrease of our debt to banks.

OTHER INCOME (EXPENSES)

           In 2001 we recorded other income of NIS 0.15 million, compared to
other income of NIS 0.75 million in 2000. The other income for the year 2000
resulted from cancelled reserves. Such reserves were cancelled following the
resolution of a dispute over tax reserves related to the cancellation of a
long-term property lease in 1995.

INCOME BEFORE TAXES ON INCOME (LOSS)

           Loss before taxes in 2001 amounted to NIS 14.8 million, or 4.2% of
sales, compared to income of NIS 0.9 million in 2000, or 0.2% of sales.

TAXES

           Benefit from taxes in 2001 were NIS 5.7 million, compared to NIS 0.6
million in 2000.

MINORITY INTEREST IN NET INCOME (LOSS) OF C.D. PACKAGING SYSTEMS LTD.

           The minority interest in the net loss of C.D. amounted to NIS 0.2
million in 2001, compared to interest in net income of NIS 0.6 million in 2000.

NET INCOME (LOSS)

           Our net loss for 2001 was NIS 8.9 million, or 2.5% of sales, compared
to a net income of NIS 1 million in 2000, or 0.2% of sales.


                                       17
<PAGE>
WEIGHTED INCOME (LOSS) PER SHARE

           Weighted loss per share in 2001 was NIS 3.71, compared to a weighted
income per share of NIS 0.41 in 2000.

B.         LIQUIDITY AND CAPITAL RESOURCES.

           We meet our financial requirements primarily through funds provided
by operations, long-term financing (long-term bank loans and other long term
loans) and short-term financing (including short-term bank loans and credit
provided by suppliers of materials).

           During 2002, we experienced a positive cash flow of NIS 18.1 million
($3.8 million), compared with a positive cash flow of NIS 35.3 million in 2001.
This positive cash flow included depreciation of NIS 26.1 million ($5.5
million), compared to a depreciation of NIS 27.3 million in 2001. Furthermore,
we decreased our reserve for postponed taxes by NIS 6.4 million ($1.3 million),
compared to an decrease of NIS 5.7 million in 2001.

           In 2002, we purchased equipment and invested in the infrastructure of
our plants in an aggregate net amount of NIS 1.9 million ($0.4 million),
compared with similar investments in an aggregate net amount of NIS 10.1 million
in 2001. We paid NIS 16.0 million ($3.4 million) of our long- and short-term
loans, compared with payment of loans of NIS 25.2 million in 2001.

           For the year ended December 31, 2002, we had positive working capital
of NIS 42.6 million ($9.0 million), compared with working capital of NIS 59.0
million for the year ended December 31, 2001. This decrease in working capital
resulted primarily from a decrease in inventories, an increase of current
maturities of long-term loans and trade payables.

           Long-term loans from banks and other financial sources amounted to
NIS 37.7 million ($8.0 million) (net of current maturities that included
short-term loans) in 2002, compared to NIS 61.1 million in 2001.

           Our only major investments, other than regular investments undertaken
in the ordinary course of our business, in the four years ended December 31,
1999 are in our corrugated board manufacturing facilities, primarily in
Caesarea. See "Item 4. Information on our Company." During 1996, 1997, 1998 and
1999 our investments amounted to an aggregate of approximately NIS 170.2
million, of which we invested NIS 157.8 million in our corrugated board plants,
primarily in the Caesarea plant.

           During 2001 and 2000, we invested in our plant and infrastructure an
aggregate amount of NIS 10.1 million, and NIS 10.1 million, respectively, as
part of our normal course of business. In 2002, we invested 1.9 million (0.4
million), most of which was invested in our Caesarea plant to improve the
production of corrugated cardboard.


                                       18
<PAGE>
IMPACT OF INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS, LIABILITIES AND
ASSETS

           The dollar cost of our operations is influenced by the extent to
which any inflation in Israel is or is not offset, or is offset on a lagging
basis, by the devaluation of the NIS in relation to the dollar. When the rate of
inflation in Israel exceeds the rate of devaluation of the NIS against the
dollar, we experience an increase in the dollar cost of our operations in
Israel. However, inflation in Israel, which is not offset by a devaluation of
the NIS, will have a positive effect on our profitability, as we receive payment
in NIS for most of our sales, while we incur a significant portion of our
expenses in dollars.

           The following table presents information about the rate of inflation
in Israel, the rate of devaluation of the NIS against the dollar, and the rate
of inflation in Israel adjusted for the devaluation:

                                                             ISRAELI INFLATION
YEAR ENDED        ISRAELI INFLATION   NIS DEVALUATION           ADJUSTED FOR
DECEMBER 31,             RATE %            RATE %               DEVALUATION %
------------             ------            ------               -------------

   1998                   8.6              17.6                     (7.7)
   1999                   1.3              (0.1)                     1.4
   2000                     0              (2.7)                     2.8
   2001                   1.4               9.3                     (7.2)
   2002                   6.5               7.3                     (0.7)


           A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities that are
payable in NIS, unless those expenses or payables are linked to the dollar. This
devaluation also has the effect of decreasing the dollar value of any asset that
consists of NIS or receivables payable in NIS, unless the receivables are linked
to the dollar. Conversely, any increase in the value of the NIS in relation to
the dollar has the effect of increasing the dollar value of any unlinked NIS
assets and the dollar amounts of any unlinked NIS liabilities and expenses.

           We are exposed to a variety of market risks, including changes in
interest rates and foreign currency fluctuations. Because exchange rates between
the NIS and the dollar fluctuate continuously, with a historically declining
trend in the value of the NIS, exchange rate fluctuations, particularly larger
periodic devaluations, may have an impact on our profitability and
period-to-period comparisons of our results. There can be no assurance that we
will not be materially adversely affected in the future if devaluation of the
NIS against the dollar exceeds the inflation in Israel. See "Item 3. Key
Information - Selected Financial Data."

POLITICAL CONDITIONS

           We are directly influenced by the political, economic and military
conditions in Israel. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its Arab
neighbors, and the continued state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Since October
2000, there has been a significant increase in violence, primarily in the West


                                       19
<PAGE>
Bank and Gaza Strip, and more recently Israel has experienced terrorist
incidents within its borders. As a result, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. We could be adversely affected by hostilities involving
Israel, the interruption or curtailment of trade between Israel and its trading
partners, or a continuous downturn in the economic or financial condition of
Israel. In addition, several countries continue to restrict business with Israel
and with companies having operations in Israel. We could be negatively affected
by adverse developments in the peace process, including the recent violence, or
by restrictive laws or practices directed towards Israel or Israeli exporters
such as our customers.

           All male adult citizens and permanent residents of Israel under the
age of 48 are, unless exempt, obligated to perform up to 39 days of military
reserve duty annually. Additionally, these residents are subject to being called
to active duty at any time under emergency circumstances. Many of our officers
and employees are currently obligated to perform annual reserve duty. While we
have maintained operations effectively under these requirements since we began
operations, we cannot assess the full impact of these requirements on our
workforce or business if conditions should change, and we cannot predict the
effect on us of any expansion or reduction of these obligations.

ECONOMIC CONDITIONS

           Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli Government has intervened in various sectors of
the economy by utilizing fiscal and monetary policies, import duties, foreign
currency restrictions and controls of wages, prices and foreign currency
exchange rates.

           In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents may deal in foreign
currency and non-residents of Israel may purchase and sell Israeli currency and
assets. The Israeli government has periodically changed its policies in all
these areas. There are currently no Israeli currency control restrictions on
remittances of dividends on the ordinary shares or the proceeds from the sale of
the shares; however, legislation remains in effect pursuant to which currency
controls can be imposed by administrative action at any time. In addition,
Israeli residents are required to file reports pertaining to certain types of
actions or transactions.

           The Israeli government's monetary policy contributed to relative
price and exchange rate stability in recent years, despite fluctuating rates of
economic growth and a high rate of unemployment. We cannot assure you that the
Israeli government will be successful in its attempts to keep prices and
exchange rates stable. Price and exchange rate instability may have a material
adverse effect on us.


                                       20
<PAGE>
TRADE AGREEMENTS

           Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development and the
International Finance Corporation. Israel is a signatory to the General
Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade
barriers among its members. In addition, Israel has been granted preferences
under the Generalized System of Preferences from the United States, Australia,
Canada and Japan. These preferences allow Israel to export the products covered
by such programs either duty-free or at reduced tariffs.

           Israel and the EEC, known as the European Union, concluded a Free
Trade Agreement in July 1975 that confers certain advantages on Israeli exports
to most European countries and obligates Israel to lower its tariffs on imports
from these countries over a number of years. In 1985, Israel and the United
States entered into an agreement to establish a free-trade area. The free-trade
area has eliminated all tariff and specified non-tariff barriers on most trade
between the two countries. On January 1, 1993, an agreement between Israel and
the European Free Trade Association, known as EFTA, which includes Austria,
Finland, Iceland, Liechtenstein, Norway, Sweden and Switzerland, established a
free-trade zone between Israel and the EFTA nations. In November 1995, Israel
entered into a new agreement with the European Union, which includes
redefinement of rules of origin and other improvements, including providing for
Israel to become a member of the research and technology programs of the
European Union. In recent years, Israel has established commercial and trade
relations with a number of other nations, including China, India, Russia, Turkey
and other nations in Eastern Europe and Asia.

C.         RESEARCH AND DEVELOPMENT.

           In 2002, we undertook a joint research project with the Volcani
Center Agricultural Research Organization. The research project focused on the
development of an improved corrugated board container that would prolong the
shelf-life of citrus, and certain other fruits and vegetables. The project was
concluded unsuccessfully in December 2002 at a cost to us of NIS 220,000
($46,000). The Chief Scientist of the Ministry of Industry and Commerce has
committed to reimburse us for up to fifty percent of our investment.


D.         TREND INFORMATION.

           We are not aware of any significant trends in our industry.



                                       21
<PAGE>
ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.         DIRECTORS AND SENIOR MANAGEMENT.

           Our directors and executive officers are as follows:


Name                       Age       Position with Company
----                       ---       ---------------------

Robert K. Kraft             62       Director, Chairman of the Board

Yaakov Yerushalmi           61       Vice Chairman of the Board, Chairman
                                     of the Management and Finance Committee

Richard A. Karelitz         53       Director, Chairman of the Audit Committee

Myra H. Kraft               59       Director

Jonathan A. Kraft           38       Director

Yoram Firon                 34       Director

Richard P. Morse            71       Director

Avshalom Patir              55       Director

Israel Eldar                57       Director

Irit Eluz                   36       Director

Zeev Birenboim              52       External Director

David Harman                58       External Director

Doron Kempler               53       General Manager

Daniel Attias               64       Chief Financial Officer

Moshe Balter                59       Secretary

Shimon Yarel                52       Internal Auditor


           ROBERT K. KRAFT has been Chairman of our board of directors since
March 1989 and a director since October 1988. For more than the past twenty-five
years, Mr. Kraft has been the Chairman of International Forest Products
Corporation or IFPC, a company engaged in marketing and trading paper and
related products and a supplier of raw materials, including to us. Mr. Kraft is
also the President of Rand-Whitney Group LLC, a company engaged in the cardboard
and packaging field and our shareholder; Chairman of Chestnut Hill Management
Corp., an investment management company; President and Chief Executive Officer
of the New England Patriots, a football team in the National Football League;
and President and Chief Executive Officer of NPS LLC, which owns and operates
Gillette Stadium in Foxborough, Massachusetts. He is also a director of Kraft
Soccer LLC and Kraft Holdings Trust. Mr. Kraft is the husband of Myra H. Kraft
and the father of Jonathan A. Kraft.

           YAAKOV YERUSHALMI has been a director of our company since August
1992 and Executive Vice Chairman of our board of directors and Chairman of the
Management and Finance Committee since September 1992. Mr. Yerushalmi has served


                                       22
<PAGE>
as Chairman of the Board of Directors of AIPM since January 1999, and served as
General Manager of AIPM from June 1990 to March 2003. Mr. Yerushalmi currently
serves as Chairman of Amnir Recycling Industries Ltd., as well as chairman or
director of several subsidiaries or affiliates of AIPM.

           RICHARD A. KARELITZ has been a director of our company since October
1988. He has been employed in various capacities with International Forest
Products Corporation since 1975 and presently is its Senior Vice President. Mr.
Karelitz also is Treasurer of Chestnut Hill Management Corp., an investment
management company, and General Counsel to the New England Patriots, a football
team in the National Football League, to the New England Revolution, a soccer
team in Major League Soccer, and to NPS LLC, which owns and operates Gillette
Stadium in Foxborough, Massachusetts. Mr. Karelitz is a director of IFP Products
(UK) Limited, International Forest Products (H.K.) Limited, IFP Corporate
Services SDN, BDH and International Forest Products Limited.

           MYRA H. KRAFT has been a director of our company since August 1992.
Mrs. Kraft is a director of International Forest Products Corporation and is an
indirect holder of membership interests of Kraft Group. Mrs. Kraft is Robert K.
Kraft's wife and the mother of Jonathan A. Kraft.

           JONATHAN A. KRAFT has been a director of our company since August
1992. Mr. Kraft is a director of International Forest Products Corporation,
Rand-Whitney Group LLC, Kraft Holdings Trust and CMGI, Inc. Mr. Kraft is also
President and Chief Executive Officer of Rand-Whitney Containerboard, Vice
Chairman and Owners Representative of the New England Patriots, a football team
in the National Football League, investor/operator of the New England
Revolution, a soccer team in Major League Soccer, and Vice President of NPS LLC,
which owns and operates Gillette Stadium in Foxborough, Massachusetts. Mr. Kraft
is the son of Robert K. Kraft and Myra H. Kraft.

           YORAM FIRON has been a director of our company since November 5,
2002. Mr. Firon serves as Secretary and Vice President - Investments and
Corporate Affairs of Ampal American - Israel Corporation and its subsidiaries.
Prior to this position, Mr. Firon served as the Vice President of Merhav M.M.F.
Ltd. and was a partner in the law firm of Firon Karni Sarov & Firon.

           RICHARD P. MORSE has been a director of our company since October
1988. Mr. Morse is a private investor who was formerly a Vice President and
director of Morse Shoe, Inc.

           AVSHALOM PATIR has been a director of our company since April 2003.
Mr. Patir has served as the General Manager of AIPM since April 2003. From
1998-April 2003 Mr. Patir served as General Manager of Barak I.T.C. (1995) - The
International Telecommunications Services Corp. Ltd. Mr. Patir holds a Masters


                                       23
<PAGE>
degree in Electrical Engineering. Mr. Patir also serves as a director of several
subsidiaries or affiliates of AIPM.

           ISRAEL ELDAR has served as a director of our company since August,
2000. Mr. Eldar has served as the comptroller of AIPM Ltd. since 1985. Mr. Eldar
serves as a director of several subsidiaries or affiliates of AIPM.

           IRIT ELUZ has been a director of our company since November 5, 2002.
Ms. Eluz serves as the Chief Financial Officer and Vice President-Finance and
Treasurer of Ampal American-Israel Corporation and its subsidiaries. Prior to
that position, Ms. Eluz served as an Associate Chief Financial Officer of
Merhav. From 1998-April 1993, M.M.F. Ltd. and Chief Financial Officer of Karnor
Ltd. Ms. Eluz serves as a Director of Ampal Development Ltd.

           ZEEV BIRENBOIM in 1999 acted as Chief Executive Officer of Ampa Ltd.,
in 1996 V.P. for Marketing, Delek - Israel Petrol Co. Ltd., in 1994 Chief
Executive Officer and member of the board of directors of Klal Retail Chains of
Klal Group, in 1993 Chief Executive Officer, Bezeq Bit, and in 1990 Products
Manager in Hogla Ltd.

           DAVID HARMAN has served as Chief Executive Officer of TeachLink Ltd.
(remote learning services) since 1998. From 1991 to 1998, he served as Chief
Executive Officer of Joint Authority for Jewish Education of the Jewish Agency
and the Zionist Agency. From 1987 to 1991, he was a Lecturer on Education at
Columbia University. From 1984 to 1991, he was an Education Adviser and Chief
Scientist for the American Jewish Joint Distribution Committee.

           DORON KEMPLER was appointed as our General Manager on May 6, 2001.
Mr. Kempler has been the Chief Executive Officer of our packaging paper and
machinery division since October 1999. From 1996 to 1998, he was the manager of
the fine paper mills in AIPM. From 1993 to 1996, he served as Vice President for
Operations in the recycling division of AMIR Ltd. Mr. Kempler served in the
Israeli Air Force for 25 years, retiring with the rank of Colonel.

           DANIEL ATTIAS has been our Chief Financial Officer since June 1985.
From 1984 to 1985, Mr. Attias was General Manager of Jerusalem Paper Products,
Ltd. (which subsequently changed its name to Ofek Paper Products Ltd. and was
acquired by us).

           MOSHE BALTER was appointed as our Secretary on February 25, 1992. Mr.
Balter is an Israeli attorney who has been practicing law since 1971.

           SHIMON YAREL was appointed as our Internal Auditor on March 2, 1993.
Mr. Yarel is an Israeli Certified Public Accountant in the firm of Yarel & Co.,
Accountants.

                                       24
<PAGE>
EXTERNAL DIRECTORS

           On July 30, 2000, Zeev Birenboim and David Harman were appointed as
external directors of our company, as required by Israeli law. Pursuant to
Israeli law, the external directors are appointed for a three-year term.

RESIGNATION OF DIRECTORS AND OFFICERS

           Messrs. Zvi Firon and Yuval Levi resigned as directors on November 5,
2002. Mr. Yoram Shetrit resigned as a director in March 31, 2003.

SHAREHOLDERS' AGREEMENT

           On May 14, 1992, Robert K. Kraft, on the one hand, and AIPM and
AMPAL, on the other hand, entered into a shareholders' agreement, or the
Shareholders Agreement, which provides, among other things, that our board of
directors will be comprised of twelve directors, of whom five are to be
recommended by Mr. Kraft, three by AIPM, two by AMPAL and the remaining two will
be External Directors pursuant to the requirements of Israeli law.

           In accordance with the Shareholders' Agreement, the board of
directors has established a Management and Finance Committee and an Audit
Committee.

           The Management and Finance Committee is comprised of four members,
one recommended by each of Kraft, AMPAL and AIPM, respectively, and the fourth
member being one of the External Directors . The Audit Committee is comprised of
five members, the two External Directors and one director recommended by each of
Mr. Kraft, AMPAL and AIPM, respectively.

           Pursuant to the Shareholders' Agreement, the board of directors deals
with any matters it considers to be material and delegates the remaining matters
to the Management and Finance Committee including compensation and of our senior
management. The Audit Committee deals with all matters required by Israeli law
to be reviewed or approved by the Audit Committee.

           The following matters require the affirmative vote of at least 80% of
our directors: (i) any sale or disposition of any fixed assets, subsidiaries or
investments of our company having value in excess of $500,000; (ii) the issuance
of our ordinary shares (which shall require a majority vote of 85%); (iii) any
capital expenditures in excess of $500,000; (iv) the incurrence of indebtedness
or the granting of a guarantee in an amount exceeding $500,000 and the granting
of any security in connection therewith; (v) making loans to or investments in
any third party in excess of $500,000; (vi) curtailing or closing down material
portions of our business, expanding into material new lines of business, making
material acquisitions or entering into other new ventures if substantially
different from our existing business; (vii) any transaction between us and any
interested party or our affiliates; (viii) any decision regarding dividends


                                       25
<PAGE>
(which shall require a majority vote of 85%); or (ix) changing the nature of our
business (which shall require a majority vote of 85%).

           Pursuant to the shareholders' agreement, Mr. Kraft, AIPM and AMPAL
have agreed to co-operate with respect to certain issues (i.e., mergers,
amendments to our Memorandum and Articles of Association, dissolution and
liquidation of our company, changes to our capital structure and payment of
dividends) which may be voted on at shareholders' meetings. Mr. Kraft, AIPM and
AMPAL have also granted each other certain rights of first refusal with respect
to our ordinary shares held by them.

B.         COMPENSATION.

           The aggregate compensation paid to or accrued for the account of all
of our directors and executive officers as a group during the 2002 fiscal year
was NIS 2.7 million ($561,000), of which NIS 0.7 million($141,000) was paid to
or accrued for the account of our general manager. This amount includes
directors' fees, officers' compensation, amounts set aside or accrued to provide
pension, retirement or similar benefits, amounts expended by our company for
automobiles made available to our officers and expenses (including business
travel, professional and business association dues and expenses) for which our
directors were reimbursed.

C.         BOARD PRACTICES.

APPOINTMENT OF DIRECTORS AND TERMS OF OFFICE

           Our directors are appointed by our shareholders at our annual general
meeting and hold office until the next annual general meeting. Our annual
general meetings are held at least once every calendar year, but not more than
15 months after the last preceding annual general meeting. In the intervals
between our annual general meetings, our board of directors may appoint new
directors to fill vacancies. Our officers serve at the discretion of our board
of directors, subject to the terms of any agreement between them and us and the
provisions of the Israeli Companies Law, 5739-1999, or the Companies Law.

EXTERNAL DIRECTORS

           Under the Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public in or outside of Israel are
required to appoint two external directors. The Companies Law requires that the
external directors be residents of Israel. However, the Minister of Justice of
the State of Israel has promulgated regulations exempting certain qualifying
foreign companies, such as us, from the applicability of certain provisions of
the Companies Law. The Companies Regulations (Concessions for Public Companies
Whose Shares are Registered in a Stock Exchange Outside Israel), 5760-2000, as
amended, define "foreign company" as a public company whose shares have been
offered solely to the public outside of Israel or are registered only on a stock


                                       26
<PAGE>
exchange outside of Israel. Pursuant to these regulations, an external director
of a foreign company need not be an Israeli resident.

           The Companies Law provides that a person may not be appointed as an
external director if the person or the person's relative, partner, employer or
any entity under the person's control, has, as of the date of the person's
appointment to serve as an external director, or had, during the two years
preceding that date, any affiliation with the company, any entity controlling
the company or any entity controlled by the company or by this controlling
entity. The term affiliation includes: (i) an employment relationship; (ii) a
business or professional relationship maintained on a regular basis; (iii)
control; and (iv) service as an officer holder. The Companies Law further
provides that if, at the time the external directors are appointed, a company's
board of directors is comprised solely of members of the same gender, then at
least one of the external directors must be of a different gender than the other
directors.

           No person can serve as an external director if the person's position
or other business creates, or may create, conflicts of interest with the
person's responsibilities as an external director. Until the lapse of two years
from termination of office, a company may not engage an external 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.

           External directors are to be elected by a majority vote at a
shareholders' meeting, provided that either: (i) 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; or (ii) the
total number of shares voted against the election of the external director does
not exceed one percent of the aggregate voting rights in the company.

           The initial term of an external director is three years and may be
extended for an additional three years. Each of the external directors is
required to serve on the company's audit committee. Each other committee of a
company's board of directors is required to include at least one external
director.

AUDIT COMMITTEE

           Under the Companies Law, the board of directors of any company that
is required to nominate external directors must also appoint an audit committee
comprised of at least three directors, including all of the external directors,
but excluding: (i) the chairman of the board of directors; (ii) the general
manager; (iii) the chief executive officer; or (iv) any controlling shareholder
or its relative and any director employed by the company or who provides
services to the company on a regular basis.

           The role of the audit committee is to examine flaws in the business
management of the company, in consultation with the internal auditor and the
company's independent accountants, and suggest appropriate course of action. Our


                                       27
<PAGE>
audit committee meets three or four times a year, during which Mr. Yarel, our
internal auditor, presents his quarterly report.

           The approval of the audit committee is required to effect specified
actions and transactions with office holders and interested parties. An
interested party is defined in the Companies Law as a 5% or greater shareholder,
any person or entity who has the right to designate one director or more or the
general manager of the company or any person who serves as a director or as a
general manager. An audit committee may not approve an action or a transaction
with an interested party or with an office holder unless at the time of approval
the two external directors are serving as members of the audit committee, at
least one of whom was present at the meeting in which any approval was granted.

           The current members of our audit committee are Richard A. Karelitz,
chairman, Israel Eldar, Irit Eluz, Zeev Birenboim and David Harman.

INTERNAL AUDITOR

           Under the Companies Law, the board of directors must appoint an
internal auditor proposed by the audit committee. Mr. Shimon Yarel has been our
internal auditor since 1993. The role of the internal auditor is to examine
whether the company's actions comply with the law, integrity and orderly
business procedure. Under the Companies Law, the internal auditor may not be an
interested party, an office holder, or an affiliate, or a relative of an
interested party, an office holder or affiliate, nor may the internal auditor be
the company's independent accountant or its representative.

D.         EMPLOYEES.

           As of December 31, 2002, we had 578 employees, including
approximately 87 employees in management, finance and marketing, and
approximately 441 full-time employees and 50 temporary employees in
manufacturing. All of our employees are employed in Israel.

           The following is a breakdown of our employees by main category of
activity for the last three years.

                                                  Employees
                                                  ---------
                                       2000         2001          2002
                                       ----         ----          ----
Area of Employment
   Manufacturing
      Permanent Employees              457          467           441
      Temporary Employees               73           56            50
Management, Finance and Marketing      105           82            87
                                       ---           --            --

Total                                  635           605           578



                                       28
<PAGE>
           We consider our relations with all of our employees to be
satisfactory. Most of our employees are covered by three collective bargaining
agreements. Certain of our employees, in particular, executive officers and
those employed in management, finance and marketing, as well as certain key
employees in manufacturing, have entered into personal employment contracts with
us. In addition, by order of the Israeli Ministry of Labor and Welfare, certain
provisions of the collective bargaining agreement between the Histadrut (General
Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (a central organization representing most of Israel's employers'
associations) are applicable to all of our employees. These provisions
principally concern the length of the work day and the work week, insurance for
work-related accidents, minimum daily wages, pension fund contributions,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. The wages of most of our employees are linked, in
part, to the CPI.

           Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute (which is similar to the United States
Social Security Administration). These payments amount to approximately 14.63%
of total compensation, with the employee contributing approximately 5.76% and
the employer contributing the balance. The majority of our permanent employees
are covered by pension insurance policies and pension funds providing customary
benefits to employees, including retirement and severance benefits. We
contribute 13.3% (which includes 8-1/3% of severance pay) of base wages to such
plans and the employee contributes between 5% to 5.5% of base wages. Under
Israeli law, employees are required to contribute up to 4.8% of their total
compensation to the National Insurance Institute for health insurance coverage.

E.         SHARE OWNERSHIP.

           The following table sets forth certain information regarding the
ownership of our ordinary shares by our directors and executive officers as of
June 20, 2003.

                       NUMBER OF ORDINARY SHARES     PERCENTAGE OF OUTSTANDING
      NAME               BENEFICIALLY OWNED(1)          ORDINARY SHARES(2)
      ----               ---------------------          ------------------

Robert K. Kraft                   851,174                    35.46%(3)
Richard A. Karelitz                11,550                        *
Richard P. Morse                    1,250                        *

------------------------
*          Less than 1%.

(1)        Except as otherwise noted and pursuant to applicable community
           property laws, each person named in the table has sole voting and
           investment power with respect to all ordinary shares listed as owned
           by such person.

(2)        Ordinary shares deemed beneficially owned by virtue of the right of
           any person or group to acquire such shares within 60 days of June 30,
           2003 are treated as outstanding only for the purposes of determining
           the percent owned by such person or group.


                                       29
<PAGE>
(3)        In calculating this percentage only outstanding shares with voting
           rights were considered. Tri-Wall's 119,813 non-voting shares were not
           considered.

ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.         MAJOR SHAREHOLDERS.

           The following table sets forth certain information as of May 31,
2003, pertaining to the beneficial ownership of our Ordinary Shares, by persons
known to us to own 5% or more of our Ordinary Shares. Except as disclosed below,
we are not directly or indirectly owned or controlled by another corporation or
by any foreign government.

           The information contained herein has been obtained from our records,
or from information furnished directly by the individual or entity to us.

<TABLE>
<CAPTION>
                                                      Number of
Name of Beneficial Owner(1)                          Shares Owned            Percent of Class (6)
---------------------------                          ------------            ----------------
<S>                                                  <C>                     <C>
Kraft Group LLC                                        275,000       (2)          11.46%
American-Israeli Paper Mills Ltd.                      630,000       (3)          26.25%
Ampal Enterprises Ltd.                                 522,000       (3)          21.75%
Robert K. Kraft                                        851,174       (4)          35.46%
All Directors and executive officers as a group
(16 persons)                                           863,974       (5)          36.00%

</TABLE>

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

(1)        The address of each of Kraft Group LLC (Kraft Group) and Robert K.
           Kraft is One Patriot Place, Foxborough, MA 02035. The address of
           American-Israeli Paper Mills Ltd. (AIPM) is P.O. Box 142, Hadera,
           Israel. The address of Ampal Enterprises Ltd. (AMPAL) is 111
           Arlozorov St., Tel-Aviv, Israel.

(2)        Excludes 470,324 Ordinary Shares beneficially owned by Robert K.
           Kraft, the President of the managing member and an indirect holder of
           membership interests of Kraft Group; 26,250 Ordinary Shares
           beneficially owned by Richard P. Morse (a Director of the Company),
           25,000 of which Mr. Robert K. Kraft has the right to vote pursuant to
           an agreement between Mr. Morse and Mr. Robert K. Kraft; 52,500
           Ordinary Shares owned by the Kraft Foundation (of which Mr. Robert K.
           Kraft is a Trustee with shared investment and voting authority);
           2,100 Ordinary Shares beneficially owned by Myra H. Kraft (Mr.
           Kraft's wife), an indirect holder of membership interests of Kraft
           Group; and 26,250 Ordinary Shares beneficially owned by the Kraft
           Irrevocable Family Trust (6,562 shares of which are owned for the
           benefit of Jonathan A. Kraft (Mr. & Mrs. Kraft's son), an indirect
           holder of membership interests of Kraft Group). See footnote (4)
           below.

(3)        On July 31, 1992, Robert K. Kraft, AIPM and AMPAL entered into an
           agreement pursuant to which Robert K. Kraft (after having purchased
           from Carmel Plaro Holdings Limited, Koor Industries Ltd. and Koor
           Foods Ltd. all the Ordinary Shares beneficially owned by them)


                                       30
<PAGE>
           transferred 630,000 Ordinary Shares to AIPM and 514,000 Ordinary
           Shares to AMPAL. AMPAL has since increased its Ordinary Share
           holdings to 522,000.

(4)        Includes 26,250 Ordinary Shares beneficially owned by Mr. Richard P.
           Morse (a Director of the Company), 25,000 of which Mr. Robert K.
           Kraft has the right to vote pursuant to an agreement between Messrs.
           Morse and Kraft, and 52,500 Ordinary Shares owned by the Kraft
           Foundation (of which Mr. Robert K. Kraft is a Trustee with shared
           investment and voting authority). Also includes 2,100 Ordinary Shares
           beneficially owned by Mrs. Myra H. Kraft (Mr. Kraft's wife), 26,250
           Ordinary Shares beneficially owned by the Kraft Irrevocable Family
           Trust (with respect to which Mr. Robert K. Kraft disclaims beneficial
           interest), and 275,000 Ordinary Shares owned by Kraft Group (of which
           Mr. Robert K. Kraft is the President of the managing member and an
           indirect holder of membership interests). See footnote (2) above.

(5)        Includes 26,250 Ordinary Shares beneficially owned by Mr. Richard P.
           Morse (25,000 of which Mr. Robert K. Kraft has the right to vote
           pursuant to an agreement between Messrs. Morse and Kraft), 52,500
           Ordinary Shares owned by the Kraft Foundation (of which Mr. Robert K.
           Kraft, Mrs. Myra H. Kraft and Mr. Richard A. Karelitz are Trustees
           with shared investment and voting authority) and 26,250 Ordinary
           Shares beneficially owned by the Kraft Irrevocable Family Trust (of
           which Mr. Morse is a Trustee, but with respect to which Mr. Robert K.
           Kraft, Mrs. Myra H. Kraft and Mr. Morse disclaim beneficial interest,
           and as to 6,562 Ordinary Shares of which Mr. Jonathan A. Kraft is the
           beneficiary). Also includes 275,000 Ordinary Shares owned by Kraft
           Group (of which Mr. Kraft is the President of the managing member and
           an indirect holder of membership interests; and Mrs. Myra H. Kraft
           and Mr. Jonathan A. Kraft are indirect holders of membership
           interests). See footnote (2) above.

(6)        In calculating this percentage only outstanding shares with voting
           rights were considered. Tri-Wall's 119,813 non-voting shares were not
           considered.

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

           The company acquired at the end of 2000 through Tri-Wall, its
subsidiary, 109,400 ordinary shares from two shareholders for a total amount of
$875,200. Together with its formerly held 10,413 shares, Tri-Wall now holds
119,813 shares (4.75% of our total shares), including 157 shares held in trust
on behalf of one current employee pursuant to terms of our 1986 Stock Purchase
Plan.)

B.         RELATED PARTY TRANSACTIONS.

           In the ordinary course of our business, in 2000, 2001 and 2002 we
purchased all of our supply of Israeli produced paper, and 41%, 47% and 53%,
respectively, of our overall paper requirements from AIPM, which is a principal
shareholder of our company. We believe that such transactions have been on terms
no more or less favorable than could have been obtained from unrelated third
parties. See notes 4, 9, 10, 15, and 18 of the notes to consolidated financial
statements appearing elsewhere herein.


                                       31
<PAGE>
           In October 1988, we entered into a ten year agreement with IFPC, an
affiliate of Robert Kraft and Rand-Whitney, pursuant to which IFPC undertook to
cause Rand-Whitney to provide technical and marketing know-how and assistance to
our company. This agreement was approved at a time when no members of our board
of directors were affiliated with IFPC or Rand-Whitney. The material terms of
the agreement, as they relate to IFPC's and Rand-Whitney's rights and
obligations with regard to our company, are as follows: we are entitled to call
upon the technical and marketing expertise of Rand-Whitney for advice and
assistance, by telephone, telex or in person, from time to time, as determined
by us. The assistance is to be provided on the most favorable terms possible,
and the compensation for such assistance is to be limited to reimbursement for
out-of-pocket costs and expenses incurred by Rand-Whitney. As part of such
agreement, IFPC agreed to supply up to 80% of our imported paper and forest
products requirements, pursuant to a ten-year right of first refusal, in the
ordinary course of our business and on a competitive basis.

           On March 9, 1998, we and IFPC agreed to extend the initial period of
the supply agreement for an additional ten years through October 2008. This
extension was duly approved by our Audit Committee and our Board of Directors in
March 1998.

           During each of 2000, 2001 and 2002, we purchased 38%, 47% and 49%,
respectively, of our imported paper supply (in terms of cost) from IFPC. We
intend to make future purchases from IFPC on a competitive basis, in our best
interests.

C.         INTERESTS OF EXPERTS AND COUNSEL.

           Not applicable.


ITEM 8.    FINANCIAL INFORMATION

A.         CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

           The Financial Statements required by this item are found at the end
of this annual report, beginning on page F-1.

LEGAL PROCEEDINGS

           In 1993, Tri-Wall brought a claim against Rav Kol-Bo Tagar
(Wechselman) Ltd., or Kol-Bo, the party from which Tri-Wall sub-leased its
facility and property in Netanya, Israel. Tri-Wall's claim sought to enforce its
option to acquire the Netanya facility and property, or the Netanya Property, in
accordance with a sub-lease agreement between Tri-Wall and Kol-Bo. Kol-Bo
subsequently filed a counter-claim against Tri-Wall, which, together with
Tri-Wall's claim, was submitted to arbitration. In May 1994, the arbitrator
ruled in favor of Tri-Wall and Kol-Bo appealed the ruling to the District Court
in Tel Aviv, Israel. On January 10, 2000, the District Court ruled that Tri-Wall
had the right to exercise an option to purchase the Netanya Property directly
from the landowners. Both Kol-Bo and the landowners have


                                       32
<PAGE>
appealed that ruling to the Israeli Supreme Court. In March 2000, Tri-Wall
notified the landowners of the Netanya Property that Tri-Wall had elected to
exercise its option to purchase the Netanya Property. Tri-Wall then delivered
the consideration for the purchase of the Netanya Property, as determined in the
sub-lease agreement between Tri-Wall and Kol Bo, to the landowners. The
landowners rejected Tri-Wall's payment, returned the consideration for the
purchase of the Netanya Property to Tri-Wall and, since March 2000, have
demanded rental payments from Tri-Wall. After failing to resolve this matter
through a mediation process, all parties have submitted their summation to the
Israeli Supreme Court. On December 31, 2002 arguments were heard by the Supreme
Court. The parties await the court's ruling on the matter.

           We do not believe that the outcome of this proceeding will have a
material effect on us. See note 13(b) to consolidated financial statements.

           In 2002, Tri-Wall was notified by the municipality of Netanya of the
municipality's intention to expropriate, without consideration, approximately
24,000 square feet of the aforementioned property on which Tri-Wall's factory is
situated in order to construct a public road.

           In 2000, a lawsuit was filed against us by relatives of a former
employee who was insured by a special insurance policy, known as manager's
insurance. Such relatives claim loss of income resulting from the fact that such
former employee was insured by manager's insurance rather than a pension plan.
In December 2002, we reached a settlement of this claim, the terms of which
require us to pay a total of NIS 80,000 ($17,000).

           On July 29, 2001, several employees of C.D. filed a lawsuit against
C.D. for the payment of a holiday bonus in the aggregate amount of NIS 842,000
($190,700). C.D. has set aside the necessary reserves in its Financial
Statements pursuant to the advice of counsel. See note 13(c) to Consolidated
Financial Statements.

           On December 8, 2002, the Investment Center retroactively cancelled
C.D.'s "approved enterprise" status which was granted to C.D. in 1992. As a
result, C.D. is required to refund certain grants in the amount of $400,000 to
be paid in 36 equal monthly installments commencing August 2002. C.D. has
committed to employ a certain number of employees, as determined by the
Investment Center, until July 2005.

B.         SIGNIFICANT CHANGES.

           Except as otherwise disclosed in this annual report, there has been
no material change in our financial position since December 31, 2002.


                                       33
<PAGE>
ITEM 9.    THE OFFER AND LISTING

A.         OFFER AND LISTING DETAILS.

           The following table sets forth the high and low closing sale prices
of our ordinary shares as reported by the American Stock Exchange for the
calendar periods indicated:

                                                              PRICE PER
                                                            ORDINARY SHARE
                                                            --------------
                                                         HIGH             LOW
                                                         ----             ---
1998
January 1 - December  31.............................   9 3/4           5 3/16

1999
January 1 - March 31.................................   6 1/8           5 1/8
April 1 - June 30....................................   7 1/2           5 7/8
July 1 - September 30................................   8 3/4           7 1/2
October 1 - December 31..............................   8 7/8           6 5/8

2000
January 1 - March 31.................................   9 3/4           8 1/8
April 1 - June 30....................................   8 13/16         7 3/4
July 1 - September 30................................   8 1/2           6 7/8
October 1 - December 31..............................   6 7/8           4 3/4

2001
January 1 - March 31.................................   5 3/5           4 5/8
April 1 - June 30....................................   5 1/5           4 6/7
July 1 - September 30................................   5 1/5           4 9/10
October 1 - December 31..............................   5 1/5           4 9/10

2002
January 1 - March 31.................................   5 7/20          4 4/5
April 1 - June 30....................................   6 1/20          5 2/5
July 1 - September 30................................   5 3/10          4 7/20
October 1 - December 31..............................   4 1/4           3 1/2


                                       34
<PAGE>
2003
January 1 - January 31...............................   4 1/5           3 1/2
February 1 - February 28.............................   4 1/10          4
March 1 - March 31...................................   4 1/10          3 9/10
April 1 - April 30...................................   4 1/10          4 1/20
May 1 - May 31.......................................   4 1/5           4


B.         PLAN OF DISTRIBUTION.

           Not applicable.

C.         MARKETS.

           Since our initial public offering in 1986, our ordinary shares have
traded on the American Stock Exchange under the symbol "KML."

D.         SELLING SHAREHOLDERS.

           Not applicable.

E.         DILUTION.

           Not applicable.

F.         EXPENSES OF THE ISSUE.

           Not applicable.

ITEM 10.   ADDITIONAL INFORMATION

A.         SHARE CAPITAL.

           Not applicable.

B.         MEMORANDUM AND ARTICLES OF ASSOCIATION.

           The following is a summary description of certain provisions of our
Memorandum of Association and Articles of Association:

OBJECTIVE

           Our objective, as stated in our Memorandum of Association, is
primarily the manufacturing, processing, recycling and marketing of all types of
paper and paper-based related products.


                                       35
<PAGE>
OUR BOARD OF DIRECTORS

           The Companies Law requires that certain transactions, actions and
arrangements be approved as provided for in a company's articles of association
and in certain circumstances by the audit committee and by the board of
directors itself. Those transactions that require such approval pursuant to a
company's articles of association must be approved by its board of directors. In
certain circumstances, audit committee and shareholder approval also is
required. The vote required by the audit committee and the board of directors
for approval of such matters, in each case, is a majority of the disinterested
directors participating in a duly convened meeting. Under the Companies Law, the
audit committee is to be comprised of at least three members appointed by the
board of directors, which members must include all of the external directors,
but excluding the chairman of the board of directors, a general manager, the
chief executive officer, a controlling shareholder and any director employed by
the company or who provides services to the company on a regular basis.

           The Companies Law requires that a member of the board of directors or
senior management of the company promptly disclose any personal interest that he
or she may have (either directly or by way of any corporation in which he or she
is, directly or indirectly, 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) and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In
addition, if the transaction is an extraordinary transaction (that is, a
transaction other than in the ordinary course of business, otherwise than on
market terms, or is likely to have a material impact on the company's
profitability, assets or liabilities), the member of the board of directors or
senior management must also disclose any personal interest held by his or her
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouses of any of the foregoing.

           Once the member of the board of directors or senior management
complies with the above disclosure requirement, a company may approve the
transaction in accordance with the provisions of its articles of association. If
the transaction is with a third party in which the member of the board of
directors or senior management has a personal interest, the approval must
confirm that the transaction is not adverse to the company's interest.
Furthermore, if the transaction is an extraordinary transaction, then, in
addition to any approval stipulated by the articles of association, it also must
be approved by the company's audit committee and then by the board of directors,
and, under certain circumstances, by a meeting of the shareholders of the
company.

           Our articles of association provide that, subject to the provisions
of Companies Law, our directors may enter into business transactions with us or
be a party to any transaction in which we are interested, so long as the
interested director discloses to the remaining directors the nature and extent
of his material interest. Subject to certain limited exceptions, a director may
not vote on any resolution concerning a matter in which he has, directly or
indirectly, a material interest. Our shareholders have the power, however, to


                                       36
<PAGE>
suspend, either generally or with respect to a specific matter, any provision of
our articles of association prohibit a director from voting on a certain matter.

           Our directors are entitled to such remuneration that, pursuant to an
ordinary resolution, our shareholders determine to pay them. We do not impose an
age-limit requirement with respect to retirement of our directors and they are
not required to hold any qualification shares.

DESCRIPTION OF SECURITIES

           We are authorized to issue 10,000,000 ordinary shares, par value NIS
1.0 per share.

           The ordinary shares do not have preemptive rights. Neither our
memorandum of association or articles of association nor the laws of the State
of Israel restrict the ownership or voting of ordinary shares by non-residents
of Israel, except for subjects of countries which are enemies of Israel.

           Subject to the Companies Law, we may declare dividends, pursuant to
ordinary resolution, in accordance with the respective rights of our
shareholders, but no dividend shall exceed the amount recommended by our
directors. Dividends may be payable in assets. No dividend or other moneys
payable in respect of a share shall bear interest against us unless otherwise
provided by the rights attached to the share. Any dividend that has remained
unclaimed for 12 years from the date when it became due for payment shall, if
our directors so resolve, be forfeited and cease to remain owing by us.

           Upon our liquidation, the liquidator may, pursuant to an
extraordinary resolution of our shareholders and any other approval required by
law, divide among our shareholders the whole or any part of our assets and may,
for that purpose, value any assets and determine how the division shall be
carried out as between our shareholders or different classes of them. The
liquidator may vest the whole or any part of the assets in trustees, upon such
trusts for the benefit of our shareholders as he determines, but no shareholder
shall be compelled to accept any assets upon which there is a liability.

           Subject to any rights or restrictions attached to any shares, each
shareholder is entitled to one vote for each ordinary share held on all matters
submitted to a vote of shareholders. All general shareholder meetings other than
annual general shareholder meetings shall be called extraordinary general
meetings. Our directors may call general shareholder meetings and, at the
request of our shareholders pursuant to the provisions of the Companies Law,
will convene an extraordinary general meeting, for a date not later than eight
weeks after receipt of the request. If there are not sufficient directors to
call a general meeting located in Israel, any director or any of our
shareholders may call a general meeting.

           Subject to the terms of allotment, our directors may make calls upon
our shareholders in respect of any moneys unpaid on their shares (whether in


                                       37
<PAGE>
respect of nominal value or premium), and each shareholder shall (subject to
receiving at least 14 days' notice specifying when and where payment is to be
made) pay to us as required by the notice the amount called on his shares. A
call may be required to be paid by installments. A call may, before receipt by
us of any sum due thereunder, be revoked in whole or part and payment of a call
may be postponed in whole or part. A person upon whom a call is made shall
remain liable for calls made upon him, notwithstanding the subsequent transfer
of the shares in respect whereof the call was made.

           If at any time our shares are divided into different classes, the
rights attached to any class, unless otherwise provided by the terms of issue of
the shares of that class, may be modified, abrogated or otherwise dealt with by
us, with the consent in writing of the holders of 75% of the issued shares of
that class or pursuant to a special resolution passed at a separate general
meeting of the holders of the shares of that class.

           There are no limitations imposed by our Articles of Association or
the Companies Law with respect to the right to own our shares, including the
rights of non-resident or foreign shareholders to hold or exercise voting rights
of our shares.

           Certain provisions of Israeli corporate and tax law may have the
effect of delaying, preventing or making more difficult a merger or other
acquisition of our company; there are no such provisions in our Articles of
Association.

C.         MATERIAL CONTRACTS.

           On January 1, 2003, we signed an agreement pursuant to which we would
purchase all of the shares of Best Carton Ltd., (Best), from the shareholders of
Best. Pursuant to the terms of the agreement, in consideration for such Best
shares, we would issue to Best's shareholders such number of newly-issued
ordinary shares of our company as would constitute 27.9% of the outstanding
ordinary shares of our company (excluding dormant shares) following the
issuance. The consummation of this transaction was contingent upon the approval
of our shareholders and the authorization of the Supervisor of Restrictive
Business Practices in Israel.

           Concurrent with our agreement with Best, Tri-Wall, entered into an
agreement with Ampal, a member of the controlling group of our company, pursuant
to which Tri-Wall will acquire all of Ampal's holdings in our company (522,000
shares, which currently constitute 21.75% of the currently outstanding ordinary
shares of Carmel), in consideration for $6.75 per share in cash. Upon completion
of this transaction, the acquired shares would become dormant shares. The
consummation of the Tri-Wall/Ampal transaction was contingent upon the
consummation of the Carmel/Best transaction and upon obtaining the
authorizations required by law.

           On May 29, 2003, we were notified that the Supervisor of Restrictive
Business Practices in Israel rejected the proposed transaction. We are currently
assessing all actions available to us in response to the decision of the
Supervisor of Restrictive Business Practices.


                                       38
<PAGE>
D.         EXCHANGE CONTROLS.

           Israeli law and regulations do not impose any material foreign
exchange restrictions on non-Israeli holders of our ordinary shares. In May
1998, a new "general permit" was issued under the Israeli Currency Control Law,
1978, which removed most of the restrictions that previously existed under the
law, and enabled Israeli citizens to freely invest outside of Israel and freely
convert Israeli currency into non-Israeli currencies.

           Any amounts payable upon our dissolution, liquidation or winding up,
as well as the proceeds of any sale in Israel of our ordinary shares to an
Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli
currency, may be converted into freely repatriable dollars at the rate of
exchange prevailing at the time of conversion.

E.         TAXATION.

ISRAELI TAX CONSIDERATIONS

           The following is a discussion of Israeli and United States tax
consequences material to our shareholders. To the extent that the discussion is
based on new tax legislation that has not been subject to judicial or
administrative interpretation, the views expressed in the discussion might not
be accepted by the tax authorities in question. The discussion is not intended,
and should not be construed, as legal or professional tax advice and does not
exhaust all possible tax considerations.

           Holders of our ordinary shares should consult their own tax advisors
as to the United States, Israeli or other tax consequences of the purchase,
ownership and disposition of ordinary shares, including, in particular, the
effect of any foreign, state or local taxes.

TAX REFORM

           On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 5762-2002, known as the Tax Reform, came into effect,
following its enactment by the Israeli Parliament on July 24, 2002. On December
17, 2002, the Israeli Parliament approved a number of amendments to the tax
reform, which also came into effect on January 1, 2003.

           The tax reform introduced the following, among other things:

           o          Reduction of the tax rate levied on capital gains (other
                      than gains deriving from the sale of listed securities)
                      derived after January 1, 2003, to a general rate of 25%
                      for both individuals and corporations. Regarding assets
                      acquired prior to January 1, 2003, the reduced tax rate
                      will apply to a proportionate part of the gain, in


                                       39
<PAGE>
                      accordance with the holding periods of the asset, before
                      or after January 1, 2003, on a linear basis;

           o          Imposition of Israeli tax on all income of Israeli
                      residents, individuals and corporations, regardless of the
                      territorial source of income, including income derived
                      from passive sources such as interest, dividends and
                      royalties;

           o          Introduction of controlled foreign corporation (CFC) rules
                      into the Israeli tax structure. Generally, under such
                      rules, an Israeli resident who holds, directly of
                      indirectly, 10% or more of the rights in a foreign
                      corporation whose shares are not publicly traded, in which
                      more than 50% of the rights are held directly or
                      indirectly by Israeli residents, and a majority of whose
                      income in a tax year is considered passive income, will be
                      liable for tax on the portion of such income attributed to
                      his holdings in such corporation, as if such income were
                      distributed to him as a dividend; and

           o          Imposition of capital gains tax on capital gains realized
                      by individuals as of January 1, 2003, from the sale of
                      shares of publicly traded companies (such gain was
                      previously exempt from capital gains tax in Israel). For
                      information with respect to the applicability of Israeli
                      capital gains taxes on the sale of ordinary shares, see
                      "Capital Gains Tax on Sales of Our Ordinary Shares" below;

           o          Introduction of a new regime for the taxation of shares
                      and options issued to employees and officers (including
                      directors).

GENERAL CORPORATE TAX STRUCTURE

           Generally, Israeli companies are subject to "Company Tax" at the rate
of 36% of taxable income (and are subject to Capital Gains Tax at a rate of 25%
for capital gains derived after January 1, 2003). However, the effective tax
rate payable by a company which derives income from an approved enterprise (as
further discussed below) may be considerably less.

TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

           The Law for the Encouragement of Capital Investments, 1959, as
amended (the "Investment Law"), provides that a proposed capital investment in
eligible facilities may, upon application to the Investment Center of the
Ministry of Industry and Commerce of the State of Israel, be designated as an
approved enterprise. The Investment Center bases its decision as to whether or
not to approve an application on the criteria set forth in the Investment Law
and regulations, the then prevailing policy of the Investment Center, and the
specific objectives and financial criteria of the applicant. Each certificate of
approval for an approved enterprise relates to a specific investment program
delineated both by its financial scope, including its capital sources, and by


                                       40
<PAGE>
its physical characteristics, e.g., the equipment to be purchased and utilized
pursuant to the program.

           The Investment Law provides that an approved enterprise is eligible
for tax benefits on taxable income derived from its approved enterprise programs
under an amendment to the Investments Law that was made within the framework of
the tax reform, it was clarified that tax benefits under the Investments Law
shall also apply to income generated by a company from the grant of a usage
right with respect to know-how developed by the approved enterprise, income
generated from royalties, and income derived from a service which is auxiliary
to such usage right or royalties, provided that such income is generated within
the Approved Enterprise's ordinary course of business. If a company has more
than one approval or only a portion of its capital investments are approved, its
effective tax rate is the result of a weighted average of the applicable rates.
The tax benefits under the Investment Law are not available with respect to
income derived from products manufactured outside of Israel. In addition, the
tax benefits available to an approved enterprise are contingent upon the
fulfillment of conditions stipulated in the Investment Law and regulations and
the criteria set forth in the specific certificate of approval, as described
above, In the event that a company does not meet these conditions, it would be
required to refund the amount of tax benefits, plus a consumer price index
linkage adjustment and interest.

           The Investment Law also provides that an approved enterprise is
entitled to accelerated depreciation on its property and equipment that are
included in an approved enterprise program.

           Taxable income of a company derived from an approved enterprise is
subject to company tax at the maximum rate of 25%, rather than 36%, for the
benefit period. This period is ordinarily seven years commencing with the year
in which the approved enterprise first generates taxable income, and is limited
to twelve years from commencement of production or 14 years from the date of
approval, whichever is earlier.

           A company that has an approved enterprise program is eligible for
further tax benefits if it qualifies as a foreign investors' company. A foreign
investors' company is a company in which more than 25% of its share capital and
combined share and loan capital is owned by non-Israeli residents. A company
that qualifies as a foreign investors' company and has an approved enterprise
program is eligible for tax benefits for a ten year benefit period. As specified
below, depending on the geographic location of the approved enterprise within
Israel, income derived from the approved enterprise program may be exempt from
tax on its undistributed income for a period of between two to ten years, and
will be subject to a reduced tax rate for the remainder of the benefits period.
The tax rate for the for the remainder of the benefits period will be 25%,
unless the level of foreign investment exceeds 49%, in which case the tax rate
will be 20% if the foreign investment is more than 49% and less than 74%; 15% if
more than 74% and less than 90%; and 10% if 90% or more.


                                       41
<PAGE>
           Instead of the foregoing tax benefits, a company may elect to receive
an alternative package of benefits. Under the alternative package of benefits,
our undistributed income derived from the approved enterprise will be exempt
from company tax for a period of between two and ten years from the first year
the company derives taxable income under the program, depending on the
geographic location of the approved enterprise within Israel, and such company
will be eligible for a reduced tax rate for the remainder of the benefits
period. A company that has elected the alternative package of benefits, such as
us, that subsequently pays a dividend out of income derived from the approved
enterprise during the tax exemption period will be subject to tax in respect of
the amount distributed, including any taxes thereon, at the rate which would
have been applicable had it not elected the alternative package of benefits,
generally 10%-25%, depending on the percentage of the company's ordinary shares
held by foreign shareholders. The dividend recipient is taxed at the reduced
rate of 15% applicable to dividends from approved enterprises, if the dividend
is distributed during the tax exemption period or within twelve years
thereafter. The company must withhold this tax at source, regardless of whether
the dividend is converted into foreign currency.

           Subject to applicable provisions concerning income under the
alternative package of benefits, dividends paid by a company are considered to
be attributable to income received from the entire company and the company's
effective tax rate is the result of a weighted average of the various applicable
tax rates, excluding any tax exempt income. Under the Investment Law, a company
that has elected the alternative package of benefits is not obliged to
distribute retained profits, and may generally decide from which year's profits
to declare dividends. We currently intend to reinvest any income derived from
our approved enterprise program and not to distribute such income as a dividend.

           The Israeli government may reduce or eliminate tax benefits available
to approved enterprise programs in the future. We cannot assure you that our
approved program and the benefits thereunder shall continue in the future at its
current level or at any level -- see Item 3 (Risks relating to Location in
Israel), and below - "Proposed Reform of Taxes on Income in Israel".

TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

           Under the Law for the Encouragement of Industry (Taxes), 1969 (the
"Industry Encouragement Law"), Industrial Companies are entitled to the
following preferred corporate tax benefits:

           o          deduction of purchases of know-how and patents over an
                      eight-year period for tax purposes;

           o          right to elect, under specified conditions, to file a
                      consolidated tax return with additional related Israeli
                      Industrial Companies; and

           o          accelerated depreciation rates on equipment and buildings.


                                       42
<PAGE>
           Eligibility for benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. Under the
Industry Encouragement Law, an "Industrial Company" is defined as a company
resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans,
capital gains, interest and dividends, is derived from an "Industrial
Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise
owned by an Industrial Company, whose major activity in a given tax year is
industrial production activity.

           We believe that we currently qualify as an Industrial Company within
the definition of the Industry Encouragement Law. No assurance can be given that
we will continue to qualify as an Industrial Company or that the benefits
described above will be available in the future.

CAPITAL GAINS TAX ON SALES OF OUR ORDINARY SHARES

           Israeli law generally imposes a capital gains tax on the sale of
capital assets located in Israel, including shares in Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available
or a tax treaty between Israel and the shareholder's country of residence
provides otherwise. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is a portion of the total capital gain which
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. The real gain is the excess of the total
capital gain over the inflationary surplus.

           Prior to the tax reform, sales of our ordinary shares by individuals
were generally exempt from Israeli capital gains tax for so long as they were
quoted on the American Stock Exchange or listed on a stock exchange in a country
appearing in a list approved by the Controller of Foreign Currency and we
qualified as an Industrial Company.

           Pursuant to the tax reform, generally, capital gains tax is imposed
at a rate of 15% on real gains derived on or after January 1, 2003, from the
sale of shares in companies, such as ours, whose shares are (i) publicly traded
on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of
Israel. However, this tax rate does not apply to: (i) dealers in securities;
(ii) shareholders that report in accordance with the Inflationary Adjustment
Law; or (iii) shareholders who acquired their shares prior to an initial public
offering (that are subject to a different tax arrangement). The tax basis of
shares acquired prior to January 1, 2003 will be determined in accordance with
the average closing share price in the three trading days preceding January 1,
2003. However, a request may be made to the tax authorities to consider the
actual adjusted cost of the shares as the tax basis if it is higher than such
average price. Moreover, non-Israeli residents are exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on the


                                       43
<PAGE>
Tel Aviv Stock Exchange or a recognized stock exchange outside of Israel,
provided however that such capital gains are not derive from a permanent
establishment in Israel and provided that such shareholders did not acquire
their shares prior to an initial public offering. However, non-Israeli
corporations will not be entitled to such exemption if an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) is the beneficiary or is entitled to 25% or more of the revenues or profits
of such non-Israeli corporation, whether directly or indirectly.

           In any event, the provisions of the tax reform shall not effect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described above.

           In some instances where our shareholders may be liable to Israeli tax
on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source. Pursuant to the
Convention Between the government of the United States of America and the
government of Israel with Respect to Taxes on Income, as amended or the
U.S.-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by
a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as
a resident of the United States within the meaning of the U.S.-Israel Tax Treaty
and (iii) is entitled to claim the benefits afforded to such person by the
U.S.-Israel Tax Treaty generally will not be subject to the Israeli capital
gains tax unless such Treaty U.S. Resident holds, directly or indirectly, shares
representing 10% or more of our voting power during any part of the 12-month
period preceding such sale, exchange or disposition, subject to certain
conditions. In this case, the sale, exchange or disposition of ordinary shares
would be subject to Israeli tax, to the extent applicable; however, under the
U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a
credit for such taxes against the U.S. federal income tax imposed with respect
to such sale, exchange or disposition, subject to the limitations in U.S. laws
applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to
U.S. state or local taxes.

TAXATION OF NON-RESIDENT HOLDERS OF SHARES

           Non-residents of Israel are subject to income tax on income accrued
or derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest, as well as non-passive income from
services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, income tax at the rate of up to 25% is withheld at
source, unless a different rate is provided in a treaty between Israel and the
shareholder's country of residence. Under the U.S.-Israel Tax Treaty, the
maximum tax on dividends paid to a holder of ordinary shares who is a Treaty
U.S. Resident is 25%. However, under the Investment Law, dividends generated by
an Approved Enterprise are taxed at the rate of 15%. Furthermore, dividends not
generated by an Approved Enterprise paid to a U.S. company holding 10% or more
of our ordinary shares are taxed at a rate of 12.5%.

           Under an amendment to the Inflationary Adjustments Law, non-Israeli
corporations might be subject to Israeli taxes on the sale of traded securities


                                       44
<PAGE>
in an Israeli company, subject to the provisions of any applicable double
taxation treaty or unless a specific exemption is available.

           For information with respect to the applicability of Israeli capital
gains taxes on the sale of ordinary shares by United States residents, see
Capital Gains Tax on Sales of Our Ordinary Shares above.

EXCHANGE CONTROLS

FOREIGN EXCHANGE REGULATIONS

           Dividends (if any) paid to the holders of our ordinary shares, and
any amounts payable upon our dissolution, liquidation or winding up, as well as
the proceeds of any sale in Israel of our ordinary shares, may be paid in
non-Israeli currency or, if paid in Israeli currency, may be converted into
freely repatriable dollars at the rate of exchange prevailing at the time of
conversion.

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

           Subject to the limitations described herein, the following discussion
summarizes the material United States federal income tax consequences to a U.S.
Holder of our ordinary shares. A "U.S. Holder" means a holder of our ordinary
shares who is:

           o          a citizen or resident of the United States;

           o          a corporation (or other entity taxable as a corporation)
                      created or organized in the United States or under the
                      laws of the United States or any political subdivision
                      thereof;

           o          an estate, the income of which is subject to United States
                      federal income tax regardless of its source; or

           o          a trust, (i) if, in general a court within the United
                      States is able to exercise primary supervision over its
                      administration and one or more U.S. persons have the
                      authority to control all of its substantial decisions, or
                      (ii) that has in effect a valid election under applicable
                      U.S. Treasury regulations to be treated as a U.S. person.

           This discussion considers only U.S. Holders that will own their
ordinary shares as capital assets and does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to each
person's decision to purchase ordinary shares.

           This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, or the Code, current and proposed Treasury
regulations promulgated thereunder, and administrative and judicial decisions as
of the date hereof, all of which are subject to change, possibly on a
retroactive basis. Under current consideration are various legislative proposals


                                       45
<PAGE>
under which, among other things, certain dividends would be excluded from income
and individual income tax rates on ordinary income would be reduced. It is not
clear at this time whether, or in what form, any of such legislative proposals
(or other proposals) will be enacted, what the effective date of any such
changes would be, and what other changes would be made that could further affect
the tax consequences discussed herein. This discussion does not address all
aspects of United States federal income taxation that may be relevant to any
particular U.S. holder in light of such Holder's individual circumstances. In
particular, this discussion does not address the potential application of the
alternative minimum tax or United States federal income tax consequences to
shareholders that are subject to special treatment, including Holders that:

           o          are broker-dealers or insurance companies;

           o          have elected mark-to-market accounting;

           o          are tax-exempt organizations or retirement plans;

           o          are financial institutions or "financial services
                      entities";

           o          hold ordinary shares as part of a straddle, "hedge" or
                      "conversion transaction" with other investments;

           o          acquired their shares upon the exercise of employee stock
                      options or otherwise as compensation;

           o          hold their shares through partnerships or other
                      pass-through entities;

           o          own directly, indirectly or by attribution at least 10% of
                      our voting power; or

           o          have a functional currency that is not the U.S. dollar.

           In addition, this discussion does not address any aspect of state,
local or non-United States tax laws or the possible application of United States
federal gift or estate tax.

           EACH HOLDER OF ORDINARY SHARES IS ADVISED TO CONSULT SUCH PERSON'S
OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF
PURCHASING, HOLDING OR DISPOSING OF OUR ORDINARY SHARES, INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX AND
OTHER TAX LAWS IN SUCH PERSON'S PARTICULAR CIRCUMSTANCES.


                                       46
<PAGE>
TAXATION OF ORDINARY SHARES

           Taxation of Dividends Paid On Ordinary Shares. A U.S. Holder will be
required to include in gross income as ordinary dividend income the amount of
any distribution paid on ordinary shares, including any Israeli taxes withheld
from the amount paid, on the date the distribution is received to the extent the
distribution is paid out of our current or accumulated earnings and profits as
determined for United States federal income tax purposes. Distributions in
excess of such earnings and profits will be applied against and will reduce the
U.S. Holder's basis in our ordinary shares and, to the extent in excess of such
basis, will be treated as gain from the sale or exchange of our ordinary shares.
The dividend portion of such distributions generally will not qualify for the
dividends received deduction available to corporations.

           Distributions of current or accumulated earnings and profits paid in
foreign currency to a U.S. Holder (including any Israeli taxes withheld
therefrom) will be includible in the income of a U.S. Holder in a U.S. dollar
amount calculated by reference to the exchange rate on the day the distribution
is received. A U.S. Holder that receives a foreign currency distribution and
converts the foreign currency into U.S. dollars subsequent to receipt will have
foreign exchange gain or loss based on any appreciation or depreciation in the
value of the foreign currency against the U.S. dollar, which will generally be
U.S. source ordinary income or loss.

           U.S. Holders will have the option of claiming the amount of any
Israeli income taxes withheld at source either as a deduction from gross income
or as a dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of the Israeli
income taxes withheld, but such amount may be claimed as a credit against the
individual's United States federal income tax liability. The amount of foreign
income taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. These limitations include, among others, rules which limit
foreign tax credits allowable with respect to specific classes of income to the
United States federal income taxes otherwise payable with respect to each such
class of income. The total amount of allowable foreign tax credits in any year
cannot exceed regular U.S. tax liability for the year attributable to foreign
source taxable income. A U.S. Holder will be denied a foreign tax credit with
respect to Israeli income tax withheld from a dividend received on the ordinary
shares if such U.S. Holder has not held the ordinary shares for at least 16 days
of the 30-day period beginning on the date which is 15 days before the
ex-dividend date with respect to such dividend, or to the extent such U.S.
Holder is under an obligation to make related payments with respect to
substantially similar or related property. Any days during which a U.S. Holder
has substantially diminished its risk of loss on the ordinary shares are not
counted toward meeting the required 16 day holding period. Distributions of
current or accumulated earnings and profits will be foreign source passive
income for United States foreign tax credit purposes.


                                       47
<PAGE>
           Taxation of the Disposition of Ordinary Shares. Upon the sale,
exchange or other disposition of our ordinary shares, a U.S. Holder will
recognize capital gain or loss in an amount equal to the difference between such
U.S. Holder's basis in such ordinary shares, which is usually the cost of such
shares, and the amount realized on the disposition. A U.S. Holder that uses the
cash method of accounting calculates the U.S. dollar value of the proceeds
received on the sale as of the date that the sale settles, while a U.S. Holder
that uses the accrual method of accounting is required to calculate the value of
the proceeds of the sale as of the "trade date," unless such U.S. Holder has
elected to use the settlement date to determine its proceeds of sale. Capital
gain from the sale, exchange or other disposition of ordinary shares held more
than one year is long-term capital gain, and is eligible for a reduced rate of
taxation for individuals. Gains recognized by a U.S. Holder on a sale, exchange
or other disposition of ordinary shares will be treated as United States source
income for United States foreign tax credit purposes. A loss recognized by a
U.S. Holder on the sale, exchange or other disposition of ordinary shares is
allocated to U.S. source income. The deductibility of a capital loss recognized
on the sale, exchange or other disposition of ordinary shares is subject to
limitations. A U.S. Holder that receives foreign currency upon disposition of
ordinary shares and converts the foreign currency into U.S. dollars subsequent
to the settlement date or trade date (whichever date the taxpayer was required
to use to calculate the value of the proceeds of sale) will have foreign
exchange gain or loss based on any appreciation or depreciation in the value of
the foreign currency against the U.S. dollar, which will generally be U.S.
source ordinary income or loss.

TAX CONSEQUENCES FOR NON-US.  HOLDERS OF ORDINARY SHARES

           Except as described in "Information Reporting and Back-up
Withholding" below, a non-U.S. Holder of ordinary shares will not be subject to
U.S. federal income or withholding tax on the payment of dividends on, and the
proceeds from the disposition of, ordinary shares, unless:

           o          such item is effectively connected with the conduct by the
                      non-U.S. Holder of a trade or business in the United
                      States and, in the case of a resident of a country which
                      has a treaty with the United States, such item is
                      attributable to a permanent establishment or, in the case
                      of an individual, a fixed place of business, in the United
                      States;

           o          the non-U.S. Holder is an individual who holds the
                      ordinary shares as a capital asset and is present in the
                      United States for 183 days or more in the taxable year of
                      the disposition and does not qualify for an exemption; or

           o          the non-U.S. Holder is subject to tax pursuant to the
                      provisions of United States tax law applicable to U.S.
                      expatriates.


                                       48
<PAGE>
INFORMATION REPORTING AND BACK-UP WITHHOLDING

           U.S. Holders generally are subject to information reporting
requirements with respect to dividends paid in the United States on ordinary
shares. Under the Code, a U.S. Holder may be subject, under certain
circumstances, to backup withholding at a rate of up to 30% with respect to
dividends paid on our ordinary shares unless the holder provides proof of an
applicable exemption or correct taxpayer identification number and otherwise
complies with applicable requirements of the backup withholding rules.

           A holder of ordinary shares who does not provide a correct taxpayer
identification number may be subject to penalties imposed by the IRS. Amounts
withheld under the backup withholding rules are not an additional tax and may be
refunded or credited against the holder's federal income tax liability, provided
the required information is furnished to the IRS.

           Non-U.S. Holders generally are not subject to information reporting
or back-up withholding with respect to dividends paid on, or the proceeds from
the disposition of, ordinary shares, provided that such non-U.S. Holder provides
a taxpayer identification number, certifies to its foreign status, or otherwise
establishes an exemption.

F.         DIVIDENDS AND PAYING AGENTS.

           Not applicable.

G.         STATEMENTS BY EXPERTS.

           Not applicable.

H.         DOCUMENTS ON DISPLAY.

           We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), applicable to foreign
private issuers and fulfill the obligation with respect to such requirements by
filing reports with the Securities and Exchange Commission. You may read and
copy any document we file with the Securities and Exchange Commission without
charge at the Securities and Exchange Commission's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may be
obtained by mail from the Public Reference Branch of the Securities and Exchange
Commission at such address, at prescribed rates. Please call the Securities and
Exchange Commission at l-800-SEC-0330 for further information on the public
reference room.

           As a foreign private issuer, we are 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
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the Securities and Exchange Commission as


                                       49
<PAGE>
frequently or as promptly as United States companies whose securities are
registered under the Exchange Act. A copy of each report submitted in accordance
with applicable United States law is available for public review at our
principal executive offices.

I.         SUBSIDIARY INFORMATION.

           Not applicable.

ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

FOREIGN CURRENCY RISK

           Our operating expenses are influenced by changes in the exchange
rates between the NIS and foreign currencies, especially the U.S. dollar. Our
financial expenses increase when the NIS is devalued against such currencies. At
December 31, 2002, our financial liabilities linked to the dollar amounted to
NIS 35.4 million ($7.5 million). In 2002, our financial liabilities denominated
in foreign currencies represented 20.7% of our total financial liabilities,
compared to NIS 32.6 million amounting to 19% of the financial liabilities in
2001. Our financial assets in 2002 linked to foreign currency were NIS 1.9
million ($0.4 million) compared to NIS 1.3 million in 2001. See note 17 to our
Consolidated Financial Statements.

           In the ordinary course of our operations, we purchase option
contracts to hedge our net exposures, by currency, related to the foreign
currency and to the Israeli CPI denominated monetary assets and liabilities of
our operations. We do not use derivative financial instruments for speculative
or trading purposes. The dollar amount underlying such derivative financial
instruments at December 31, 2002 was NIS 3.8 million ($0.8 million), compared to
NIS 6.6 million on December 31, 2001. These transactions were valid until March
2003 and the expenses associated therewith were not large enough to affect our
operating results. We paid a premium of 1.65% for 90-day option warrants. To
hedge our net exposures to an increase in the Israeli CPI, we purchased a
derivative instrument which has since expired.

           As of December 31, 2002, we had NIS 6.2 million ($1.3 million) debt
linked to the Israeli CPI amounting to 3.6% of our financial liabilities in the
year 2002, compared with NIS 18.5 million which amounted to 10.8% of our
financial liabilities as of December 31, 2001.

           Despite our hedging transactions, our outstanding financial
liabilities at December 31, 2002 are exposed to exchange rate differentials.
Based on the volume of the foreign currency liabilities described above, a 5%
rise in the exchange rate may lead to additional financial expenses of NIS 1.7
million ($335,000).

                                       50
<PAGE>
INTEREST RATE RISK

           Of our financial liabilities denominated in foreign currency, or
those linked to foreign currency, as of December 31, 2002, the long-term
liabilities amounted to NIS 2.8 million ($0.6 million), compared to NIS 5.6
million on December 31, 2001. This loan bears interest at a rate of LIBOR +0.7%
and is therefore sensitive to changes in the LIBOR interest rate.

           Changes of 5% in the LIBOR interest rate pose no significant effect
on our financial expenses.

ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

           Not applicable.


                                     PART II

ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

           Not applicable.

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

           Not applicable.

ITEM 15.   CONTROLS AND PROCEDURES

           (a) Within 90 days prior to the filing date of this Annual Report on
Form 20-F, we have carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective in assuring that all material information
relating to our company is made known to them.

           (b) There have been no significant changes in our internal controls
or in other factors, which could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this Annual Report on Form 20-F.

ITEM 16.   [RESERVED]

                                       51
<PAGE>
                                    PART III

ITEM 17.   FINANCIAL STATEMENTS

           We have responded to Item 18 in lieu of this item.

ITEM 18.   FINANCIAL STATEMENTS

           The Financial Statements required by this item are found at the end
of this annual report, beginning on page F-1.

ITEM 19.   EXHIBITS

           The exhibits filed with or incorporated into this annual report are
listed on the index of exhibits below:


      EXHIBIT
        NO.           DESCRIPTION
------------------    ----------------------------------------------------------
       1.1            Memorandum of Association*

       1.2            Articles of Association*

       4.1            Carmel Container Systems Ltd. 1999 Senior Employee Stock
                      Option Plan **

       8              Subsidiaries of Carmel Container Systems Ltd.***

      12.1            Consent of Kost, Forer & Gabbay****

      12.2            Certification pursuant to 18 U.S.C.ss.1350****

      12.3            Certification pursuant to 18 U.S.C.ss.1250****


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

*          Incorporated herein by reference to our Registration Statement on
           Form F-1 (Registration No. 3308150).

**         Incorporated herein by reference to our Registration Statement of
           Form S-8 (Registration No. 333-10002).

***        Incorporated herein by reference to our annual report on Form 20-F
           for the year ended December 31, 2000.

****       Filed herewith.


                                       52
<PAGE>
                                   SIGNATURES

           Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                        CARMEL CONTAINER SYSTEMS LTD.

Dated: June 20, 2003                    By: /s/ Doron Kempler
                                            -----------------------------------
                                            General Manager





















                                       53
<PAGE>
                                 CERTIFICATIONS

I, Doron Kempler, certify that:

1. I have reviewed this annual report on Form 20-F of Carmel Container Systems,
Ltd.;

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
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

           a. designed such disclosure controls and procedures to ensure that
           material information relating to the registrant, including its
           consolidated subsidiaries, is made known to us by others within those
           entities, particularly during the period in which this annual report
           is being prepared;

           b. evaluated the effectiveness of the registrant's disclosure
           controls and procedures as of a date within 90 days prior to the
           filing date of this annual report (the "Evaluation Date"); and

           c. presented in this annual report our conclusions about the
           effectiveness of the disclosure controls and procedures based on our
           evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

           a. all significant deficiencies in the design or operation of
           internal controls which could adversely affect the registrant's
           ability to record, process, summarize and report financial data and
           have identified for the registrant's auditors any material weaknesses
           in internal controls; and

           b. any fraud, whether or not material, that involves management or
           other employees who have a significant role in the registrant's
           internal controls;


<PAGE>
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: June 20, 2003


                                          /s/ Doron Kempler
                                          -----------------------------------
                                          General Manager


<PAGE>
                                CERTIFICATIONS

I, Daniel Attias, certify that:

1. I have reviewed this annual report on Form 20-F of Carmel Container Systems,
Ltd.;

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
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

           a. designed such disclosure controls and procedures to ensure that
           material information relating to the registrant, including its
           consolidated subsidiaries, is made known to us by others within those
           entities, particularly during the period in which this annual report
           is being prepared;

           b. evaluated the effectiveness of the registrant's disclosure
           controls and procedures as of a date within 90 days prior to the
           filing date of this annual report (the "Evaluation Date"); and

           c. presented in this annual report our conclusions about the
           effectiveness of the disclosure controls and procedures based on our
           evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

           a. all significant deficiencies in the design or operation of
           internal controls which could adversely affect the registrant's
           ability to record, process, summarize and report financial data and
           have identified for the registrant's auditors any material weaknesses
           in internal controls; and

           b. any fraud, whether or not material, that involves management or
           other employees who have a significant role in the registrant's
           internal controls; and

<PAGE>
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: June 20, 2003


                                   /s/ Daniel Attias
                                   ----------------------------------------
                                   Chief Financial Officer


<PAGE>


                          CARMEL CONTAINER SYSTEMS LTD.


                                AND SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2002


                      ADJUSTED TO THE NIS OF DECEMBER 2002



                                      INDEX


                                                             PAGE
                                                       ------------------

REPORT OF INDEPENDENT AUDITORS                                F-2

CONSOLIDATED BALANCE SHEETS                                F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                         F-5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                 F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                      F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                F-9 - F-50

APPENDIX - LIST OF INVESTEES                                 F-51


                              - - - - - - - - - - -

<PAGE>
ERNST & YOUNG

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                          CARMEL CONTAINER SYSTEMS LTD.


         We have audited the accompanying consolidated balance sheets of Carmel
Container Systems Ltd. ("the Company") and its subsidiaries as of December 31,
2001 and 2002, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 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 did not audit the financial statements of certain subsidiaries,
whose assets included in the consolidation constitute approximately 20% and 10%
of total consolidated assets as of December 31, 2001 and 2002, respectively, and
whose revenues included in the consolidation constitute approximately 30%, 29%
and 9% of total consolidated revenues for each of the three years ended December
31, 2000, 2001 and 2002, respectively. The financial statements of those
companies were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for those
companies is based on the reports of the other auditors.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States and in Israel, including those prescribed by the
Israeli Auditors' Regulations (Auditor's Mode of Performance), 1973. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.

         In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2001 and 2002, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in Israel, which differ in certain respects from those followed in the United
States (see Note 21 to the consolidated financial statements).

         As explained in Note 2, the consolidated financial statements referred
to above have been prepared on the basis of historical cost adjusted to reflect
the changes in the general purchasing power of the Israeli currency, in
accordance with pronouncements of the Institute of Certified Public Accountants
in Israel.




Tel-Aviv, Israel                                     KOST FORER & GABBAY
March 4, 2003                                  A Member of Ernst & Young Global


                                      F-2
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2002


<TABLE>
<CAPTION>
                                                                                                                    CONVENIENCE
                                                                                                                    TRANSLATION
                                                                                                                     (NOTE 2C)
                                                                                         DECEMBER 31,            -----------------
                                                                               --------------------------------      DECEMBER 31,
                                                                                  2001                 2002             2002
                                                                               --------------   ----------------------------------
                                                                                         ADJUSTED NIS                  U.S. $
                                                                               --------------------------------  -----------------
                                                                                                    (IN THOUSANDS)
<S>                                                                            <C>               <C>             <C>
      ASSETS

                                 CURRENT ASSETS:
    Cash and cash equivalents                                                          490              648               137
    Trade receivables, (net of allowance for doubtful accounts of adjusted
      NIS 3,738 thousand and adjusted NIS 2,515 thousand as of December 31,
      2001 and 2002, respectively) (Note 3)                                        110,543            1,345            25,616
    Other accounts receivable and prepaid expenses (Note 4)                    *)    3,398            4,182               883
    Inventories (Note 5)                                                            54,984           49,872            10,528
                                                                               --------------   ---------------  -----------------

 Total current assets                                                              169,415          176,047            37,164
                                                                               --------------   ---------------  -----------------

 SEVERANCE PAY FUND, NET (Note 12)                                                      14               -                  -
                                                                               --------------   ---------------  -----------------

 PROPERTY AND EQUIPMENT, NET (Note 6)                                          *)  152,878         130,509             27,551
                                                                               --------------   ---------------  -----------------

 Total assets                                                                      322,307         306,556             64,715
                                                                               ==============   ===============  =================

</TABLE>

*) Reclassified.


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




                                      F-3
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2002 (EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                                     CONVENIENCE
                                                                                                                     TRANSLATION
                                                                                                                      (NOTE 2C)
                                                                                         DECEMBER 31,            -------------------
                                                                               --------------------------------      DECEMBER 31,
                                                                                    2001             2002               2002
                                                                               --------------   ---------------  -------------------
                                                                                         ADJUSTED NIS                   U.S. $
                                                                               --------------------------------  -------------------
                                                                                                 (IN THOUSANDS)
<S>                                                                            <C>              <C>              <C>
      LIABILITIES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES:
    Short-term credit from banks and others (Note 8)                                 12,016           10,399          2,195
    Current maturities of long-term loans and capital lease obligations
      (Note 11)                                                                      25,158           31,233          6,593
    Trade payables (Note 9)                                                          58,304           76,004         16,045
    Other accounts payable and accrued expenses (Note 10)                            14,946           15,818          3,339
                                                                               --------------   ---------------  -------------------

 Total current liabilities                                                          110,424          133,454         28,172
                                                                               --------------   ---------------  -------------------

 LONG-TERM LIABILITIES:
    Long-term loans from banks and others (Note 11)                                  49,517           30,113          6,357
    Capital lease obligations (Note 11)                                              11,593            7,584          1,601
    Accrued severance pay, net (Note 12)                                                  -              479            101
    Deferred income taxes (Note 16g)                                                 14,272            7,962          1,681
                                                                               --------------   ---------------  -------------------

 Total long-term liabilities                                                         75,382           46,138          9,740
                                                                               --------------   ---------------  -------------------

 CONTINGENT LIABILITIES AND COMMITMENTS (Note 13)

 MINORITY INTEREST IN SUBSIDIARY                                                     12,163           11,341          2,395
                                                                               --------------   ---------------  -------------------

 SHAREHOLDERS' EQUITY (Note 15):
    Share capital - Ordinary shares of NIS 1.0 par value: 10,000,000 shares
      authorized as of December 31, 2001 and 2002; 2,520,000 issued and
      outstanding as of
      December 31, 2001 and 2002                                                     24,169           24,169          5,102
    Additional paid-in capital                                                       46,281           46,281          9,770
    Retained earnings                                                                58,227           49,512         10,452
                                                                               --------------   ---------------  -------------------

                                                                                    128,677          119,962         25,324
 Less - shares held by a subsidiary                                                   4,339            4,339            916
                                                                               --------------   ---------------  -------------------

 Total shareholders' equity                                                         124,338          115,623         24,408
                                                                               --------------   ---------------  -------------------

 Total liabilities and shareholders' equity                                         322,307          306,556         64,715
                                                                               ==============   ===============  ===================

</TABLE>

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

                                      F-4
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2002


<TABLE>
<CAPTION>
                                                                                                               CONVENIENCE
                                                                                                               TRANSLATION
                                                                                                                (NOTE 2C)
                                                                                                            -----------------
                                                                         YEAR ENDED DECEMBER 31,               YEAR ENDED
                                                           -----------------------------------------------    DECEMBER 31,
                                                                2000             2001            2002             2002
                                                           --------------   --------------  --------------  -----------------
                                                                             ADJUSTED NIS                         U.S. $
                                                           -----------------------------------------------  -----------------
                                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>              <C>             <C>             <C>
 Revenues from sales, net (Note 20)                              412,577          356,722         344,086             72,637
 Cost of revenues (Note 19a)                                     357,399          322,375         317,187             66,960
                                                           --------------   --------------  --------------  -----------------

 Gross profit                                                     55,178           34,347          26,899              5,677
                                                           --------------   --------------  --------------  -----------------

 Selling and marketing expenses (Note 19b)                        18,870           18,417          17,079              3,605
 General and administrative expenses (Note 19c)                   27,458           19,831          18,026              3,806
                                                           --------------   --------------  --------------  -----------------

                                                                  46,328           38,248          35,105              7,411
                                                           --------------   --------------  --------------  -----------------

 Operating income (loss)                                           8,850          (3,901)         (8,206)            (1,734)
 Financial expenses, net (Note 19d)                              (8,662)         (11,069)         (6,193)            (1,307)
                                                           --------------   --------------  --------------  -----------------

                                                                     188         (14,970)        (14,399)            (3,041)
 Other income (expenses), net (Note 19e)                             750              155         (1,177)              (248)
                                                           --------------   --------------  --------------  -----------------

 Income (loss) before tax benefit                                    938         (14,815)        (15,576)            (3,289)
 Tax benefit (Note 16)                                             (643)          (5,673)         (6,039)            (1,275)
                                                           --------------   --------------  --------------  -----------------

 Income (loss) after tax benefit                                   1,581          (9,142)         (9,537)            (2,014)
 Minority interest in losses (earnings) of a subsidiary            (555)              236             822                174
                                                           --------------   --------------  --------------  -----------------

 Net income (loss)                                                 1,026          (8,906)         (8,715)            (1,840)
                                                           ==============   ==============  ==============  =================

 Basic net earnings (loss) per NIS 1 par value of shares
    (in adjusted NIS)                                               0.41           (3.71)          (3.63)             (0.76)
                                                           ==============   ==============  ==============  =================

 Weighted average number of shares outstanding during
    the year (in thousands)                                        2,491            2,400           2,400              2,400
                                                           ==============   ==============  ==============  =================

</TABLE>


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

                                      F-5
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2002

<TABLE>
<CAPTION>
                                            SHARE        ADDITIONAL                       LESS -SHARES           TOTAL
                                           CAPITAL         PAID-IN        RETAINED          HELD BY          SHAREHOLDERS'
                                          (NOTE 15)        CAPITAL        EARNINGS         SUBSIDIARY            EQUITY
                                       --------------- --------------- --------------- ------------------ --------------------
                                                                            ADJUSTED NIS
                                       ---------------------------------------------------------------------------------------
                                                                           (IN THOUSANDS)
<S>                                    <C>             <C>              <C>            <C>                <C>
 Balance at January 1, 2000                    24,169          46,281          66,107              (305)              136,252

    Purchase of shares by subsidiary                -               -               -            (4,034)              (4,034)
    Net income                                      -               -           1,026                  -                1,026
                                       --------------- --------------- --------------- ------------------ --------------------

 Balance at December 31, 2000                  24,169          46,281          67,133            (4,339)              133,244

    Net loss                                        -               -         (8,906)                  -              (8,906)
                                       --------------- --------------- --------------- ------------------ --------------------

 Balance at December 31, 2001                  24,169          46,281          58,227            (4,339)              124,338

    Net loss                                        -               -         (8,715)                  -              (8,715)
                                       --------------- --------------- --------------- ------------------ --------------------

 Balance at December 31, 2002                  24,169          46,281          49,512            (4,339)              115,623
                                       =============== =============== =============== ================== ====================


                                                              CONVENIENCE TRANSLATION INTO U.S. $ (NOTE 2C)
                                       ---------------------------------------------------------------------------------------
                                                                             (IN THOUSANDS)

 Balance at January 1, 2002                     5,102           9,770          12,292              (916)               26,248

    Net loss                                        -               -         (1,840)                  -              (1,840)
                                       --------------- --------------- --------------- ------------------ --------------------

 Balance at December 31, 2002                   5,102           9,770          10,452              (916)               24,408
                                       =============== =============== =============== ================== ====================

</TABLE>



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


                                      F-6
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2002


<TABLE>
<CAPTION>
                                                                                                                  CONVENIENCE
                                                                                                                  TRANSLATION
                                                                                                                   (NOTE 2C)
                                                                                                               -----------------
                                                                                YEAR ENDED DECEMBER 31,            YEAR ENDED
                                                             -----------------------------------------------      DECEMBER 31,
                                                                   2000            2001            2002              2002
                                                             ---------------  --------------  ---------------  -----------------
                                                                                ADJUSTED NIS                        U.S. $
                                                             -----------------------------------------------   -----------------
                                                                                       (IN THOUSANDS)
<S>                                                          <C>              <C>             <C>              <C>
 Cash flows from operating activities:
    Net income (loss)                                                 1,026         (8,906)          (8,715)            (1,840)
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
      Minority interest in earnings (losses) of a
         subsidiary                                                     555           (236)            (822)              (174)
      Depreciation                                                   28,571          27,298           26,056              5,501
      Deferred income taxes, net                                      (643)         (5,673)          (6,377)            (1,346)
      Accrued severance pay, net                                       (34)           (412)              493                104
      Capital gain on sale of property and equipment, net             (185)           (155)            (159)               (34)
      Erosion of long-term loans and capital lease
         obligations                                                   (14)           (140)          (3,939)              (832)
      Decrease (increase) in trade receivables                        9,035          16,930         (10,802)            (2,280)
      Decrease (increase) in other accounts receivable and
         prepaid expenses                                               127             708            (844)              (178)
      Decrease in inventories                                         1,396          10,997            5,112              1,079
      Increase (decrease) in trade payables                         (8,371)         (1,530)           17,700              3,737
      Increase (decrease) in other accounts
      payable and accrued expenses                                  (1,402)         (3,558)              380                 80
                                                             ---------------  --------------  ---------------  -----------------

 Net cash provided by operating activities                           30,061          35,323           18,083              3,817
                                                             ---------------  --------------  ---------------  -----------------

 Cash flows from investing activities:
    Purchase of property and equipment                             (28,974)        (10,789)          (2,431)              (513)
    Proceeds from investment grants                                      44               -                -                  -
    Proceeds from sale of property and equipment                     18,802             675              763                161
    Refund of an investment grant                                         -               -            (258)               (54)
                                                             ---------------  --------------  ---------------  -----------------

 Net cash used in investing activities                             (10,128)        (10,114)          (1,926)              (406)
                                                             ---------------  --------------  ---------------  -----------------

</TABLE>


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


                                      F-7
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2002


<TABLE>
<CAPTION>
                                                                                                                 CONVENIENCE
                                                                                                                 TRANSLATION
                                                                                                                  (NOTE 2C)
                                                                                                               ---------------
                                                                               YEAR ENDED DECEMBER 31,            YEAR ENDED
                                                             ------------------------------------------------    DECEMBER 31,
                                                                 2000             2001             2002             2002
                                                             -------------   --------------   ---------------  ---------------
                                                                                 ADJUSTED NIS                       U.S. $
                                                             ------------------------------------------------  ---------------
                                                                                       (IN THOUSANDS)
<S>                                                          <C>             <C>              <C>              <C>
 Cash flows from financing activities:
    Purchase of shares by subsidiary                              (4,034)                -                 -                -
    Proceeds from long-term loans                                  42,805           15,968            10,150            2,143
    Principal payments of long-term loans                        (43,413)         (20,398)          (24,532)          (5,179)
    Principal payments of loans from a related party              (1,619)          (1,911)                 -                -
    Short-term credit from bank and others, net                  (13,588)         (18,892)           (1,617)            (341)
                                                             -------------   --------------   ---------------  ---------------

 Net cash used in financing activities                           (19,849)         (25,233)          (15,999)          (3,377)
                                                             -------------   --------------   ---------------  ---------------

 Increase (decrease) in cash and cash equivalents                      84             (24)               158               34
 Cash and cash equivalents at the beginning of the year               430              514               490              103
                                                             -------------   --------------   ---------------  ---------------

 Cash and cash equivalents at the end of the year                     514              490               648              137
                                                             =============   ==============   ===============  ===============

 a. Non-cash activity:

           Liability in respect to an investment grant
             refund                                                     -                -             1,602              338
                                                             =============   ==============   ===============  ===============

 b.        Supplemental disclosure of cash flows activities:
           Cash paid during the year for:

           Interest                                                 8,990            8,891             7,369            1,556
                                                             =============   ==============   ===============  ===============

           Income taxes                                                30               22                29                6
                                                             =============   ==============   ===============  ===============

</TABLE>



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


                                      F-8
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1:-   GENERAL

           a.         Carmel Container Systems Ltd. ("Carmel Systems" or "the
                      Company"), an Israeli corporation, is an industrial
                      company. The products of the Company and its subsidiaries
                      ("the Group") are marketed mainly in Israel.

                      The Group designs, manufactures and markets shipping
                      containers, consumer packaging products and packaging
                      wooden pallets and boxes. The Group's sales are to a large
                      number of customers mainly in Israel.

           b.         Definitions:

                      In these financial statements:

                      The Group           - Carmel Containers Ltd. and its
                                            subsidiaries (refer to enclosed
                                            list).

                      Subsidiaries        - Companies in which more than 50% of
                                            the voting equity is owned or
                                            controlled by the Company (as
                                            defined in Opinion 57 of the
                                            Institute of Certified Public
                                            Accountants in Israel) and whose
                                            accounts are consolidated with those
                                            of the Company.

                      Jointly controlled
                         entity           - a company owned by several entities
                                            among which there is a contractual
                                            consent for joint control, and whose
                                            accounts are consolidated with those
                                            of the Company using the
                                            proportionate consolidation method.

                      Related parties     - as defined in Opinion 29 of the
                                            Institute of Certified Public
                                            Accountants in Israel.


NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES

           The consolidated financial statements presented herein are prepared
           in accordance with generally accepted accounting principles ("GAAP")
           in Israel, which differ in certain respects from those followed in
           the United States, as described in Note 21.

           a.         Use of estimates:

                      The preparation of financial statements in conformity with
                      generally accepted accounting principles requires
                      management to make estimates and assumptions that affect
                      the amounts reported in the financial statements and
                      accompanying notes. Actual results could differ from those
                      estimates.


                                      F-9
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

           b.         Financial statements in adjusted New Israeli Shekels:

                      1.         The Group maintains its accounting records in
                                 nominal New Israeli Shekels (NIS). In
                                 accordance with the Statements of the Institute
                                 of Certified Public Accountants in Israel, all
                                 the amounts in the financial statements
                                 (including comparative figures) are presented
                                 in adjusted NIS, which have a constant
                                 purchasing power. The purchasing power of
                                 adjusted NIS reflects the average price level
                                 in December 2002, according to the Israeli
                                 Consumer Price Index ("CPI") published on
                                 January 15, 2003 (182.0 points on the average
                                 basis of 1993 = 100).

                      2.         The adjusted amounts of non-monetary assets do
                                 not necessarily represent realizable value or
                                 current economic value, but only the original
                                 historical cost of those assets in terms of
                                 adjusted NIS.

                      3.         The term "cost" in these consolidated financial
                                 statements signifies cost in adjusted NIS.

           c.         Principles of adjustments:

                      1.         Balance sheet:

                                 a)         Non-monetary items (items whose
                                            amounts in the balance sheet reflect
                                            their nominal amounts upon
                                            acquisition or incurrence, see
                                            below) have been adjusted on the
                                            basis of the changes in the Israeli
                                            CPI since their acquisition or
                                            incurrence.

                                            Items which were treated as
                                            non-monetary include: inventories,
                                            property and equipment and the
                                            related accumulated depreciation,
                                            share capital and additional paid-in
                                            capital derived from cash received
                                            from shareholders.

                                 b)         Minority interest in subsidiary and
                                            the related operating results for
                                            the reported year, are included on
                                            the basis of the adjusted financial
                                            statements of that company.

                                 c)         Deferred income taxes are computed
                                            based on the adjusted figures (see
                                            j. below).

                                 d)         Monetary items (items whose amounts
                                            in the balance sheet reflect current
                                            or realizable values) are presented
                                            in the balance sheet as of December
                                            31, 2002 in their nominal amounts
                                            (comparative figures have been
                                            adjusted to the December 2002
                                            Israeli CPI).


                                      F-10
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

           2.         Statement of operations:

                      a)         The components of the statement of operations
                                 (except for financing), relating to
                                 transactions carried out during the year -
                                 sales, purchases, labor costs, etc., have been
                                 adjusted at monthly indices at the time the
                                 related transactions were carried out or paid.
                                 The erosion of monetary balances relating to
                                 the aforesaid transactions has been included in
                                 financial income or expenses.

                      b)         The components of the statement of operations
                                 relating to non-monetary items included in the
                                 balance sheet, (such as changes in inventories,
                                 depreciation, capital gains and minority
                                 interest in subsidiary) have been adjusted on
                                 the same basis used for the adjustment of the
                                 related balance sheet items.

                      c)         The components of the statement of operations
                                 relating to provisions included in the balance
                                 sheet, such as liability in respect of accrued
                                 severance pay and accrued vacation pay, have
                                 been included according to the analysis of the
                                 adjusted change in the related balance sheet
                                 items after their relative cash flows are taken
                                 into account.

                      d)         Current taxes includes the expense which
                                 derives from the erosion of the value of the
                                 payments on account from the date of payment to
                                 the end of the year.

                                 As for deferred income taxes, see j. below.

                      e)         The financing item, net, reflects real
                                 financial income and expenses and results of
                                 the derivative financial instruments, as well
                                 as the erosion of monetary balances during the
                                 year.

           3.         Convenience translation into U.S. dollars:

                      The adjusted financial statements as of December 31, 2002
                      and for the year then ended, have been translated into
                      U.S. dollars using the representative exchange rate of the
                      U.S. dollars as of such date (U.S.$ 1 = NIS 4.737). The
                      translation was made solely for the convenience of the
                      readers. It should be noted that the adjusted New Israeli
                      Shekel figures do not necessarily represent the current
                      costs of the various elements presented, and that the
                      translated U.S. dollar figures should not be construed to
                      represent amounts receivable or payable in dollars, or
                      convertible into dollars, unless otherwise indicated in
                      these statements.

           4.         Data regarding Israeli CPI and exchange rates of foreign
                      currency:

                      1.         Assets and liabilities in or linked to foreign
                                 currency are included in the financial
                                 statements according to the representative
                                 exchange rates as published by the Bank of
                                 Israel on December 31, 2002.

                      2.         Assets and liabilities linked to the Israeli
                                 CPI are included in the financial statements
                                 according to the relevant index for each asset
                                 or liability.


                                      F-11
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

           The following are details of the Israeli CPI and the exchange rate of
           the U.S. dollar:

<TABLE>
<CAPTION>
                                                                                   EXCHANGE RATE
        AT DECEMBER 31:                         ISRAELI CPI                      OF THE U.S. DOLLAR
        ----------------                ----------------------------        -----------------------------
                                                 POINTS *)                              NIS
                                        ----------------------------        -----------------------------
<S>                                     <C>                                 <C>
        2002                                        182.0                              4.737
        2001                                        170.9                              4.416
        2000                                        168.5                              4.041
        1999                                        168.5                              4.153

        CHANGES DURING THE YEAR:                     %                                   %
        ------------------------        ----------------------------        -----------------------------

        2002                                          6.5                                7.3
        2001                                          1.4                                9.3
        2000                                          -                                 (2.7)

</TABLE>

                      *)         According to the Israeli CPI for the month
                                 ending on the balance sheet date on an average
                                 basis of 1993 = 100.


           d.         Principles of consolidation:

                      The consolidated financial statements include the accounts
                      of Carmel Systems and its over 50% controlled subsidiaries
                      and a jointly controlled entity (see list of investees).
                      Intercompany balances and transactions among the Company
                      and the subsidiaries (wholly consolidated or consolidated
                      using the proportionate consolidation method) have been
                      eliminated in consolidation. As for tax aspects, see j.
                      below.

           e.         Cash equivalents:

                      Cash equivalents are considered by the Company to be
                      highly liquid investments, which include unrestricted
                      short-term bank deposits originally purchased with
                      maturities of three months or less.

           f.         Allowance for doubtful debts:

                      Such allowance is determined in respect of specific debts
                      which, based on management's estimation, are doubtful of
                      collection.


                                      F-12
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

           g.         Inventories:

                      Inventories are stated at the lower of cost or market
                      value. Cost of inventories is determined on the following
                      basis:

                      Raw materials and goods in transit - using the "first-in,
                      first-out" method.

                      Supplies and packaging materials - on the basis of
                      moving-average cost.

                      Work in progress and finished products - on the basis of
                      computed direct manufacturing costs with allocable
                      indirect manufacturing costs.

           h.         Property and equipment:

                      1.         The assets are stated at cost, net of related
                                 investment grants received from the State of
                                 Israel under the terms of the Law for the
                                 Encouragement of Capital Investments and net of
                                 accumulated depreciation. Cost of pallets and
                                 spare parts are stated as base stock.

                      2.         Depreciation is computed using the
                                 straight-line method over the estimated useful
                                 lives of the assets. The annual depreciation
                                 rates are as follows:

                                                                %
                                                    ---------------------------

         Buildings                                              8
         Machinery and equipment                              6 - 10
         Motor vehicles and forklifts                        10 - 15
         Office furniture and equipment                       6 - 33
         Leasehold improvements                     over the term of the lease

                      The Company and its subsidiaries periodically assess the
                      recoverability of the carrying amount of property and
                      equipment, providing for any possible impairment losses,
                      based upon the excess of carrying amount over the fair
                      value of such assets in accordance with IAS 36 "Impairment
                      of Assets" ("IAS 36"). As of December 31, 2002, no
                      impairment losses have been identified.

           i.         Sale - leaseback transaction:

                      The Company accounts for sales with leasebacks in
                      accordance with Statement of Financial Accounting
                      Standards ("SFAS") 28, "Accounting for Sales With
                      Leasebacks".

                      The Company entered into two sale - leaseback transactions
                      of machinery and equipment. The first transaction occurred
                      in September 1998 for the aggregate amount of adjusted NIS
                      15,858 thousand and the second transaction occurred in
                      October 2000 for the aggregate amount of adjusted NIS
                      17,965 thousand. The unearned gain is immaterial. The
                      Company retains the option to purchase the machinery and
                      equipment at the end of the lease period.

                      The leases are capital leases for a period of four years
                      and five years, respectively.


                                      F-13
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

           During September 2002, upon the fulfillment of its liability under
           the first lease the Company exercised its option to purchase the
           machinery and equipment under the lease in consideration of adjusted
           NIS 65 thousand.

           The Company depreciates the leased machinery and equipment over the
           remaining estimated useful lives of the machinery and equipment
           (approximately ten years).

           j.         Deferred income taxes:

                      1.         Deferred income taxes are computed in respect
                                 of temporary differences between the carrying
                                 amounts of the assets and liabilities included
                                 in these financial statements and those to be
                                 considered for tax purposes. The Company and
                                 its subsidiaries provide a valuation allowance
                                 for capital losses, to reduce deferred tax
                                 assets to their estimated realizable value. As
                                 for the main components in respect of which
                                 deferred income taxes have been included, see
                                 Note 16g.

                      2.         Deferred income tax balances are computed at
                                 the enacted tax rate expected to be effect at
                                 the time when these taxes will be released to
                                 the statement of operations. The amount
                                 presented in the statement of income represents
                                 the changes in the said balances during the
                                 reported year.

                      3.         The Company has not recorded deferred income
                                 taxes for the realization of investments in
                                 subsidiaries that management intends to retain.
                                 Similarly, deferred income taxes have not been
                                 provided for future taxable distributions from
                                 subsidiaries, since it is the Company's policy
                                 not to initiate a distribution of dividend that
                                 involves an additional tax liability to the
                                 Group.

           k.         Revenue recognition:

                      Revenues from sales net of discounts are recognized when
                      persuasive evidence of an agreement exists, delivery of
                      the products has occurred, the fee is fixed or
                      determinable, collectibility is probable and no
                      significant obligations remain.

           l.         Earnings per share:

                      Earnings per share are computed based on the weighted
                      average number of shares outstanding during the year, in
                      accordance with Opinion 55 of the Institute of Certified
                      Public Accountants in Israel.

                      All outstanding stock options have been excluded from the
                      calculation of the net loss per share, because all the
                      outstanding stock options are anti-dilutive for all
                      periods presented. As of December 31, 2002, all the
                      options have been expired.

           m.         Derivative financial instruments:

                      The Company enters into call option contracts to hedge
                      certain of its balance sheet exposure against changes in
                      foreign currency exchange rates and in changes in the CPI.
                      Such exposure is a result of the portion of the Company's
                      liabilities being denominated in currencies other than NIS
                      or indexed to the CPI.


                                      F-14
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                      Gains and losses on the options are included in the
                      statement of operations in financial expenses, net, along
                      with the exchange rate changes of the underlying foreign
                      currency denominated liabilities. During the year ended
                      December 31, 2002, the Company recognized a net gain of
                      adjusted NIS 235 thousand.

                      All of the foreign exchange contracts are due by March
                      11, 2003.

                      The Company neither holds nor issues financial instruments
                      for trading or speculative purposes.

                      The Company had foreign exchange call option contracts of
                      NIS 3,808 thousand outstanding at December 31, 2002.

           n.         Advertising expenses:

                      Advertising expenses are carried to the statement of
                      operations as incurred. Advertising expenses for the years
                      ended December 31, 2000, 2001 and 2002, were approximately
                      adjusted NIS 422 thousand, adjusted NIS 251 thousand and
                      adjusted NIS 247 thousand ($ 52 thousand), respectively.

           o.         Severance pay:

                      The Company's liability for severance pay, which reflects
                      the undiscounted amount of liability, is calculated
                      pursuant to Israeli severance pay law based on the most
                      recent salary of the employees multiplied by the number of
                      years of employment, as of the balance sheet date.
                      Employees are entitled to one month's salary for each year
                      of employment or a portion thereof. The Company's
                      liability for all of its employees, is fully provided by
                      monthly deposits with insurance policies and by an
                      accrual.

                      The deposited funds include profits accumulated up to the
                      balance sheet date. The deposited funds may be withdrawn
                      only upon the fulfillment of the obligation pursuant to
                      Israeli severance pay law or labor agreements. The value
                      of the deposited funds is based on the cash surrendered
                      value of these policies, and includes immaterial profits.

                      Severance expenses for the years ended December 31, 2000,
                      2001 and 2002, amounted to approximately adjusted NIS
                      2,512 thousand, adjusted NIS 2,287 thousand and adjusted
                      NIS 3,361 thousand ($ 710 thousand), respectively.

           p.         Fair value of financial instruments:

                      The following disclosures of the estimated fair value of
                      financial instruments have been determined by the Company
                      using available market information and valuation
                      methodologies described below. However, considerable
                      judgment is required in interpreting market data to
                      develop the estimates of fair value. Accordingly, the
                      estimates presented herein may not be indicative of the
                      amounts that the company could realize in a current market
                      exchange. The use of different market assumptions or
                      valuation methodologies may have a material effect on the
                      estimated fair value amounts.


                                      F-15
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                      The carrying values of cash and cash equivalents, trade
                      receivables, short-term credit from banks and others and
                      trade payables approximate their fair values due to the
                      short-term maturities of these instruments.

                      The carrying amount of the Company's long-term borrowing
                      arrangements and capital lease obligations approximates
                      their fair value. The fair value of the Company's
                      long-term borrowings and capital lease obligations is
                      estimated using discounted cash flows analysis, based on
                      the Company's current incremental borrowing rates for
                      similar types of borrowing arrangements.

           q.         Accounting for stock based compensation:

                      The Company has elected to follow Accounting Principles
                      Board Opinion No. 25 "Accounting for Stock Issued to
                      Employees" ("APB No. 25") and Interpretation No. 44
                      "Accounting for Certain Transactions Involving Stock
                      Compensation" ("FIN No. 44") in accounting for its
                      employee stock option plans. Under APB 25, when the
                      exercise price of the Company's share options is less than
                      the market price of the underlying shares on the date of
                      grant, compensation expense is recognized.

                      As of December 31, 2002 all options have been expired.

           r.         Concentration of credit risk:

                      Financial instruments that potentially subject the Company
                      to concentrations of credit risk consist principally of
                      cash and cash equivalents and trade receivables.

                      The Company's cash and cash equivalents are invested in
                      deposits in major Israeli banks. Management believes that
                      the financial institutions that hold the Company's
                      investments are financially sound and, accordingly,
                      minimal credit risk exists with respect to these
                      investments.

                      Concentrations of credit risk with respect to trade
                      receivables are limited due to the large number of
                      entities comprising the Company's customer base and their
                      dispersion across many different industries. The Company
                      performs ongoing credit evaluations of its debtors. In
                      management's estimations, the allowance for doubtful debts
                      adequately covers anticipated losses in respect of its
                      accounts receivable credits risks.

           s.         Reclassification:

                      Certain amounts from prior years have been reclassified to
                      conform with current period presentation.


                                      F-16
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

           t.         Implementation of new accounting standards and their
                      impact on the financial statements

                      During October 2001, the Israel Accounting Standards Board
                      published Accounting Standard No. 12 with respect to the
                      discontinuation of the adjustment of financial statements,
                      and Accounting Standard No. 13 with respect to the effect
                      of the changes in the exchange rates for foreign
                      currencies. In August 2002, Accounting Standard No. 14 was
                      published with respect to fiscal reporting for interim
                      periods, and in December 2002, Accounting Standard No. 15
                      was published with respect to the decline in the value of
                      assets. In December 2002, Accounting Standard No. 17 was
                      published with respect to deferral of application of
                      Standards No. 12 and 13 as described below.

                      According to Standard No. 12 and No. 17, which deal with
                      the adjustment of financial statements, financial
                      statements will discontinue to be adjusted for inflation
                      in Israel commencing January 1, 2004. Until December 31,
                      2003, the Company will continue to prepare adjusted
                      financial statements in conformity with Opinion No. 36 of
                      the Institute of Certified Public Accountants in Israel.
                      The adjusted amounts included in the financial statements
                      as of December 31, 2003, will serve as the starting point
                      for nominal financial reporting beginning January 1, 2004.

                      In accordance with the provisions of Accounting Standard
                      No. 13 and No. 17, it is possible to continue adjusting
                      the financial statements pursuant to the changes in the
                      foreign currency exchange rates in accordance with section
                      29(a) to Opinion No. 36 of the Institute of Certified
                      Public Accountants in Israel up until the date on which
                      the Accounting Standards Board will publish a new Standard
                      regarding this issue. This Standard requires disclosure
                      with respect to the reasons for presenting the financial
                      statements in foreign currency. In addition, this Standard
                      requires disclosure with respect to any change whatsoever
                      in the reporting currency.

                      The objective of Accounting Standard No. 14, which deals
                      with fiscal reporting for interim periods, is to determine
                      the minimum content for financial reporting for interim
                      periods, as well as to determine the recognition and
                      measurement principles in financial statements for interim
                      periods. This Accounting Standard, which is based on
                      International Accounting Standard No. 34, "Interim
                      Financial Reporting", and Opinion No. 60 that deals with
                      the amendment of Opinion No. 43 with respect to the
                      cancellation of the obligation to include information
                      regarding nominal data in financial statements for interim
                      periods, will apply in respect to financial statements for
                      periods beginning on or after January 1, 2003.

                      Accounting Standard No. 15, which deals with the decline
                      in the value of assets, is based on International
                      Accounting Standard No. 36 "Impairment of Assets", and
                      prescribes the accounting treatment in the case of a
                      decline/elimination of the decline, in the value of a
                      company's assets, including investments in affiliates that
                      are not subsidiaries, goodwill arising from the
                      acquisition of subsidiaries and fair value adjustments.
                      This Standard will apply with respect to financial
                      statements for periods commencing on or after January 1,
                      2003. The Council of the Israel Accounting Standards Board
                      deferred the coming into force of Accounting Standard No.
                      15 until March 3, 2003.

                      Management does not anticipate that the adoption of the
                      new Standards, as discussed above, will have a significant
                      effect on its results of operations, financial position
                      and cash flows.


                                      F-17
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3:-   TRADE RECEIVABLES

           a.         Composition:

<TABLE>
<CAPTION>
                                                                                                       CONVENIENCE
                                                                                                       TRANSLATION
                                                                     DECEMBER 31,                ------------------------
                                                       ----------------------------------------        DECEMBER 31,
                                                              2001                 2002                    2002
                                                       -------------------  -------------------  ------------------------
                                                                     ADJUSTED NIS                         U.S. $
                                                       ----------------------------------------  ------------------------
                                                                                 (IN THOUSANDS)
<S>                                                    <C>                  <C>                  <C>
    Open accounts                                                 100,620              106,243                    22,428
    Notes receivable                                               13,661               17,617                     3,719
                                                       -------------------  -------------------  ------------------------

                                                                  114,281              123,860                    26,147
    Less - allowance for doubtful debts                             3,738                2,515                       531
                                                       -------------------  -------------------  ------------------------

                                                                  110,543              121,345                    25,616
                                                       ===================  ===================  ========================
</TABLE>

           b.         As for balances with related parties, see Note 18b.

NOTE 4:-   OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

<TABLE>
<CAPTION>
                                                                                                        CONVENIENCE
                                                                                                        TRANSLATION
                                                                      DECEMBER 31,                ------------------------
                                                        ----------------------------------------        DECEMBER 31,
                                                               2001                 2002                    2002
                                                        -------------------  -------------------  ------------------------
                                                                      ADJUSTED NIS                         U.S. $
                                                        ----------------------------------------  ------------------------
                                                                                  (IN THOUSANDS)
<S>                                                     <C>                   <C>                 <C>
                  Related parties (1)                                  737                  990                       209
                  Employees                                            138                  149                        31
                  Government authorities                               442                  402                        85
                  Deferred income taxes (2)                            660                  600                       127
                  Prepaid expenses                                   1,039                1,636                       345
                  Other receivables                                    382                  405                        86
                                                        -------------------  -------------------  ------------------------

                                                                     3,398                4,182                       883
                                                        ===================  ===================  ========================

                 (1) See Note 18b.
                 (2) See Note 16g.


NOTE 5:-   INVENTORIES

                  Raw materials                                     31,915               32,209                     6,799
                  Supplies and packaging materials                   2,540                2,147                       453
                  Work in progress                                   1,942                1,457                       308
                  Finished products                                 12,887               11,069                     2,337
                                                        -------------------  -------------------  ------------------------

                                                                    49,284               46,882                     9,897
                  Goods in transit                                   5,700                2,990                       631
                                                        -------------------  -------------------  ------------------------

                                                                    54,984               49,872                    10,528
                                                        ===================  ===================  ========================
</TABLE>

                                      F-18
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6:-   PROPERTY AND EQUIPMENT, NET

           a.      Composition:

<TABLE>
<CAPTION>
                                                    MACHINERY   MOTOR     OFFICE                 PALLETS               CONVENIENCE
                                                       AND     VEHICLES  FURNITURE              AND SPARE              TRANSLATION
                                        LAND AND    EQUIPMENT    AND        AND      LEASEHOLD    PARTS -              -----------
                                        BUILDINGS     *)**)   FORKLIFTS  EQUIPMENT IMPROVEMENTS BASE STOCK   TOTAL        TOTAL
                                        ---------  ---------- --------- ---------- ------------ ---------- ----------- -----------
                                                                       ADJUSTED NIS                                       U.S. $
                                        ------------------------------------------------------------------------------ -----------
                                                                              (IN THOUSANDS)
<S>                                     <C>        <C>        <C>       <C>        <C>          <C>       <C>          <C>
Cost at January 1, 2002                    9,766     352,814    13,605     22,410       14,556     11,561     424,712      89,658
   Additions during the year                 419       1,351        13        642            6          -       2,431         513
   Refund of an investment grant (Note
     16a1)                                     -       1,860         -          -            -          -       1,860         393
   Disposals during the year                   -         252     2,246          9            -          9       2,516         531
                                        ---------  ---------- --------- ---------- ------------ ---------- ----------- -----------

Balance at December 31, 2002              10,185     355,773    11,372     23,043       14,562     11,552     426,487      90,033
                                        ---------  ---------- --------- ---------- ------------ ---------- ----------- -----------

Accumulated depreciation at
   January 1, 2002                         9,291     222,477     9,046     18,712       12,308          -     271,834      57,385
   Additions during the year                 221      22,424     1,293      1,547          304        267      26,056       5,501
   Disposals during the year                   -         222     1,681          9            -          -       1,912         404
                                        ---------  ---------- --------- ---------- ------------ ---------- ----------- -----------

Balance at December 31, 2002               9,512     244,679     8,658     20,250       12,612        267     295,978      62,482
                                        ---------  ---------- --------- ---------- ------------ ---------- ----------- -----------

Depreciated cost at December 31, 2002        673     111,094     2,714      2,793        1,950     11,285     130,509      27,551
                                        =========  ========== ========= ========== ============ ========== =========== ===========

Depreciated cost at December 31, 2001        475     130,337     4,559      3,698        2,248     11,561     152,878      32,273
                                        =========  ========== ========= ========== ============ ========== =========== ===========

</TABLE>

           *)         Net of investment grant (see Note 2h) amounting to
                      adjusted NIS 1,165 thousand ($ 246 thousand) and adjusted
                      NIS 3,501 thousand as for the years ended December 31,
                      2002 and 2001, respectively.

           **)        Including machinery and equipment under capital lease -
                      cost amounting to adjusted NIS 32,535 thousand ($ 6,868
                      thousand) and accumulated depreciation amounting to
                      adjusted NIS 10,399 thousand ($ 2,195 thousand) as for
                      December 31, 2002. See Notes 7 and 11.

b.         As for charges, see Note 14. As for claims, see Note 13b.

c.         Depreciation expenses amounted to adjusted NIS 28,571 thousand,
           adjusted NIS 27,298 thousand and adjusted NIS 26,056 thousand ($
           5,501 thousand) for the years ended December 31, 2000, 2001 and 2002,
           respectively.

                                      F-19
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 7:-   LEASES

           a.         The facilities which include offices and warehouses of the
                      Company and its subsidiaries are rented under operating
                      leases for various periods ending 2016.

           b.         Future minimum rental commitments under the aforementioned
                      non-cancelable leases (all of which are operating leases)
                      are linked either to the exchange rate of the U.S. dollar
                      or to the Israeli CPI in effect as of balance sheet date,
                      as follows:

<TABLE>
<CAPTION>
                                                                                             CONVENIENCE
                                                                                             TRANSLATION
                                                                                       ------------------------
                                                                  ADJUSTED NIS                  U.S. $
                                                            ------------------------   ------------------------
                                                                              (IN THOUSANDS)
<S>                                                         <C>                        <C>
              For the years ending December 31,

              2003                                                           13,422                      2,833
              2004                                                           11,784                      2,488
              2005                                                           10,257                      2,165
              2006                                                           10,257                      2,165
              2007 and thereafter                                            89,952                     18,989
                                                            ------------------------   ------------------------

                                                                            135,672                     28,640
                                                            ========================   ========================
</TABLE>

                      Rent expenses amounted to approximately adjusted NIS
                      13,570 thousand, adjusted NIS 13,304 thousand and adjusted
                      NIS 13,404 thousand ($ 2,830 thousand) for the years ended
                      December 31, 2000, 2001 and 2002, respectively.

           c.         The Company leases under capital lease machinery and
                      equipment for a period of 4 years commencing September
                      1998 and for a period of 5 years commencing October 2000
                      (see also Note 2i). In September 2002, the Company
                      fulfilled its liability of the first lease. As for future
                      payments under the capital lease, see Note 11.




                                      F-20
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8:-   SHORT-TERM CREDIT FROM BANKS AND OTHERS

           a.         Composition:

<TABLE>
<CAPTION>
                                                                                                      CONVENIENCE
                                                                                                      TRANSLATION
                                                                       UNLINKED                   --------------------
                                                        ---------------------------------------         UNLINKED
                               AVERAGE INTEREST RATE                 DECEMBER 31,                 --------------------
                             -------------------------  ---------------------------------------       DECEMBER 31,
                                 2001         2002             2001                 2002                  2002
                             ------------ ------------  ------------------   ------------------   --------------------
                                         %                           ADJUSTED NIS                        U.S. $
                             -------------------------  ---------------------------------------   --------------------
                                                                               (IN THOUSANDS)
<S>                          <C>                        <C>                  <C>                  <C>
  Overdrafts                         7.5         11.0                 282                  473                    100
  Short-term credit from
     banks                           3.9         10.2               8,539                6,926                  1,462
  Short-term credit from
     others                         13.0         18.2               3,195                3,000                    633
                                                        ------------------   ------------------   --------------------

                                                                   12,016               10,399                  2,195
                                                        ==================   ==================   ====================
</TABLE>


           b.         As of December 31, 2002, the Company and its subsidiaries
                      had authorized credit lines from several banks in the
                      amount of adjusted NIS 3,725 thousand, which bear interest
                      at the average rate of Prime +1.8%.

                      The weighted average interest rate of short-term credit in
                      unlinked NIS as of December 31, 2001 and 2002, was
                      approximately 6.4% and 12.5%, respectively.

                      The Company and its subsidiaries had an unused credit
                      facility in the amount of approximately adjusted NIS 3,252
                      thousand ($ 687 thousand) as of December 31, 2002 (there
                      is no fee for the unused portion of the credit facility).

           c.         As for charges to collateralize part of the short-term
                      loans and credit, see Note 14.



                                      F-21
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 9:-   TRADE PAYABLES

<TABLE>
<CAPTION>
                                                                                                                CONVENIENCE
                                                                                                                TRANSLATION
                                                                              DECEMBER 31,                ------------------------
                                                                 ---------------------------------------        DECEMBER 31,
                                                                       2001                 2002                    2002
                                                                 ------------------  -------------------  ------------------------
                                                                              ADJUSTED NIS                         U.S. $
                                                                 ---------------------------------------  ------------------------
                                                                                          (IN THOUSANDS)
<S>                                                              <C>                 <C>                  <C>
                Trade payables                                              53,500               68,856                    14,536
                Notes payable                                                4,804                7,148                     1,509
                                                                 ------------------  -------------------  ------------------------

                                                                            58,304               76,004                    16,045
                                                                 ==================  ===================  ========================

                Including shareholders (1)                                  11,804               21,666                     4,574
                                                                 ==================  ===================  ========================

                Including related companies of a shareholder (1)            11,036               18,705                     3,949
                                                                 ==================  ===================  ========================

                (1) See Note 18a.


NOTE 10:-   OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                                                                                CONVENIENCE
                                                                                                                TRANSLATION
                                                                              DECEMBER 31,                ------------------------
                                                                 ---------------------------------------        DECEMBER 31,
                                                                       2001                 2002                    2002
                                                                 ------------------  -------------------  ------------------------
                                                                              ADJUSTED NIS                         U.S. $
                                                                 ---------------------------------------  ------------------------
                                                                                          (IN THOUSANDS)

                Related companies of a shareholder (1)                          77                1,338                       282
                Liabilities to employees and payroll accruals               11,719               10,620                     2,242
                Government authorities                                         602                1,010                       213
                Deferred income taxes (2)                                      127                    -                         -
                Accrued expenses (3)                                         2,128                1,803                       381
                Other                                                          293                1,047                       221
                                                                 ------------------  -------------------  ------------------------

                                                                            14,946               15,818                     3,339
                                                                 ==================  ===================  ========================
                (1) See Note 18a.

                (2) See Note 16g.

                (3) Including liability to a shareholder
                    (see Note 18a.)                                            505                    -                         -
                                                                 ==================  ===================  ========================
</TABLE>


                                      F-22
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:-   LONG-TERM LOANS FROM BANKS , OTHERS AND CAPITAL LEASE OBLIGATIONS

           a.         Composition of long-term loans from banks and others.

                      1.         Banks:

<TABLE>
<CAPTION>
                                                                                                         CONVENIENCE
                                                                                                         TRANSLATION
                                                                       DECEMBER 31,                ------------------------
                                                         ----------------------------------------        DECEMBER 31,
                                                                2001                 2002                    2002
                                                         -------------------  -------------------  ------------------------
                                                                       ADJUSTED NIS                         U.S. $
                                                         ----------------------------------------  ------------------------
                                                                                   (IN THOUSANDS)
<S>                                                      <C>                  <C>                  <C>
              Banks                                                  68,352               57,062                    12,046
              Less - current maturities                              18,835               27,931                     5,896
                                                         -------------------  -------------------  ------------------------

                                                                     49,517               29,131                     6,150
                                                         ===================  ===================  ========================

      2. Capital lease obligations:
              Capital lease obligations                              17,916               10,886                     2,298
              Less - current maturities                               6,323                3,302                       697
                                                         -------------------  -------------------  ------------------------

                                                                     11,593                7,584                     1,601
                                                         ===================  ===================  ========================


      3. Liability in respect to an investment
                 grant refund (Note 16a(1))                               -                1,602                       338
              Less - current maturities (included in
                 other accounts payable)                                  -                  620                       131
                                                         -------------------  -------------------  ------------------------
                                                         -------------------  -------------------  ------------------------

                                                                          -                  982                       207
                                                         ===================  ===================  ========================
</TABLE>

                      As to pledges to secure these liabilities, see Note 14.

           b.         The loans are classified by linkage terms and interest
                      rates as follows:

                         1. Banks:

<TABLE>
<CAPTION>
                                                                                                  CONVENIENCE
                                                                                                  TRANSLATION
                                      AVERAGE                          AMOUNT                  ------------------
                                     INTEREST          --------------------------------------        AMOUNT
                                       RATE                         DECEMBER 31,               ------------------
                             ------------------------- --------------------------------------     DECEMBER 31,
                                 2001         2002           2001                 2002                2002
                             ------------  ----------- -----------------   ------------------  ------------------
  LINKAGE TERMS                          %                          ADJUSTED NIS                     U.S. $
 --------------------------- ------------------------- --------------------------------------  ------------------
                                                                             (IN THOUSANDS)
<S>                          <C>           <C>         <C>                 <C>                 <C>
  Unlinked                       5.5          10.0               47,923               48,000              10,133
  Israeli CPI                    4.8           4.7               14,786                6,220               1,313
  In or linked U.S. $            3.1           3.1                5,643                2,842                 600
                                                       -----------------   ------------------  ------------------

                                                                 68,352               57,062              12,046
                                                       =================   ==================  ==================
</TABLE>

                                      F-23
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:-   LONG-TERM LOANS FROM BANKS, OTHERS AND CAPITAL LEASE OBLIGATIONS
            (CONT.)

           2.         Capital lease obligations:

<TABLE>
<CAPTION>
                                                                                                               CONVENIENCE
                                                                                                               TRANSLATION
                                                 INTEREST RATE                       AMOUNT                -------------------
                                          --------------------------- ------------------------------------       AMOUNT
                                                 DECEMBER 31,                     DECEMBER 31,             -------------------
                                          --------------------------- ------------------------------------    DECEMBER 31,
                                              2001          2002            2001               2002               2002
                                          ------------ -------------- -----------------  ----------------- -------------------
               LINKAGE TERMS                           %                          ADJUSTED NIS                   U.S. $
              --------------------------- --------------------------- ------------------------------------ -------------------
<S>                                       <C>                         <C>                <C>               <C>
               Israeli CPI                    5.8            -                   3,113                  -                   -
               Unlinked                       9.3           9.3                 14,803             10,886               2,298
                                                                      -----------------  ----------------- -------------------

                                                                                17,916             10,886               2,298
                                                                      =================  ================= ===================

       3.         Liability in respect to an investment grant
                  refund (unlinked)                          -                       -              1,602                 338
                                                                      =================  ================= ===================

</TABLE>

           c.         Repayment dates subsequent to the balance sheet date are
                      as follows:

                      1.         Banks:

<TABLE>
<CAPTION>
                                                                                                           CONVENIENCE
                                                                                                           TRANSLATION
                                                                                                     -----------------------
                                                                                DECEMBER 31,              DECEMBER 31,
                                                                                    2002                      2002
                                                                          ------------------------   -----------------------
                                                                                ADJUSTED NIS                 U.S. $
                                                                          ------------------------   -----------------------
                                                                                            (IN THOUSANDS)
<S>                                                                       <C>                        <C>
                  First year (current maturities)                                          27,931                     5,896
                                                                          ------------------------   -----------------------

                  Second year                                                              15,129                     3,194
                  Third year                                                                6,245                     1,318
                  Fourth year                                                               6,395                     1,350
                  Fifth year                                                                1,362                       288
                                                                          ------------------------   -----------------------

                                                                                           29,131                     6,150
                                                                          ------------------------   -----------------------

                                                                                           57,062                    12,046
                                                                          ========================   =======================

         2. Capital lease obligations:

                  First year (current maturities)                                           3,302                       697
                                                                          ------------------------   -----------------------

                  Second year                                                               3,619                       764
                  Third year                                                                3,965                       837
                                                                          ------------------------   -----------------------

                                                                                            7,584                     1,601
                                                                          ------------------------   -----------------------

                                                                                           10,886                     2,298
                                                                          ========================   =======================
</TABLE>

                                      F-24
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:-   LONG-TERM LOANS FROM BANKS, OTHERS AND CAPITAL LEASE OBLIGATIONS
            (CONT.)

           3.         Liability in respect to an investment grant refund

<TABLE>
<CAPTION>
                                                                                                       CONVENIENCE
                                                                                                       TRANSLATION
                                                                                                 ------------------------
                                                                            DECEMBER 31,               DECEMBER 31,
                                                                                2002                       2002
                                                                      ------------------------   ------------------------
                                                                            ADJUSTED NIS                  U.S. $
                                                                      ------------------------   ------------------------
                                                                                        (IN THOUSANDS)
<S>                                                                   <C>                        <C>
                                  First year (current maturities)                         620                        131
                                                                      ------------------------   ------------------------

                                  Second year                                             620                        131
                                  Third year                                              362                         76
                                                                      ------------------------   ------------------------

                                                                                          982                        207
                                                                      ------------------------   ------------------------

                                                                                        1,602                        338
                                                                      ========================   ========================
</TABLE>


NOTE 12:-  ACCRUED SEVERANCE PAY, NET

           a.         Severance pay and retirement grants:

                      1.         Under Israeli law and valid labor agreements,
                                 the companies of the Group are required to make
                                 severance or current pension payments in
                                 addition to retirement grants to dismissed
                                 employees and to employees leaving employment
                                 under certain other circumstances.

                                 These liabilities are fully covered by regular
                                 deposits with severance pay and pension funds
                                 and by the balance sheet accrual.

                                 Employees dismissed before attaining retirement
                                 age are entitled to severance pay computed on
                                 the basis of their most recent salary. As for
                                 part of the Group's employees - in the event
                                 that the amounts accumulated in the pension
                                 fund are insufficient to cover the severance
                                 pay computed as above - the Company and its
                                 subsidiaries are to supplement the difference.

                                 The companies' employees are participants in a
                                 pension fund to which the companies make
                                 current monthly payments. The deposits relieve
                                 the companies of their severance pay liability.
                                 The pension fund is external and independent of
                                 the Group.

                                 Amounts deposited in severance pay funds, and
                                 related liabilities are not reflected in the
                                 balance sheet since the funds are not under the
                                 control and management of the Group.


                                      F-25
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12:-  ACCRUED SEVERANCE PAY, NET

           2.         The current payments that the group made with severance
                      funds are as follows:


<TABLE>
<CAPTION>
                                                                                CONVENIENCE
                                                                                TRANSLATION
                                                                            --------------------
                                  YEAR ENDED DECEMBER 31,                        YEAR ENDED
                  --------------------------------------------------------      DECEMBER 31,
                        2000               2001                2002                 2002
                  -----------------  -----------------  ------------------  --------------------
                                        ADJUSTED NIS                               U.S. $
                  --------------------------------------------------------  --------------------
                                                  (IN THOUSANDS)
<S>                                   <C>               <C>                 <C>
                          5,145              5,013              4,928               1,040
                  =================  =================  ==================  ====================
</TABLE>


                 b.      Under labor agreements, certain employees who retire
                         after the age of 55, and who have utilized no more than
                         65% of the sick leave to which they are entitled, will
                         receive compensation for unutilized sick leave. The
                         Company has provided for this liability.

                 c.      The amounts funded for compensation are deposited with
                         the Central Fund for Compensation and with provident
                         funds in the name of the employees. The amounts funded
                         may be withdrawn provided that the instructions of the
                         severance pay law are fulfilled.

                 d.      Below are the amounts for accrued severance pay,
                         retirement grants and compensation for unutilized sick
                         leave, as presented in balance sheet:

<TABLE>
<CAPTION>
                                                                                                          CONVENIENCE
                                                                                                          TRANSLATION
                                                                        DECEMBER 31,                ------------------------
                                                          ----------------------------------------        DECEMBER 31,
                                                                 2001                 2002                    2002
                                                          -------------------  -------------------  ------------------------
                                                                        ADJUSTED NIS                         U.S. $
                                                          ----------------------------------------  ------------------------
                                                                                    (IN THOUSANDS)
<S>                                                       <C>                  <C>                  <C>
     Severance pay (1)                                                10,253                8,821                     1,862
     Less - amounts funded                                            10,453                8,504                     1,795
                                                          -------------------  -------------------  ------------------------

                                                                       (200)                  317                        67
     Compensation for unutilized sick leave                              186                  162                        34
                                                          -------------------  -------------------  ------------------------

                                                                        (14)                  479                       101
                                                          ===================  ===================  ========================
     (1)     Including liabilities for
               salaries to retired employees                              46                   72                        15
                                                          ===================  ===================  ========================
</TABLE>


                                      F-26
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13:-  CONTINGENT LIABILITIES AND COMMITMENTS

           a.         An investee of a shareholder, which is also a supplier of
                      raw materials, has a right of first refusal regarding the
                      sale of part of the purchases of the Company's raw
                      materials for a period of ten years commencing October
                      1998. The Company purchases raw materials from the
                      investee of a shareholder in the ordinary course of
                      business (see Note 18c. with respect to purchases from
                      shareholders).

           b.         Option to purchase property:

                      Tri-Wall Containers Ltd. ("Tri-wall"), a wholly owned
                      subsidiary leases property in Netanya on which Tri-Wall's
                      plant is situated, from a primary lessee. In accordance
                      with the agreement, the Company has an option to purchase
                      the property in consideration of approximately $ 2.1
                      million from the primary lessee, who has an option to
                      purchase the property from the owner.

                      Tri-Wall gave notice to the primary lessee of its
                      intention to exercise the option. The owner of the
                      property claims that the primary lessee breached certain
                      provisions of their agreement and therefore has no rights
                      to the property. The matter was transferred to an
                      arbitrator who determined that Tri-Wall has the right to
                      exercise the option to purchase the land from the owner or
                      that Tri-Wall should be compensated in the amount of U.S.
                      $ 2.8 million. A request has been filed with the court to
                      overturn the decision of the arbitrator. A hearing on this
                      request has been set for March 2003.

                      As a result of appeals filed by the owner and the primary
                      lessee, on January 16, 2000, the district court ruled that
                      the primary lessee is not entitled to exercise the option
                      as a result of a breach of the lease contract.
                      Notwithstanding the above, the ruling determined that
                      Tri-Wall is entitled to exercise the option and acquire
                      the property. The consideration is to be paid directly to
                      the owner of the property. The Court did not specify the
                      exercise price of the option or the date the option can be
                      exercised. The owner and the primary lessee have appealed
                      to the Supreme Court, which has been holding hearings on
                      this matter. The rent in respect of the above property
                      from the period beginning in March 2000 has been recorded
                      in the statement of operations. This liability has been
                      offset against a designated bank deposit intended to be
                      held until the resolution of the matter.

           c.         On July 29, 2001, several employees of C.D. filed a
                      lawsuit against C.D. for the payment of holiday bonus.
                      According to the estimation of C.D.'s management and its
                      legal counsel, an adequate provision was recorded in the
                      balance sheets as of December 31, 2002, in order to
                      reflect the potential loss in respect of the litigation.

           d.         As for guarantees among the companies of the Group, see
                      Note 14c.

           e.         As for leases, see Notes 7 and 11.


                                      F-27
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13:-  CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)

           f.         Royalty commitments:

                      Under the Company's research and development agreements
                      with the Office of the Chief Scientist of Israel Ministry
                      of Industry and Trade ("OCS") and pursuant to applicable
                      laws, the Company is required to pay royalties at the rate
                      of 3%-3.5% of sales of products developed with funds
                      provided by the Chief Scientist, up to an amount equal to
                      100% of the Chief Scientist research and development
                      grants, linked to the U.S. dollar and bears LIBOR interest
                      per annum.

                      As of December 31, 2002, the Company had an outstanding
                      contingent obligation to pay royalties in the amount of
                      adjusted NIS 59 thousand. According to the Company's
                      management estimation, the Company does not expect any
                      sales from the product developed with the OCS's funds.
                      Therefore no future royalties payment is projected.

NOTE 14:-  CHARGES (ASSETS PLEDGED) AND GUARANTEES

           a.         As collateral for the Company and its subsidiaries'
                      liabilities to banks, the State of Israel and a
                      shareholder, a fixed charge was placed, in an unlimited
                      amount, on any unpaid share capital, equipment, machinery,
                      insurance rights and the shares of Tri-Wall, and a
                      floating charge was placed on all the other properties of
                      the plants and the Group's assets.

           b.         As collateral for repayment of a loan for the lease of
                      property and equipment in the context of sale - leaseback
                      transaction of machinery and equipment, the Company
                      provided bank guarantee totaling adjusted NIS 10,188
                      thousand ($ 2,151 thousand). The Company has also
                      mortgaged, in favor of the lender, a containers production
                      line.

           c.         The Company has provided a guarantee to the State of
                      Israel in favor of C.D. Packaging Ltd. in connection with
                      investment grants received by C.D. in an amount not to
                      exceed 50% of C.D. liabilities in respect of its "approved
                      enterprise". Additional guarantee of an amount not to
                      exceed adjusted NIS 801 thousand was provided, see Note
                      16a(1).

           d.         Liabilities secured by pledges are as follows:

<TABLE>
<CAPTION>
                                                                                                           CONVENIENCE
                                                                                                           TRANSLATION
                                                                         DECEMBER 31,                 ----------------------
                                                           ----------------------------------------        DECEMBER 31,
                                                                  2001                  2002                   2002
                                                           -------------------   ------------------   ----------------------
                                                                         ADJUSTED NIS                         U.S. $
                                                           ----------------------------------------   ----------------------
                                                                                    (IN THOUSANDS)
<S>                                                        <C>                   <C>                  <C>
      Short-term loans and credit                                       8,821                7,399                    1,562
      Long-term liabilities including current maturities               86,268               68,749                   14,513
                                                           -------------------   ------------------   ----------------------

                                                                       95,089               76,148                   16,075
                                                           ===================   ==================   ======================
</TABLE>

                                      F-28
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15:-  SHARE CAPITAL

           a.         The shares of Carmel Containers are traded on the American
                      Stock Exchange in the United States.

<TABLE>
<CAPTION>
                                                                              DECEMBER 31, 2001 AND 2002
                                                                     ---------------------------------------------
                                                                                                  ISSUED AND
                                                                          AUTHORIZED              OUTSTANDING
                                                                     ---------------------    --------------------
                                                                                   NUMBER OF SHARES
                                                                     ---------------------------------------------
<S>                                                                  <C>                      <C>
                        Ordinary shares of NIS 1 par value each              10,000,000                  2,520,000
                                                                     =====================    ====================
</TABLE>

                      The Ordinary shares confer upon their holders the right to
                      participate and vote in the general meetings, the right to
                      receive dividends and the right to a share in excess of
                      assets upon liquidation of the Company.

           b.         As of December 31, 2002, a subsidiary of the Company holds
                      a total of 119,813 of the Ordinary shares of NIS 1 par
                      value of the Company, which is netted from shareholders'
                      equity in the amount of adjusted NIS 4,339 thousand. The
                      subsidiary intends to hold these shares for a long period
                      of time.

           c.         Share option plan:

                      In August 1996, the Company's Board of Directors
                      authorized through a share option plan ("the plan") the
                      grant of options to the Company's employees to purchase up
                      to 100,000 of the Company's Ordinary shares at the
                      exercise price of $ 8.5 per share (the share's market
                      price at the date the plan was approved, was $ 10). Half
                      of the options are exercisable after two years and the
                      other half are exercisable after three years. Any options
                      that are canceled or forfeited become available for future
                      grant.

                      As of December 31, 2002, all options have expired.

                      A summary of the Company's share option activity and
                      related information, is as follows:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                  ----------------------------------------------------------------------------------------------
                                               2000                            2001                            2002
                                  ------------------------------- ------------------------------  ------------------------------
                                                     WEIGHTED                        WEIGHTED                       WEIGHTED
                                                      AVERAGE                        AVERAGE                         AVERAGE
                                     NUMBER OF       EXERCISE        NUMBER OF       EXERCISE       NUMBER OF       EXERCISE
                                      OPTIONS          PRICE          OPTIONS         PRICE          OPTIONS          PRICE
                                  --------------- --------------- --------------- --------------  -------------- ---------------
                                                         $                              $                               $
                                                  ---------------                 --------------                 ---------------
<S>                               <C>             <C>             <C>             <C>             <C>            <C>
     Outstanding - at beginning           54,000   8.5                    54,000   8.5                   54,000             8.5
        of year
     Outstanding - at end of
        year                              54,000   8.5                    54,000   8.5                        -               -

     Exercisable options                  54,000   8.5                    54,000   8.5                        -               -

</TABLE>

As of December 31, 2002, no options are available for future grant.


                                      F-29
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15:-  SHARE CAPITAL (CONT.)

                      Where the Company has recorded compensation for options
                      issued with an exercise price below the fair value of the
                      Ordinary shares, the deferred compensation is amortized
                      and recorded as compensation expense ratably over the
                      vesting period of the options. No compensation expense was
                      recognized during the years ended December 31, 2000, 2001
                      and 2002.

           d.         Pro forma information regarding net income and net
                      earnings per share is required by SFAS-123, and has been
                      determined as if the Company had accounted for its
                      employee stock options under the fair value method of that
                      Statement. Such information does not have any effect for
                      the years 2000, 2001 and 2002.

           e.         Dividends:

                      Dividends declared on the Ordinary shares will be paid in
                      NIS. Dividends paid to shareholders outside Israel will be
                      converted into dollars, on the basis of the exchange rate
                      prevailing at the date of payment.

NOTE 16:-  INCOME TAXES

           a.         Tax benefits under Israel's Law for the Encouragement of
                      Capital Investments, 1959:

                      1.         C.D. Packaging Systems Ltd. ("C.D.") was
                                 granted the status of an "approved enterprise",
                                 including an expansion plan, pursuant to the
                                 law for the Encouragement of Capital
                                 Investments 1959, as amended. On December 8,
                                 2002, the Investment Center management informed
                                 C.D. on the cancellation of the approval from
                                 1992, retroactively since C.D. failed to comply
                                 with the terms contained in the approval.

                                 In addition, C.D. was compelled to fulfill the
                                 following conditions:

                                 1)       To refund certain investment grants
                                          that C.D. received in the amount of
                                          NIS 1,860 thousand, which will be paid
                                          in 36 equal installments starting
                                          August 2002. The refunded amount was
                                          charged to property and equipment from
                                          which it was previously netted.

                                 2)       C.D. committed to employ the amount of
                                          employees, as determined by the
                                          Investment Center management, through
                                          2005.

                                 3)       The Company and C.D.'s other
                                          shareholders guarantee C.D.'s
                                          liabilities as stated in the above
                                          items 1) and 2).

                      2.         In 1997, the production facilities of the
                                 Company's subsidiary Tri-wall containers Ltd.
                                 ("Tri-wall") have been granted the status of an
                                 "approved enterprise" under the Law or the
                                 Encouragement of Capital Investments, 1959.
                                 Tri-wall has elected the alternative benefits,
                                 waiving grants in return for tax exemption. In
                                 accordance with this Law, the income from the
                                 approved enterprise will be exempt from tax for
                                 a period of two years and for the remaining
                                 benefit period will be subject to a reduced tax
                                 rate of 25%. The total benefit period is for
                                 ten years, commencing with the first year in
                                 which taxable income is generated, but limited
                                 to twelve years from commencement of production
                                 or fourteen years from the date of approval,
                                 whichever is earlier ("benefit period").


                                      F-30
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 16:-  INCOME TAXES (CONT.)

                                 The entitlement to the above benefits is
                                 conditional upon Tri-Wall's fulfilling the
                                 conditions stipulated by the above 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 canceled and
                                 Tri-Wall may be required to refund the amount
                                 of the benefits, in whole or in part, including
                                 interest. As of December 31, 2002, management
                                 believes that Tri-Wall is meeting all of the
                                 aforementioned conditions.

                                 Due to tax losses incurred by the Company, tax
                                 benefit period for the approved enterprise
                                 program has not yet commenced.

                      3.         Income derived from other sources is taxed at
                                 the regular tax rate of 36%. The tax exempt
                                 income attributable to the "Approved
                                 Enterprise" can be distributed to shareholders
                                 without imposing tax liability on the company
                                 only upon the complete liquidation of the
                                 Company.

                                 The subsidiaries have decided not to declare
                                 dividends out of such tax-exempt income.
                                 Accordingly, no deferred income taxes have been
                                 provided on income attributable to the
                                 Company's subsidiaries' "Approved Enterprise".
                                 If the retained tax-exempt income is
                                 distributed in a manner other than in the
                                 complete liquidation of the subsidiaries, it
                                 would be taxed at the corporate tax rate
                                 applicable to such profits as if the Company
                                 has not elected the alternative tax benefits.
                                 As of December 31, 2002, the subsidiaries have
                                 immaterial tax exempt profits from the
                                 "Approved Enterprise".

           b.         Tax benefits under the Law for the Encouragement of
                      Industry ("Taxation"), 1969:

                      Carmel Container Systems and its subsidiaries are
                      "industrial companies" under the Law for the Encouragement
                      of Industry (Taxation), 1969, and as such are entitled to
                      certain tax benefits by virtue of this law, mainly
                      accelerated depreciation.

                      Under the above law, Carmel Container Systems and
                      Tri-Wall, file consolidated tax returns.

           c.         Measurement of taxable income under the Income Tax
                      (Inflationary Adjustments) Law, 1985:

                      In accordance with the above law, the results for tax
                      purposes are measured in real terms, based on the changes
                      in the Israeli CPI. The group is taxed under this law.

           d.         Deferred income taxes:

                      1.         Deferred income taxes are computed in respect
                                 of temporary differences between the carrying
                                 amounts of assets and liabilities included in
                                 these financial statements and those to be
                                 considered for tax purposes.

                                 The main components in respect of which
                                 deferred income taxes have been included are as
                                 follows:

                                 Depreciation in respect of property and
                                 equipment in the adjusted financial statements
                                 and for tax purposes (taking into consideration
                                 Opinion No. 40 of the Institute of Certified
                                 Public Accountants in Israel); differences
                                 between the value of inventories in the
                                 adjusted financial statements and its value for
                                 tax purposes; differences in accounting for
                                 other income and expenses items in the adjusted
                                 financial statements and for tax purposes
                                 (mainly provisions for employee rights);
                                 carryforward losses and deductions.


                                      F-31
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 16:-  INCOME TAXES (CONT.)

                      2.         As of December 31, 2002, the outstanding
                                 balance of losses for tax purposes in the
                                 consolidated financial statements aggregates to
                                 adjusted NIS 73,321 thousand ($ 15,478
                                 thousand). Israeli carryforward losses have no
                                 expiration date.

                      3.         As of December 31, 2002, the outstanding
                                 balance of capital losses for tax purposes in
                                 the consolidated financial statements,
                                 aggregates to adjusted NIS 680 thousand ($ 144
                                 thousand). Israeli capital losses expire after
                                 seven years.

                      4.         Significant components of the Company and its
                                 subsidiaries deferred tax liabilities and
                                 assets are as follows:

<TABLE>
<CAPTION>
                                                                                                 CONVENIENCE
                                                                                                 TRANSLATION
                                                               DECEMBER 31,                ------------------------
                                                 ----------------------------------------        DECEMBER 31,
                                                        2001                 2002                    2002
                                                 -------------------  -------------------  ------------------------
                                                               ADJUSTED NIS                         U.S. $
                                                 ----------------------------------------  ------------------------
                                                                           (IN THOUSANDS)
<S>                                              <C>                   <C>                 <C>
    Deferred tax assets:

    Tax loss carryforward                                    24,953               26,816                     5,661
    Provision for employee rights                             1,981                2,145                       453
    Allowance for doubtful debts                              1,197                  870                       184
    Others                                                      381                  381                        81
                                                 -------------------  -------------------  ------------------------

    Net deferred tax assets before valuation
       allowance                                             28,512               30,212                     6,379
    Valuation allowance                                       (359)                (245)                      (52)
                                                 -------------------  -------------------  ------------------------

    Net deferred tax assets                                  28,153               29,967                     6,327
                                                 -------------------  -------------------  ------------------------

    Deferred tax liabilities:
    Depreciable property and equipment                       41,387               36,814                     7,772
    Inventories                                                 505                  515                       109
                                                 -------------------  -------------------  ------------------------

    Net deferred tax liability                               41,892               37,329                     7,881
                                                 -------------------  -------------------  ------------------------

    Net deferred taxes                                       13,739                7,362                     1,554
                                                 ===================  ===================  ========================

</TABLE>
                                 As of December 31, 2002, the Company and its
                                 subsidiaries have provided valuation allowances
                                 of approximately adjusted NIS 245 thousand ($
                                 52 thousand), in respect of deferred tax assets
                                 resulting from tax capital loss carryforward.
                                 Management currently believes that it is more
                                 likely than not that the deferred tax regarding
                                 the capital loss carryforward will not be
                                 realized in the foreseeable future.


                                      F-32
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

           e.         Income tax reconciliation:

                      A reconciliation between the theoretical tax expense
                      assuming all income is taxed at the statutory rate of 36%
                      and the actual tax expense is as follows:

<TABLE>
<CAPTION>
                                                                                                                  CONVENIENCE
                                                                                                                  TRANSLATION
                                                                                                              --------------------
                                                                   YEAR ENDED DECEMBER 31,                         YEAR ENDED
                                                   --------------------------------------------------------       DECEMBER 31,
                                                          2000               2001               2002                  2002
                                                   ------------------  -----------------  -----------------   --------------------
                                                                         ADJUSTED NIS                                U.S. $
                                                   --------------------------------------------------------   --------------------
                                                                                   (IN THOUSANDS)
<S>                                                <C>                 <C>                <C>                 <C>
          Income (loss) before taxes on income                   938           (14,815)           (15,576)                (3,289)
                                                   ==================  =================  =================   ====================

          Theoretical tax expense (benefit)
             computed at the Israeli statutory
             tax rate - 36%                                      337            (5,333)            (5,607)                (1,184)

          Increase (decrease) in income taxes resulting from:

          Tax adjustments in respect of
             inflation in Israel and others                    (150)              (349)              (432)                   (91)
          Non-deductible expenses (tax exempt
             income) and others, net                           (435)                 31              (183)                   (39)
          Increase (decrease) in tax expense due
             to reduced tax rates in companies
             which were granted approved
             enterprise status                                 (395)                (9)                183                     39
          Decrease in deferred income taxes
             resulting from utilization of
             losses and capital losses which
             were not recorded as an asset in
             previous years                                        -               (13)                  -                      -
                                                   ------------------  -----------------  -----------------   --------------------

          Actual tax benefit                                   (643)            (5,673)            (6,039)                (1,275)
                                                   ==================  =================  =================   ====================


           f.    Income taxes included in the statements of income:

          Deferred income taxes, net                           (643)            (5,673)            (6,377)                (1,346)
          Taxes in respect of previous year                        -                  -                338                     71
                                                   ------------------  -----------------  -----------------   --------------------

                                                               (643)            (5,673)            (6,039)                (1,275)
                                                   ==================  =================  =================   ====================
</TABLE>

                                      F-33
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 16:-  INCOME TAXES (CONT.)

           g.         Deferred income taxes:

                      Composition and changes in deferred income taxes as
                      presented in the consolidated balance sheet:
<TABLE>
<CAPTION>
                                                        IN RESPECT OF BALANCE SHEET ITEMS
                                 -------------------------------------------------------------------------------
                                  DEPRECIABLE
                                   PROVISION
                                   ALLOWANCE
                                    PROPERTY                     FOR            FOR                       LOSSES
                                      AND                      EMPLOYEE       DOUBTFUL                   FOR TAX
                                   EQUIPMENT    INVENTORIES     RIGHTS         DEBTS        OTHERS       PURPOSES        TOTAL
                                 ------------- ------------- -------------- ------------- -----------  ------------- --------------
                                                                            ADJUSTED NIS
                                 --------------------------------------------------------------------------------------------------
                                                                           (IN THOUSANDS)
<S>                              <C>           <C>           <C>            <C>           <C>          <C>          <C>
 Balance at January 1, 2001            41,030           505        (2,205)       (1,920)       (381)       (17,617)         19,412
    Changes during 2001:
    Amounts charged to the
      statement of operations             357             -            224           723           -        (6,977)        (5,673)
                                 ------------- ------------- -------------- ------------- -----------  ------------- --------------

 Balance at December 31, 2001          41,387           505        (1,981)       (1,197)       (381)       (24,594)         13,739
    Changes during 2002:
    Amounts charged to the
      statement of operations         (4,573)            10         (164)            327           -        (1,977)        (6,377)
                                 ------------- ------------- -------------  ------------- -----------  ------------- --------------

 Balance at December 31, 2002          36,814           515       (2,145)          (870)       (381)       (26,571)          7,362
                                 ============= ============= =============  ============= ===========  ============= ==============

 Balance at December 31, 2002
    (convenience translation
    into U.S. $)                        7,771           109         (453)          (184)        (80)        (5,609)          1,554
                                 ============= ============= =============  ============= ===========  ============= ==============

</TABLE>

                      Deferred income taxes are presented in the balance sheet
                      as follows:
<TABLE>
<CAPTION>
                                                                                                         CONVENIENCE
                                                                                                         TRANSLATION
                                                                      DECEMBER 31,                 ------------------------
                                                        -----------------------------------------        DECEMBER 31,
                                                                2001                 2002                    2002
                                                        --------------------  -------------------  ------------------------
                                                                      ADJUSTED NIS                          U.S. $
                                                        -----------------------------------------  ------------------------
                                                                                  (IN THOUSANDS)
<S>                                                     <C>                    <C>                 <C>
       Among current assets  ("Other accounts
          receivable and prepaid expenses")                             660                   600                      127
       Among current liabilities  ("Other accounts
          payable and accrued expenses")                              (127)                     -                        -
       Among long-term liabilities                                 (14,272)               (7,962)                  (1,681)
                                                        --------------------   -------------------  -----------------------

                                                                   (13,739)               (7,362)                  (1,554)
                                                        ====================   ===================  =======================
</TABLE>

                                      F-34
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 16:-  INCOME TAXES (CONT.)

           h.         Income tax assessments:

                      Final tax assessments have been received by the Company
                      and it subsidiaries as follows:

                      Carmel Systems and Tri-Wall Containers up to and including
                      the 2000 tax year, C.D. Packaging Systems up to and
                      including the 1999 tax year and Solid Packaging Board has
                      not yet been assessed since incorporation.





















                                      F-35
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 17:-  LINKAGE TERMS OF MONETARY BALANCES

<TABLE>
<CAPTION>
                                                 DECEMBER 31, 2001                                   DECEMBER 31, 2002
                                --------------------------------------------------  -----------------------------------------------
                                 LINKED TO      IN OR                                           LINKED TO      IN OR
                                THE ISRAELI    LINKED TO                                       THE ISRAELI   LINKED TO
                                  CONSUMER     FOREIGN                                PRICE     CONSUMER      FOREIGN
                                PRICE INDEX    CURRENCY      UNLINKED     TOTAL       INDEX     CURRENCY      UNLINKED     TOTAL
                                ------------ ------------- ------------ ----------  --------- ------------ ------------- ----------
                                                                            ADJUSTED NIS
                                ---------------------------------------------------------------------------------------------------
                                                                           (IN THOUSANDS)
<S>                             <C>          <C>            <C>         <C>         <C>       <C>          <C>           <C>
Assets:

   Cash and cash equivalents              -             -          490        490          -           85           563        648
   Trade receivables                      -         1,340      109,203    110,543          -        1,836       119,509    121,345
   Other accounts receivable
     and prepaid expenses               442             -        1,257      1,699        402            -         1,544      1,946
                                ------------ ------------- ------------ ----------  --------- ------------ ------------- ----------

                                        442         1,340      110,950    112,732        402        1,921       121,616    123,939
                                ============ ============= ============ ==========  ========= ============ ============= ==========

Liabilities:

   Short-term credit from banks
     and others                           -             -       12,016     12,016          -            -        10,399     10,399
   Trade payables                         -        26,986       31,318     58,304          -       32,553        43,451     76,004
   Other accounts payable and
     accrued expenses                   602             -       14,217     14,819          -            -        15,818     15,818
   Long-term loans from banks
     and others (including
     current maturities)             17,899         5,643       62,726     86,268      6,220        2,842        59,868     68,930
                                ------------ ------------- ------------ ----------  --------- ------------ ------------- ----------

                                     18,501        32,629      120,277    171,407      6,220       35,395       129,536    171,151
                                ============ ============= ============ ==========  ========= ============ ============= ==========

</TABLE>





                                      F-36
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 17:-  LINKAGE TERMS OF MONETARY BALANCES (CONT.)

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31, 2002
                                                    ----------------------------------------------------------------------------
                                                        LINKED TO             IN OR
                                                       THE ISRAELI          LINKED TO
                                                         CONSUMER            FOREIGN
                                                       PRICE INDEX          CURRENCY           UNLINKED              TOTAL
                                                    ------------------  -----------------  -----------------   -----------------
                                                                          CONVENIENCE TRANSLATION INTO U.S. $
                                                    ----------------------------------------------------------------------------
                                                                                     (IN THOUSANDS)
<S>                                                 <C>                 <C>                <C>                 <C>
   Assets:

      Cash and cash equivalents                                     -                 18                119                 137
      Trade receivables                                             -                388             25,228              25,616
      Other accounts receivable and prepaid
        expenses                                                   85                  -                326                 411
                                                    ------------------  -----------------  -----------------   -----------------

                                                                   85                406             25,673              26,164
                                                    ==================  =================  =================   =================
   Liabilities:

      Short-term credit from banks and others                       -                  -              2,195               2,195
      Trade payables                                                -              6,872              9,173              16,045
      Other accounts payable and accrued expenses                   -                  -              3,339               3,339
      Long-term loans from banks and others
        (including current maturities)                          1,313                600             12,638              14,551
                                                    ------------------  -----------------  -----------------   -----------------

                                                                1,313              7,472             27,345              36,130
                                                    ==================  =================  =================   =================

</TABLE>





                                      F-37
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 18:-  TRANSACTIONS AND BALANCES WITH RELATED PARTIES

<TABLE>
<CAPTION>
                                                                                                                       CONVENIENCE
                                                                                                                       TRANSLATION
                                                                                              DECEMBER 31,           --------------
                                                                                        ---------------------------    DECEMBER 31,
                                                                         INTEREST RATE     2001            2002            2002
                                                                         -------------  -----------   -------------  --------------
                                                          LINKAGE TERMS        %                ADJUSTED NIS              U.S. $
                                                          -------------  -------------  ---------------------------  --------------
                                                                                             (IN THOUSANDS)
<S>                                                     <C>              <C>            <C>                          <C>
a. Current liabilities to related parties:

       1. Trade payables:

              Shareholder                                 U.S. dollar    Interest free
                                                                                           11,804          21,666           4,574
              Related companies of a shareholder          U.S. dollar    Interest free
                                                                                           11,036          18,705           3,949
       2. Other accounts payable and accrued expenses:

              Shareholder                                    Unlinked    Interest free        505               -               -
              Related companies of a shareholder             Unlinked    Interest free         77           1,338             282

b. Current receivables from related parties:

       1. Trade receivables:

              Related parties                                Unlinked    Interest free      1,030             965             204
                                                             Euro                           1,260           1,808             382

       2. Other accounts receivable and prepaid expenses:

              Investees of shareholders                   Israeli CPI    Interest free        737             990             209

</TABLE>



                                      F-38
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 18:-  TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)

           c.         Transactions with related parties:

                      The Company sells to, shareholders, investees of a
                      shareholder and purchases raw materials from investees of
                      a shareholder and shareholders. The terms of these
                      transactions do not differ materially from similar
                      transactions with third parties. The sales, purchases and
                      other transactions are as follows:

<TABLE>
<CAPTION>
                                                                                                               CONVENIENCE
                                                                                                               TRANSLATION
                                             INVESTEES OF                                                  --------------------
                                             A SHAREHOLDER          SHAREHOLDERS             TOTAL                TOTAL
                                         ---------------------- -------------------- --------------------- --------------------
                                                                   ADJUSTED NIS                                   U.S. $
                                         ----------------------------------------------------------------- --------------------
                                                                             (IN THOUSANDS)
<S>                                      <C>                    <C>                  <C>                   <C>
      In 2002:

      Expenses:
      Purchases                                         31,307               75,872               107,179               22,626
      Financing and commissions                              -                  300                   300                   63
                                         ---------------------- -------------------- --------------------- --------------------

                                                        31,307               76,172               107,479               22,689
                                         ====================== ==================== ===================== ====================

      Sales                                              9,469                3,903                13,372                2,823
                                         ====================== ==================== ===================== ====================


                                                              INVESTEES OF
                                                             A SHAREHOLDER        SHAREHOLDERS                  TOTAL
                                                         ----------------------  ---------------------  ----------------------
                                                                                     ADJUSTED NIS
                                                         ---------------------------------------------------------------------
                                                                                    (IN THOUSANDS)
      In 2001:

         Expenses:
           Purchases                                                    33,089                 63,011                  96,100
           Financing and commissions                                         -                    686                     686
                                                         ----------------------  ---------------------  ----------------------

                                                                        33,089                 63,697                  96,786
                                                         ======================  =====================  ======================

           Sales                                                        12,274                  8,676                  20,950
                                                         ======================  =====================  ======================

      In 2000:

         Expenses:
           Purchases                                                    40,388                 62,658                 103,046
           Financing and commissions                                         -                  (479)                   (479)
                                                         ----------------------  ---------------------  ----------------------

                                                                        40,388                 62,179                 102,567
                                                         ======================  =====================  ======================

         Sales                                                           7,630                  9,918                  17,548
                                                         ======================  =====================  ======================
</TABLE>

                                      F-39
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 19:-  SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS

           a.         Cost of revenues:

<TABLE>
<CAPTION>
                                                                                                                 CONVENIENCE
                                                                                                                 TRANSLATION
                                                                                                             --------------------
                                                                   YEAR ENDED DECEMBER 31,                        YEAR ENDED
                                                  ---------------------------------------------------------      DECEMBER 31,
                                                         2000               2001                2002                 2002
                                                  ------------------  -----------------  ------------------  --------------------
                                                                        ADJUSTED NIS                                U.S. $
                                                  ---------------------------------------------------------  --------------------
                                                                                  (IN THOUSANDS)
<S>                                               <C>                 <C>                <C>                 <C>
             Materials (1)                                 228,665             201,107            197,577                 41,709
             Salaries, wages and employee
             benefits                                       57,165              54,793             53,430                 11,279
             Subcontracted work                              3,054               3,067              3,162                    668
             Other manufacturing costs                      39,274              36,928             36,905                  7,791
             Depreciation                                   25,730              24,709             23,810                  5,026
                                                  -----------------   -----------------  -----------------   --------------------

                                                           353,888             320,604            314,884                 66,473
             Decrease (increase) in
                inventories of work in progress              (190)               1,442                485                    103
             Decrease in inventories of
                finished products                            3,701                 329              1,818                    384
                                                  -----------------   -----------------  -----------------   --------------------

                                                           357,399             322,375            317,187                 66,960
                                                  =================   =================  =================   ====================

            (1) As for purchases from major suppliers (related
                parties), see Note 18c.

    b. Selling and marketing expenses:

            Salaries and employee benefits                    7,223               7,052              5,262                  1,111
            Advertising expenses                                449                 267                248                     52
            Depreciation                                        278                 349                295                     62
            Other selling expenses                           10,920              10,749             11,274                  2,380
                                                   -----------------   -----------------  -----------------  ---------------------

                                                             18,870              18,417             17,079                  3,605
                                                   =================   =================  =================  =====================

    c. General and administrative expenses:

             Salaries and employee benefits                  13,707               9,972              9,674                  2,042
             Depreciation                                     2,563               2,240              1,951                    412
             Office maintenance and other
                expenses (1)                                 11,188               7,619              6,401                  1,352
                                                   -----------------   -----------------  -----------------  ---------------------

                                                             27,458              19,831             18,026                  3,806
                                                   =================   =================  =================  =====================

             (1) Including doubtful and bad
                     debts expenses                           2,927                 400                259                     55
                                                   =================   =================  =================  =====================
</TABLE>

                                      F-40
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 19:-  SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

           d.         Financial expenses, net:

<TABLE>
<CAPTION>
                                                                                                                   CONVENIENCE
                                                                                                                   TRANSLATION
                                                                                                              ---------------------
                                                                      YEAR ENDED DECEMBER 31,                       YEAR ENDED
                                                      ------------------------------------------------------      DECEMBER 31,
                                                           2000               2001               2002                 2002
                                                      ---------------  ------------------  -----------------  ---------------------
                                                                           ADJUSTED NIS                              U.S. $
                                                      ------------------------------------------------------  ---------------------
                                                                                     (IN THOUSANDS)
<S>                                                   <C>              <C>                 <C>                <C>
            Financial expenses:
               Interest expenses and bank charges:
               On short-term credit                            4,129              6,324               3,072                    649
               On long-term loans                              5,283              6,086               6,736                  1,422
               Losses arising from inflationary
                 erosion of the Israeli currency                   -              1,781               7,463                  1,575
                                                      ---------------  -----------------   -----------------  ---------------------

                                                               9,412             14,191              17,271                  3,646
                                                      ---------------  -----------------   -----------------  ---------------------
            Financial income:
               Interest income                                 (215)              (610)               (681)                  (144)
               Gains arising from inflationary
                 erosion of the Israeli currency               (535)            (2,512)            (10,397)                (2,195)
                                                      ---------------  -----------------   -----------------  ---------------------

                                                               (750)            (3,122)            (11,078)                (2,339)
                                                      ---------------  -----------------   -----------------  ---------------------

                                                               8,662             11,069               6,193                  1,307
                                                      ===============  =================   =================  =====================

           e.         Other income (expenses), net:

            Capital gain on sale of property and
               equipment, net                                    185                155                 159                     34
            Other expenses                                       565                  -             (1,336)                  (282)
                                                      ---------------  -----------------   -----------------  ---------------------

                                                                 750                155             (1,177)                  (248)
                                                      ===============  =================   =================  =====================
</TABLE>


                                      F-41
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 20:-  OPERATING SEGMENTS DATA

           The Company operates in three operating segments, the manufacturing
           of containers, corrugated cardboard panels and other types of paper
           consumer packaging, (see Note 1a. for a brief description of the
           Company's business) and follows the requirements of Accounting
           Standard No. 11 regarding Segment reporting:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 2002
                                  -------------------------------------------------------------------------------------------------
                                                          CONSUMER            TRI-WALL
                                      SHIPPING            PACKAGING       PACKAGING WOODEN
                                     CONTAINERS           PRODUCTS        PALLETS AND BOXES     ELIMINATIONS           TOTAL
                                  ------------------ ------------------- ------------------- ------------------- ------------------
                                                                      ADJUSTED NIS IN THOUSANDS
                                  -------------------------------------------------------------------------------------------------
<S>                               <C>                <C>                 <C>                 <C>                 <C>
Revenues:
   Sales to external customers              255,890              30,666              57,530                   -            344,086
   Intersegmental sales                       9,762               1,437               3,348            (14,547)                  -
                                  ------------------ ------------------- ------------------- ------------------- ------------------

Total revenues                              265,652              32,103              60,878            (14,547)            344,086
                                  ================== =================== =================== =================== ==================

Segments operating income (loss)           (12,124)             (1,662)               5,580                                (8,206)
                                  ================== =================== ===================

Financial expenses                          (4,544)               (689)               (960)                                (6,193)
                                  ================== =================== ===================
Other expenses, net                                                                                                        (1,177)
Tax benefit                                                                                                                  6,039
Minority interest in losses of a
   subsidiary                                                                                                                  822
                                                                                                                 ------------------
Net loss                                                                                                                   (8,715)
                                                                                                                 ==================

Assets and liabilities:

Segments assets                             246,729              30,763              28,464                                305,956
                                  ================== =================== ===================                     ------------------

Total assets                                                                                                               305,956
                                                                                                                 ==================

Segments liabilities                        153,496              10,324               7,810                                171,630
                                  ================== =================== ===================                     ------------------

Total liabilities                                                                                                          171,630
                                                                                                                 ==================

Capital investments                           1,974                  47                 410
                                  ================== =================== ===================

Depreciation                                 22,278               1,978               1,800
                                  ================== =================== ===================

</TABLE>

                                      F-42
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 20:-  OPERATING SEGMENTS DATA (CONT.)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 2002
                                  -------------------------------------------------------------------------------------------------
                                                          CONSUMER            TRI-WALL
                                      SHIPPING            PACKAGING       PACKAGING WOODEN
                                     CONTAINERS           PRODUCTS        PALLETS AND BOXES     ELIMINATIONS           TOTAL
                                  ------------------ ------------------- ------------------- ------------------- ------------------
                                                                 CONVENIENCE TRANSLATION INTO U.S. $
                                  -------------------------------------------------------------------------------------------------
                                                                           (IN THOUSANDS)
<S>                               <C>                <C>                 <C>                 <C>                 <C>
Revenues:
   Sales to external customers               54,018               6,474              12,145                   -             72,637
   Intersegmental sales                       2,061                 303                 707             (3,071)                  -
                                  ------------------ ------------------- ------------------- ------------------- ------------------

Total revenues                               56,079               6,777              12,852             (3,071)             72,637
                                  ================== =================== =================== =================== ==================

Segments operating income (loss)            (2,560)               (351)               1,177                                (1,734)
                                  ================== =================== ===================

Financial expenses                            (959)               (145)               (203)                                (1,307)
                                  ================== =================== ===================
Other expenses, net                                                                                                          (248)
Tax benefit                                                                                                                  1,275
Minority interest in losses of a
   subsidiary                                                                                                                  174
                                                                                                                 ------------------
Net loss                                                                                                                   (1,840)
                                                                                                                 ==================

Assets and liabilities:

Segments assets                              52,085               6,494               6,009                                 64,588
                                  ================== =================== ===================                     ------------------

Total assets                                                                                                                64,588
                                                                                                                 ==================

Segments liabilities                         32,404               2,179               1,649                                 36,232
                                  ================== =================== ===================                     ------------------

Total liabilities                                                                                                           36,232
                                                                                                                 ==================

Capital investments                             417                  10                  87
                                  ================== =================== ===================

Depreciation                                  4,703                 418                 380
                                  ================== =================== ===================
</TABLE>


                                      F-43
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 20:-  OPERATING SEGMENTS DATA (CONT.)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 2001
                                  -------------------------------------------------------------------------------------------------
                                                          CONSUMER            TRI-WALL
                                      SHIPPING            PACKAGING       PACKAGING WOODEN
                                     CONTAINERS           PRODUCTS        PALLETS AND BOXES     ELIMINATIONS           TOTAL
                                  ------------------ ------------------- ------------------- ------------------- ------------------
                                                                      ADJUSTED NIS IN THOUSANDS
                                  -------------------------------------------------------------------------------------------------
<S>                               <C>                <C>                 <C>                 <C>                 <C>
Revenues:
   Sales to external customers              258,408              30,724              67,590                   -            356,722
   Intersegmental sales                      13,906               3,930               2,771            (20,607)                  -
                                  ------------------ ------------------- ------------------- ------------------- ------------------

Total revenues                              272,314              34,654              70,361            (20,607)            356,722
                                  ================== =================== =================== =================== ==================

Segments operating income (loss)            (8,920)               (387)               5,406                                (3,901)
                                  ================== =================== ===================

Financial expenses                         (10,725)               (288)                (56)                               (11,069)
                                  ================== =================== ===================
Other income, net                                                                                                              155
Tax benefit                                                                                                                  5,673
Minority interest in losses of a
   subsidiary                                                                                                                  236
                                                                                                                 ------------------
                                                                                                                           (8,906)
Net loss
                                                                                                                 ==================

Assets and liabilities:

Segments assets                             260,295              29,728              31,624                                321,647
                                  ================== =================== ===================                     ------------------

Total assets                                                                                                               321,647
                                                                                                                 ==================

Segments liabilities                        158,103               4,739               8,565                                171,407
                                  ================== =================== ===================                     ------------------

Total liabilities                                                                                                          171,407
                                                                                                                 ==================

Capital investments                           9,439                 460                 890
                                  ================== =================== ===================

Depreciation                                 23,818               1,649    1,831
                                  ================== =================== ===================

</TABLE>

                                      F-44
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 20:-  OPERATING SEGMENTS DATA (CONT.)

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31, 2000
                                   -------------------------------------------------------------------------------------------------
                                                           CONSUMER            TRI-WALL
                                       SHIPPING            PACKAGING       PACKAGING WOODEN
                                      CONTAINERS           PRODUCTS        PALLETS AND BOXES     ELIMINATIONS           TOTAL
                                   ------------------ ------------------- ------------------- ------------------- ------------------
                                                                       ADJUSTED NIS IN THOUSANDS
                                   -------------------------------------------------------------------------------------------------
<S>                                <C>                <C>                 <C>                 <C>                 <C>
Revenues:
   Sales to external customers               291,247              43,443              77,887                   -            412,577
   Intersegmental sales                       19,418                 697               3,505            (23,620)                  -
                                   ------------------ ------------------- ------------------- ------------------- ------------------

Total revenues                               310,665              44,140              81,392            (23,620)            412,577
                                   ================== =================== =================== =================== ==================

Segments operating income (loss)             (1,709)               1,173               9,386                                  8,850
                                   ================== =================== ===================

Financial (expenses) income                  (8,802)                  95                  45                                (8,662)
                                   ================== =================== ===================
Other income, net                                                                                                               750
Tax benefit                                                                                                                     643
Minority interest in earnings of a
   subsidiary                                                                                                                 (555)
                                                                                                                  ------------------

Net income                                                                                                                    1,026
                                                                                                                  ==================

Assets and liabilities:

Segments assets                              296,834              34,818              35,670                                367,322
                                   ================== =================== ===================                     ------------------

Total assets                                                                                                                367,322
                                                                                                                  ==================

Segments liabilities                         184,625               8,880               8,578                                202,083
                                   ================== =================== ===================                     ------------------

Total liabilities                                                                                                           202,083
                                                                                                                  ==================

Capital investments                           26,628                 561               1,785
                                   ================== =================== ===================

Depreciation                                  24,965               1,882               1,724
                                   ================== =================== ===================
</TABLE>

           For each of the years ended December 31, 2000, 2001 and 2002 more
           than 95% of the Company's revenues were derived from customers
           located in Israel.

           All long-lived assets are located in Israel.


                                      F-45
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21:-  DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
           ACCOUNTING PRINCIPLES

           The consolidated financial statements of the Company conform to
           accounting principles generally accepted in Israel ("Israeli GAAP"),
           which differ in certain respects from those followed in the United
           States ("U.S. GAAP"), as described below:

           a.         Accrued severance pay, net:

                      According to Israeli GAAP, accrued severance pay is
                      included in the balance sheet net of amounts funded, and
                      income from earnings on amounts funded is netted from the
                      severance pay expenses.

                      According to U.S. GAAP accrued severance pay is included
                      in the balance sheets at the total liabilities amount and
                      total amounts funded through provident fund and through
                      insurance policies. Income from earnings on amounts funded
                      is added to severance pay fund.

                      The effect of this difference on both income and equity is
                      not material.

           b.         Effect of inflation:

                      The Company, in accordance with Israeli GAAP,
                      comprehensively includes the effect of price level changes
                      in the accompanying consolidated financial statements, as
                      described in Note 2b. Such Israeli accounting principles
                      measure the effects of price level changes in the
                      inflationary nature of the Israeli economy and, as such,
                      is considered a more meaningful presentation than
                      financial reporting based on historical cost for Israeli
                      and U.S. accounting purposes. As permitted by the United
                      States Securities and Exchange Commission rules for
                      Foreign Private Issuers whose financial statements
                      comprehensively include the effects of inflation, price
                      level adjustments have not been reversed and included in a
                      reconciliation of Israeli accounting principles to U.S.
                      accounting principles.

           c.         Treatment of deferred income taxes:

                      Under Israeli GAAP, companies reporting in adjusted NIS
                      provide deferred income taxes on differences between the
                      financial reporting and tax bases of assets and
                      liabilities.

                      Under U.S. GAAP, paragraph 9(f) of SFAS No. 109,
                      "Accounting for Income Taxes", creates an exception which
                      prohibits the recognition of deferred tax liabilities or
                      assets that arise from differences between the financial
                      reporting and tax bases of assets and liabilities that are
                      remeasured from the local currency into adjusted NIS.

                      Under Israeli GAAP, income taxes are not provided on the
                      undistributed tax exempt profits of approved enterprise,
                      where such profits have been reinvested and will not be
                      distributed to the company shareholders.

                      Under U.S. GAAP, deferred income taxes should be provided
                      on the undistributed tax exempt profits of domestic
                      subsidiaries that arose in fiscal years beginning after
                      December 15, 1992.


                                      F-46
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21:-  DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
           ACCOUNTING PRINCIPLES (CONT.)

                      Both Tri-Wall and C.D. Packaging have immaterial profits
                      from Approved Enterprises, and therefore, in the
                      reconciliation there is no effect from providing deferred
                      income taxes on the undistributed tax exempt profits of an
                      approved enterprise.

           d.         Proportionate consolidation:

                      Under Israeli GAAP, a jointly controlled entity is
                      included in the Company's consolidated financial
                      statements according to the proportionate consolidation
                      method.

                      Under U.S. GAAP, investments in a jointly controlled
                      entities are accounted for by the equity method.
                      Proportionate consolidation is permitted by the Securities
                      and Exchange Commission rules applicable for foreign
                      private issuers.

           e.         Earnings per share:

                      According to Israeli GAAP (Opinion No. 55) the dilutive
                      effect of options is included in the computation of basic
                      net earnings per share only if their being exercised is
                      considered to be probable, based on the ordinary
                      relationship between the market price of the shares
                      issuable upon the exercise of the options, and the
                      discounted present value of the future proceeds derived
                      from the exercise of such options.

                      According to U.S. GAAP basic net earnings per share is
                      computed based on the weighted average number of Ordinary
                      shares outstanding during each year. Diluted net earnings
                      per share is computed based on the weighted average number
                      of Ordinary shares outstanding during each year, plus
                      dilutive potential Ordinary shares considered outstanding
                      during the year, in accordance with FASB Statement No.
                      128, "Earnings Per Share".

                      All outstanding stock options have been excluded from the
                      calculation of the diluted net earnings per Ordinary
                      share, because they are anti-dilutive for all periods
                      presented. The total weighted average number of shares
                      related to the options excluded from the calculations of
                      diluted net earnings per share, was 54,000, 54,000 and
                      45,000 for the years ended December 31, 2000, 2001 and
                      2002. The net earnings per share according to U.S. GAAP is
                      identical to the net earnings per NIS 1 par value of share
                      according to Israeli GAAP for the years ended December 31,
                      2000, 2001 and 2002.

           f.         Base stock:

                      Pallets and spare parts are presented as base stock among
                      property and equipment, while new purchases are charged as
                      an expense. According to U.S. GAAP, such amounts should be
                      capitalized and depreciated over the useful lives of the
                      assets.

                      The effect of this difference on both income and equity is
                      not material.


                                      F-47
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21:-  DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
           ACCOUNTING PRINCIPLES (CONT.)

           g.         Derivative financial instruments:

                      Under Israeli GAAP derivative financial instruments are
                      accounted for according to the provisions prevailing under
                      U.S. GAAP before the adoption of Financial Accounting
                      Standards Board Statement No. 133, "Accounting for
                      Derivative Instruments and Hedging Activities" ("Statement
                      133").

                      Under U.S. GAAP, Statement 133, requires companies to
                      recognize all of its derivative instruments as either
                      assets or liabilities in the statement of financial
                      position at fair value. The accounting for changes in the
                      fair value (i.e., gains or losses) of a derivative
                      instrument depends on whether it has been designated and
                      qualifies as part of a hedging relationship and further,
                      on the type of hedging relationship. For those derivative
                      instruments that are designated and qualify as hedging
                      instruments, a company must designate the hedging
                      instrument, based upon the exposure being hedged, as a
                      fair value hedge, cash flow hedge or a hedge of a net
                      investment in a foreign operation.

                      For derivative instruments that are designated and qualify
                      as a fair value hedge (i.e., hedging the exposure to
                      changes in the fair value of an asset or a liability or an
                      identified portion thereof that is attributable to a
                      particular risk), the gain or loss on the derivative
                      instrument as well as the offsetting loss or gain on the
                      hedged item attributable to the hedged risk are recognized
                      in current earnings during the period of the change in
                      fair values. For derivative instruments that are
                      designated and qualify as a cash flow hedge (i.e., hedging
                      the exposure to variability in expected future cash flows
                      that is attributable to a particular risk), the effective
                      portion of the gain or loss on the derivative instrument
                      is reported as a component of other comprehensive income
                      and reclassified into earnings in the same period or
                      periods during which the hedged transaction affects
                      earnings. The remaining gain or loss on the derivative
                      instrument in excess of the cumulative change in the
                      present value of future cash flows of the hedged item, if
                      any, is recognized in current earnings during the period
                      of change. For derivative instruments that are designated
                      and qualify as a hedge of a net investment in a foreign
                      currency, the gain or loss is reported in other
                      comprehensive income as part of the cumulative translation
                      adjustment to the extent it is effective. For derivative
                      instruments not designated as hedging instruments, the
                      gain or loss is recognized in current earnings during the
                      period of change.

                      The Company uses purchased call options to hedge the fair
                      value of balance sheet accounts denominated in foreign
                      currencies and indexed to the CPI, against changes in
                      foreign exchange rates and changes in the CPI. Due to the
                      short-term settlement period of the derivatives
                      instruments, the difference between the intrinsic values
                      as required under Israeli GAAP and the fair value as
                      required under U.S. GAAP, is immaterial. Additionally the
                      translation adjustment is immaterial.

           h.         Other expenses:

                      The Company included an amount of adjusted NIS 1,336
                      thousand in other income (expenses), which relates to
                      consultation fee with respect to efficiency improvement of
                      the Company's operations. Under US GAAP, these expenses
                      should be included in the statements of operations as a
                      part of operating income (loss).


                                      F-48
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21:-  DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
           ACCOUNTING PRINCIPLES (CONT.)

           i.         Segment information:

                      According to Israeli GAAP, segment disclosures are
                      provided in accordance with the guidance of Accounting
                      Standard No. 11 regarding segment reporting.

                      According to U.S. GAAP, segment disclosures are provided
                      in accordance with the guidance of Statement of Financial
                      Accounting Standard No. 131, " Disclosures about Segments
                      of an Enterprise and Related Information" ("SFAS No.
                      131"), which defines a business as a component of an
                      enterprise that (a) engages in business activities from
                      which it may earn revenues and incur expenses (including
                      revenues and expenses relating to transactions with other
                      components of the same enterprise); (b) whose operating
                      results are regularly reviewed by the enterprise's chief
                      operating decision-maker to make decisions about resources
                      to be allocated to the segment and assess its performance;
                      and (c) for which discreet financial information is
                      available.

                      For all years presented, there were no material
                      differences between those two disclosure requirements, as
                      both definitions resulted in the same two reportable
                      segments.

           j.         Impact of recently issued accounting standards:

                      In November 2002, the FASB issued FASB Interpretation No.
                      45, "Guarantor's Accounting and Disclosure Requirements
                      for Guarantees, Including Indirect Guarantees of
                      Indebtedness of Others, an interpretation of FASB
                      Statements No. 5, 57, and 107 and Rescission of FASB
                      Interpretation No. 34" ("FIN No. 45"). FIN No. 45
                      elaborates on the disclosures to be made by a guarantor in
                      its interim and annual financial statements about its
                      obligations under certain guarantees that it has issued.

                      It also clarifies that a guarantor is required to
                      recognize, at the inception of a guarantee, a liability
                      for the fair value of the obligation undertaken in issuing
                      the guarantee. FIN No. 45 does not prescribe a specific
                      approach for subsequently measuring the guarantor's
                      recognized liability over the term of the related
                      guarantee.

                      It also incorporates, without change, the guidance in FASB
                      Interpretation No. 34, "Disclosure of Indirect Guarantees
                      of Indebtedness of Others," which is being superseded. The
                      disclosure provisions of FIN No. 45 are effective for
                      financial statements of interim or annual periods that end
                      after December 15, 2002 and the provisions for initial
                      recognition and measurement are effective on a prospective
                      basis for guarantees that are issued or modified after
                      December 31, 2002, irrespective of a guarantor's year-end.
                      The Company does not expect the adoption of FIN No. 45 to
                      have a material impact on its results of operations or
                      financial position.


                                      F-49
<PAGE>
                                                  CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 22:-  SUBSEQUENT EVENTS (UNAUDITED)

           On January 1, 2003, the Company signed a share purchase agreement,
           according to which the Company will purchase all issued and
           outstanding shares of Best Carton Ltd. (hereinafter "Best"), an
           Israeli company which is engaged in the manufacturing, marketing and
           the distribution of corrugated carton boxes, in consideration of
           726,788 ordinary shares of the Company (consisting 27.9% of its share
           capital), which are to be issued to Best's shareholders.

           In addition, on that date, Tri-Wall signed a share purchase agreement
           according to which, Tri-Wall will purchase all, 522 thousand,
           ordinary shares of the Company (Carmel Systems) held by Ampal
           Enterprises Ltd., in consideration of $ 3,523 thousand ($ 6.75 per
           share).

           The shares purchased by Tri-Wall will not confer upon their holders
           the right to vote in the general meetings.

           The two transactions are contingent upon the approvals of:

           The Director of the Anti Trust Authority, Carmel's Board of Directors
           (was approved on January 1, 2003), Carmel's Shareholders and the
           Israel Union Bank Ltd. and Discount Bank Ltd. (Best's creditors).

           The closing date was scheduled for one month after the approval by
           the Director of the Anti Trust Authority.

           On May 29, 2003, the Director of the Anti Trust Authority has
           rejected the proposed transaction. The Company is currently assessing
           all actions available.






                                      F-50
<PAGE>
                                                 CARMEL CONTAINER SYSTEMS LTD.
                                                               AND SUBSIDIARIES
LIST OF INVESTEES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     PERCENTAGE OF
                                                                          -------------------------------------
                             NAME OF COMPANY                                  OWNERSHIP            CONTROL
                            ----------------------------------------      -----------------   -----------------
<S>                         <C>                                           <C>                 <C>
  a. Subsidiaries:
                             C.D. Packaging Systems Ltd.                          50                  50.1
                             Tri-Wall Containers (Israel) Ltd.                   100                 100
                             Solid Packaging Board Ltd. *)                        50                  50

  b. Inactive companies:
                             Plaro Container Systems (1989) Ltd.                 100                 100
                             Tri-Wall Pallets (1973) Ltd.                        100                 100

</TABLE>


           *)         Percentage of control represents the percentage of control
                      of C.D. Packaging Systems Ltd. in its jointly controlled
                      entity.




                              - - - - - - - - - - -





                                      F-51
<PAGE>
PRICEWATERHOUSECOOPERS
--------------------------------------------------------------------------------
                                                   KESSELMAN & KESSELMAN
                                                   Certified Public Accountants
                                                   1 Nathanson Street
                                                   Telephone +972-4-8605000
                                                   Facsimile +972-4-8605001


                                AUDITORS' REPORT

                             To the shareholders of

                           C.D. PACKAGING SYSTEMS LTD.


We have audited the financial statements of C.D. Packaging Systems Ltd.
(hereafter - the Company) and the consolidated financial statements of the
Company and its proportionately consolidated subsidiary: balance sheets as of
December 31, 2002 and 2001 and statements of income (loss), 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 U.S.A. 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 the Company's board of directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a fair basis for our opinion.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position - of the Company and consolidated - as
of December 31, 2002 and 2001 and the results of operations, changes in
shareholders' equity and cash flows - of the Company and consolidated - for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted ("GAAP") in Israel (as applicable to
these financial statements Israeli GAAP and U.S. GAAP are practically identical
in all material respects). Also, in our opinion, except for failure to meet the
requirements of the Securities Regulations (Presentation of Transactions between
a Corporation and its Controlling Shareholder in the Financial Statements),
1996, as explained in note 11, and except for the exclusion of certain
specifications, as explained in that note, the abovementioned financial
statements have been prepared in accordance with the Securities (Preparation of
Annual Financial Statements) Regulations, 1993.

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


Haifa,
March 3, 2003

<PAGE>
THE FOLLOWING IS A COPY OF THE PREVIOUSLY ISSUED INDEPENDENT PUBLIC ACCOUNTANT'S
REPORT OF ARTHUR ANDERSEN. THIS REPORT WAS ISSUED ON JANUARY 28, 2002. THE
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN.


                            [Letterhead of Andersen]
                              [Luboshitz Kasierer]


                      AUDITORS' REPORT TO THE SHAREHOLDERS


                                       OF


                        TRI-WALL CONTAINERS (ISRAEL) LTD.


We have audited the accompanying balance sheets of TRI WALL CONTAINERS (ISRAEL)
LTD. (the Company) as of December 31, 2001 and 2000, 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, 2001. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the United States and Israel, including those prescribed under the Auditors'
Regulations (Auditor's Mode of Performance), 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations, changes in shareholders'
equity and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with generally accepted accounting principles
in Israel.

As described in Note 2A, the financial statements referred to above have been
prepared 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.


                                            /s/ Luboshitz Kasierer
                                            ----------------------------------
                                            Luboshitz Kasierer
                                            Certified Public Accountants (Isr.)
Tel-Aviv.January 28, 2002

<PAGE>
                                  EXHIBIT INDEX


EXHIBIT
  NO.            DESCRIPTION
-------          --------------------------------------------------------------
  1.1            Memorandum of Association*

  1.2            Articles of Association*

  4.1            Carmel Container Systems Ltd. 1999 Senior Employee Stock
                 Option Plan **

  8              Subsidiaries of Carmel Container Systems Ltd.***

 12.1            Consent of Kost, Forer & Gabbay****

 12.2            Certification Pursuant to 18 U.S.C.ss.1350

 12.3            Certification Pursuant to 18 U.S.C.ss.1350



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

*          Incorporated herein by reference to our Registration Statement on
           Form F-1 (Registration No. 3308150).

**         Incorporated herein by reference to our Registration Statement of
           Form S-8 (Registration No. 333-10002).

***        Incorporated by reference to our annual report on Form 20-F for the
           year ended December 31, 2000.

****       Filed herewith.