Commission File No. 1-4212

================================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 20-F

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

                   For the fiscal year ended December 31, 2003

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

                        AMERICAN ISRAELI PAPER MILLS LTD.

    (Exact name of Registrant as specified in its charter and translation of
                        Registrant's name into English)

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

                                     Israel

                 (Jurisdiction of incorporation or organization)

                       P.O. Box 142, Hadera 38101, Israel

                    (Address of principal executive offices)

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

 Securities registered or to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
          Title of each class                    Name of each exchange on which registered
<S>                                                     <C>
Ordinary Shares, par value NIS .01 per share             American Stock Exchange
</TABLE>



                    Securities registered or to be registered

                      pursuant to Section 12(g) of the Act:

                                      None

      (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:

             3,968,295 Ordinary Shares, par value NIS .01 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: Yes |X| No |_|.

Indicate by check mark which financial statement item the registrant has elected
to follow: Item 17 |_| Item 18 |X|

<PAGE>

                                     PART I

ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS


Not applicable to Annual Reports

ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable to Annual Reports

ITEM 3 - KEY INFORMATION

A.       Selected Financial Data

         The Company prepares its financial statements in accordance with
Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain respects, as described
in ITEM 18 below.

         The following selected financial data is derived from the audited
consolidated financial statements of American Israeli Paper Mills Ltd. ("AIPM"
or the "Company"). The consolidated financial statements since 2000 were
influenced significantly by the following transactions:

         (a) The finalization of the joint venture with Neusiedler AG (NAG), an
Austrian corporation, under which Neusiedler Hadera Paper (NHP), a company
engaged in the manufacture of printing and writing paper was formed, effective
January 1, 2000, and in which NAG holds 50.1% and AIPM holds 49.9% of the
shares. Consequently, as of that date, the results of NHP's operations are no
longer consolidated with the results of the Company. Since January 1, 2000,
AIPM's share in NHP's results is included in the Company's statement of income
under the item "Company's share in profits of associated companies." In the
balance sheets, AIPM's share in the shareholders' equity of NHP is included in
"Investments in associated companies."


         (b) On March 31, 2000, Kimberly-Clark Corporation (KC) exercised the
option that was granted to it in January 2000 and acquired from AIPM 0.2% of the
shares in Hogla-Kimberly Ltd. in return for $5 million, thereby increasing its
holdings in Hogla-Kimberly to 50.1%. Consequently, as of the second quarter of
2000, the results of Hogla-Kimberly are no longer consolidated with AIPM's
consolidated results and AIPM's share in the results of operations of
Hogla-Kimberly (49.9%) is included in the item "Company's share in the profits
of associated companies." AIPM's share in the shareholders' equity of
Hogla-Kimberly is included in the balance sheets under "Investments in
associated companies."


                                       2
<PAGE>

         The following table sets forth certain selected financial data with
respect to the Company presented in New Israeli Shekel (NIS):

                     Five Fiscal Year Financial Summary/1/
<TABLE>
<CAPTION>
According to Israeli GAAP
(In Thousands of Adjusted NIS Except Per Share Amounts)       Year Ended December 31
Income Statement data:                    ---------------------------------------------------------
                                             2003       2002        2001      /2/2000      /2/1999
                                          ---------   ---------   ---------   ---------   ---------
<S>                                         <C>         <C>         <C>         <C>       <C>
Net Sales                                   465,092     455,775     469,709     745,946   1,665,690
Operating Income                             46,584      36,454      20,526      63,212     156,839
Share in profits of associated
companies, net                               35,549      16,727      15,011      36,034       2,763
Net Income
                                             60,047      37,460      34,447   /3/84,445      70,122

      Selected balance sheet data:
Total Assets                              1,253,274   1,052,123   1,052,141   1,058,901   1,628,249
Working Capital                             229,411      86,931      77,963      74,433     265,550
Investment in Marketable Securities and
Fixed Term Bank Deposits                                                                     78,822
Property, Plant &  Equipment (net)          325,641     325,837     311,168     311,872     539,631
Long-term Debt                              268,052      70,257      79,611      93,510     141,067
Share Capital & Capital Surplus             215,317     215,316     215,316     215,316     215,860
Shareholders' Equity                        614,230     650,950     634,472     603,200     572,929
Per Share Data:
Shares Outstanding at End of Year         3,968,295   3,918,710   3,918,710   3,890,561   3,854,571
Net Income per NIS 1 Par value:
         Primary                              1,494         947         873       2,137       1,794
         Fully Diluted                        1,494         947         873       2,137       1,794

Dividend per share                         /4/25.12     /4/5.30        /4/-       13.79       69.49
</TABLE>
----------

/1/      The financial statements of the Company are presented in New Israeli
         Shekels adjusted to reflect the changes in the purchasing power of
         Israeli currency (i.e., adjusted shekels). These adjustments were
         determined on the basis of the changes in the U.S. Dollar/Israel Shekel
         exchange rate (see page 5 and see Note 1 to Consolidated Financial
         Statements).

/2/      See above explanation of changes in the consolidated statements,
         resulting in the de-consolidation of NHP (as of January 1, 2000) and of
         Hogla-Kimberly (as of March 31, 2000).

/3/      The net income includes a material non-reoccurring gain in the year
         2000, in the sum of NIS 20,087 thousands, originated from the changes
         in holdings described above.

/4/      Dividend for 2001, in the sum of NIS 5.30 per share ($1.21 per share)
         was declared in March 2002 and paid in April 2002.

         Dividend for 2002, in the sum of NIS 6.31 per share ($1.44 per share)
         was declared in March 2003 and paid in April 2003.

         Dividend paid in 2003 includes a special dividend for 2003 in the sum
         of NIS 18.81 per share ($4.29 per share ).

                                       3
<PAGE>


According to U.S. GAAP

(In Thousands of re-measured NIS except per share amounts)

<TABLE>
<CAPTION>
                                                                  Year ended December 31
                                                ---------------------------------------------------------
Income Statement and balance sheet data:           2003        2002       2001        *2000      *1999
---------------------------------------         ---------   ---------   ---------   ---------   ---------
<S>                                             <C>         <C>         <C>         <C>       <C>
Sales                                             481,491     492,990     451,152     705,884   1,567,871
Operating Income                                   53,688      53,751      25,723      61,189     150,374
Share in profits of associated companies, net      20,972      27,464      22,993      37,967       4,040
Net Income                                      /1/38,469      54,624      49,876   /1/79,853      61,750
Total Assets                                    1,189,215   1,026,083     966,747     926,362   1,419,187
Working Capital                                   225,788      85,803      78,111      65,272     232,546
Investment in Marketable Securities and Fixed
Term Bank Deposits                                                                                 72,738
Property, Plant & Equipment (net)                 283,831     279,077     245,949     243,656     418,051
Long-term Debt                                    268,052      76,001      80,284      86,292     133,787
Shareholders' Equity                              550,354     602,675     569,920     512,988     478,731
Per Share Data: (re-measured NIS)
Shares Outstanding at End of Year               3,968,295   3,918,710   3,918,710   3,890,561   3,854,571
Net Income Per Share
         Basic                                       9.77       13.94       12.75       20.52       16.02
         Diluted                                     9.69       13.81       12.66       20.16       15.63
Dividend per share                               /2/25.55     /2/5.77        /2/-       12.84       64.82
</TABLE>
----------

For further information about the effect of application of U.S. GAAP, see Item
18.

*        See above explanation of changes in the consolidated statements,
         resulting in the de-consolidation of NHP (as of January 1, 2000) and of
         Hogla-Kimberly (as of March 31, 2000) and their becoming associated
         companies.

/1/      The net income includes a material non-reoccurring loss in the year
         2003, in the sum of NIS 16,986 thousands, representing other than
         temporary impairment of an investment in an associated company. A
         material non-reoccurring gain was included in the year 2000, in the sum
         of NIS 18,500 thousands, originated from the changes in holdings
         described above.

/2/      Dividend for 2001, in the sum of NIS 5.77 per share ($1.21 per share)
         was declared in March 2002 and paid in April 2002.


         Dividend for 2002, in the sum of NIS 6.61 per share ($1.44 per share)
         was declared in March 2003 and paid in April 2003.


         Dividend paid in 2003 includes a special dividend for 2003 in the sum
         of NIS 19.04 per share ($4.29 per share).


                                       4
<PAGE>

Exchange Rates

         The exchange rate between the NIS and U.S. dollar published by the Bank
of Israel was NIS 4.555 to the dollar on May 31, 2004. The high and low exchange
rates between the NIS and the U.S. dollar during the six months of December 2003
through May 2004, as published by the Bank of Israel, were as follows:


Month                       High                     Low
-----                       ----                     ---
                            1 U.S. dollar =          1 U.S. dollar =

December 2003               4.352 NIS                4.441 NIS
January 2004                4.371 NIS                4.483 NIS
February 2004               4.437 NIS                4.493 NIS
March 2004                  4.483 NIS                4.535 NIS
April 2004                  4.599 NIS                4.515 NIS
May 2004                    4.634 NIS                4.555 NIS


         The average exchange rate between the NIS and U.S. dollar, using the
average of the exchange rates on the last day of each month during the period,
for each of the five most recent fiscal years was as follows:

Period                                                Exchange Rate
------                                                -------------
January 1, 1999 - December 31, 1999                   4.154 NIS/$1
January 1, 2000 - December 31, 2000                   4.067 NIS/$1
January 1, 2001 - December 31, 2001                   4.219 NIS/$1
January 1, 2002 - December 31, 2002                   4.736 NIS/$1
January 1, 2003 - December 31, 2003                   4.512 NIS/$1



Forward Looking Statements

         This Annual Report on Form 20-F contains "forward-looking" statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act")
(collectively, the "Safe Harbor Provisions"). These are statements that are not
historical facts and include statements about our beliefs and expectations.
These statements contain potential risks and uncertainties and actual results
may differ significantly. Forward-looking statements are typically identified by
the words "believe", "expect", "intend", "estimate" and similar

                                       5
<PAGE>

expressions. Such statements appear in this Annual Report and include statements
regarding the intent, belief or current expectation of the Company or its
directors or officers. Actual results may differ materially from those
projected, expressed or implied in the forward-looking statements as a result of
various factors including, without limitation, the factors set forth below under
the caption "Risk Factors" (we refer to these factors as "Cautionary
Statements"). Any forward-looking statements contained in this Annual Report
speak only as of the date hereof, and we caution potential investors not to
place undue reliance on such statements. We undertake no obligation to update or
revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the Cautionary Statements.

B.       Capitalization and indebtedness

         Not applicable.

C.       Reason for the offer and use of proceeds

         Not applicable.

D.       Risk factors

              Risks relating to the Company's Operations in Israel

Security, economic and political conditions in Israel may affect the results of
the Company's operations.

         The Company is incorporated under Israeli law and our principal offices
are located in Israel. Political, economic and security conditions in Israel
directly affect our operations. Since the establishment of the State of Israel
in 1948, various armed conflicts have taken place between Israel and its Arab
neighbors and a state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Israel signed a peace treaty with
Egypt in 1979 and a peace treaty with Jordan in 1994. As of the date of this
annual report, Israel has not entered into any peace agreement with Syria or
Lebanon. Since 1993 several agreements have been signed between Israel and the
Palestinians, but a final agreement has not been achieved. Since October 2000,
there has been a marked increase in hostilities between Israel and the
Palestinians, which have adversely affected the peace process, placed the
Israeli economy under significant stress, and have negatively influenced
Israel's relationship with several Arab countries.

Competition

         Most of the Group's products are exposed to competition with local and
imported products. The said competition might have influence over the selling
prices and the Group's market share in its different fields of operations,
especially in times of recession.

Raw materials prices

         The Group is exposed to changes in raw materials prices, especially
from imports (mainly pulp and fluff). Because of the small size of the Israeli
market and the influence of the competing imports over selling prices, an
increase in raw materials prices might erode the Group's gross margin and by
that to decrease the Group's profitability.

Dependency on energy prices

                                       6
<PAGE>

         The Group's operations are highly dependent on energy consumption and
thereby are highly effected by fuel prices. The Group's profit may be adversely
effected in case of high increase in fuel prices.

Inflation

         A high inflation rate can, in the long run affect the Group's wage
expenses, since these expenses might be influenced by the changes in the
Inflation rate.

An income tax reform in Israel may affect the Company's shareholders and the
Company

         Effective as of January 2003, the Israeli Parliament has enacted a wide
ranging reform of the Israeli income tax system. These tax reforms have resulted
in significant changes to the Israeli tax system. (See Note 7e to the financial
statements attached- Reform of the Israeli tax system).

Risks relating to our operations in Turkey

         The company is subject to various risks related to the operations in
Turkey, where Hogla-Kimberly operates through its subsidiary, Ovisan, resulting
from the economic instability in Turkey, and the high inflation rates. This
economic instability may effect the purchasing power in Turkey and together with
the volatility of the Turkish currency that may continue, might have a material
adverse effect on the operations of Ovisan.

         For further information, see "Item 11 - Quantitative and Qualitative
Disclosure about Market Risk".

ITEM 4 - INFORMATION ON THE COMPANY

A.       History and Development of the Company

         The Company was incorporated in 1951 under the laws of the State of
Israel, and, together with its subsidiaries and associated companies (which
together with the Company are referred to as the "Group") is Israel's major
manufacturer of paper and paper products.

         The Company's principal executive offices are located at 1 Meizer St.,
Industrial Zone, P.O. Box 142, Hadera, Israel, Tel: (972-4) 634-9349, fax:
(972-4) 633-9740.

         The need to meet future challenges caused the Company to reorganize its
operations into separate business units. Effective as of December 31, 1995, the
Company's machines used in the manufacture of packaging and printing and writing
paper were transferred to a wholly-owned subsidiary of the Company, and the
Company's machines used in the manufacturing of printing and writing papers were
sold in 2000 to NHP. The Company's machines used in the manufacture of household
papers were sold to Hogla-Kimberly.

         The organizational structure of the Company and certain subsidiaries
thereof was changed as of January 1, 1999. This change was intended to result in
an operational separation between various activities, especially in the paper
and board divisions, to allow for better business focus, greater operating
efficiency and the formulation of business strategies that facilitate the
establishment of additional international strategic alliances.

         Within the framework of the organizational changes, different fields of
operations were defined and separated, including printing and writing paper and
packaging paper. For each of them a separate

                                       7
<PAGE>

management was assigned.

         Over the last few years, the Group has created several new joint
ventures as follows:

         1. In July 1992, the Group purchased 25% of the shares of Carmel
Container Systems Ltd. ("Carmel"), a leading Israeli designer, manufacturer and
marketer of containers, packaging materials and related products. As of May 31,
2004, the Group held 26.5% of the shares of Carmel. Other major shareholders in
this company are Rand Whitney Inc. (35.46%) and Ampal Ltd. (21.75%).

         2. In 1996, KC acquired, 49.9% of the shares of Hogla, a wholly-owned
subsidiary of the Company and a leading Israeli consumer products company, which
was then renamed Hogla-Kimberly Ltd. The partnership was intended to expand the
local production base in Israel, in order to serve both local and regional
demand, and to offer Hogla-Kimberly access to international markets. In 1999,
Hogla-Kimberly purchased Ovisan, a Turkish manufacturer and marketer of diapers
and paper products.

         In January 2000, AIPM and KC entered into an agreement pursuant to
which AIPM granted KC an option to acquire from AIPM an additional 0.2% of the
Hogla-Kimberly equity. On March 31, 2000, KC exercised the option thereby
increasing its holdings in Hogla-Kimberly to 50.1%.

         3. In February 2000, effective January 1, 2000, AIPM entered into a
joint venture agreement with NAG, pursuant to which NAG acquired 50.1% of AIPM's
printing and writing paper operations. The printing and writing paper operation
was separated from AIPM upon the completion of this transaction and was sold to
NHP, a subsidiary that was established for this purpose. In return for the
acquisition of 50.1% of the shares of the new company, NAG paid to NHP $10
million in cash and lent to NHP $10 million.

         NAG is a member of Mondi Europe, a group of companies with many years
of experience in the paper industry, wide global deployment and annual
production capacity in excess of 5 million tons of various grades of paper and
pulp. The establishment of the joint venture is expected to result in a doubling
of the paper production capacity in Israel within the coming years, while
relying on the NAG marketing network for the export of 50,000 to 80,000 tons of
printing and writing paper annually.

         4. Amnir Recycling Industries Ltd. (a wholly owned subsidiary of AIPM)
acquired in 1997 and 1998 20% and 10%, respectively, of Cycle-Tec Recycling
Technologies Ltd. (Cycle-Tec), a research and development company which develops
a process for manufacturing of a high strength / low cost composite material,
based on recycled post consumer plastic and paper treated with special chemical
additives, for a total of $150,000. In 1999, Amnir acquired additional shares of
Cycle-Tec for $80,000. In March 2000 and in July 2001, Amnir acquired additional
shares of Cycle-Tec for $93,243 and $100,000, respectively. As of May 31, 2004,
Amnir owned 30.18% of Cycle-Tec.

         5. In July 1998, the Company signed an agreement with a strategic
partner, Compagnie Generale d'Entreprises Automobiles (CGEA), for the sale of
51% of the operations of Amnir Industries and Environmental Services Ltd. (Amnir
Environment) in the field of solid waste management (waste disposal and
management of transfer stations and landfills) for a purchase price of $7.8
million. . CGEA is an international French company which is part of the Veolia
group and one of the world's leading companies in the field of environmental
services. The agreement does not apply to Amnir's operations in collecting and
recycling paper and plastic.

         6. In March 2000, AIPM and CGEA, on the one hand, and Tamam Integrated
Recycling Industries Ltd. (T.M.M) and its controlling shareholders, on the other
hand, entered into an agreement

                                       8
<PAGE>

pursuant to which AIPM and CGEA acquired through a joint company from T.M.M.'s
controlling shareholders 62.5% of the share capital of T.M.M., a leading Israeli
company in the solid waste management field, for $15.85 million. Simultaneously
therewith, 100% of Amnir Environment's shares were transferred to T.M.M. in
return for an allocation of 35.3% of the shares of T.M.M to the shareholders of
Amnir Environment. Following such transaction, AIPM and CGEA owned together,
75.74% of the shares of T.M.M. In August and September 2000, T.M.M. acquired
approximately 3% of its own share capital. In December 2001, and in August 2003
AIPM and CGEA acquired additional shares of T.M.M.'s share capital through a
joint company (Barthelemi Holdings Ltd.), resulting in an increase in the
ownership of shares of T.M.M. by AIPM and CGEA to 88.02% as of May 31, 2004.


                                       9
<PAGE>


Capital Expenditures and Divestitures

2003:

         The investments in fixed assets of the Company totaled about NIS 29.2
 million in 2003 (about $6.7 million). These investments included:

-        Investments of approximately NIS 2.6 million ($0.6 million) in
         environmental issues, mainly in the process of purification of waste
         from water.
-        An investment of approximately NIS 2.6 million ($0.6 million) in the
         expansion of the output of the packaging paper machine.
-        Investments totaling NIS 24 million ($5.5 million) in buildings,
         equipment, transportation and IT.

2002:

         The investments in fixed assets totaled about NIS 46.8 million (about
$10.7 million). These investments included:

-        The payment of approximately NIS 26.8 million ($6.1 million) in
         connection with the extension of the lease for the Shafir Compound,
         from the Tel Aviv Municipality, for an additional period ending during
         2059.
-        The completion of the investment in the anaerobic installation in
         Hadera, Israel as part of the Group's environmental operations. The
         additional investment in 2002 totaled NIS 3.5 million ($0.8 million).
-        Investments totaling NIS 16.6 million ($3.8 million) in the renovation
         of manufacturing and transport equipment. 2001:

2001:

         The investments in fixed assets in 2001 totaled about NIS 30.0 million
(about $6.9 million). These investments included:

-        An initial investment of NIS 4.0 million ($0.9 million) in an anaerobic
         plant in Hadera, Israel as part of the Group's environmental
         operations.
-        Investments totaling NIS 26.1 million ($6.0 million) in the renovation
         of equipment and transportation.

B.       Business Overview

         I. The Group's Operations and Principal Activities

         The Group, through its subsidiaries and main affiliated companies,
produces and markets a wide variety of paper types such as coated and uncoated
printing and writing paper, packaging and wrapping paper, tissue paper for
personal care and household use and various grades of board.

         The Group is also engaged in the conversion of household paper products
into consumer products such as bathroom tissue and paper towels, napkins and
facial tissue; the production and marketing of disposable baby diapers, adult
incontinence, absorbent products and feminine hygiene products; the production
and marketing of paperboard for the packaging industry; the production and
marketing of corrugated boxes; and the marketing of office supplies.

                                       10
<PAGE>

         The collection and recycling of a variety of waste materials is also a
major Group activity, with waste paper used in the production of paper and
board. In addition, the Group is engaged in plastics and solid waste recycling
for industrial and agricultural applications.

         In 1989, the Company was declared a monopoly in the field of paper
production and marketing in reels and sheets by Israel's Authority for
Restricted Trade Practices, but this declaration was partially revoked in 1998
with respect to printing and writing paper. Until January 2001, some of the
Group's products, such as printing and writing paper (in reels and sheets) were
under price control. In January 2001, these restrictions were cancelled.

         The principal products produced and/or marketed by the Company and its
subsidiaries and associated companies are as follows:

o        Grades of Paper and Board

         Printing and writing paper, publication papers in reels, coated paper,
carbonless paper, recycled paper, cut-size paper for copy laser and inkjet,
copy-book paper, paper for continuous forms, paper for envelopes and direct
mailing and various grades of packaging paper and board.

o        Packaging Products

         Folding cartons, Corrugated containers and pallets and Solid board
containers.

o        Household Products

         Bathroom tissue, kitchen towels, facial tissue, , napkins, tablecloths,
sanitary towels, panty shields, tampons, disposable baby diapers, training
pants, baby wipes, disposable adult diapers, incontinence pads, cups and plates.

o        Industrial, Hospital and Food Service Products

         Toilet paper, towel rolls, C-fold towels, napkins, place mats,
coasters, bed sheets, wadding, paper toilet seat covers, disposable bed-pans and
urinals, sterilizing paper, bathroom tissue and paper towel dispensers,
dispensers for liquid hand soaps and room deodorizing dispensers for washrooms
and cleaners, detergents and cleaning complimentary products.

o        Other Products

         Aluminum food wraps, cling-film wraps, garbage bags, air purifiers for
lavatories, oven baking and cooking trays, office supplies, recycled ground and
palletized plastics used by the plastic products industry, compost for soil
conditioning and fertilizers for agriculture and landscape planting.

Sales and Marketing

         The Group's paper grades are sold to publishers, major printers,
converters, and wholesalers some of which are part of the Group, and independent
and other direct customers.

         The Group's household products are marketed mainly through retail
marketing chains, stores and the institutional market.

The Group's main marketing strategy has the following objectives:

                                       11
<PAGE>

         (a) Maintaining its existing dominant share in the Israeli market of
paper grades and paper products produced by the Group and imported by it through
short delivery time and prompt service, while constantly improving the quality
of its products.

         (b) Increasing cut-size paper exports of NHP significantly, through the
marketing network of NAG in Europe and worldwide.

         (c) Meeting the growing and changing requirements of the market by
adding new paper grades and improving the quality of existing grades to meet the
technological changes required by new printing equipment.

         (d) Exploring new business opportunities and increasing the range of
its products.

The following table sets forth the consolidated sales in adjusted NIS
millions(**) by categories of the consolidated segments of operations:

**       The financial statements of the Company are presented in NIS adjusted
         to reflect the changes in the purchasing power of Israeli currency
         (i.e., adjusted NIS). These adjustments were determined on the basis of
         the changes in the U.S. Dollar/NIS exchange rate (see Item 3 - "Key
         Information - Selected Financial Data" and Note 1 to the Company's
         Consolidated Financial Statements).

<TABLE>
<CAPTION>
             Paper
          Manufacturing                     Marketing Office                        Total
         and recycling /1/                     Supplies /2/
----------------------------------   --------------------------------    -----------------------------
    2003         2002       2001        2003        2002      2001     2003       2002        2001
    ----         ----       ----        ----        ----      ----     ----       ----        ----
<S>             <C>         <C>        <C>         <C>        <C>      <C>       <C>         <C>
   332.1        314.6       316.4      133.0       141.1      153.3    465.1     455.8       469.7
   =====        =====       =====      =====       =====      =====    =====     =====       =====
</TABLE>

The above mentioned segments include the following activities:

1.       Paper manufacturing and recycling - collecting and recycling of paper
         waste; manufacturing and marketing paper, mainly packaging paper, which
         rely mainly on paper waste as raw materials.

2.       Marketing office supplies - Marketing of office supplies and paper,
         mainly to institutions.


Raw Materials

         The raw materials required for paper and board production are different
wood pulps, secondary fibers (i.e., waste paper) and various chemicals and
fillers. Pulp is imported primarily from major suppliers in Scandinavia, the
United States, Portugal, Austria, Germany, Brazil and South Africa on a regular
basis. The bulk of the pulp tonnage purchased is secured by revolving long-term
agreements renewed on a yearly basis. Most of the waste paper and the fillers
are acquired from Israeli sources.

         About 65% of the fibers required in paper production of the Group
(including printing and writing paper and household products) come from waste
paper, which in some paper grades, is used in lieu of relatively more expensive
pulp.

         Since 1996, the Company has been using precipitated calcium carbonate
(PCC), a special pigment used for filling and coating paper in order to improve
quality. The PCC is manufactured in a plant constructed and operated by
Specialty Minerals Israel Ltd. (SMI), which is a wholly owned subsidiary of
Minerals Technologies Inc., a U.S. company.

                                       12
<PAGE>

         The cost of paper production is affected by fluctuating raw material
prices and the cost of water and energy.

Competition

         Most of the Group's products that are sold on the local market are
exposed to competition with local and imported products. The imported products
arrive in Israel exempt from import tariffs, especially from the EEC, EFTA and
the USA. The tariffs on imports of paper from other countries are in the range
of 0% -12%.
The said competition has influence over the selling prices that the Group can
charge.

         The main competitors of the Group in the different fields of operation
are Israeli companies which sells mainly imported products, except for sales of
baby diapers and hygienic products in which the Group's main competitor is
Proctor & Gamble.

C.       Organizational Structure

         Clal Industries and Investment Ltd. (Clal) owns 32.54% of the Company.
Discount Investment Corporation Ltd. (DIC) owns 18.39% of the Company. Clal and
DIC agreed to coordinate and pool their voting power in the Company. IDB
Development Corporation Ltd. owns 64.7% of DIC and 63.6% of Clal.

                Significant subsidiaries and associated companies

<TABLE>
<CAPTION>
         Name of the Company                                             Ownership and   Country of
         -------------------                                                 Voting    Incorporation
                                                                             ------    -------------
<S>                                                                          <C>       <C>
Subsidiaries

Amnir Recycling Industries Ltd.                                              100.00%       Israel

Graffiti Office Supplies & Paper Marketing Ltd.                              100.00%       Israel

Attar Marketing Office Supplies Ltd.                                         100.00%       Israel

American Israeli Paper Mills Paper Industry (1995) Ltd.                      100.00%       Israel


Associated Companies

Hogla-Kimberly Ltd.                                                           49.90%       Israel

Hogla-Kimberly Marketing Ltd.                                                 49.90%       Israel

Shikma Ltd.                                                                   49.90%       Israel

Ovisan Sihhi Bez Sanai Ve Ticavet A.S                                         49.90%       Turkey

Hogla-Kimberly Holdings A.S                                                   49.90%       Turkey

Neusiedler Hadera Paper Ltd.                                                  49.90%       Israel

Neusiedler Hadera Paper  Marketing (1999) Ltd.                                49.90%       Israel

Grafinir Paper Marketing Ltd.                                                 49.90%       Israel
</TABLE>

                                       13
<PAGE>
<TABLE>
<CAPTION>
         Name of the Company                                             Ownership and   Country of
         -------------------                                                 Voting    Incorporation
                                                                             ------    -------------
<S>                                                                          <C>       <C>
Mitrani Paper Marketing 2000 (1998) Ltd.                                      49.90%       Israel

Yavnir (1999) Ltd.                                                            49.90%       Israel

Barthelemi Holdings Ltd.                                                      33.91%       Israel

T.M.M. Integrated Recycling Industries Ltd. (direct and indirect)             41.60%       Israel

Carmel Containers Systems Ltd.                                                26.25%       Israel

C.D. Packaging Systems Limited (direct and indirect)                          63.20%*      Israel
</TABLE>


D.       Property, Plants and Equipment

         The Group's principal executive offices and manufacturing and warehouse
facilities are located on approximately 69 acres of land in Hadera, Israel,
which is 31 miles south of Haifa, a major seaport, and 28 miles north of Tel
Aviv. The Company owns 51 acres, and 18 acres are leased from the Israel Land
Administration, an agency of the State of Israel, under several leases. The
lease periods terminate during future years until 2050.

         The Group's facilities in Hadera are housed in two-story plants and
several adjoining buildings. Approximately 1,200,000 square feet are utilized
for manufacturing, storage and sales and administrative offices. An additional
plant is located in renovated modern buildings on a 10 acre plot in Afula, a
city in northern Israel. The Molett plant is located in Nahariya, in northern
Israel, on approximately 6 acres. In September 2002, the Group signed an
agreement with the Tel Aviv Municipality for the extension of the lease period
of the real estate lease for a plant in Tel Aviv, that was shut down at the end
of 2002, until the year 2059, in return for the payment of $6.2 million by the
Group. The Group is investigating several options for using the land.

         The Group also owns a warehouse containing 50,000 square feet situated
on three acres in the Tel Aviv area, and a two acre parcel in the industrial
zone of Bnei Brak, near Tel-Aviv, which is used for waste paper collection.
Hogla-Kimberly headquarters and logistic center which are rented under a long
term lease agreement are located in a new modern site in Zrifin, near Tel-Aviv,
covering an area of 430,550 square feet., with 188,370 square feet of buildings.

         The Group sold at the end of 2002 the land and buildings it owned in
the city of Ashdod, in southern Israel, and at the beginning of 2003 the Group
sold 8 of 10 apartments it owned in Hadera.

         The Group rents plant and office facilities in Migdal Haemek and
Caesarea and additional warehouses and waste paper collection sites throughout
Israel.

         The machinery, equipment and assets of the Company are free of any
mortgage, lien, pledge or

----------
* The holding in voting shares is 63.05%

                                       14
<PAGE>

other charge or security interest.

         The Group owns six paper machines that are used in the manufacture of
various grades of paper and board. Most of the paper production facilities of
the Company and its subsidiaries are located in Hadera where it operates five
machines with a combined production capacity of over 310,000 tons per year. The
Group owns another machine in Nahariya which produces tissue paper with
production capacity of 20,000 tons per year.

         The Group also operates converting lines for personal care and
household paper products in Hadera and Nahariya.

         The Group maintains facilities for collecting, sorting and baling waste
paper and board in various locations in Israel and a plant for the recycling of
urban waste in Afula. It also has a plant in Afula for the production of
disposable baby diapers, incontinence absorbent products and feminine hygiene
products, a plant in Migdal Haemek for the production of paperboard consumer
packages and a plant in Hadera for recycling plastic waste. The Group also
operates, through an associated company, a second plant for handling and
recycling urban waste in Petah Tikva, near Tel-Aviv and several landfills.

         The Company established in 2000 a new co-generation power plant, based
on high-pressure steam available from steam drying employed in paper production,
for a total investment of $14 million. The operation of the power plant,
situated in Hadera, concluded two years of work, and the Group now enjoys an
independent power generation capacity of 18MW, with generation costs
considerably lower than the cost of electricity purchased from the Israel
Electricity Company. As part of this project, the infrastructure of the main
electricity supply system was renovated and improved, utilizing modern
technological innovations.

         Environmental Regulation Matters

         Certain of the Group's manufacturing operations are subject to
environmental and pollution control laws in Israel. In order to comply with
these laws, the Group planned and acquired, during 2001, a new modern facility
for the treatment of effluent using an anaerobic treatment process. This process
was installed in the Group's site in Hadera as a pre-treatment phase in the
existing system based on aerobic treatment, in order to improve the treated
effluent quality in compliance with environmental regulations.

         In 2003 the Group recorded a significant improvement in sewage waste
quality, following the conclusion of the running-in and the optimization of its
anaerobic process facility and a significant reduce in sewage quantity.

         The Company is investing money and efforts in environmental projects,
while placing emphasis on separating industrial effluent streams by type and
curtailing their volume. This effort includes educating the employees on
environmental matters.

         The Group's achievements in the environmental protection during the
last few years were acknowledged at the end of 2002, when the paper mills at the
Hadera site won the Shield for Environmental Excellence in Industry Award
granted by the Israeli Ministry of the Environment. In 2003 all plants at the
main Hadera site passed successfully various environmental inspections.

ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Critical Accounting Policies and Estimates

                                       15
<PAGE>

         The Company's discussion and analysis of the financial condition and
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in Israel (for information as to the reconciliation between U.S. and Israeli
GAAP, see Item 18). The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.

         The Company identified the most critical accounting principles upon
which its financial status depends. The Company determined the critical
principles by considering accounting policies that involve subjective decisions
or assessments.

         The Company states its accounting policies in the notes to the
consolidated financial statements and at relevant sections in this discussion
and analysis.

         This discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere
in this report.

         The Company identified the following to be the most critical accounting
policies:

Inventories

         The inventory is valued at the lower of cost or market, where cost is
determined on the moving average basis. The Company writes down its inventory
for estimated obsolescence or unmarketable inventory based on analysis of
inventory aging, assumptions about future demand and market conditions. If
actual demand and/or market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

Allowance for doubtful accounts

         The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company provides an allowance for doubtful accounts as a percentage of all
specific debts doubtful of collection. The allowances are based on the
likelihood of recoverability of accounts receivable considering the aging of the
balances, our historical write-off experience, net of recoveries, change in
credit worthiness of the customers, and taking into account current collection
trends that are expected to continue. These estimated allowances are
periodically reviewed, analyzing the customers' payment history. Actual customer
collections could differ from the Company's estimates.

Contingencies and risks involving the business

         The Company is subject, from time to time, to various claims arising in
the ordinary course of operations. In determining whether liabilities should be
recorded for pending litigation claims, the Company assesses, based on advice of
its outside legal counsel, the allegations made and the likelihood that it will
successfully defend itself.

         When the Company believes that it is probable that it will not prevail
in a particular matter, it then estimates the amount of the liability. The
evaluation of the probability of success of such claims and the determination of
whether there is a necessity to include provisions in respect thereof require
judgment by the Company's legal counsel and management.

                                       16
<PAGE>

Deferred income taxes

         Deferred taxes are determined utilizing the asset and liability method,
based on the differences between the amounts presented in the financial
statements and those taken into account for tax purposes, in accordance with the
related tax laws. Valuation allowances are included in respect of deferred tax
assets when it is more likely than not that such assets will not adibe realized.
The Company has considered future taxable income and tax planning strategies in
assessing the need for the valuation allowance. Management evaluates the
realizability of the deferred tax assets on a current basis. If it were
determined that the Company would be able to realize the deferred tax assets in
excess of its net recorded amount, an adjustment to deferred tax assets would
increase income.

Impairment in value of Long-Lived Assets (including fixed assets and investments
in associated companies)


         In February 2003, Accounting Standard No. 15 of the Israeli Accounting
Standard Board (hereafter - IASB) - "Impairment of Assets", became effective.
According to this standard the company performs a periodic review to evaluate
the need for a provision for the impairment its non-monetary assets - mainly
fixed assets as well as investments in associated companies.

         Accordingly, at each balance sheet date, the company assesses whether
any events have occurred or changes in circumstances have taken place, which
might indicate that there has been an impairment of one or more of the above
assets. When such indicators of impairment are present, the Company evaluates
whether the carrying value of the asset in the Company's accounts can be
recovered from the cash flows anticipated from that asset.

         The recoverable value of an asset is determined according to the higher
of the net selling price of the asset or its value in use to the Company. The
value in use is determined according to the present value of anticipated cash
flows from the continued use of the asset, including those expected at the time
of its future retirement and disposal. When it is not possible to assess whether
an impairment provision is required for a particular asset on its own, the need
for such a provision is assessed in relation to the recoverable value of the
cash generating unit to which that asset belongs.

         Through December 31, 2002, the Company applied the provisions for
assessing and recording impairment of assets, prescribed by the U.S. standard,
FAS 121.


Recently issued pronouncement - "Discontinuance of Adjusting Financial
Statements for Inflation"

         In October 2001, the IASB issued Israel Accounting Standard No. 12 -
"Discontinuance of Adjusting Financial Statements for Inflation", which provided
for the discontinuance of adjusting financial statements for the effects of
inflation, as of January 1, 2003. In December 2002, Accounting Standard No. 17
was issued that postponed the date from which Accounting Standard No. 12 is to
be applied until January 1, 2004.

         Since the Company's financial statements are drawn up in NIS adjusted
for the changes in the dollar (as allowed by section 29(b) of Opinion 36 of the
Israeli Institute), and based on the provisions in paragraph 4 to Israeli
Accounting Standard No. 13, with effect from January 1, 2004, the Company will
no longer be able to measure its operations in dollars, and will have to resume
measuring its operations in NIS. The inflation-adjusted NIS amounts as of
December 31, 2003, as presented in these financial statements, will be the base
for the nominal-historical financial reporting following January 1, 2004.

                                       17
<PAGE>

         The implementation of Standard No. 12 will mainly affect the financial
income and expenses items.

A.       Operating Results

         The following is a summary of the period-to-period changes in the
principal items included in the Consolidated Statements of Income:

                   Amount and Percentage Increase (Decrease)
                     New Israeli Shekels (in thousands)/1/

<TABLE>
<CAPTION>
                                                            Year ended 12/31/03             Year ended 12/31/02
                                                                    v.                              v.
                                                            year ended 12/31/02             year ended 12/31/01
                                                          ----------------------          -------------------------
                                                          Changes           %             Changes              %
                                                            NIS                             NIS
                                                          -------        -------          -------           -------
<S>                                                        <C>              <C>           <C>                  <C>
Net sales                                                   9,317            2.0          (13,934)             (3.0)
Cost of sales                                              (1,586)          (0.4)         (20,053)             (5.2)
                                                          -------        -------          -------           -------
Gross profit                                               10,903           11.9            6,119               7.1
Selling, administrative and general expenses                  774            1.4           (9,809)            (15.0)
                                                          -------        -------          -------           -------
Income from ordinary operations                            10,129           27.8           15,928              77.6
Financial income (expenses) - net                         (13,001)         435.3           (8,090)           (158.5)
Other income (loss)                                         4,551                          (4,037)
                                                          -------                         -------
Income before taxes on income                               1,679            5.5            3,801              14.2
Taxes on income                                             2,086           21.3           (2,504)            (34.4)
                                                          -------        -------          -------           -------
Income from operation of the Company and the
consolidated subsidiaries                                   3,765           18.2            1,297               6.7
Share in profits of associated companies                   18,822          112.5            1,716              11.4
                                                          -------        -------          -------           -------
Net income                                                 22,587           60.3            3,013               8.0
                                                          =======        =======          =======           =======
</TABLE>

         The statements of income for the years ended December 31, 2003, 2002
and 2001 are presented in adjusted New Israeli Shekels as explained in Note 1 to
the Consolidated Financial Statements. The changes in purchasing power of New
Israeli Shekels were determined on the basis of changes in the U.S. dollar/New
Israeli Shekel exchange rate. All figures in the adjusted statements of income
are expressed in terms of December 31, 2003 shekels (1 U.S. $= NIS 4.379).

         The number of New Israeli Shekels which were exchangeable for 1 U.S.
dollar increased (decreased) over the prior year by 9.3%, 7.3% and (7.6%) in
2001, 2002 and 2003, respectively.

----------
/1/      The financial statements of the Company are presented in New Israeli
         Shekels adjusted to reflect the changes in the purchasing power of
         Israeli currency (i.e., adjusted shekels). These adjustments were
         determined on the basis of the changes in the U.S. Dollar/Israel Shekel
         exchange rate (see page 5 and see Note 1 to Consolidated Financial
         Statements).

                                       18
<PAGE>

         The adjusted NIS figures have been translated into U.S. dollars using
the representative exchange rate of the U.S. dollar on December 31, 2003 ($1 =
NIS 4.379).

         The translated U.S. dollar figures should not be construed as a
representation that the Israeli currency amounts actually represent, or could be
converted into U.S. dollars.

         See Note 1 to the financial statements attached and Item 18 for
anticipated effect of adoption of accounting pronouncements that have been
issued but are not yet required to be adopted.

2003 compared to 2002

I.       Overview of Results of Operations

         1.       Consolidated Data

         Sales in 2003 totaled NIS 465.1 million, as compared with NIS 455.8
million in 2002 ($106.2 million as compared with $104.1 million).

         The operating profit in 2003 amounted to NIS 46.6 million, as compared
with NIS 36.5 million in 2002 ($10.6 million, as compared with $8.3 million).

         The financial expenses in 2003 amounted to NIS 16.0 million, as
compared with NIS 3.0 million in 2002 ($3.7 million, as compared with $0.7
million). The increased financial expenses are primarily attributed to the
impact of the revaluation on the net monetary balances (see analysis below -
Chapter III, Section 5).

         2.       Net Income and Earnings Per Share

         Net profit in 2003 amounted to NIS 60.0 million, as compared with NIS
37.5 million in 2002 ($13.7 million, as compared with $8.6 million).

         Net profit in 2003 includes NIS 1.0 million ($0.2 million) in net
capital gains, resulting from the sale of apartments that were owned by the
Company and that served Company employees in the past, coupled with a NIS 1.6
million ($0.4 million) tax benefit, on account of the exercise of employee
option warrants. The net profit in 2002 included approximately NIS 0.4 million
($0.1 million) in non-recurring income, net, from the realization of assets and
from taxes on account of preceding years.

         The Earnings Per Share in 2003 amounted to NIS 1,494 per NIS 1 par
value ($3.41 per share), as compared with NIS 947 per NIS 1 par value ($2.16 per
share) in 2002.

         The return on shareholders' equity amounted to 9.2% in 2003, as
compared with 5.9% in 2002.

II.      The Business Environment

         The severe recession that has been plaguing the Israeli economy over
the past several years, as part of the global economic crisis, has been
accompanied by security events and terrorist attacks and has resulted in
negative growth of the Israeli economy during this period, along with a
considerable rise in unemployment, lower domestic demand (due to the lower
purchasing power of the public and due to the significant decrease in incoming
tourism), coupled with a significant escalation in competition in all sectors.

                                       19
<PAGE>

         The said global economic crisis - especially in Europe - has also
affected the paper industry and resulted in a supply surplus and consequently in
continuing the importing of low-priced paper into Israel. These imports have led
to increased competition, especially in fine paper, accompanied by a decrease in
selling prices. As a result of the rise in pulp prices during the same period,
the margin between selling prices and pulp prices has decreased as well.

         Pulp prices rose by an average of approximately 10% in 2003, as
compared with 2002. These prices are estimated to continue to rise moderately in
the first half of 2004.

         Despite the difficult business environment, the Group has managed to
maintain its operations at full capacity throughout this period, while expanding
its operations in overseas markets.

         Signs of a recovery in the Israeli economy began appearing toward the
end of 2003, as reflected by low, albeit positive growth (although no growth was
recorded in 2003 in per capita terms), coupled with a certain positive change in
the business atmosphere in the economy.

         The exchange rate of the NIS compared to the U.S. dollar was revaluated
by 7.6% in 2003, as compared with a devaluation of 7.3% in 2002.

         Inflation was negative in 2003, at -1.9%, as compared with an inflation
rate of 6.5% in 2002.

         The negative inflation enabled the Bank of Israel to significantly
lower the interest rates, by approximately 3.7% in 2003. This has led to a
lowering of the Prime rate at the commercial banks in 2003, from 10.4% to 6.7%.

III.     Analysis of Operations and Profitability

         The analysis set forth below is based on the consolidated data.

         1.       Sales

         The consolidated sales totaled NIS 465.1 million in 2003, as compared
with NIS 455.8 million in 2002 ($106.2 million as compared with $104.1 million).

         The 2002 consolidated sales included a sum of NIS 7.9 million ($1.8
million) of sales derived from the Shafir operation that was discontinued as of
September 2002.

         The NIS 17.2 million ($3.9 million) increase in sales - net of Shafir's
sales in 2002 - originated primarily from a quantitative increase of
approximately 6% in packaging paper.

         2.       Cost of Sales

         The cost of sales amounted to NIS 362.2 million in 2003 -77.9% of sales
- as compared with NIS 363.8 million -79.8% of sales - in 2002 ($82.7 million,
as compared with $83.1 million).

         The gross margin as a percentage of sales reached 22.1% in 2003, as
compared with 20.2% in 2002.

         The improved gross margin in 2003 compared to 2002, was achieved due to
the Company's ongoing improvements and increased efficiency. The said efficiency
was expressed by the increased output of the machines, by less work hours per
ton and a decrease in the consumption of energy per ton produced, coupled with
the continued reduction of various manufacturing costs.

                                       20
<PAGE>

         The improved gross margin was achieved despite a sharp increase in
energy prices, following an average increase of approximately 21% in fuel oil
prices compared to 2002 (energy expenses grew by NIS 4.8 million ($1.1 million),
also on account of the transition to low-sulfur fuel oil, due to the demands of
the Ministry of the Environment). Furthermore a 23% increase was recorded in
water prices.


         Labor Wages

         The labor wages recorded in the cost of sales, in the selling expenses
and in the general and administrative expenses, totaled NIS 137.0 million in
2003, as compared with NIS 125.5 million in 2002 ($31.3 million as compared with
$28.7 million).

         The increase in labor expenses originated primarily from an increase in
wages in dollar terms, due to the change in the average exchange rate between
the two periods, coupled with the updating of wages, to prevent a decrease in
real wages as a result of the rise in the CPI in 2002 (as mentioned above, the
CPI rose by 6.5% in 2002).

         The said increase in wages was partially offset by the decrease in
personnel (as a result of efficiency measures and the shutting down of Shafir).

         3.       Selling, General and Administrative Expenses

         The selling, general and administrative expenses (including wages)
amounted to NIS 56.3 million in 2003 (12.1% of sales), as compared with NIS 55.5
million (12.2% of sales) in 2002 ($12.9 million as compared with $12.7 million).

         The increase in selling, general and administrative expenses originated
primarily from an increase in NIS-denominated expenses (including wages), in
dollar terms (due to the low dollar exchange rate, as compared with 2002).

         4.       Operating Profit

         The operating profit amounted to NIS 46.6 million - 10.0% of sales - in
2003, as compared with NIS 36.5 million - 8% of sales - in 2002 ($10.6 million,
as compared with $8.3 million).

         5.       Financial Expenses

         The financial expenses totaled NIS 16.0 million in 2003, as compared
with NIS 3.0 million in 2002 ($3.7 million as compared with $0.7 million).

         The Company possesses a surplus of NIS-denominated financial
liabilities over financial assets (consisting primarily of notes and short-term
bank credit, denominated in NIS). Consequently, whereas a devaluation serves to
lower the financial expenses, a revaluation leads to an increase in the
financial expenses.

         Elevated financial expenses were recorded by the Company in 2003,
originating primarily from the dollar revaluation, whereas in 2002, the
devaluation led to lower financial expenses (a difference of 15% between the
current year and in 2002).

         It should nevertheless be stated that the cash-flow-related financial
expenses in 2003 (interest expenses net of revenues) amounted to NIS 8.8 million
($2.0 million), similar to the amount paid in 2002.

                                       21
<PAGE>

         6.       Taxes on Income

         The expenditure for taxes on income totaled NIS 7.7 million in 2003, as
compared with NIS 9.8 million in 2002 ($1.8 million as compared with $2.2
million).

         The principal factor behind the decrease in tax expenses in 2003, as
compared with 2002, is the difference between the real-term revaluation in 2003
and the real term devaluation in 2002. This devaluation served to decrease the
protection on shareholders' equity (measured for tax purposes according to the
changes in the Consumer Price Index) and increased the expenditure on taxes in
2002. A high real-term revaluation was recorded in 2003, that contributed to
lowering the tax expenditure.

         7.       Profit After Taxes and Before the Company's Share in the
                  Earnings of Associated Companies

       The profit after taxes and before the Company's share in the earnings of
associated companies amounted to NIS 24.5 million in 2003, as compared with NIS
20.7 million in 2002 ($5.6 million, as compared with $4.7 million).

         8.       Company's Share in Earnings of Associated Companies

         The companies whose earnings are reported under this item (according to
AIPM's holdings therein), include primarily: NHP, Hogla-Kimberly, Carmel and
TMM.

         The Company's share in the earnings of associated companies amounted to
NIS 35.5 million in 2003, as compared with NIS 16.7 million in 2002 ($8.1
million, as compared with $3.8 million).

         The following principal changes were recorded in the Company's share in
the earnings of associated companies, in relation to the preceding year:

-    The Company's share in the net profit of NHP grew by NIS 1.2 million ($0.3
     million) as a result of the continuing improvement in operating
     profitability, that was attained primarily due to efficiency measures and
     the reorganization of operations and marketing at the division. The
     improved profitability was impaired by a certain decrease in operating
     profit in the second half of 2003, as compared with the preceding quarters
     of 2003 (due to the lower margins and the competition against imports),
     coupled with the increase in financial expenses, primarily on account of
     the repayment of some of the loans that were received from the shareholders
     when the Company was founded.

-    The Company's share in the net earnings of Hogla-Kimberly grew by NIS 19.0
     million ($4.3 million), as a result of the improved operating profit at
     Hogla-Kimberly as compared with 2002. This is primarily attributed to the
     improved efficiency in logistics following the relocation to the central
     warehouse in Tzrifin and the gradual transition toward the manufacturing of
     HUGGIES diapers in Afula. Efficiency measures were also initiated at Ovisan
     (the subsidiary in Turkey) and were expressed by a significant improvement
     in the operating profit. The net profit also grew compared with 2002 on
     account of financial revenues that were recorded at Hogla-Kimberly and at
     Ovisan in 2003, due to the effects of the revaluation (in the NIS and in
     the Turkish lira, as compared with the U.S. dollar).

-    The Company's share in the net profit of the Carmel Group grew by NIS 2.5
     million ($0.6 million) due to the transition from an operating loss in the
     preceding quarters, to an operating profit starting with the third quarter
     of 2003. This improvement is attributed to the comprehensive efficiency
     measures that are being initiated by Carmel.

                                       22
<PAGE>

-    The Company's share in the net profit of TMM decreased by NIS 2.3 million
     ($0.5 million), as a result of higher financial expenses in 2003, as
     compared with 2002. This is attributed to an increase in bank credit (as a
     result of an increase in customer debts primarily local municipalities
     coupled by strategic investments in the development of the Company that
     were financed using bank credit) and to the real-term interest in CPI
     terms, that was higher in 2003 than it was in 2002.

IV.      Liquidity and Investments

         1.       Cash Flows

         The cash flows from operating activities amounted to NIS 52.7 million
in 2003, as compared with NIS 77.2 million in 2002 ($12.0 million, as compared
with $17.6 million). The decrease in the cash flows from operating activities in
2003, despite the improvement in the net profit, originated primarily from the
increase in operating working capital in 2003, that is non-recurring for the
most part. This increase stemmed primarily from the increase in customer debts,
on the one hand, and from the decrease in the supplier debt, on the other hand
(originated primarily from a change in the days of payables credit, as part of
price update agreements).

         2.       Investments in Fixed Assets

         The investments in fixed assets amounted to NIS 29.2 million in 2003,
as compared with NIS 46.8 million in 2002 ($6.7 million, as compared with $10.7
million). The investments in 2003 included investments in environmental issues
(approximately $0.6 million), an investment in expanding the output of the
packaging paper machine (approximately $0.6 million), as well as investments in
equipment, transportation and IT.

         3.       Financial Liabilities

         The long-term liabilities (including current maturities) amounted to
NIS 275.0 million at December 31, 2003, as compared with NIS 77.2 million at
December 31, 2002 ($62.8 million as compared with $17.6 million).

         Most of the increase in the long-term liabilities is attributed to
loans raised through notes (Series 2) from institutional entities, in the amount
of NIS 200 million ($45.6 million), at December 21, 2003.

         Some of the proceeds from the notes were used for the repayment of
short-term credit.

         The short-term credit balance totaled NIS 144.6 million at December 31,
2003, as compared with NIS 104.0 million at December 31, 2002 ($33.0 million, as
compared with $23.8 million).

         The increase in 2003 in the credit balances (which reached at the
maximum point about NIS 200 million) originates primarily from the dividends
paid to the shareholders (totaling NIS 100 million, or $22.6 million), as well
as from the repayment of long-term debts. The increase in the credit balances
was partially offset by dividends and by the repayment of a loan from associated
companies, coupled with part of the proceeds from the notes, as stated above.

         Most of the credit for financing the Company's operations is
denominated in NIS. Due to the said increase in liabilities, the surplus of net
financial liabilities denominated in NIS grew from NIS 104.9 million at December
31, 2002 to NIS 159.8 million at December 31, 2003 (from $24.0 million to $36.5
million).


                                       23
<PAGE>

2002 compared to 2001

I.       Overview of Results of Operations

         The following are principal figures regarding the Company's operations.
         For a detailed analysis, see paragraph III - "Analysis of Operations
         and Profitability" below.

         1.       Consolidated Data - The Company and its subsidiaries

         The consolidated sales amounted to NIS 455.8 million in 2002, as
compared with NIS 469.7 million in 2001 ($104.1 million, as compared with $107.3
million).

         The operating income in 2002 amounted to NIS 36.5 million in 2002, as
compared with NIS 20.5 million in 2001 ($8.3 million, as compared with $4.7
million).

         The earnings before taxes and before other incomeamounted to NIS 33.5
million in 2002, as compared with NIS 25.6 million in 2001 ($7.6 million, as
compared with $5.9 million).

         2.       Net Income and Earnings Per Share

         Net income (before non-recurring income) totaled NIS 37.1 million in
2002, as compared with NIS 30.6 million in 2001 ($8.5 million, as compared with
$7.0 million).

         Net income in 2002 included non-recurring income of NIS 0.4 million
($0.1 million), net, generated by the discontinuation of operations at Shafir
and Molett, from the sale of real estate in Ashdod, Israel (after deduction of
the applicable taxes) and from non-recurring tax revenues (see III.9, below).

         Net income in 2002, including non-recurring income, totaled to NIS
37.5, as compared with NIS 34.4 million in 2001 ($8.6 million, as compared with
$7.9 million).

         Earnings Per Share for 2002 totaled NIS 947 per NIS 1 par value ($2.16
per share), as compared with NIS 873 per NIS 1 par value ($1.99 per share) for
2001.

         The return on shareholders' equity, before non-recurring income,
amounted to 5.8% in 2002, as compared with 5.1% in 2001.

II.      The Business Environment and the influence of External Factors

         The slowdown in Israel's economy grew more severe in 2002. The slowdown
in operations, effected by the global economic situation and by the
security-related events in Israel, was characterized by a decrease in domestic
demand, negative GDP growth and increased unemployment.

         The accelerated devaluation of the NIS against the US dollar continued
with fluctuation throughout the year. At its peak, the US dollar exchange rate
reached a record of NIS 5 per dollar (13% devaluation since the end of 2001),
and its ascent was only curbed by the raising of interest rates by the Governor
of the Bank of Israel.

         The accelerated devaluation during 2002 resulted in an increase in the
prices of imported inputs, but due to the economic situation in Israel, the
reduced demand and the increased competition, it was impossible to adjust the
selling prices as warranted by such devaluation. The sales turnover in dollar

                                       24
<PAGE>

terms was consequently eroded, despite the quantitative growth in sales in most
of the Group's operations, and the profitability was impaired.

         In response to the foregoing economic situation, the Group initiated
efficiency measures that were intended to deal with the difficult economic
environment, while preserving AIPM's market shares and profitability of its
various operations, despite the said erosion and while focusing on its cost
base. These efficiency measures, which encompass all of the Group's different
operations, included personnel cutbacks, on both management and operational
levels, increased productivity and the creation of a lower cost base, resulting
in a greater ability to adjust to market conditions.

         2002 was a year marked by stability in global pulp prices, following a
year with a sharp decline in prices. Pulp prices appeared to be rising in the
first quarter of 2003 (by approximately 10%) and this trend is expected to
continue in the second quarter of 2003 as well.

         The inflation rate in 2002 amounted to 6.5%, as compared with an
inflation rate of 1.4% in 2001.

         The NIS declined by 7.3% against the dollar in 2002, compared with a
decline of 9.3% in 2001.

III.     Analysis of Operations and Profitability

         The analysis below is based on the consolidated data.

         1.       Sales

         The consolidated sales amounted to NIS 455.8 million in 2002, as
compared with NIS 469.7 million in 2001 (-3%); ($104.1 million, as compared with
$107.3 million).

         The decrease in the sales turnover is primarily attributed to the
termination of some operations in 2002 (See III.9, below). The termination of
these operations resulted in a NIS 26.3 million (approximately $6 million)
decrease in the consolidated sales turnover.

         An increase was recorded in 2002 in the volume sales of packaging paper
(fluting) in the domestic market, as compared to 2001. The growth in sales as a
result of such volume growth was partially offset by the decrease in local
selling prices, resulting from the severe crisis impacting the packaging sector
(corrugators).

         With the intention of running at full capacity, while preserving
manufacturing efficiency, lowering the cost base, the Packaging Papers and
Recycling Division expanded its production and sales in 2002, thereby lowering
the average total cost per ton.

         The turnover of the office supplies sector declined due to lower demand
stemming from the economic situation and the erosion of prices in dollar terms.

         2.       Cost of Sales

         The cost of sales amounted to NIS 363.8 million - or 79.8% of sales -
in 2002, as compared with NIS 383.8 million - or 81.7% of sales - in 2001 ($83.1
million, as compared with $87.7 million).

         The gross profit amounted to NIS 92.0 million - or 20.2% of sales - in
2002, as compared with NIS 85.9 million - or 18.3% of sales - in 2001 ($21.0
million, as compared with $19.6 million).

                                       25
<PAGE>

         The increase in the gross margin was due to the Group's continuing
efficiency measures and the acceleration of these measures due to the economic
situation in Israel.

         The improved efficiency was achieved, among other things, by:

         -        Lower wage costs, primarily as a result of personnel cutbacks
                  and the impact of the devaluation (see below).

         -        Increased output of the packaging paper machine, thereby
                  lowering the cost per ton.

         -        Lower raw material utilization costs.

         -        Reduction of various operating expenses.

         -        Increased proportion of self-generated electricity (as opposed
                  to purchased electricity), following improvements in the
                  operation of the new power plant at the Hadera plant.

         Some of the above savings were offset as a result of a 12.3% increase
in fuel oil prices, originating from the increase in fuel oil prices in 2002,
coupled with the transition to the use of low-sulfur fuel oil, in accordance
with the demands of the Israeli Ministry of the Environment.

         The increase in fuel oil prices increased the cost of self-generated
electricity by approximately $1 million, compared with 2001 (not including the
increase in quantity, resulting from the increase in production).

         Labor Wages

         The labor wages reflected in the cost of sales, the selling expenses
and the general and administrative expenses, amounted to NIS 125.5 million in
2002, as compared with NIS 148.4 million in 2001, representing a decrease of
15.4% ($28.7 million as compared with $33.9 million).

         The lower labor expenses originated both from the reduction in the
number of personnel as a result of the Group's efficiency measures (savings of
6.2%, excluding the shutting down of Shafir), as well as the erosion of the
wages in dollar terms, due to the sharp devaluation of the NIS during 2002.

         3.       Selling, General and Administrative Expenses

         The selling, general and administrative expenses (including wages)
amounted to NIS 55.5 million in 2002 (12.2% of sales), as compared with NIS 65.4
million (13.9% of sales) in 2001 ($12.7 million, as compared with $14.9
million).

         This decrease is primarily attributed to the lower labor expenses and
to the efficiency measures implemented by AIPM, as detailed above.

         4.       Operating Income

         The operating income amounted to NIS 36.5 million in 2002 (8.0% of
sales), as compared with NIS 20.5 million in 2001 (4.4% of sales) ($8.3 million,
as compared with $4.7 million).

         5.       Financial Revenues (Expenses)

                                       26
<PAGE>

         Financial expenses of NIS 3.0 million were recorded in 2002, as
compared with financial revenues of NIS 5.1 million in 2001 ($0.7 million in
expenses, as compared with revenues of $1.2 million).

         Most of AIPM's interest-bearing liabilities are denominated in NIS,
while some are linked to the CPI .

         Due to the increased devaluation in 2001 (which was considerably
greater than the increase in the CPI), the CPI-linked and NIS liabilities
eroded, thereby creating financial revenues for 2001. In 2002, the devaluation
was lower and only slightly surpassed the increase in the CPI, resulting in
financial expenses.

         Furthermore, despite the fact that the average balance of short-term
credit in 2002 was similar to that in 2001, the average interest rate on the
credit was higher this year, due to the interest rate increases by the Bank of
Israel.

         6.       Profits Before Taxes

         The profits before taxes and before other income/expenses amounted to
NIS 33.5 million in 2002, as compared with NIS 25.6 million in 2001 ($7.6
million, as compared with $5.9 million).

         7.       Taxes on Income

         The taxes on income expenses, on account of the current operations,
totaled NIS 13.1 million in 2002, as compared with NIS 11.2 million in 2001
($3.0 million, as compared with $2.6 million).

         The tax expenses grew in 2002 compared to 2001, primarily due to the
NIS 7.9 million increase in income before taxes ($1.8 million). The said
increase was partially offset by the larger real-term devaluation last year,
which resulted in the erosion of the hedging of shareholders' equity for tax
purposes in 2001, calculated according to changes in the Consumer Price Index,
resulting in increased tax expenses in the financial statements for 2001.

         8.       Company's Share in Earnings of Associated Companies

         The companies whose earnings are reported under this item (according to
AIPM's share therein), include primarily: Hogla-Kimberly, NHP, Carmel and T.M.M.
(including Amnir Environmental Services).

         AIPM's share in the earnings of associated companies amounted to NIS
16.7 million in 2002, as compared with NIS 15.0 million in 2001 ($3.8 million,
as compared with $3.4 million, respectively).

         The following are the detailed changes in the earnings of associated
companies in 2002 as compared to 2001:

-    The Company's share in NHP's earnings grew by approximately NIS 11.8
     million ($2.7 million) in 2002, as compared with 2001. This growth was
     rendered possible by the comprehensive efficiency program implemented by
     NHP, which included the restructuring of operations and marketing,
     including a significant growth in export sales. The manufacturing
     efficiency and machine output at NHP grew considerably in 2002 as a result
     of the said measures and assisted NHP in returning to profitability,
     despite the adverse market conditions.

-    The decrease in the Company's share in Hogla-Kimberly's earnings amounted
     to NIS 8.8 million ($2.0 million). This decrease was attributed to an
     increase in competition in the non-food household

                                       27
<PAGE>

     sector (in which Hogla-Kimberly operates) during 2002, both from
     international brands - primarily Procter & Gamble in the baby diapers
     sector - as well as from private labels of the retail marketing chains. In
     response to the competition, Hogla-Kimberly is implementing various
     marketing measures that are intended to enable it to preserve its sales
     volumes, although while incurring certain erosion in selling prices and
     operating profitability.

-    The decrease in the Company's share in Carmel's earnings amounted to NIS
     1.3 million ($0.3 million). This decrease was attributed to the continuing
     crisis, expressed by lower demand for packaging, due to the declining
     volumes of operation in industry and agriculture, which resulted in a
     volume decrease in demand for packaging and in lower prices. The decrease
     in sales adversely affected the profitability of Carmel, despite the
     efficiency efforts and the lower raw material costs. Carmel is continuing
     to implement additional efficiency measures, which are expected to result
     in an increased level of profitability.

-    The T.M.M.-Amnir operations continued to expand in 2002, while recording a
     constant improvement in operational efficiency and in profitability.

IV.      Liquidity and Investments

         1.       Cash Flows

         Cash flows from operating activities amounted to NIS 55.3 million in
2002 (excluding dividend received from an associated company), as compared with
cash flows of NIS 19.3 million in 2001 ($12.6 million, as compared with $4.4
million). The improved cash flows were attributed primarily to annual
differences in operating working capital. The operating working capital grew by
NIS 29.4 million ($6.7 million) in 2001, as compared with a NIS 5.5 million
($1.2 million) decrease in operating working capital in 2002, originating
primarily from a decrease in inventories in 2002. The cash flows from operating
activities, including the said dividend, amounted to $17.6 million in 2002.

         2.       Investments in Fixed Assets

         The investments in fixed assets totaled NIS 46.8 million in 2002, as
compared with NIS 30.0 million in 2001 ($10.7 million, as compared with $6.9
million).

         The investments in 2002 included the payment of approximately NIS 26.8
million ($6.1 million) on account of the extension of the lease on the Shafir
Compound from the Tel Aviv Municipality, for an additional period, until 2059.

         The investments also included the completion of the investment in the
anaerobic installation in Hadera, as part of the Group's environmental
operations, coupled with ongoing investments in the renovation of manufacturing
and transport equipment.

B.       Liquidity and capital resources

         The Company anticipates that its existing credit lines are sufficient
for financing its working capital needs. The Company uses its cash flow from
operating activities to finance its investments and for repayment of loans and
dividend distributions to its shareholders.

         Based on the Company's balance sheet, the Company believes that it is
unlikely that there will be any difficulties to obtain credit, whether short
term debts or long-term debts, to finance anticipated investments.

                                       28
<PAGE>

         At December 21, 2003, the Company issued notes - through tender by
private placement - in the amount of NIS 200 million, to institutional
investors. These notes carry an interest rate of 5.65% per annum (a margin of
1.45% above government notes with a comparable average maturity). The principal
will be repaid in seven equal annual installments between the years 2007-2013
(average maturity of 6 years), with both the principal and the interest being
linked to the CPI. The notes are not convertible into the Company's ordinary
shares and shall not be registered for trade on a public exchange.


         The Company uses loans from local financial institutions, mostly banks,
to finance its activities. As of December 31, 2003, these loans consisted of the
following:


         1.       Short-term credit from banks - see Note 10d to the financial
                  statements attached.

         2.       Long-term loans from banks and other liabilities - see Note 4a
                  and 4c to the financial statements attached.

         3.       Notes - see Note 4b to the financial statements attached.

         For information regarding financial instruments used for hedging
purposes and market risks - see Item 11, "Quantitative and Qualitative
Disclosure about Market Risk".

         The Group may incur additional tax liabilities in the event of
inter-company dividend distributions, derived from "approved enterprises"
profits. The said dividend distribution from investee companies is in the amount
of up to approximately NIS 95 million (of which the Company's share of the
additional tax is NIS 16 million, if this dividend is distributed). No account
was taken of the additional tax, since AIPM has the ability and the intention
that such earnings are to be reinvested and that no dividend would be declared
which would involve additional tax liability to the Group in the foreseeable
future.

C.       Research and development, patents and licenses, etc.

         There are no significant investments in research and development
activities.

D.       Trend information

         For trend information see "The Business Environment and the Influence
of External Factors" above.

ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

         The following table sets forth certain information with respect to the
directors and executive officers of the Company:

<TABLE>
<CAPTION>
NAME                               DIRECTOR     Year of
Directors:                          SINCE       Birth          POSITION
----------                          -----       -----          --------
<S>                                  <C>         <C>           <C>
Michael Dorsman                      1999        1965          Director

Nochi Dankner                        2003        1954          Director
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>
NAME                               DIRECTOR     Year of
Directors:                          SINCE       Birth          POSITION
----------                          -----       -----          --------
<S>                                  <C>         <C>           <C>
Avi Fischer                          2004        1956          Director

Aviezer (Gezi) Kaplan                2001        1948          Director

Jacob Laskow                         1999        1954          Director until June 8, 2003.

Miri Lent-Sharir                     2000        1956          Director

Oren Lieder                          2003        1948          Director

Zvi Livnat                           2003        1953          Director

Isaac Manor                          2003        1941          Director

Amos Mar-Haim                        1984        1938          Director

Leon Recanati                        1988        1948          Director

Shmuel Rotem                         1979        1926          Vice Chairman until November 1, 2003.

Meir Shannie                         2001        1945          Director until February 23, 2004.

Avi Yehezkel                         2003        1958          Director

Yaacov Yerushalmi                    1998        1942          Chairman of the Board since  January  1999,  CEO of
                                                               the Company since June 1990 until April 2003.
</TABLE>


The business experience of each of the directors is as follows:

         Mr. Michael Dorsman is a businessman, Chairman of the Board and CEO of
D.B.P.L. Public Investments Ltd. and Papaya Investments Ltd. Mr. Dorsman holds
11.4% of the Company's shares directly.

         Mr. Nochi Dankner is Chairman and Chief Executive Officer of IDB
Holdings Corporation Ltd., Chairman of IDB Development Ltd., Discount
Investments Ltd. and of Clal Industries and Investments Ltd. Serves or served as
Chairman and Director in public and private companies of Ganden Group, IDB Group
and Bank Hapoalim.

         Mr. Avi Fischer is Co-CEO of Clal Industries and Investments Ltd. and
Deputy CEO of IDB Holdings Corporation Ltd., director of IDB Development Ltd,
Discount Investment Ltd. and several public and private companies of Ganden
Group and IDB Group. Senior partner of Fischer, Behar, Chen & Co. Law Office.

         Mr. Aviezer (Gezi) Kaplan is the CEO and a director of Tivall (1993)
Ltd., Deputy Managing Director of Osem Group, Chairman of the Boards of Sabra
Salad Food Industries (1985) Ltd., Ostiv Ltd., and Of Tov Products (2001) Ltd.,
and a director of Beit-Hashita Assis Food Industries Limited Partnership. He
serves as an external director of the Company.

         Ms. Miri Lent-Sharir is a businesswoman and an external director of the
Company. Until November 2000, she was Assistant to the General Manager for
Special Projects of Housing and Construction Holding Ltd. Until August 1998, she
was the Deputy General Manager of Ampal American Israel Corporation and a
director of companies in the Ampal Group.

                                       30
<PAGE>

         Mr. Oren Liedr is Executive Vice President and Chief Financial Officer
of Discount Investments Ltd. Serves as director at various companies, including
publicly-traded companies. Formerly served as Chief Financial Officer of Bezeq,
the Israeli Telecom Company Ltd.

         Mr. Zvi Livnat is Co-CEO of Clal Industries and Investments Ltd. and
Deputy CEO of IDB Holdings Corporation, Vice President of Taavura Holdings Ltd.,
Director in IDB Development Ltd., Discount Investments Ltd., Clal Industries and
Investments Ltd. and other public and private companies.

         Mr. Isaac Manor is a director at various publicly-traded and
privately-held companies within the IDB Group, IDB Holdings Ltd., IDB
Development Ltd., Discount Investment Ltd. and Clal Industries and Investments
Ltd ,Israel Union Bank Ltd. and others; Chairman of companies in the David
Lubinsky Group Ltd.,.

          Mr. Amos Mar-Haim is Chairman of the Board of Atara Investments
Company Ltd., Migdal Underwriting and Investment Banking Ltd., director of
Al-Rov (Israel) Ltd., the Jerusalem Development Authority, Metrix Ltd., Moria
Ltd., Keter Ltd., and Yissum Research and Development Co. Ltd., and Chairman of
the Association of Public Companies until 2001. Until May 1999 he was Vice
Chairman of Israel Company, Chairman of Zim Israel Navigation Co., Vice Chairman
of Israel Chemicals Ltd., and Vice Chairman of Oil Refineries Ltd.

         Mr. Leon Recanati is CEO and Chairman of Glenrock Israel Ltd., Ligum
Ltd. and Gorli Ltd. Until May 2003 he was Chairman of the Board of Clal
Industries and Investments Ltd., Chairman of the Board of Discount Investments
Corporation Ltd., CEO (until February 2003) and Chairman of IDB Holding
Corporation Ltd., and Chairman of IDB Development Ltd. Until the middle of 2000,
he also acted as the Chairman of Clal (Israel) Ltd.

          Mr. Avi Yehezkel is an external director at Bank Yahav. He served as a
Knesset member between 1992-2003, during these years alternately, he served as
Deputy Minister of transportation, Chairman of the Economics Committee, Chairman
of the Defense Budget Committee, Chairman of the Capital Market Sub-Committee,
Chairman of the Banking Sub-Committee and member of the Finance Committee.

         Mr. Yaacov Yerushalmi is Chairman of the Board and was the CEO of the
Company until April 2003. In addition, he is the Chairman or Vice-Chairman of
subsidiaries and associated companies of the Group.


                     Senior Management (as of May 31, 2004)
<TABLE>
<CAPTION>
      Name                  Year of Birth           Position and Business Experience for past five years
      ----                  -------------           ----------------------------------------------------
<S>                               <C>        <C>
Yaacov Yerushalmi                 1942       Chief Executive Officer from June 1990 until April 2003; Chairman of the
                                             Board since January 1999.

Avi Patir                         1948       Chief Executive Officer until February, 2004.
</TABLE>

                                       31
<PAGE>

<TABLE>
<CAPTION>
      Name                  Year of Birth           Position and Business Experience for past five years
      ----                  -------------           ----------------------------------------------------
<S>                               <C>        <C>

Israel Eldar                      1945       Corporate Controller and responsible for risks and business interruption
                                             management.  A director of subsidiaries and affiliated companies of the
                                             Company.

Ofra Gorni                        1953       Business Development Manager and a director of subsidiaries and
                                             affiliated companies of the Company.

Lea Katz                          1950       Legal counsel and Corporate Secretary since August 2000.

Gabi Kenan                        1944       Deputy General Manager.  A director of subsidiaries and affiliated
                                             companies of the Company.

Pinhas Rimon                      1940       General manager of Packaging Paper and Recycling Division.  A director of
                                             subsidiaries and affiliated companies of the Company.

Gideon Liberman                   1950       General Manager of Development and Infrastructure Division
</TABLE>


 Senior Management in Subsidiaries and Affiliated Companies (as of May 31, 2004)

<TABLE>
<CAPTION>
     Name                              Position in the Company
     ----                              -----------------------
<S>                          <C>
Avi Brener                   General Manager, Hogla-Kimberly Ltd.

Avner Solel                  General Manager, Neusiedler Hadera Paper Ltd.

Doron Katzir                 General Manager, Graffiti Office Supplies & Paper Marketing Ltd.

Rafi Alon                    General Manager, T.M.M. Integrated Recycling Industries Ltd.

Doron Kempler                General Manager, Carmel Container Systems Ltd.
</TABLE>


B.       Compensation

         The aggregate amount of remuneration paid to all directors and the
above senior officers of the Company as a group for services provided by them to
the Company during 2003 was approximately NIS

                                       32
<PAGE>

10,071,000 (approximately `$2,218,000). The aggregate amount set aside for
pension, retirement or similar benefits for directors and officers as a group
for services provided by them to the Company during 2003 was approximately NIS
896,000 (approximately $197,000).

         Remuneration paid by the Company in 2003 to Mr. Yerushalmi, the
Company's CEO and Chairman of the Board, for services provided by him to the
Company during 2003, was NIS 2,178,000 (approximately $479,000).

         Agreement with Mr. Yerushalmi

         The general shareholders meeting which took place in 2003 approved the
foregoing addition to the Chairman's employment agreement. :

         The agreement regarding the employment of the Chairman will end on
March 1, 2007 ("retirement date"). Each of the Company and the Chairman will
have the right to terminate the employment agreement prior to the foregoing date
by giving the other party a 180-day prior notice, provided that the Chairman may
not give notice of termination of the employment agreement prior to March 1,
2005. If the Chairman's employment is terminated by the Company or if he
resigns, the Chairman will have the right to receive (i) all rights relating to
a managers' insurance policy maintained for him by the Company and (ii) all
severance monies and other amounts paid for him by the Company to various funds.
If the Chairman's employment is terminated by the Company or if he resigns as a
result of a demotion in his responsibilities without his consent, the Chairman
will have the right to continue receiving all payments and other benefits
payable to him under the employment agreement until his retirement date.

         In addition, upon the termination of employment of the Chairman he will
have the right to receive a payment in an aggregate amount equal to one-month's
salary for each year in which he was employed by the Company and an additional
$300,000, as a bonus in respect of the establishment by him of strategic
partnerships. All other terms of the Chairman's employment agreement as
currently in effect shall remain unchanged.

         On May 7, 2001, the Company's Board of Directors adopted an incentive
plan, which was subsequently approved by the Company's shareholders, to
remunerate the Company's Chairman of the Board of Directors. According to the
plan, such remuneration will be equal to the increase in the value of 50,000
ordinary shares of the Company in the period from May 7, 2001 (share price - NIS
194.37) to May 7, 2008. The remuneration will be spread over the period
commencing two years from the resolution of the Board of Directors, until the
seventh anniversary of such resolution. As of December 31, 2003 one quarter of
the remuneration is exercisable.

         Remuneration of Directors

         The remuneration of the directors (including the external directors)
for 2003 was approved at the 2003 general meeting of shareholders. Pursuant to
regulations under the Israeli Companies Law, each external director of the
Company must receive the same annual compensation, which must be between NIS
28,022 and NIS 45,531, plus an additional fee for each meeting attended which
must be between NIS 986 and NIS 1,751. The Board approved in 2000 that the
remuneration of each director, including the external directors, be fixed at NIS
39,000 plus an additional NIS 1,500 for each meeting attended. The same amounts
were approved by the Board in 2001. In 2002, the Board of Directors resolved
that the remuneration of each director will be NIS 35,000 plus NIS 1,350 for
each meeting attended (a decrease of 10% compared to 2001), subject to the
approval of the Company's shareholders. In 2003 the Board of Directors resolved
that the remuneration of each director will be the same as in the years 2000 and
2001,

                                       33
<PAGE>

namely, NIS 39,000 plus an additional NIS 1,500 for each meeting attended.
The remuneration was also approved by the General Meeting of Shareholders.

C.       Board practices

         The directors of the Company, except for the external directors, retire
from office at the Annual General Meeting of Shareholders and are eligible for
re-appointment at such Annual General Meeting.

         Notwithstanding the aforesaid, if no directors were appointed at any
Annual General Meeting, the directors appointed at the previous Annual General
Meeting shall continue in office. Directors, except for the external directors,
may be removed from office earlier by a resolution at an Annual General Meeting
of Shareholders.

         The Articles of Association of the Company provide that any director
may, by written notice, appoint any person who is approved by the directors to
be an alternate director and to act in his place and to vote at any meeting at
which he is not personally present. The alternate director is entitled to notice
of Board meetings and he will be remunerated out of the remuneration of the
director appointing him. The alternate director shall vacate his office if and
when the director appointing him vacates his office as director, or removes him
from office by written notice.

         There are no services contracts which give the current directors of the
Company any benefits upon termination of appointment, except for Mr. Yaacov
Yerushalmi, whose terms of employment were submitted for approval at the Annual
General Meeting of Shareholders according to Israeli law.

External Directors

         Under the Israeli Companies Law, which became effective on February 1,
2000, the Company (as a public company) is required to have at least two
external directors as members of its Board of Directors. An external director
may not have any financial or other substantial connection with the Company and
must be appointed at the Annual General Meeting of Shareholders. The external
directors are elected for a three-year term of office that may be extended for
another three years. External directors who were elected before February 1, 2000
may serve five years.

Audit Committee

         Under the Israeli Companies Law, members of the Audit Committee are to
be elected from members of the Board of the Company by the Board. The Audit
Committee will be comprised of at least three directors, including all of the
external directors, but excluding: (i) the chairman of the board of directors;
(ii) any director employed by the Company or who provides services to the
Company on a regular basis; or (iii) a controlling shareholder of the Company or
his relative.

         The role of the Audit Committee under the Israeli law is: (i) to
examine flaws in the business management of the Company in consultation with its
auditors and to suggest appropriate courses of action and (ii) to decide whether
to approve actions or transactions which under the Israeli Companies Law require
the approval of the Audit Committee (transaction with a related party, etc.) The
Company does not currently have a Nominating Committee nor a Compensation
Committee.

Our Audit Committee complies with the applicable provisions of the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder."

                                       34
<PAGE>

         The Company's Audit Committee members are: Amos Mar-Haim, Chairman,
Miri Lent-Sharir, and Aviezer (Gezi) Kaplan.

D.       Employees

         As of April 30, 2004, the Company and its subsidiaries had 724
employees and the Group (including associated companies) had 3,133 employees, of
whom 884 were engaged in the household paper activities, 291 were engaged in the
printing and writing paper activities, 871 were engaged in the recycling
activities, 571 were engaged in the corrugated board containers activities, 165
were engaged in the office supplies activities, 286 worked at the paper mills in
Hadera and Tel Aviv and for other related subsidiaries and 65 were management
and clerical personnel at the Company's headquarters in Hadera.

         Some of the employees are subject to the terms of employment of
collective bargaining agreements. The parties to such collective bargaining
agreement are the Company and the employees, through the union.

E.       Share ownership

         In January 1998, the Company's Board of Directors approved a stock
option plan, pursuant to which options for ordinary shares were allocated to
senior officers of the Company and its subsidiaries, including 32,000 options to
the CEO, in three annual installments. The plan was approved at the Company's
Annual General Meeting of Shareholders in February 1998.

         In 1998, 52,833 options were granted to senior officers under this
plan. In 1999, 51,335 options were granted under this plan and in 2000 51,335
options were granted. For further information regarding the 1998 plan, see Note
6 of the Notes to the Consolidated Financial Statements.

         A total of 35,990 shares were issued in March 2000, as a result of the
exercise of 51,335 options from the first installment, which were allocated to
employees within the framework of the 1998 stock option plan. In March 2001,
28,149 shares were issued as a result of the exercise of 46,002 stock options
which were allocated to them within the framework of the 1998 stock option plan.
In 2003, an additional 28,693 shares were issued as a result of the exercise of
56,663 stock options which were allocated to employees within the framework of
the 1998 stock option plan. The unexercised balance of 1,498 options granted
expired in 2003.

         In April 2001, the Board of Directors of the Company adopted a new
stock option plan under which options to purchase a total of 194,300 shares may
be granted to senior officers of the Company and certain other companies in the
Group. All of the options were granted in July 2001. Each option is exercisable
to purchase one ordinary share of NIS 0.01 par value of the Company. The options
vest in four yearly installments. The vesting period of the first installment is
two years, commencing on the date of grant, and the next three installments vest
on the third, fourth and fifth anniversary of the grant date. Each installment
is exercisable for two years from the vesting date of such installment. For
further information regarding the 2001 plan, see Note 6 of the Notes to the
Consolidated Financial Statements.

         In 2003,1,550 options were exercised under the 2001 plan. 227 shares
were issued following the exercise.

         In August 2001, the Company's Board of Directors approved a stock
option plan for employees of the Company and its subsidiaries. Under this plan,
up to 125,000 options may be granted without consideration. Each option is
exercisable to purchase one ordinary share of NIS 0.01 par value of the Company.
In November 2001, 81,455 options were granted under the 2001 employee plan. For
further

                                       35
<PAGE>

information regarding the 2001 employee plan, see Note 6 of the Notes to the
Consolidated Financial Statements.

         In 2003, 57,962 options were exercised under the 2001 employee plan.
20,665 shares were issued following the exercise.

ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       Major shareholders

         The following table sets forth, as of June 15, 2004, the number of
Ordinary Shares of the Company owned beneficially by (i) all those persons who,
to the Company's knowledge, were the beneficial owners of more than 5% of such
outstanding shares, and (ii) all officers and directors of the Company as a
group:

<TABLE>
<CAPTION>
------------------------------------------------------------------- ---------------------------- --------------------
Name and Address:                                                      Amount Beneficially Owned    Percent of Class
Principal Shareholders:                                                  Directly or Indirectly/1/   Outstanding
----------------------                                                       -------------           -----------
<S>                                                                          <C>                         <C>
Clal Industries and Investments Ltd. ("Clal"), 3 Azrieli Center,             1,292,769/2/                32.54
the Triangle Building, Tel Aviv, Israel

Discount Investment Corporation Ltd. ("DIC"), 3 Azrieli Center,                730,565/2/                18.39
the Triangle Building, Tel Aviv, Israel

Michael Dorsman, 20 Shlonski St., Tel Aviv, Israel                             455,150                   11.5

Bank Hapoalim Ltd. 62 Yehuda Halevi st. Tel Aviv, Israel (Through              213,489                    5.37
trust and provident funds)
------------------------------------------------------------------- ---------------------------- --------------------
All officers and directors as a group                                                 /3/
------------------------------------------------------------------- ---------------------------- --------------------
</TABLE>

/1/      Beneficial ownership is based on shared voting and dispositive power
         over the securities listed in the table.

/2/      IDB Holding Corporation Ltd. ("IDBH") is the parent of IDB Development
         Corporation Ltd. ("IDBD"), which, in turn, is the parent of DIC and
         Clal. IDBH, IDBD, Clal and DIC are public companies traded on the Tel
         Aviv Stock Exchange.

         On May 19, 2003, private companies controlled by Oudi Recanati, Leon Y.
         Recanati, Judith Yovel Recanati and Elaine Recanati completed a sale of
         all of the shares of IDBH held by them, constituting approximately
         51.7% of the outstanding share capital of IDBH, to a group comprised
         of: (i) Ganden Investments I.D.B. Ltd. ("Ganden"), a private Israeli
         company controlled by Nochi Dankner and his sister, Shelly Bergman,
         which, following this transaction, holds 31.02% of the equity of and
         voting power in IDBH; (ii) Manor Investments-IDB Ltd. ("Manor"), a
         private Israeli company controlled by Ruth Manor, which, following this
         transaction, holds 10.34% of the equity of and voting power in IDBH;
         and (iii) Avraham Livnat Investments (2002) Ltd. ("Livnat"), a private
         Israeli company controlled by Avraham Livnat, which, following this
         transaction, holds 10.34% of the equity of and voting power in IDBH. In
         addition, Shely Bergman owns approximately 4.75% of the equity and
         voting power of IDBH.

         Ganden, Manor and Livnat, owning in the aggregate approximately 51.7%
         of the equity of and voting power in IDBH, entered into a Shareholders
         Agreement relating, among other things, to their joint control of IDBH,
         the term of which is until May 19, 2023.

         Nochi Dankner is Chairman of IDBH, IDBD, Clal and DIC. Shelly Bergman,
         Isaac Manor (the husband of Ruth Manor), and Zvi Livnat (the son of
         Avraham Livnat) are directors of each of IDBH, IDBD, Clal and DIC.

/3/      The officers and directors of the Company own, in the aggregate, less
         than 1% of the Company's outstanding Ordinary Shares, excluding the
         shares beneficially owned by Michael Dorsman, Nochi Dankner, Isaac
         Manor and Zvi Livnat whose ownerships are described above.


                                       36
<PAGE>

         On February 5, 1980, Clal entered into a Voting Agreement with DIC,
pursuant to which Clal and DIC agreed to coordinate and pool their voting power
in the Company in order to appoint an equal number of On February 5, 1980, Clal
entered into a Voting Agreement wit DIC., pursuant to which Clal and DIC agreed
to coordinate and pool their voting power in the Company in order to appoint
equal of each party's nominees to the Board of Directors of the Company and in
order to elect designees on their behalf to the main board committees of the
Company. The parties have also agreed to vote en bloc at general meetings of the
Company on the subject of dividend distributions. Finally, in the event that any
party to the agreement decides to dispose of its Ordinary Shares, the agreement
grants the other parties thereto a first refusal option with respect to such
shares. The term of the agreement is for ten years, subject to extensions for
additional ten year periods. This agreement has been extended through the year
2010.

         Based on the foregoing and on the shareholdings and other relationships
set forth in the preceding table and the footnotes thereto, Clal, DIC, IDBD,
IDBH and Nochi Dankner, Shelly-Bergman, Isaac, Ruth and Dori Manor, and Avraham
and Zvi Livnat may be deemed to constitute a group in control of the Company.

         The Company estimates that as of April 30, 2004, 9.21% of its
outstanding ordinary shares were held in the United States by 2,396 record
holders.

         All ordinary shares of the Company have equal voting rights.

B.       Related Party Transactions

         The information is included in the Company's attached Consolidated
Financial Statements: For loans to associated companies, see Note 2 to the
attached financial statements. For a capital note to an associated company, see
Note 4c to the attached financial statements. For transactions and balances with
related parties, see Note 12 to the attached financial statements.

         For further information see also Note 9e to the financial statements
attached.

C.       Interests of Experts and Counsel

         Not applicable to annual reports.

ITEM  8 - FINANCIAL INFORMATION


                                       37
<PAGE>

A.       Consolidated Statements and Other Financial Information

         See the financial statements included in Item 18.

B.       Significant Changes

         None.

ITEM 9 - THE OFFER AND LISTING

A.       Offer and Listing Details

         The Company's ordinary shares are listed on the American Stock
Exchange. The trading symbol for the ordinary shares is AIP. The ordinary shares
are also listed on the Tel Aviv Stock Exchange.

         The following table sets forth the high and low sale prices of the
Company's ordinary shares on the American Stock Exchange and the Tel Aviv Stock
Exchange for the periods indicated:

         Last full five fiscal years

<TABLE>
<CAPTION>
                                  American Stock Exchange                  Tel Aviv Stock Exchange
------------------------------ ----------------------------- ---------------------------------------------------
                                   High           Low           High          Low          High         Low
------------------------------ ------------- --------------- ------------ ------------- ----------- ------------
                                            $                           NIS                      $/1/
------------------------------ ----------------------------- -------------------------- ------------------------
<S>                              <C>            <C>           <C>           <C>         <C>          <C>
Calendar Year
----------------------------------------------------------------------------------------------------------------
  2003                           54.66          29.22         239.00        143.60      54.58        30.01
----------------------------------------------------------------------------------------------------------------
  2002                           40.50          25.10         178.00        116.10      40.10        24.90
----------------------------------------------------------------------------------------------------------------
  2001                           64.25          30.00         267.50        130.30      64.80        29.82
----------------------------------------------------------------------------------------------------------------
  2000                           83.5           55.31         347.00        224.90      86.10        54.96
----------------------------------------------------------------------------------------------------------------
  1999                           65.5           31.13         282.00        139.70      66.71        34.37
----------------------------------------------------------------------------------------------------------------
</TABLE>


         Quarters during last two full fiscal years and first quarter of 2004:

<TABLE>
<CAPTION>
                                  American Stock Exchange                  Tel Aviv Stock Exchange
------------------------------ ----------------------------- ---------------------------------------------------
                                   High           Low           High          Low          High         Low
------------------------------ ------------- --------------- ------------ ------------- ----------- ------------
                                            $                           NIS                      $/1/
------------------------------ ----------------------------- -------------------------- ------------------------
<S>                              <C>            <C>           <C>           <C>         <C>          <C>
2004 Quarter Ended
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
March 31                       60.73           53.01         267.10        234.90      60.33        52.10
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------


2003 Quarter Ended                 High           Low           High          Low         High          Low
------------------------------ ----------------------------- -------------------------- -------------------------
                                            $                           NIS                        $/1/
------------------------------ ----------------------------- -------------------------- -------------------------
March 31                       35.50           29.22         165.20         143.60      35.25       30.01
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
June 30                        46.12           35.65         200.00         163.30      46.38       35.66
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
September 30                   47.20           41.10         205.70         178.60      46.19       40.31
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
December 31                    54.66           45.00         239.00         197.50      54.58       44.56
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------


2002 Quarters Ended                High           Low           High          Low         High         Low
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
                                            $                           NIS                      $/1/
------------------------------ ----------------------------- -------------------------- -------------------------
March 31                       40.50           32.00         178.00         149.30      40.10       32.00
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
June 30                        32.10           26.30         149.20         125.20      31.30       25.60
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
September 30                   28.60           25.10         133.60         116.10      28.60       24.90
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
December 31                    33.30           26.50         155.20         125.30      33.50       26.30

</TABLE>
                                       38
<PAGE>


----------
/1/      Share prices have been translated from New Israeli Shekels (NIS) to
         U.S. Dollars at the representative rate of exchange, as reported by the
         Bank of Israel, on the dates when such high or low prices in NIS were
         recorded.


                                       39
<PAGE>

         Last full six months prior to filing of this report:
<TABLE>
<CAPTION>
------------------------------ ----------------------------- ----------------------------------------------------
                 American Stock Exchange Tel Aviv Stock Exchange
----------------------------- ------------- --------------- -------------- ----------- ----------- -------------
                                   High           Low            High          Low         High         Low
----------------------------- ----------------------------- -------------------------- -------------------------
                                            $                           NIS                      $/1/
------------------------------ ----------------------------- -------------------------- -------------------------
<S>                            <C>           <C>             <C>            <C>         <C>         <C>
May 2004                       53.88         51.30           245.70         235.70      53.94       51.01
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
April 2004                     57.25         53.25           257.30         239.30      56.80       52.88
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
March 2004                     56.20         53.01           249.00         234.90      55.53       52.10
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
February 2004                  55.65         54.50           255.00         242.00      57.18       54.23
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
January 2004                   60.73         53.13           267.10         242.70      60.33       54.50
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
December 2003                  54.66         49.01           239.00         222.40      54.58       50.17
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
</TABLE>


ITEM 10 - ADDITIONAL INFORMATION

A.       Share Capital

         Not applicable to Annual Reports.

B.       Memorandum and Articles of Association


         The Company was registered under Israeli law on February 10, 1951 and
its registration number with the Israeli registrar of companies is 52-001838-3.

         On June 20, 2001, the Company's shareholders approved a new version of
the Articles of Association ("Articles").


Objects of the Company

         As indicated in Article 5 of the Company's Articles, the Company may,
at any time, engage in any branch or kind of business in which it is, expressly
or by implication, authorized to engage in accordance with the Articles. The
Company may also cease to engage in such businesses, whether or not it has
commenced to engage in such branch or kind of business.

----------
/1/      Share prices have been translated from New Israeli Shekels (NIS) to
         U.S. Dollars at the representative rate of exchange, as reported by the
         Bank of Israel, on the dates when such high or low prices in NIS were
         recorded.

                                       40
<PAGE>

Director's Personal Interest

         The Israeli Companies Law requires that a director and an officer of a
company disclose to the company any personal interest that he may have and all
related material information, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and
in any event no later than the date of meeting of the board of directors in
which the transaction is first discussed.

         If the transaction is an extraordinary transaction, the procedure of
approval is as described below. Under Israeli law, an extraordinary transaction
is a transaction other than in the ordinary course of business, otherwise than
on market terms or that is likely to have a material impact on the company's
profitability, assets or liabilities.

         Subject to the restrictions of the Israeli Companies Law, a director is
entitled to participate in the deliberations and vote with regard to the
approval of transactions in which he has a personal interest. A director is not
entitled to participate and vote with regard to the approval of an extraordinary
transaction in which he has a personal interest, the approval of indemnity,
exemption or insurance of the directors or the approval of the directors'
compensation. If a majority of the directors have a personal interest in a
certain decision, they may participate and vote but the issue must be approved
also by the audit committee and by the shareholders. If the controlling
shareholder has a personal interest in an extraordinary transaction, the issue
must be approved also by the audit committee and the shareholders.

         Any power of the Company which has not been conferred by law or by the
Articles to any other body, may be exercised by the Board. The management of the
Company is guided by the Board.

         The Board shall formulate the policies of the Company and shall
supervise the performance of the office and actions of the General Manager,
including inter alia examination of the financial position of the Company and
determination of the credit framework which the Company may receive. Without
derogating from any power vested in the Board in accordance with the Articles,
the Board may, from time to time, at its discretion, decide upon the issuance of
a series of debentures, including capital notes or undertakings, including
debentures, capital notes or undertakings which can be converted into shares,
and also the terms thereof, and mortgage of the property of the Company, in
whole or in part, at present or in future, by floating or fixed charge.
Debentures, capital notes, undertakings or other securities, as aforesaid, may
be issued either at a discount or at a premium or in any other manner, whether
with deferred rights or special rights and/or preferred rights and/or other
rights, all the aforesaid as the Board may, at its discretion, determine.

         Except for special cases as detailed in the Articles and subject to the
provisions of the Israeli Companies Law, the Board may delegate its powers to
the General Manager, to an officer of the Company or to any other person or to
the Board committees. Delegation of the powers of the Board may be with regard
to a specific matter or for a particular period, at the discretion of the Board.

         There are no limitation requirements regarding age affecting directors'
ability to serve as directors of the Company. The directors need not be
shareholders of the Company in order to qualify as directors.


The Shares -Rights and Restrictions

         All of the Company's shares are ordinary shares. Every ordinary share
in the capital of the Company is of equal rights, for all intents and purposes,
to every other ordinary share, including the right

                                       41
<PAGE>

to dividends, to bonus shares and to participation in the surplus assets of the
Company upon liquidation, proportionately to the par value of each share,
without taking into consideration any premium paid in respect thereof, all the
aforesaid subject to the provisions of the Articles.

         Each of the ordinary shares entitles the holder thereof to participate
at and to one vote at Annual General Meetings of the Company. As described in
Item 6.C, all directors, except external directors, stand for election each year
at the Annual General Meeting.

         Subject to the provisions of the Israeli Companies Law, the Board may
resolve upon the distribution of a dividend. When deciding on the distribution
of a dividend, the Board may decide that the dividend shall be paid, in whole or
in part, in cash or by way of the distribution of assets in specie, including
securities or bonus shares, or in any other manner at the discretion of the
Board.

         Dividends on the Company's ordinary shares may be paid only out of
retained earnings, as defined in the Israeli Companies Law, as of the end of the
most recent fiscal year or profits accrued over a period of two years, whichever
is higher.

         The Company may, by resolution adopted at an Annual General Meeting by
an ordinary majority, decrease the capital of the Company and of any reserve
fund from redemption of capital. For the execution of any resolution as
aforesaid, the Board may, at its discretion, resolve any issues, which may arise
in connection therewith.

         In case of winding up of the Company, the liquidator may determine the
proper value of the assets available for distribution and determine how the
distribution among the shareholders will be carried out.

         The liability of the shareholders is limited to the payment of par
value of their ordinary shares.

         Under the Israeli Companies Law, each and every shareholder has a duty
to act in good faith in exercising his rights and fulfilling his obligations
toward the Company and other shareholders and to refrain from abusing his power
in the Company, such as in voting at the General Meeting of shareholders on the
following matters: any amendment to the Articles; an increase of authorized
share capital; a merger; or an approval of certain actions and transactions
which require shareholder approval.

         In addition, each and every shareholder has the general duty to refrain
from depriving other shareholders of their rights.

         Furthermore, any controlling shareholder, any shareholder who knows
that it possesses the power to determine the outcome of a shareholder vote and
any shareholder that, pursuant to the provisions of the Articles, has the power
to appoint or to prevent the appointment of an officer in the Company or any
other power toward he Company is under a duty to act in fairness toward the
Company. The Israeli Companies Law does not describe the substance of this duty
of fairness. These various shareholder duties may restrict the ability of a
shareholder to act in what the shareholder perceives to be its own best
interests.


Modification of Rights of Shares

         If the share capital is divided into different classes, the Company may
by resolution adopted at a General Meeting by a special majority (except if the
terms of the issuance of the shares of such class otherwise provide) annul,
convert, expand, supplement, restrict, amend or otherwise modify the rights of a
class of shares of the Company, provided that the consent, in writing, of all
the shareholders of such

                                       42
<PAGE>


class thereto shall be received or that the resolution shall have been approved
by a General Meeting of the shareholders of such class by special majority, or
in the event that it was otherwise provided in the terms of the issuance of a
particular class of the shares of the Company, as may have been provided in the
terms of issuance of such class, provided that the quorum at the class meeting
shall be the presence, in person or by proxy, at the opening of the meeting of
at least two shareholders who own at least twenty five percent (25%) of the
number of the issued shares of such class.

         The rights conferred upon the shareholders or owners of a class of
shares, whether issued with ordinary rights or with preference rights or with
other special rights, shall not be deemed to have been converted, restricted,
prejudiced or altered in any other manner by the creation or issuance of
additional shares of any class, whether of the same degree or in a degree
different or preferable to them, nor shall they be deemed to have been
converted, restricted, prejudiced or altered in any other manner by a change of
the rights linked to any other class of shares, all the aforesaid unless
otherwise expressly provided in the terms of the issuance of such shares.


Shareholders Meeting

         The Company shall hold an Annual General Meeting each year not later
than fifteen months after the previous Annual Meeting, at such time and place as
may be determined by the Board. Any other General Meeting is referred to as a
"Special Meeting".

         A notice of a General Meeting shall be published in at least two widely
distributed daily newspapers published in Hebrew. The notice shall be published
at least fourteen days prior to the convocation of the meeting. In addition the
Company provides a notice of the meeting and related proxy statement in English
to the holders of its Ordinary Shares listed on the records of the Company's
registrar and stock transfer agent in the United States.

         Apart from the notices as to the General Meeting as above, according to
its articles and the Israeli Companies Law the Company is not required to give
any notice as to the General Meeting, either to the registered shareholders or
to shareholders who are not registered, subject to provisions of the Companies
Law and/or any other applicable law. The notice as to a General Meeting is
required to detail the place, the day and the hour at which the meeting will be
held and to include the agenda as well as a summary of the proposed resolutions
and any other details required by law.

         The board of directors of the Company shall convene a Special Meeting
as may be decided by the Board, and shall also convene a special meeting at the
demand of any two directors or one quarter of the directors in office or one or
more shareholders who hold at least five percent of the issued capital and one
percent of the voting rights, or one or more shareholders who hold at least five
percent of the voting rights.

         If the Board receives a demand for the convocation of a Special Meeting
as aforesaid, the Board shall within twenty one days of receipt of the demand
convene the meeting for a date fixed in the notice as to the Special Meeting,
provided that the date for convocation shall not be later than thirty five days
from the date of publication of the notice, all the aforesaid subject to the
provisions of the Companies Law.

         In the resolution of the Board to convene a meeting, the Board may, at
its discretion and subject to the provisions of the law, fix the manner in which
the items on the agenda will be determined and notice given to the shareholders
entitled to participate at the meeting.

                                       43
<PAGE>


         No business shall be transacted at any General Meeting unless a quorum
is present at the time the meeting proceeds to business. A quorum shall be
constituted when two shareholders, holding collectively at least twenty five
percent of the voting rights, are present in person or by proxy within half an
hour from the time appointed for commencement of the meeting, unless otherwise
determined in the Articles.

         If a quorum is not present within half an hour, the meeting shall stand
adjourned for seven days, to the same day of the week at the same time and
place, without need for notification to the shareholders, or to such other day,
time and place as the Board may by notice to the shareholders appoint.

         If a quorum is not present as aforesaid at the adjourned meeting, the
meeting shall be postponed.


Voting and Adopting Resolutions at General Meetings

         A shareholder who wishes to vote at a General Meeting shall prove to
the Company his ownership of his shares. The Board may issue directives and
procedures relating to the proof of ownership of shares of the Company.

         A shareholder is entitled to vote at a General Meeting or class
meeting, in person or by proxy. A voting proxy need not be a shareholder of the
Company.

         The above shall also apply to any person entitled to shares, provided
that at least forty eight hours before the time for the meeting or the adjourned
meeting, as the case may be, at which he proposes to vote, he shall satisfy the
Board of his right to vote such shares unless the Company shall have previously
recognized his right to vote the shares at such meeting.

         The instrument appointing a proxy (hereinafter "Proxy Appointment")
shall be in writing signed by the principal, or if the principal is a
corporation the proxy appointment shall be in writing and signed by authorized
signatories of the corporation The Board is entitled to demand that prior to the
holding of the meeting, there shall be produced to the Company a confirmation in
writing of the authority of signatories to bind the corporation to the
satisfaction of the Board. The Board may also issue provisions and procedures
relating to such matters.

         The Proxy Appointment or an office copy to the satisfaction of the
Board shall be deposited at the registered office or at such other place or
places, in or outside of Israel, as may from time to time be determined by the
Board, either generally or in respect of a specific meeting, at least forty
eight hours prior to the commencement of the meeting or the adjourned meeting,
as the case may be, at which the proxy proposes to vote on the strength of such
Proxy Appointment.

         A voting proxy is entitled to participate in the proceedings at the
General Meeting and to be elected as chairman of the meeting in the same manner
as the appointing shareholder, unless the Proxy Appointment otherwise provides.
The Proxy Appointment shall be in form usual in Israel or any other form which
may be approved by the Board.

         Each ordinary share entitles the holder thereof to participate at a
General Meeting of the Company and to one vote at a poll.

                                       44
<PAGE>


Right of Non-Israeli Shareholders to Vote

         There is no limitation on the right of non-resident or foreign owners
of any class of the Company's securities to hold or to vote according to the
rights vested in such securities.


Change of Control

         Under the Articles, the approval of merger as provided in the Israeli
Companies Law, is subject to a simple majority at the General Meeting or class
meeting, as the case may be, all the aforesaid subject to the applicable
provisions of any law. It is also subject to the approval of the boards of the
merging companies.

         For purposes of shareholders' approval, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares held by
shareholders, other than the shareholders who are also shareholders in the other
merging company whose shares are held by the other merging company, or by any
person who holds 25% or more of the shares or the right to appoint 25% or more
of the directors in the other merging company, vote against the merger. Upon the
request of a creditor of either party to the proposed merger, a court may delay
or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger, the surviving company will be unable to satisfy
the obligations of any of the parties to the merger. In addition, a merger may
not be completed unless at least 70 days have passed from the time that a
proposal of the merger has been filed with the Israeli Registrar of Companies.

         The Israeli Companies Law also provides that an acquisition of shares
of a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 25% shareholder of the company and
there is no existing 25% or more shareholder in the company. If there is no
existing 50% or greater shareholder in the company, the Companies Law provides
that an acquisition of shares of a public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become a 45%
shareholder of the company.

         If following any acquisition of shares, the acquirer will hold 90% or
more of the company's shares, the acquisition may not be made other than through
a tender offer to acquire all of the shares of such class. If more than 95% of
the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be sold to it. However, the remaining minority
shareholders may seek to alter the consideration by court order.

         Under the Israeli Securities Act 5728-1968, any major shareholder who
is the beneficial owner of more then 5% of the Company's equity capital or
voting securities is required to report this fact to the Israeli Securities
Authority.

C.       Material Contracts

         During the two years preceding the date of this annual report, the
Company did not enter into any material contract.

D.       Exchange Controls

         Foreign Exchange Regulations

         There are no Israeli governmental laws, decrees or regulations that
restrict or that affect the export or import of capital, including but not
limited to, foreign exchange controls on remittance of

                                       45
<PAGE>

dividends on the ordinary shares or on the conduct of the Group's operations,
except as otherwise set forth in the paragraph below regarding taxation.

E.       Taxation

         Investors are advised to consult their tax advisors with respect to the
tax consequences of their purchases, ownership and sales of Ordinary Shares,
including the consequences under applicable state and local law and federal
estate and gift tax law, and the application of foreign laws or the effect of
nonresident status on United States taxation. This tax summary does not address
all of the tax consequences to the investors of purchasing, owning or disposing
of the Ordinary Shares.

Income Taxes on Dividends Distributed by the Company to Non-Israeli Residents

         Subject to the provisions of applicable tax treaties, dividend
distributions from regular profits by the Company to a non-resident shareholder
are subject to withholding tax of 25%. The portion of dividends paid out of
profits earned by an Approved Enterprise of the Company is subject to
withholding tax at the rate of 15%.


         The same rates generally apply under the Israeli-U.S. Tax Treaty.
However, when a U.S. tax resident corporation is the recipient of the dividend,
the rate on a dividend out of regular (non-Approved Enterprise) profits may be
reduced to 12.5% under the treaty, where the following conditions are met:

(a)      the recipient corporation owns at least 10% of the outstanding voting
         rights of the Company for all of the period preceding the dividend
         during the Company's current and prior taxable year; and
(b)      generally not more than 25% of the gross income of the paying
         corporation for its prior tax year consists of certain interest and
         dividend income.

         Otherwise, the usual rates apply.

         United States individual citizens and residents and U.S. corporations
generally will be required to include in their gross income the full amount of
dividends received from the Company with respect to the Ordinary Shares owned by
them, including the amount withheld as Israeli income tax. Subject to the
limitations and conditions provided in the Internal Revenue Code of 1986, as
amended (the "Code"), such persons may be eligible to claim a credit for such
withheld amounts against their United States federal income tax liability. As an
alternative, the persons enumerated above (provided such persons, in the case of
individual taxpayers, itemize their deductions) may elect to deduct such
withheld tax from their gross income in determining taxable income (subject to
applicable limitations on the deductions claimed by individuals). However, such
a credit or deduction may be limited for U.S. alternative minimum tax purposes,
depending on the taxpayer's specific circumstances.

         Dividend payments on the Ordinary Shares will not be eligible for a
dividends received deduction generally allowed to United States corporations
under the Code.

Income Taxes and Capital Gains Applicable in Israel and to Non-Israeli
Shareholders

         The basic tax rate applicable to corporations is currently 36%. The
maximum tax rate for individuals is 49%. These rates are subject to the
provisions of any applicable bilateral double taxation treaty. Israeli law
generally imposes a capital gains tax on the sale of securities and any other
capital assets.

         Effective January 1, 2003, the capital gains tax rate imposed, on both
individuals and corporations upon sale of capital assets and non-traded
securities, acquired after that date has been reduced to 25%; capital gains
accrued from assets acquired before that date are subject to a blended tax rate
based on the relative Periods of time before and after that date that the asset
was held.

                                       46
<PAGE>

         Effective January 1, 2003, capital gains from the sale of ordinary
shares on the Tel Aviv Stock Exchange (or listed on a designated foreign stock
market or traded in a foreign stock exchange), accrued by individuals (and
certain corporations) whose income in this regard is not classified as business
income, derived from January 1, 2003 and thereafter, will in general be liable
to capital gains tax of up to 15%. To the extent that the holder of the ordinary
shares claims a deduction of financing expenses, the gain will be subject to tax
at a rate of 25%.

         In addition, if the ordinary shares are traded on the Tel Aviv Stock
Exchange (or listed on a designated foreign stock market), gains on the sale of
ordinary shares held by non-Israeli tax resident investors will generally be
exempt from Israeli capital gains tax.

         Notwithstanding the foregoing, dealers (both individuals and
corporation) in securities in Israel are taxed at regular tax rates applicable
to business income.

         The U.S. Israeli Tax Treaty exempts U.S. residents who hold an interest
of less than 10% an Israeli company, and who held an interest of less than 10%
during the 12 months prior to a sale of their shares, from Israeli capital gains
tax in connection with such sale. Certain other tax treaties to which Israel is
a party also grant exemptions from Israeli capital gains taxes.

F.       Dividends and Paying Agents
         Not applicable to Annual Reports.

G.       Statement by Expert
         Not applicable to Annual Reports.

H.       Documents on display

         A copy of each document (or a translation thereof to the extent not in
English) concerning the Company that is referred to in this Annual Report on
Form 20-F, is available for public view at our principal executive offices at
American Israeli Paper Mills Ltd., 1 Meizer Street Industrial Zone, Hadera
38100, Israel. Copies of this Annual Report and the exhibits hereto may be
inspected and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549 and at the SEC's regional office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be
obtained from the Public Reference Room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549 at prescribed rates. The public may obtain information on
the operation of the SEC's Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330.


ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

       Due to its operations, the Company is exposed to market risks, consisting
primarily of changes in interest rates - on both short and long-term loans -
changes in exchange rates (primarily NIS/$) and changes in raw material and
energy prices, which are denominated primarily in foreign currency. These
changes influence the Company's results.

       The Company's Board of Directors determines the policy according to which
financial instruments are employed and defines the objectives to be attained,
taking into account the Group's linkage balance sheet and the impact of various
changes in currencies and in the Consumer Price Index on the Company's balance
sheets and on its financial statements.

       AIPM conducts calculations of the Company's exposure every month and
examines the compliance with the policy determined by the Board of Directors.

                                       47
<PAGE>

       Furthermore, limited use is made of derivative financial instruments,
which the Company employs for hedging the cash flows in dollars, originating
from the existing assets and liabilities.

       Such transactions are conducted primarily through currency options and
forward transactions opposite Israeli banking institutions. The Company
therefore believes that the inherent credit risk of these transactions is
slight.

       The Company possesses CPI-linked long-term loans (notes and loans) in the
total sum of NIS 240 million ($54.8 million), with the interest thereupon being
no higher than the market interest rate. In the event that the inflation rate
increases and is considerably high, this could lead to an additional financial
expenses being recorded in the Company's financial statements as a result of a
surplus of CPI-linked liabilities. At December 31, 2003, the Company was not
involved in any forward transactions. In January 2004, the Company entered into
a forward transaction, with a term of one year, to hedge a sum of NIS 200
million against a rise in the CPI, in order to hedge the said exposure.

       The Company has only limited involvement with derivative financial
instruments. The Company uses these instruments as hedges. The Company utilizes
derivatives, mainly forward exchange contracts and currency options, to protect
its dollar cash flows in respect of existing assets and liabilities or
commitments that are to be affected by changes in exchange rates or in the
Israeli CPI. As the counter-parties to these derivatives are Israeli banks, the
Company considers the inherent credit risks remote.

Credit Risks

       Most of the Group's sales are made in Israel to a large number of
customers and the exposure to customer-related credit risks is consequently
generally limited. The Group regularly analyzes - through credit committees that
operate within the various companies - the quality of the customers, their
credit limits and the relevant collateral required, as the case may be.

       The financial statements include provisions for doubtful debts, based on
the existing risks on the date of the statements.

       The cash, cash equivalents and fixed-term deposits are by and large
deposited with large Israeli banking institutions or foreign banks controlled by
the said institutions.


Fair Value of Financial Instruments

         The fair value of financial instruments included in working capital of
the Group is usually identical or close to their carrying value. The fair value
of long-term bank loans and other liabilities also approximates the carrying
value, since they bear interest at rates close to the prevailing market rates
except for as follows:

          The fair value of long-term loans and capital notes, included under
investments in associated companies, aggregating adjusted NIS 44,637,000 and of
a capital note to an associated company in the amount of adjusted NIS
32,770,000. Their value cannot be reliably determined prior to determining their
repayment dates.

                                       48
<PAGE>


Quantitative Information Regarding Market Risk

         The following are the balance-sheet components by linkage bases at
December 31, 2003:

<TABLE>
<CAPTION>
In NIS Million                                  Unlinked     CPI-linked      In foreign            Non-monetary   Total
                                                                             currency, or             items
                                                                             linked thereto
                                                                             (primarily $)
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
<S>                                             <C>           <C>            <C>                      <C>      <C>
Assets
Cash and cash equivalents                             150.1                              8.6                      158.7
Short-term deposit                                     20.0                                                        20.0
Other accounts receivable                             210.6         0.2                 48.5             9.9      269.2
Inventories                                                                                             90.7       90.7
Investments in associated companies                    12.2        10.6                 21.9           339.2      383.9
Deferred taxes on income                                                                                 3.9        3.9
Fixed assets, net                                                                                      325.6      325.6
Deferred expenses, net of accrued
amortization                                                                                             1.3        1.3
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Total assets                                          392.9        10.8                 79.0           770.6    1,253.3
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------

Liabilities
Credit from banks                                     144.6                                                       144.6
Loans from banks                                                    0.4                                             0.4
Accounts payable                                      146.1                             11.6                      157.7
Deferred taxes on income                                                                                61.8       61.8
Notes                                                             239.6                                           239.6
Other liabilities                                      32.8                              2.2                       35.0
Shareholders' equity,                                                                                  614.2      614.2
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Total liabilities and equity                          323.5       240.0                 13.8           676.0    1,253.3
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
 Excess of monetary assets (liabilities)  at
December 31, 2003                                      69.4     (229.2)                 65.2            94.6          -
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
</TABLE>



ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable to Annual Reports

ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

None.

                                       49
<PAGE>

ITEM 15 - CONTROLS AND PROCEDURES

         The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
periodic filings with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including the Company's Chief Executive Officer (CEO - the Company's senior
executive officer) and Chief Financial Officer (CFO - the Company's senior
financial officer), as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Furthermore, management necessarily was required to
use its judgment in evaluating the cost to benefit relationship of possible
disclosure controls and procedures. Within 90 days prior to the date of this
report, the Company performed an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. The
evaluation was performed with the participation of senior management of each
business segment and key corporate functions, and under the supervision of the
CEO and CFO. Based on the evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
after the date the Company completed the evaluation.

ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT

      Amos Mar-Haim, a member of the Registrant's Audit Committee, is an Audit
Committee Financial Expert under the applicable rules and regulations of the
SEC. Amos Mar-Haim is "independent", as that term is defined in the American
Stock Exchange listing standards.

ITEM 16B.    CODE OF ETHICS

      The Company has adopted a code of ethics which is applicable to all
directors, officers and employees of the Company, including its principal
executive, financial and accounting officers and persons performing similar
functions (the "Code of Ethics"). The Code of Ethics covers areas of
professional and business conduct, and is intended to promote honest and ethical
behavior, including fair dealing and the ethical handling of conflicts of
interest; support full, fair, accurate, timely and understandable disclosure in
reports and documents the Company files with, or submits to, the SEC and other
governmental authorities, and in its other public communications; deter
wrongdoing; encourage compliance with applicable laws and governmental rules and
regulations; and ensure the protection of the Company's legitimate business
interests. The Company encourages all of its directors, officers and employees
promptly to report any violations of the Code of Ethics, and has provided
mechanisms by which they may do so. The Company will provide a copy of the Code
of Ethics to any person, without charge, upon written request addressed to the
Corporate Secretary of the Company at the Company's corporate headquarters in
Hadera, Israel.

ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The Audit Committee maintains a policy of approving and recommending only
those services to be performed by the Company's external auditors which are
permitted under the Sarbanes-Oxley Act and the applicable rules of the SEC
relating to auditor's independence, and which are otherwise consistent with and
will encourage, and are remunerated at levels that accord with, the basic
principles of auditor independence. The practice of the Audit Committee is to
receive from the Company's management, a list of all services, including audit,
audit-related, tax and other services, proposed to be provided during the

                                       50
<PAGE>

current fiscal year to the Company and its subsidiaries by Kesselman &
Kesselman, an affiliate of PricewaterhouseCoopers. After reviewing and
considering the services proposed to be provided during the current fiscal year
and, where appropriate in order better to understand their nature, discussing
them with management, the Audit Committee pre-approves such of the proposed
services, with a specific pre-approved budget, as it considers appropriate in
accordance with the above principles. Additional services from Kesselman &
Kesselman and any increase in budgeted amounts will similarly be pre-approved
during the year by the Audit Committee on a case-by-case basis.

         All audit-related and non-audit-related services performed by Kesselman
& Kesselman during 2003 were reported to, and the services proposed to be
provided by them during 2004 pre-approved by, the Audit Committee in May 10,
2004, in accordance with the procedures outlined above.

         The total fees paid by the Company to Kesselman & Kesselman for all
services, described above, including audit services, for the years ended
December 31, 2003 and 2002 were $125 in thousands and $160 in thousands,
respectively.

Item 16D.  Exemptions from the Listing Standards for Audit Committees

         Not applicable to Registrant.

Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated
           Purchasers

      Neither the Company nor any affiliated purchaser purchased any of the
Company's equity securities during 2003.


                                    PART III

ITEM 18 - FINANCIAL STATEMENTS

                Report of Independent Auditors on Reconciliation
                          of Israeli GAAP to U.S. GAAP

To the Shareholders of
American Israeli Paper Mills Ltd.

In connection with our audits of the consolidated balance sheets of American
Israeli Paper Mills Ltd. ("the Company") as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2003
(the "Financial Statements"), which are incorporated in this Form 20-F, we have
also audited the information included in the Reconciliation of Israeli GAAP to
U.S. GAAP listed under Item 18 herein. Those financial statements and the
Reconciliation are the responsibility of the Company's Board of directors and
management. Our responsibility is to express an opinion on the financial
statements and the Reconciliation based on our audit.

We did not audit the U.S.GAAP financial data of certain associated companies in
which the Company's share in excess of profits over losses of which is a net
amount of remeasured NIS 24.7 million in 2003 and re-measured NIS 26.7 million
in 2002. The financial data of those companies were audited by other independent
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to amounts included for those companies, is based solely on the reports
of the other independent auditors.

We conducted our audit in accordance with auditing standards generally accepted
in Israel, and the standards of the Public Company Accounting Oversight Board
(United States), which include examining, on a test basis, evidence supporting
the amounts and disclosures in the attached report, in order to obtain
reasonable assurance that there is no material misstatement, and to provide us
with a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other independent
auditors, the information set forth under Item 18 present fairly, in all
material respects, in relation to the Financial Statements taken as a whole the
financial position and the operating results of the Company in conformity with
accounting principles generally accepted in the United States.


                                             /s/ Kesselman & Kesselman
Tel-Aviv,  Israel                            Kesselman & Kesselman
March 10, 2004                               Certified Public Accountants (Isr.)

         The Company prepares its financial statements in accordance with
Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain significant respects,
as described below:

a.       The functional currency of the Company

         Through December 31, 1993, the financial statements of the Company,
presented in NIS values adjusted for the changes in the general purchasing power
of the Israeli currency based on the changes in the exchange rate of the dollar
(see note 1b to the financial statements attached), were also used for the
purposes of reporting in conformity with U.S. GAAP applicable to entities
operating in hyper-inflationary economic environments, as prescribed by
Statement No. 52 of the Financial Accounting Standards Board of the United
States (FASB). Since the inflation rate in Israel has decreased considerably,
the Company decided that, commencing in 1994, it would implement the rules
relating to economies no longer considered hyper-inflationary, for reporting
purposes, in accordance with U.S. GAAP.

         Under those rules:

         1)       The functional currency of the Company (the currency in which
                  most income is derived and most expenses are incurred) is the
                  New Israeli Shekel (NIS);

                                       51
<PAGE>

         2)       The opening balances for 1994 are the balances presented in
                  the Company's balance sheet at December 31, 1993;

         3)       Transactions performed from January 1, 1994 are presented on
                  the basis of their original amounts in Israeli currency.

         The term "Re-measured NIS" signifies the currency used for FASB 52
purposes, as described above.

         As to the effect of application of these rules - see (i) below.

         See also note 1q to the financial statements attached regarding new
         Israeli pronouncement that requires the discontinuance of adjustments
         for inflation as from January 1, 2004.

b.       Deferred income taxes

         Under Israeli GAAP, no deferred taxes are provided for in respect of
certain long-lived (more than 20 years) assets, such as buildings and land.
Under U.S. GAAP, in accordance with the provisions of FAS 109, income taxes are
to be provided for any assets that have a different basis for financial
reporting and income tax purposes.

         In addition, for U.S. GAAP purposes deferred taxes are to be provided
for with respect to un-remitted earnings of investee companies. Under Israeli
GAAP due to the Company's policy to hold its investments in investee companies,
and not to realize them, these temporary differences are considered differences
permanent in duration for which deferred taxes are not provided for.

         Through 1999, as long as the main investments of the Company were
subsidiaries which were controlled by the Company, the Company did not provide
for deferred taxes also for U.S. GAAP reporting purposes, since those
differences were deemed to be not taxable due to the tax free inter-company
dividend distribution law in Israel and tax planning on its behalf, accordingly.

         As from 2000, due to changes in certain of the Company's investments
from subsidiaries to investee companies, deferred taxes were provided for any
portion that arose from investee companies sources other than pre-1993
undistributed earnings (taking into account the Company's tax strategy).

         As to the effect of application of this treatment, see (i) below.

c.       Employee stock option plans

         Under Israeli GAAP, no compensation expenses are recorded in respect of
employee stock options.

         Under U.S. GAAP, the Company accounts for employee stock based
compensation using the intrinsic value-based model of accounting prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with FAS 123 -
"Accounting for Stock-Based Compensation" ("FAS 123"), the Company discloses pro
forma data assuming the Company had accounted for employee stock option grants
using the fair value-based method defined in FAS 123.

         All of the Company's awards are considered to be variable awards; thus
the difference between the price of the shares at each balance sheet date and
the exercise price of such options is charged to income over the vesting period
and is adjusted in subsequent periods up to the measurement date (exercise or
expiration date). The amount of the difference is correspondingly presented as
capital surplus.

                                       52
<PAGE>

Pro-forma disclosure

         Had compensation cost for the employee stock options plans, been
determined based on the fair value at the grant date, consistent with the method
of FAS 123, the Company's net income and earnings per share would have been
changed to the pro - forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                 Year ended December 31
                                                      --------------------------------------------
                                                           2003           2002            2001
                                                      ------             ------             ------
                                                         In thousands, except for per share data
<S>                                                   <C>                <C>                <C>
Net income, as reported under U.S. GAAP               38,469             54,624             49,876

Add (deduct):
    stock based employee compensation
expense (income), included in reported net
income, net of related tax effect                      8,132             (1,066)            (3,792)

Deduct:
    stock based employee compensation
expense determined under fair value
method for all awards, net of related tax
effects                                               (4,055)            (4,801)            (1,522)
                                                      ------             ------
Pro forma net income                                  42,546             48,757             44,562
                                                      ------             ------
Earnings per share - under U.S. GAAP:
    Basic - as reported                                 9.77              13.94              12.75
    Basic - pro forma                                  10.80              12.44              11.39
    Diluted - as reported                               9.69              13.89              12.66
    Diluted - pro forma                                10.72              12.40              11.31
</TABLE>

         A summary of the status of the Company's plans as of December 31, 2003,
2002, and 2001 , and changes during the years ended on those dates, is presented
below:

<TABLE>
<CAPTION>
                                                  2003                         2002                       2001
                                       --------------------------   -------------------------   -------------------------
                                                        Weighted                    Weighted                    Weighted
                                                         average                     average                    average
                                                        exercise                    exercise                   exercise
                                                          Price                       Price                      Price
                                         Number            NIS         Number          NIS        Number          NIS
                                       ----------      ----------   ----------     ----------   ----------     ----------
<S>                                    <C>             <C>          <C>             <C>        <C>             <C>
Options outstanding at
    beginning of year                    333,916         147.27       333,916        184.52        104,163        85.02
Changes during the year:
    Granted - below market value                                                                   275,755       200.46
    Exercised                           (116,175)        116.37                                    (46,002)       87.82
    Expired                               (1,498)         98.62
                                       ----------      ----------   ----------     ----------   ----------     ----------
Options outstanding at                   216,243         159.15       333,916        147.27        333,916        184.52
end of year                            ==========                   ==========                  ==========

Options exercisable at
    year-end                             *70,518        179.53        58,161          99.67         58,161        92.91
                                       ==========      ==========   ==========                  ==========

Weighted average fair value of
options granted during the year
                                                                                               NIS              **59.38
                                                                                                               =========
</TABLE>
                                       53
<PAGE>

The quoted price of the Company's ordinary shares on December 31, 2003 was NIS
234.3 ($53.5).

*        Based upon the Company's share market value as of December 31, 2003,
         this reflects potentially 17,547 shares regarding the options
         exercisable at year-end.

**       The fair value of the options granted is computed by the Black-scholes
         formula using the following assumptions: dividend yield of 0%; expected
         volatility of 30.5%; risk-free interest rate (linked to the Israeli
         CPI) of 4.5% and expected average life of 5-5.5 years.

The following table summarizes information about options outstanding at December
31, 2003.

<TABLE>
<CAPTION>
                               Options outstanding
         -------------------------------------------------------------------         Number of
                                      Number                                          options
          Range of                 outstanding at              Average             exercisable at
          Exercise                  December 31,              remaining             December 31,
           Prices                       2003               contractual life             2003
           ------                       ----               ----------------             ----
            NIS                                                 Years
          <S>                           <C>                      <C>                   <C>
           93.07                        48,575                   2.5
          137.09                        23,493                   2.8                   23,493
          148.97                        48,575                   3.5
          200.73                        47,025                   1.5                   47,025
          200.73*                       48,575*                  4.5

                                       216,243                   3.0                   70,518
                                       =======                   ===                   ======
</TABLE>

*        The exercise price of this batch will be ultimately determined in July
         2004, (see Note 6b(2) to the financial statements attached). If the
         exercise price of this batch was determined in December 31, 2003, it
         would have been NIS 200.73.


                                       54
<PAGE>

d.       Earnings per share ("EPS")

      Israeli GAAP relating to computation of EPS is described in note 1P to the
financial statements attached.

      The EPS computation according to U.S. GAAP presented below is in
accordance with FAS 128.

      As applicable to the Company, the main difference between the two methods
of EPS computation is that shares to be issued upon exercise of employee stock
options (under SAR plans) are taken into account in the computation of basic EPS
in Israel, whereas in the United States, in computing basic EPS, only the
weighted average number of company shares actually outstanding in the reported
period is taken into account, and shares to be issued upon exercise of options
are included in the computation of diluted EPS. Another difference is the U.S.
requirement for separate presentation - in the income statements - of basic and
diluted EPS as long as they are not identical, while, in Israel, such separate
presentation is only required if the difference between basic and diluted EPS is
in excess of 5%.

      As to the effect of application of U.S. GAAP, see (i) below.

         Following are data relating to the weighted average number of shares
for the purpose of computing basic and diluted earnings per share under U.S.
GAAP:

<TABLE>
<CAPTION>
                                                               2003          2002           2001
                                                             ---------     ---------     ---------
<S>                                                          <C>           <C>           <C>
      Weighted average number of shares used in the
      computation of basic earnings per share                3,938,035     3,918,710     3,911,673

      Net additional shares from the assumed exercise of
      employee stock options                                    31,673        14,570        28,713
                                                             ---------     ---------     ---------
      Weighted average number of shares used in the
      computation of diluted earnings per share              3,969,708     3,933,280     3,940,385
                                                             =========     =========     =========
</TABLE>

e.       Investment in marketable equity securities accounted for by the equity
         method (associated company) - Carmel Container Systems (Carmel)

         Under Israeli GAAP, an investment in an associated company is tested
for impairment under the provisions of Israeli Standard No. 15 of the Israeli
Accountant Standard Board - "Impairment of Assets" (see note 1g to the financial
statements). Based on the provisions of this Standard, and as explained in note
2e to the financial statements, the Company determined that the recoverable
value of this investment exceeds its carrying value (based, among other, on its
Discounted Cash Flows), and accordingly, the investment was not written down.

         Under U.S. GAAP (APB 18 - "The Equity Method of Accounting for
Investments in Common Stock") and SEC Staff Accounting Bulletin (SAB) No. 59
("Accounting for Noncurrent Marketable Equity Securities"), a decline in value
of investment in an associated company which is other than temporary is
recognized as a realized loss, establishing a new carrying value for the
investment. Factors considered in determining that a decline is other than
temporary include, among other, the length of time and the extent to which the
market value has been less than the carrying value of the investment. The
relevant market value for determining the impairment loss is the market value at
balance sheet date (it should be noted that the share price of Carmel rose by
about 90% since December 31, 2003).

                                       55
<PAGE>

      Therefore, although according to the Israeli GAAP the recoverable value of
this investment exceeds its carrying value (see above) under U.S. GAAP and SEC
rules described above, the decline in the market value of Carmel shares is the
significant factor in determining other than temporary decline. Accordingly, for
U.S.GAAP reporting, since the decline in the market value of Carmel is long and
extensive, the Company reduced the carrying value of this investment to its
market value as of December 31, 2003 and recorded an impairment loss amounting
NIS 16,986,000 (see also share in profits of associated companies under U.S.
GAAP in Item 3 above).

f.       Statements of income presentation

         Under Israeli GAAP, the Company included, in the statements of income
for the year ended December 31, 2002 and 2003, under "other income (expenses)",
in 2002 - loss from closure of facilities and disposal of assets and closing
inventories and in 2003 - gain from sale of apartments.

         Under U.S. GAAP, the loss from inventories should be classified as part
of cost of sales and loss from closure of facilities, disposal of assets and
sale of apartments should be classified as part of operating income.

         These adjustments were included in the reconciliation to the U.S. GAAP
(see operating income under U.S. GAAP in Item 3 above).

g.       Accounting for guarantees

         The Group's applies for U.S. GAAP purposes the provisions of FASB
interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others " ("FIN
45").

         All of the guarantees granted by the Company and its subsidiaries (see
note 9 to the financial statements) were issued prior to December 31, 2002.


h.       Supplemental disclosure on employee rights upon retirement

         The Company and its subsidiaries expects to contribute in 2004 NIS
8,500 thousands to the provident funds and to the insurance companies in respect
of its severance pay obligations.


i. The effect of applying U.S. GAAP on the consolidated financial statements is
as follows:

1) Consolidated statement of income figures:

<TABLE>
<CAPTION>
                                                                                               Year ended December 31
                                                                                         -------------------------------------
                                                                                          2003           2002            2001
                                                                                         ------         ------          ------
                                                                                                     In thousands
                                                                                               (except per share data)
<S>                                                                                      <C>            <C>             <C>
Net income, as reported  according to Israeli GAAP                                       60,047         37,460          34,447
Effect of treatment of the following items in accordance with     U.S. GAAP:
   Functional currency*                                                                   8,243         33,254           4,851
</TABLE>


                                       56
<PAGE>
<TABLE>
<CAPTION>
                                                                                               Year ended December 31
                                                                                         -------------------------------------
                                                                                          2003           2002            2001
                                                                                         ------         ------          ------
                                                                                                     In thousands
                                                                                               (except per share data)
<S>                                                                                      <C>            <C>             <C>

   Deferred income taxes - net                                                           (4,703)       (17,156)          6,786
   Other then temporary impairment of an investment in an associated company            (16,986)
   Applying APB 25 in respect of employee stock options:
      Gross amount                                                                      (12,705)         1,667           5,925
      Deferred taxes                                                                      4,573           (601)         (2,133)
                                                                                         ------         ------          ------
Net income under U.S. GAAP                                                               38,469         54,624          49,876
                                                                                         ======         ======          ======

Earnings per share:
Under Israeli GAAP - net income per NIS 1 of par value of shares - Primary**              1,494            947             873
                                                                                         ======         ======          ======
   Under U.S. GAAP - per share:
      Basic                                                                                9.77          13.94           12.75
                                                                                         ======         ======          ======
      Diluted                                                                              9.69          13.89           12.66
                                                                                         ======         ======          ======
</TABLE>

*        In 2002 and 2001 including exchange rate differences from the end of
         each of those years, to December 31, 2003.

**       Each NIS 1 par value is composed of 100 ordinary shares of NIS 0.01 par
         value.



              2) Shareholders' equity:

<TABLE>
<CAPTION>
                                                                                                       December 31
                                                                                                --------------------------
                                                                                                  2003             2002
                                                                                                ---------        ---------
                                                                                                     In thousands
<S>                                                                                             <C>              <C>
Shareholders' equity according to Israeli GAAP                                                  (614,230)        (704,168)
Effect of treatment of the following items in accordance with US GAAP:
    Functional currency                                                                           57,224          112,029
    Other then temporary impairment of an investment in an associated company                     16,986
    Deferred income taxes                                                                        (10,334)         (10,464)
                                                                                                ---------        ---------
Shareholders' equity under US GAAP                                                              (550,354)        (602,675)
                                                                                                =========        =========
</TABLE>

                                       57
<PAGE>


                    3) Consolidated balance sheet figures:

<TABLE>
<CAPTION>
                                                                                 December 31
                                                ---------------------------------------------------------------------------
                                                               2003                                    2002
                                                -----------------------------------       ---------------------------------
                                                  Adjusted NIS      Re-measured NIS       Adjusted NIS      Re-measured NIS
                                                  ------------      ---------------      ------------       ---------------
                                                                               In thousands
                                                ---------------------------------------------------------------------------
                                                As Reported Under                      As Reported Under
                                                  Israeli GAAP      Under U.S. GAAP      Israeli GAAP       Under U.S. GAAP
                                                  ------------      ---------------      ------------       ---------------
<S>                                                    <C>                <C>                 <C>                <C>
Inventories                                            90,654             75,308              90,495             76,817
                                                     ========           ========            ========             ======

Investment in associated companies                    383,879            366,376             366,156            373,878
                                                     ========           ========            ========            =======

Fixed assets - net                                    325,641            283,831             325,837            279,080
                                                     ========           ========            ========            =======

Deferred taxes - net                                  (50,789)           (41,024)            (47,318)           (37,526)
                                                     ========           ========            ========           =========

Shareholders' equity **                              (614,230)          (550,354)           (650,950)          (602,675)
                                                     ========           ========            ========           =========
</TABLE>

----------

**       In 2003 the Company distributed dividends in the amount of NIS
         100,989,000.

j.       Statement of cash flows

         The Company presents its cash flow information, under Israeli GAAP net
of the effects of inflation.

         The information to be included under US GAAP for the years ended
December 31, 2001, 2002 and 2003 is presented below:

<TABLE>
<CAPTION>
                                                                                2003            2002          2001
                                                                               -------         -------       -------
                                                                                            Adjusted NIS
                                                                               -------------------------------------
                                                                                           (In thousands)
                                                                               -------------------------------------
<S>                                                                             <C>             <C>           <C>
         Net cash provided by operating activities                              53,895          81,587        16,279
          Net cash used in investing activities                                (32,261)        (43,682)      (32,667)
          Net cash provided by (used in) financing activities                  125,517         (47,901)       (1,756)
          Effect of inflation on cash and cash equivalent                        5,649          12,056        17,394
                                                                               -------         -------       -------
          Increase (decrease) in cash and cash
             equivalents                                                       152,800           2,060          (750)
          Balance of cash and cash equivalents
             at beginning of year                                                5,906           3,846         4,596
                                                                               -------         -------       -------
          Balance of cash and cash equivalents
             at end of year                                                    158,706           5,906         3,846
                                                                               =======           =====         =====
</TABLE>


k.       Reporting comprehensive Income

         In addition to net income, comprehensive income includes translation of
         foreign currency financial statements of an investee company, as
         follows:

                                       58
<PAGE>

<TABLE>
<CAPTION>
                                                          Year Ended December 31
                                                           ----------------------
                                                           2003            2002
                                                           ------          ------
                                                              Re-measured NIS
                                                               in thousands
                                                           ----------------------
<S>                                                        <C>             <C>
          Net income under U.S. GAAP                       38,469          54,624
          Differences from translation of foreign
             currency financial statements of an
             investee company                              (2,506)          2,424
                                                           ------          ------
          Comprehensive income                             35,963          57,048
                                                           ======          ======
</TABLE>

          As of December 31, 2003 the accumulated other comprehensive income
          aggregates (82) re-measured NIS, in thousands.

l.        Recently issued accounting pronouncement in the United States:

         5)       FIN 46

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

         In December 2003, the FASB revised FIN 46 ("FIN 46-R") by amending some
of its provision and providing for new effective dates.

         The adoption of FIN 46 did not have a material effect on Company's
consolidated financial statements. The Company believes that the expected
adoption of FIN 46-R will not have a material effect on its consolidated
financial statements.


         FAS 132 (revised 2003)

         In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits, an
amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB
Statement No. 132 ("FAS 132 (revised 2003)") ". This Statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. The new
rules require additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans.

         Part of the new disclosures provisions are effective for 2003 calendar
year-end financial statements, and accordingly have been applied by the company
in these financial statements. The rest of the provisions of this Statement,
which have a later effective date, are currently being evaluated by the company.

                                       59
<PAGE>


                  Schedule - Valuation and Qualifying Accounts

                       Three Years Ended December 31, 2003

                           (Adjusted NIS in thousands)

<TABLE>
<CAPTION>
Column A                                  Column B                    Column C             Column D             Column E
                                          Balance at beginning        Additions                                   Balance at
                                          of period                   (reductions)         Deductions            end of period
                                                                      charged to
                                                                      expenses
                                          -----------------------     ----------------     ---------------    -------------------
<S>                                              <C>                         <C>                 <C>          <C>
Allowance for doubtful accounts:
Year ended December 31, 2003                     12,752                         944                   --             13,696
                                          =======================     ================     ===============    ===================
Year ended December 31, 2002                     11,538                       1,230                  (16)            12,752
                                          =======================     ================     ===============    ===================
Year ended December 31, 2001                     12,962                          92               (1,516)            11,538
                                          =======================     ================     ===============    ===================
</TABLE>

                      Report of Independent Accountants on
                          Financial Statement Schedule



To the Board of Directors of
American Israeli Paper Mills Limited.




Our audits of the consolidated financial statements referred to in our report
dated March 10, 2004, appearing in the 2003 annual report to the shareholders of
American Israeli Paper Mills Limited also included an audit of Financial
Statement Schedule - Valuation and Qualifying Accounts - listed in Item 18 on
this Form 20-F. In our opinion, the Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
related consolidated financial statements.




                                             /s/ Kesselman & Kesselman
Tel-Aviv,  Israel                            Kesselman & Kesselman
March 10, 2004                               Certified Public Accountants (Isr.)

                                       60
<PAGE>


ITEM 19 - EXHIBITS


 (a) The following financial statements and supporting documents are filed with
this report:

         (i) Consolidated Audited Financial Statements of the Company for the
year ended December 31, 2003 (including reports of independent auditors of Kost,
Forer, Gabbay and Kasierer, a member of Ernst & Young Global, for TMM Integrated
Recycling Industries Ltd. and Barthelemi Holdings Ltd., of Bar-Lev, merrari,
Geva & co. for EFFEH lanfill Ltd., of Mualem Glezer Inbar Junio & co. an
affiliate of DFK International for M.M.M. Unaited Landfill Industries (1998)
Ltd. and of Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young Global,
for Carmel Container Systems Ltd.).

         (ii) Financial statements of Neusiedler Hadera Paper Ltd. for the year
ended December 31, 2003.

         (iii) Financial statements of Hogla-Kimberly Ltd. for the year ended
December 31, 2003.

         (iv) Report of independent accountants on Schedule on Valuation and
Qualifying Accounts and Schedule.

         (v) Report of Independent auditors on reconciliation to U.S. GAAP.

(b) Exhibits:

1.1*     Memorandum of Association
1.2**    Articles of Association
3.1***   Voting Agreement dated February 5, 1980 by and among Clal Industries
         Ltd., PEC Israel Economic Corporation and Discount Bank Investment
         Corporation Ltd.
8.1      List of subsidiaries
31.1     Certification of Active Chief Executive Officer pursuant to 17 CFR
         240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
         Act.
31.2     Certification of Chief Financial Officer pursuant to 17 CFR
         240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act.
32.1     Certification of Active Chief Executive Officer pursuant to 18
         U.S.C.ss.1350, as adopted pursuant toss. 906 of the Sarbanes-Oxley Act.
32.2     Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350,
         as adopted pursuant toss.906 of the Sarbanes-Oxley Act.

*        Previously filed as an exhibit to the Company's Annual Report on Form
         20-F for the year ended December 31, 1987, file No. 1-4212, and
         incorporated by reference herein.

**       Previously filed as an exhibit to the Company's Annual Report on Form
         20-F for the year ended December 31, 2000, file No. 1-4212, filed with
         the SEC in June 2001 and incorporated by reference herein.

***      Incorporated by reference to the exhibit number 3.1 in the Company's
         form 20-F for the year ended December 31, 1987.


                                       61
<PAGE>

                                   SIGNATURES

         Pursuant to the requirement 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.



                                            AMERICAN ISRAELI PAPER MILLS LIMITED


                                            By:    /s/ Lea Katz
                                                   -----------------------------
                                                   Name: Lea Katz
                                                  Title: Corporate Secretary


Dated:   June 24, 2004


                                       62

                                  EXHIBIT INDEX

1.1*     Memorandum of Association
1.2**    Articles of Association
3.1***   Voting Agreement dated February 5, 1980 by and among Clal Industries
         Ltd., PEC Israel Economic Corporation and Discount Bank Investment
         Corporation Ltd.
8.1      List of subsidiaries
31.1     Certification of Active Chief Executive Officer pursuant to 17 CFR
         240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
         Act.
31.2     Certification of Chief Financial Officer pursuant to 17 CFR
         240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act.
32.1     Certification of Active Chief Executive Officer pursuant to 18
         U.S.C.ss.1350, as adopted pursuant toss. 906 of the Sarbanes-Oxley Act.
32.2     Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350,
         as adopted pursuant toss.906 of the Sarbanes-Oxley Act.

*        Previously filed as an exhibit to the Company's Annual Report on Form
         20-F for the year ended December 31, 1987, file No. 1-4212, and
         incorporated by reference herein.

**       Previously filed as an exhibit to the Company's Annual Report on Form
         20-F for the year ended December 31, 2000, file No. 1-4212, filed with
         the SEC in June 2001 and incorporated by reference herein.

***      Incorporated by reference to the exhibit number 3.1 in the Company's
         form 20-F for the year ended

<PAGE>



                      AMERICAN ISRAELI PAPER MILLS LIMITED
                     2003 CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
                     2003 CONSOLIDATED FINANCIAL STATEMENTS

                                TABLE OF CONTENTS


                                                                      Page

REPORT OF INDEPENDENT AUDITORS                                         2
CONSOLIDATED FINANCIAL STATEMENTS -
    IN ADJUSTED NEW ISRAELI SHEKELS (NIS):

    Balance sheets                                                    3-4
    Statements of income                                               5
    Statements of changes in shareholders' equity                      6
    Statements of cash flows                                          7-8
    Notes to financial statements                                     9-39
SCHEDULE - DETAILS OF SUBSIDIARIES AND

    ASSOCIATED COMPANIES                                               40



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








<PAGE>

PricewaterhouseCoopers                       Kesselman & Kesselman
                                             Certified Public Accountants (Isr.)
                                             Trade Tower, 25 Hamered Street
                                             Tel Aviv 68125 Israel
                                             P.O Box 452 Tel Aviv 61003
                                             Telephone +972-3-7954555
                                             Facsimile +972-3-7954556


                         REPORT OF INDEPENDENT AUDITORS

To the shareholders of
AMERICAN ISRAELI PAPER MILLS LIMITED

We have audited the consolidated balance sheets of American Israeli Paper Mills
Limited (hereafter - the Company) and its subsidiaries as of December 31, 2003
and 2002 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's board of directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We did not audit the financial statements of certain associated companies, the
Company's interest in which as reflected in the balance sheets as of December
31, 2003 and 2002 is adjusted NIS 299.3 million and adjusted NIS 285.2 million,
respectively, and the Company's share in excess of profits over losses of which
is a net amount of adjusted NIS 28.2 million, adjusted NIS 10.2 million and
adjusted NIS 19.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The financial statements of those companies were audited by other
independent auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for those companies, is based solely
on the reports of the other independent auditors.

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

In our opinion, based on our audits and the reports of the other independent
auditors, the 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, 2003 and 2002 and the consolidated results of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted ("GAAP") in Israel. Furthermore, in our opinion,
the financial statements referred to above have been prepared in accordance with
the Israeli Securities (Preparation of Annual Financial Statements) Regulations,
1993.

As explained in note 1b, the financial statements referred to above are
presented in values adjusted based on the changes in the exchange rate of the
U.S. dollar, in accordance with the pronouncements of the Institute of Certified
Public Accountants in Israel.

Tel-Aviv, Israel
March 10, 2004

                                             /s/ Kesselman & Kesselman


                                       2
<PAGE>
<TABLE>

                                        AMERICAN ISRAELI PAPER MILLS LIMITED

                                             CONSOLIDATED BALANCE SHEETS
                                           IN ADJUSTED NEW ISRAELI SHEKELS

                                                                                                December 31
                                                                                         --------------------------
                                                                          Note           2003              2002
                                                                          ----           ----              ----
                                                                                               In thousands
                                                                                       ----------------------------
<S>                                                                       <C>            <C>               <C>
                                A s s e t s                                9
      CURRENT ASSETS:                                                      8
          Cash and cash equivalents                                        1o            158,706             5,460
          Short-term deposit                                              10a             20,000
          Accounts receivable:                                            10b
             Trade                                                                       140,996           131,736
             Other                                                                       128,246           131,890
          Inventories                                                     10c             90,654            90,495
                                                                                       ---------         ---------
                 T o t a l  current assets                                               538,602           359,581
                                                                                       ---------         ---------
      INVESTMENT AND LOAN TERM RECEIVALES:

          Investments in associated companies                             2;8            383,879           366,156
          Deferred income taxes                                            7g              3,885
                                                                                       ---------         ---------
                                                                                         387,764           366,156
                                                                                       ---------         ---------
      FIXED ASSETS:                                                        3
          Cost                                                                           953,656           930,563
          L e s s - accumulated depreciation                                             628,015           604,726
                                                                                       ---------         ---------
                                                                                         325,641           325,837
                                                                                       ---------         ---------
      DEFERRED CHARGES,

          net of accumulated amortization                                  1h              1,267               549
                                                                                       ---------         ---------
                 T o t a l  assets                                                     1,253,274         1,052,123
                                                                                       =========         =========
</TABLE>


                                            ) Chairman of the
------------------------------------------- ) Board of Directors
             Yaki Yerushalmi

                                            )
------------------------------------------- ) Director
               Zvika Livnat

                                            )
------------------------------------------- ) Controller
               Israel Eldar

Date of approval of the financial statements: March 10, 2004.


                                        3
<PAGE>

<TABLE>
<CAPTION>

                                                                                                    December 31
                                                                                               -------------------
                                                                              Note             2003           2002
                                                                              ----             -------------------
                                                                                                   In thousands
                                                                                               -------------------
<S>                                                                           <C>            <C>            <C>
                     Liabilities and shareholders' equity

      CURRENT LIABILITIES:                                                     8
          Credit from banks                                                   10d            144,989        104,711
          Current maturities of long-term notes                                4b              6,590          6,214
          Accounts payable and accruals:
             Trade                                                                            84,602         99,255
             Other                                                            10e             73,010         62,470
                                                                                           ---------      ---------
                 T o t a l  current liabilities                                              309,191        272,650
                                                                                           ---------      ---------
      LONG-TERM LIABILITIES:

          Deferred income taxes                                                7g             61,801         58,266
          Loans and other liabilities
             (net of current maturities):                                     4;8
             Loans from banks                                                                                   355
             Notes                                                                           233,039         37,366
             Other liabilities                                                                35,013         32,536
                                                                                           ---------      ---------
                 T o t a l  long-term liabilities                                            329,853        128,523
                                                                                           ---------      ---------
      COMMITMENTS                                                              9
                 T o t a l  liabilities                                                      639,044        401,173
                                                                                           ---------      ---------
      SHAREHOLDERS' EQUITY:                                                    6
          Share capital (ordinary shares of NIS 0.01 par value:                              125,257        125,256
             authorized - 20,000,000 shares; issued and paid:
             December 31, 2003 and 2002 - 3,968,295 and
             3,918,710 shares, respectively)
          Capital surplus                                                                     90,060         90,060
          Currency adjustments in respect of financial statements
             of associated companies                                                          (1,122)        (3,482)
          Retained earnings                                                                  400,035        439,116
                                                                                           ---------      ---------
                                                                                             614,230        650,950
                                                                                           ---------      ---------
                 T o t a l  liabilities and shareholders' equity                           1,253,274      1,052,123
                                                                                           =========      =========
</TABLE>



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


                                        4
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED

                        CONSOLIDATED STATEMENTS OF INCOME
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                           Note            2003           2002           2001
                                                                           ----            ----           ----           ----
                                                                                                     In thousands
                                                                                           ----------------------------------
<S>                                                                       <C>            <C>             <C>            <C>
SALES - net                                                               10f;14         465,092         455,775        469,709
COST OF SALES                                                               10g          362,185         363,771        383,824
                                                                                         -------         -------        -------
GROSS PROFIT                                                                             102,907          92,004         85,885
                                                                                         -------         -------        -------
SELLING, MARKETING, ADMINISTRATIVE

    AND GENERAL EXPENSES:                                                   10h
    Selling and marketing                                                                 31,324          29,167         31,918
    Administrative and general                                                            24,999          26,382         33,441
                                                                                         -------         -------        -------
                                                                                          56,323          55,549         65,359
                                                                                         -------         -------        -------
INCOME FROM ORDINARY OPERATIONS                                                           46,584          36,455         20,526
FINANCIAL INCOME (EXPENSES) - net                                           10j          (15,989)         (2,988)         5,102
OTHER  INCOME (EXPENSES)                                                    10i            1,609          (2,942)         1,095
                                                                                         -------         -------        -------
INCOME BEFORE TAXES ON INCOME                                                             32,204          30,525         26,723
TAXES ON INCOME                                                              7             7,706           9,792          7,287
                                                                                         -------         -------        -------
INCOME FROM OPERATIONS OF THE

    COMPANY AND ITS SUBSIDIARIES                                                          24,498          20,733         19,436
SHARE IN PROFITS OF ASSOCIATED

    COMPANIES - net                                                         2             35,549          16,727         15,011
                                                                                         -------         -------        -------
NET INCOME FOR THE YEAR                                                                   60,047          37,460         34,447
                                                                                         =======         =======        =======



                                                                                                      Adjusted NIS
                                                                                           ----------------------------------
NET INCOME PER NIS 1 OF PAR VALUE
    OF SHARES                                                               1p;11          1,494             947            873
                                                                                         =======         =======        =======
</TABLE>


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


                                        5
<PAGE>
<TABLE>

                                        AMERICAN ISRAELI PAPER MILLS LIMITED

                                    STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                           IN ADJUSTED NEW ISRAELI SHEKELS
<CAPTION>

                                                                                         Currency
                                                                                      adjustments in
                                                                                   respect of financial
                                                         Share      Capital           statements of           Retained
                                                        capital     surplus        associated companies       earnings      Total
                                                        -------     -------        --------------------       --------      -----
                                                                                        In thousands
                                                        -------------------------------------------------------------------------
<S>                                                     <C>          <C>                 <C>                   <C>         <C>
BALANCE AT JANUARY 1, 2001                              125,256      90,060                                    387,885     603,201
CHANGES IN 2001:

    Net income                                                                                                  34,447      34,447
    Exercise of employee options into shares                                                                         *           *
    Currency adjustments in respect of financial
       statements of associated companies                                                (3,175)                            (3,175)
                                                        -------      ------              ------                -------     -------
BALANCE AT DECEMBER 31, 2001                            125,256      90,060              (3,175)               422,332     634,473
CHANGES IN 2002:

    Net income                                                                                                  37,460      37,460
    Dividend paid                                                                                              (20,676)    (20,676)
    Currency adjustments in respect of financial
       statements of associated companies                                                  (307)                              (307)
                                                        -------      ------              ------                -------     -------
BALANCE AT DECEMBER 31, 2002                            125,256      90,060              (3,482)               439,116     650,950
CHANGES IN 2003:

    Net income                                                                                                  60,047      60,047
    Dividend paid                                                                                              (99,128)    (99,128)
    Exercise of employee options into shares                  1                                                                  1
    Currency adjustments in respect of financial
       statements of associated companies                                                 2,360                              2,360
                                                        -------      ------              ------                -------     -------
BALANCE AT DECEMBER 31, 2003                            125,257      90,060              (1,122)               400,035     614,230
                                                        =======      ======              ======                =======     =======
</TABLE>


              * Represents an amount less than adjusted NIS 1,000.

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


                                        6
<PAGE>

                                                                (Continued) - 1

                      AMERICAN ISRAELI PAPER MILLS LIMITED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                     2003          2002          2001
                                                                                     ----          ----          ----
                                                                                                In thousands
                                                                                     --------------------------------
<S>                                                                                <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income for the year                                                         60,047        37,460        34,447
    Adjustments to reconcile net income to
       net cash provided by operating activities (*)                                (7,396)       39,718       (15,133)
                                                                                   -------       -------        ------

    Net cash provided by operating activities                                       52,651        77,178        19,314
                                                                                   -------       -------        ------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of fixed assets                                                       (29,247)      (46,807)      (30,031)
    Short-term deposit                                                             (20,000)
    Associated companies:
       Granting of loans                                                            (8,241)       (3,302)       (4,067)
       Collection of loans                                                          21,895                       2,464
    Proceeds from sale of fixed assets                                               3,332         9,792         1,436
                                                                                   -------       -------        ------
    Net cash used in investing activities                                          (32,261)      (40,380)      (30,198)
                                                                                   -------       -------        ------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Notes issuance, net of issuance expenses of NIS 800,000                        198,909
    Consideration in respect of the exercise of options by employees                     1
    Repayment of long-term loans from banks and others                                (762)       (1,038)       (1,069)
    Redemption of notes                                                             (6,770)       (5,960)       (6,696)
    Dividend paid                                                                  (99,128)      (20,676)
    Short-term credit from banks - net                                              40,606        (7,219)       17,955
                                                                                   -------       -------        ------
    Net cash provided by (used in) financing activities                            132,856       (34,893)       10,190
                                                                                   -------       -------        ------

INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                               153,246         1,905          (694)
BALANCE OF CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                                                5,460         3,555         4,249
                                                                                   -------       -------        ------
BALANCE OF CASH AND CASH EQUIVALENTS AT
    END OF YEAR                                                                    158,706         5,460         3,555
                                                                                   =======       =======        ======
</TABLE>


                                        7
<PAGE>



                                                                 (Concluded) - 2

                      AMERICAN ISRAELI PAPER MILLS LIMITED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                        2003          2002          2001
                                                                                        ----          ----          ----
                                                                                                    In thousands
                                                                                        --------------------------------
<S>                                                                                     <C>           <C>           <C>
(*)     Adjustments to reconcile net income to net cash provided by operating
        activities:
        Income and expenses not involving cash flows:
          Share in profits of associated companies - net                                (35,549)      (16,727)      (15,011)
          Dividend received from associated company                                      16,391        21,852
          Depreciation and amortization                                                  28,247        26,809        29,363
          Deferred income taxes - net                                                     3,471         3,703         7,287
          Capital losses (gains) on:
             Sale of fixed assets                                                        (2,054)         (137)           22
             Termination of activities and disposal of assets - net                                     1,345
             Gain on issuance of shares in an associated company to a
                third party - net                                                                                    (1,095)
          Linkage and exchange differences on (erosion of) principal of
            long-term loans from banks - net                                                 79           (17)         (175)
          Linkage differences on (erosion of) principal of Notes                          3,110          (524)       (3,899)
          Erosion of (linkage differences on) principal of
             long-term loans to associated companies                                     (1,101)          153           755
          Appreciation (erosion) of a long-term capital note granted to
             an associated company                                                        2,477        (2,202)       (3,015)
                                                                                        -------       -------       -------
                                                                                         15,071        34,255        14,232
                                                                                        -------       -------       -------
        Changes in operating asset and liability items:

          Decrease (increase) in trade receivables                                       (9,260)      (15,064)       24,101
          Decrease (increase) in other receivables                                       (8,935)        3,394          (120)
          Decrease (increase) in inventories                                               (159)       22,060        (4,308)
          Increase (decrease) in trade payables                                         (14,653)       11,180       (31,637)
          Increase (decrease) in other payables and accruals                             10,540       (16,107)      (17,401)
                                                                                        -------       -------       -------
                                                                                        (22,467)        5,463       (29,365)
                                                                                        -------       -------       -------
                                                                                         (7,396)       39,718       (15,133)
                                                                                        =======       =======       =======
Supplementary cash flow information = cash paid during the year for:

    Taxes on income                                                                      11,553        26,711         8,801
                                                                                        =======       =======       =======
    Interest                                                                             11,335         9,839        10,519
                                                                                        =======       =======       =======
</TABLE>

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


                                        8
<PAGE>
                      AMERICAN ISRAELI PAPER MILLS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES

          The significant accounting policies, applied on a consistent basis,
          are as follows. As to the adoption for the first time in 2003 of the
          accounting for impairment of assets, see g. below:

          a.   General:

               1)   Activities of the Group

                    American Israeli Paper Mills Limited (hereafter - the
                    Company) and its subsidiaries and associated companies
                    (hereafter - the Group) are engaged in the production and
                    sale of paper and paper products, including paper recycling
                    activities and handling solid waste. Certain companies are
                    engaged in the marketing of office supplies and in the sale
                    of products produced by others (some of which are not paper
                    or paper products). Most of the Group's sales are made to
                    the local market (Israel). As to information by operating
                    segments, see note 14.

               2)   Use of estimates in the preparation of financial statements

                    The preparation of financial statements in conformity with
                    generally accepted accounting principles requires management
                    to make estimates and assumptions that affect the reported
                    amounts of assets and liabilities, the disclosure of
                    contingent assets and liabilities at the dates of the
                    financial statements and the reported amounts of revenues
                    and expenses during the reporting years. Actual results
                    could differ from those estimates.

               3)   Definitions:

                    Subsidiaries - companies over which the Company has control
                    and over 50% of the ownership, the financial statements of
                    which have been consolidated with the financial statements
                    of the Company.

                    Associated companies - investee companies, which are not
                    subsidiaries, over whose financial and operational policy
                    the Company exerts material influence, the investment in
                    which is presented by the equity method. Material influence
                    is deemed to exist when the percentage of holding in said
                    company is 20% or more, unless there are circumstances that
                    contradict this assumption.

                    Interested parties - as defined in the Israeli Securities
                    (Preparation of Annual Financial Statements) Regulations,
                    1993.

          b.   Adjusted financial statements:

               1)   The Company and its subsidiaries maintain their accounts in
                    nominal new Israeli shekels ("NIS") and in U.S. dollars
                    (hereafter - dollar). All the figures in the financial
                    statements are presented in values adjusted for the changes
                    in the exchange rate of the dollar (rather than the changes
                    in the Israeli consumer price index; hereafter - Israeli
                    CPI), as permitted by Opinion 36 of the Institute of
                    Certified Public Accountants in Israel (hereafter - the
                    Israeli Institute), for companies whose securities are
                    traded on a foreign stock exchange; the Company's shares are
                    traded on the American Stock Exchange ("AMEX"). As to the
                    discontinuance of adjusting financial statements for the
                    effects of inflation, with effect from January 1, 2004, see
                    q. below.

                                       9
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          The adjusted NIS data are the product of the data in dollar terms
          multiplied by the representative exchange rate of the dollar at
          December 31, 2003 - $1 = NIS 4.379 (see also note 8b).

               2)   Non-monetary balance sheet items (mainly fixed assets,
                    inventories and deferred charges, and shareholders' equity
                    items originating in cash flow from shareholders) have been
                    adjusted on the basis of the changes in the exchange rate of
                    the dollar since the related transactions were carried out.
                    The income statement components relating to these
                    non-monetary balance sheet items have been adjusted on the
                    same basis as the related balance sheet items.

                    Investments in some of the associated companies (the
                    activities of which are an integral part of the Company's
                    activities) and the Company's share in their operating
                    results have been determined based on their financial
                    statements, which are adjusted on the basis of changes in
                    the exchange rate of the dollar. As to associated companies
                    the financial statements of which are adjusted on the basis
                    of the changes in the Israeli CPI, see (4) below.

                    The components of the statements of income (except
                    financing) relating to transactions carried out in the
                    reported year - sales, purchases, labor costs, etc. - have
                    been adjusted on the basis of the exchange rates in effect
                    on transaction dates.

                    Financial income and expenses represent such income and
                    expenses in real terms and the erosion of balances of
                    monetary items during the year.

               3)   The amounts of non-monetary items do not necessarily
                    represent realizable value or any other economic value, but
                    only their original historical values adjusted on basis of
                    the changes in the exchange rate of the dollar. In these
                    financial statements, the term "cost" signifies cost in
                    adjusted NIS.

               4)   Associated companies whose financial statements are adjusted
                    on the basis of the changes in the Israeli CPI

                    For purposes of inclusion on the equity basis, the amounts
                    included in the financial statements of the above associated
                    companies operating independently were treated as follows:

                    Balance sheet items at the end of the year and the results
                    of operations for the year reflect the amounts presented in
                    the financial statements of such companies. Balance sheet
                    items at the beginning of the year and changes in
                    shareholders' equity items during the year were adjusted on
                    the basis of the changes in the exchange rate of the dollar
                    at the beginning of the year or at the date of each change,
                    respectively, through the end of the year. Any differences
                    resulting from the treatment described above were carried to
                    the adjusted shareholders' equity under a separate item
                    ("currency adjustments in respect of financial statements of
                    associated companies").

<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          c.   Principles of consolidation:

               1)   The consolidated financial statements include the accounts
                    of the Company and its subsidiaries. A list of the main
                    subsidiaries is presented in a schedule to the financial
                    statements.

               2)   Intercompany transactions and balances, as well as
                    intercompany profits on sales which have not yet been
                    realized outside the Group, have been eliminated.

          d.   Inventories

               Raw materials and supplies, finished goods, purchased products
               and maintenance and sundry stores are valued at the lower of cost
               or market (net of processing costs and after deduction of a
               provision for obsolescence, where appropriate); cost is
               determined on the moving average basis.

          e.   Investments in associated companies:

               1)   The investments in these companies are accounted for by the
                    equity method.

               2)   Profits on intercompany sales, not yet realized outside the
                    Group, have been eliminated according to the percentage of
                    the Company's holding in such companies.

               3)   With effect from the interim financial statements for the
                    3-month period ended March 31, 2003, the Company reviews
                    whether any events have occurred or changes in circumstances
                    have taken place, which might indicate that there has been
                    an impairment of its investments in associated companies -
                    see g. below.

               4)   The excess of cost of the investment in associated companies
                    over the equity in net assets at time of acquisition
                    ("excess of cost of investment") or the excess of equity in
                    net assets of associated companies at time of acquisition
                    over the cost of their acquisition ("negative excess of cost
                    of investment") represent the amounts attributed to specific
                    assets upon acquisition, at fair value. The excess of cost
                    of investment and the negative excess of cost of investment
                    are presented at their net amount and are amortized over the
                    remaining useful life of the assets. The average rate of
                    amortization is 10%.

          f.   Fixed assets:

               1)   Fixed assets are stated at cost, net of related investment
                    grants.

               2)   Fixed assets of own manufacture are stated at cost, based on
                    the direct costs with the addition of an appropriate portion
                    of related production costs.

               3)   Borrowing costs in respect of credit applied to finance the
                    construction of the fixed assets - during the period until
                    construction is completed - are charged to cost of such
                    assets.


                                       10
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

               4)   The assets are depreciated by the straight-line method on
                    basis of their estimated useful life, as follows:

                                                                   Years
                                                         -----------------------

                       Buildings                               10-50 (mainly 33)
                       Machinery and equipment           7-20 (mainly 10 and 20)
                       Vehicles                                5-7 (mainly 7)
                       Office furniture and equipment
                           (including computers)               3-17 (mainly 4)

          g.   Impairment in value of Long-Lived Assets

               In February 2003, Accounting Standard No. 15 of the Israeli
               Accounting Standard Board (hereafter - IASB) - "Impairment of
               Assets", became effective. This standard requires a periodic
               review to evaluate the need for a provision for the impairment of
               the company's non-monetary assets - mainly fixed assets as well
               as investments in associated companies.

               Accordingly, commencing with the interim financial statements for
               the 3-month period ended March 31, 2003, the Company assesses -
               at each balance sheet date - whether any events have occurred or
               changes in circumstances have taken place, which might indicate
               that there has been an impairment of one or more of the above
               assets. When such indicators of impairment are present, the
               Company evaluates whether the carrying value of the asset .

               The recoverable value of an asset is determined according to the
               higher of the net selling price of the asset or its value in use
               to the Company. The value in use is determined according to the
               present value of anticipated cash flows from the continued use of
               the asset, including those expected at the time of its future
               retirement and disposal. When it is not possible to assess
               whether an impairment provision is required for a particular
               asset on its own, the need for such a provision is assessed in
               relation to the recoverable value of the cash generating unit to
               which that asset belongs.

               Through December 31, 2002, the Company and its subsidiaries
               applied the provisions for assessing and recording impairment of
               assets, prescribed by the U.S. standard, FAS 121. The adoption of
               Standard 15 for the first time has not had any effect on the
               Company and its subsidiaries.

<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          h.   Deferred charges

               The item represents notes issuance costs, which are amortized
               over the period of the notes (see note 4b).

          i.   Deferred income taxes:

               1)   Deferred taxes are computed in respect of differences
                    between the amounts presented in these statements and those
                    taken into account for tax purposes. As to the main factors
                    in respect of which deferred taxes have been included - see
                    note 7g. Deferred tax balances are computed at the tax rate
                    expected to be in effect at time of release to income from
                    the deferred tax accounts. The amount of deferred taxes
                    presented in the income statements reflects changes in the
                    above balances during the reporting years.

               2)   Taxes which would apply in the event of disposal of
                    investments in subsidiaries and associated companies have
                    not been taken into account in computing the deferred taxes,
                    as the Company intends to hold these investments, not to
                    realize them.

               3)   The Group may incur an additional tax liability in the event
                    of intercompany dividend distribution derived from "approved
                    enterprises" profits - see note 7a. No account was taken of
                    this additional tax, since it is the Group's policy not to
                    cause distribution of dividend which would involve an
                    additional tax liability to the Group in the foreseeable
                    future.

          j.   Revenue recognition

               Revenue from sale of products to the local market, net of
               discounts granted, is recognized upon shipment to the customer
               (which represents the point at which the title transfers).
               Revenue from sale of products for export, net of discounts, is
               recognized as the products are delivered to the customer in the
               target country.

          k.   Shipping and handling fees costs

               Shipping and handling costs are classified as component of
               selling and marketing expenses.

          l.   Advertising expenses

               Advertising expenses are charged to income as incurred (as to the
               amount of the expenses, see note 10h).

          m.   Allowance for doubtful accounts

               The allowance is determined mainly in respect of specific debts
               doubtful of collection (see note 13b).


                                       11
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          n.   Derivative financial instruments

               Gains or losses on and cash flows from derivatives that are
               hedging existing assets or liabilities are recognized in income
               and cash flows statements and cash flows statements commensurate
               with the results from those assets or liabilities.

          o.   Cash equivalents

               The Group considers all highly liquid investments, which include
               short-term bank deposits that are not restricted as to withdrawal
               or use, the period to maturity of which did not exceed three
               months at time of deposit, to be cash equivalents.

          p.   Net income per NIS 1 of par value of shares

               Net income per NIS 1 of par value of shares is computed in
               accordance with Opinion 55 of the Israeli Institute; as to the
               data used in the per share computation - see note 11.

          q.   Recently issued pronouncement

               In October 2001, the IASB issued Israel Accounting Standard No.
               12 - "Discontinuance of Adjusting Financial Statements for
               Inflation", which provided for the discontinuance of adjusting
               financial statements for the effects of inflation, as of January
               1, 2003. In December 2002, Accounting Standard No. 17 was issued
               that postponed the date from which Accounting Standard No. 12 is
               to be applied until January 1, 2004.

               Since the Company's financial statements are drawn up in NIS
               adjusted for the changes in the dollar (as allowed by section
               29(b) of Opinion 36 of the Israeli Institute), and based on the
               provisions in paragraph 4 to Israeli Accounting Standard No. 13,
               with effect from January 1, 2004, the Company will no longer be
               able to measure its operations in dollars, and will have to
               resume measuring its operations in NIS. The inflation-adjusted
               NIS amounts as of December 31, 2003, as presented in these
               financial statements, will be the base for the nominal-historical
               financial reporting as of January 1, 2004.

               The implementation of Standard No. 12 will mainly affect the
               financial income and expenses items.

NOTE 2 -  INVESTMENTS IN ASSOCIATED COMPANIES:

          a.   The Company has a number of investments in associated companies,
               which are held either directly or through associated companies.
               The financial statements of significant associated companies
               (Neusiedler Hadera Paper Ltd. and Hogla-Kimberly Ltd.) are
               attached to these financial statements.


                                       12
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 2 -  INVESTMENTS IN ASSOCIATED COMPANIES (continued):

          b.   Composed as follows:
<TABLE>
<CAPTION>
                                                                                             December 31
                                                                                         ------------------
                                                                                         2003          2002
                                                                                         ----          ----
                                                                                            Adjusted NIS
                                                                                            in thousands
                                                                                         ------------------
<S>                                                                                     <C>          <C>
               Cost:
                   Shares                                                                54,241       54,241
                   Excess of cost of investment - net                                     2,086        2,086
                   L e s s - accumulated amortization                                    (3,068)      (3,375)
               Gain on issuance of shares of an associated
                   company to a third party                                              40,241       40,241
               Currency adjustments                                                      (1,122)      (3,482)
               Share in profits accumulated since acquisition - net                     246,864      228,013
                                                                                        -------      -------
                                                                                        339,242      317,724
               Long-term loans and capital notes
                   (December 31, 2002 - net of current maturities)*                      44,637       48,432
                                                                                        -------      -------
                                                                                        383,879      366,156
                                                                                        =======      =======

               *  Classified by linkage terms, the total amounts of the loans
                  and capital notes are as follows:

<CAPTION>

                                                                                              December 31
                                                                                         ---------------------
                                                                                         2003             2002
                                                                                         ----             ----
                                                                                             Adjusted NIS
                                                                                             in thousands
                                                                                         ---------------------
<S>                                                                                     <C>             <C>
               Linked to the dollar                                                     21,897          43,790
               Linked to the Israeli CPI                                                10,553           8,790
               Unlinked capital note                                                    12,187           4,610
                                                                                        ------          ------
                                                                                        44,637          57,190
               L e s s - current maturities                                                              8,758
                                                                                        ------          ------
                                                                                        44,637          48,432
                                                                                        ======          ======
</TABLE>


               These loans and capital notes do not bear interest.

               As of December 31, 2003,  the  repayment  dates of the balance of
               the loans and capital notes have not yet been determined.


                                       13
<PAGE>
                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 2 -  INVESTMENTS IN ASSOCIATED COMPANIES (continued):

          c.   The changes in the investments during 2003 are as follows:
<TABLE>
<CAPTION>
                                                                                       Adjusted NIS
                                                                                       in thousands
                                                                                       ------------
<S>                                                                                      <C>
               Balance at beginning of year                                              366,156

               Changes during the year:
                   Share in profits of associated companies - net                         35,549
                    Dividend received from an associated company                         (16,391)
                   Currency adjustments                                                    2,360
                   Decrease in balance of long-term loans and capital notes - net         (3,795)
                                                                                         -------
               Balance at end of year                                                    383,879
                                                                                         =======
</TABLE>
          d.   Neusiedler Hadera Paper Ltd. (hereafter - N.H.P.)

               N.H.P. is held to the extent of 49.9% by the Company and also by
               Neusiedler AG (hereafter - Neusiedler), under an agreement dated
               November 21, 1999. According to said agreement, N.H.P. purchased
               the Group's activities in the field of printing and writing
               paper, and issued to Neusiedler 50.1% of its shares. As part of
               the said agreement, Neusiedler was granted an option (commencing
               3 years from the signing of the agreement) to sell to the Company
               its holdings in N.H.P., at a price which is 20% lower than the
               value (as defined in the agreement). The understanding between
               the parties is that the option would only be exercised under
               continued extraordinary circumstances that preclude the operation
               of N.H.P. in Israel. The Company believes that the likelihood of
               such circumstances is very remote.

          e.   Investment in Carmel Container Systems Limited (hereafter -
               Carmel)

               The investment in shares includes, as of December 31, 2003 and
               2002, an investment of adjusted NIS 29,475,000 and adjusted NIS
               28,717,000, respectively, investment in Carmel, which is held to
               the extent of 26.25%. Carmel's shares are traded in the United
               States on the "AMEX" Stock Exchange. The market value of the
               Company's holding in these shares as of December 31, 2003 and
               2002 is adjusted NIS 9,656,000.

               The financial statements of Carmel are drawn up on the basis of
               historical cost, adjusted for the changes in the general
               purchasing power of Israeli currency measured on the basis of the
               Israeli CPI. For purposes of inclusion in these financial
               statements, Carmel's financial statements were adjusted on the
               basis of the changes in the exchange rate of the dollar.


                                       14
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 -  INVESTMENTS IN ASSOCIATED COMPANIES (continued):

          The Company's management believes that the low market value of these
          shares is not representative of the economic value, as the trade in
          Carmel's shares is very weak. At the beginning of 2003, the Company
          used the services of an outside appraiser in determining the value in
          use to the Company.

          The Company's management believes, based on the abovementioned and
          current developments in 2003, that the investment should not be
          written down.

          f.   Investment in T.M.M Integrated Recycling Industries Ltd.
               (hereafter - T.M.M.)

               In 2000, the Company and Compagnie Generale D'Entreprises
               Automobiles (hereafter - CGEA), an international French group in
               the field of environmental services - through a jointly held
               company (Barthelemi Holdings Ltd., in which the Company holds
               33.9% interest; hereafter - Barthelemi) - acquired shares of
               T.M.M. from its controlling shareholders.

               In addition, T.M.M was merged with Amnir Industries and
               Environmental Services Ltd. (in which the Company and CGEA held
               49% and 51%, respectively; hereafter - Amnir Environment) in such
               a manner that Amnir Environment became a wholly-owned subsidiary
               of T.M.M.

               In August 2003, Barthelemi acquired approximately 7% of the share
               capital of T.M.M off the stock exchange.

               As of December 31, 2003, the Company's share in T.M.M. (directly
               and through Barthelemi) aggregates 41.6%.

               The excess of equity in net assets of T.M.M. shares, over the
               cost of investment therein - adjusted NIS 1,581,000 is amortized
               over a period of ten years.

               The amount invested in shares includes adjusted NIS 15,759,000
               (December 31, 2002 - adjusted NIS 15,567,000), which was directly
               invested in T.M.M. (17.8%), the shares of which are traded on the
               Tel Aviv Stock Exchange; the market value of these shares
               aggregates adjusted NIS 13,713,000 as of December 31, 2003
               (December 31, 2002 - adjusted NIS 7,300,000).

               The Company's management examined the value of its investment in
               T.M.M. for impairment which is not temporary in nature. At the
               beginning of 2003, the Company used the services of an outside
               appraiser in determining the value in use to the Company.

               The Company's management believes, based on the abovementioned
               and current developments in 2003, that the investment should not
               be written down.


                                       15
<PAGE>



                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 -  FIXED ASSETS:

          a.   Composition of assets, grouped by major classifications, and
               changes therein during 2003, are as follows:

<TABLE>
<CAPTION>
                                                               Cost
                                     --------------------------------------------------------
                                     Balance at     Additions      Retirements     Balance at
                                     beginning         during         during         end of
                                      of year        the year        the year         year
                                     ----------     ---------      -----------     ----------
                                                     Adjusted NIS in thousands
                                     --------------------------------------------------------
<S>                                   <C>            <C>              <C>           <C>
Land and buildings on the land        182,205         3,534              64         185,675
Machinery and equipment               643,549        11,619           1,962         653,206
Vehicles                               33,102         2,886           4,128          31,860
Office furniture and equipment
   (including computers)               64,185         1,384                          65,569
Payments on account of
   machinery and equipment              7,522         9,824                          17,346
                                      -------        ------           -----         -------
                                      930,563        29,247           6,154         953,656
                                      =======        ======           =====         =======
</TABLE>

<TABLE>
<CAPTION>
                                                    Accumulated depreciation
                                    --------------------------------------------------------       Depreciated balance
                                    Balance at      Additions      Retirements    Balance at       -------------------
                                     beginning         during        during         end of             December 31
                                      of year        the year       the year         year           2003         2002
                                    ----------      ---------      -----------    ----------        ----         ----
                                                                                                      Adjusted NIS
                                                   Adjusted NIS in thousands                          in thousands
                                    --------------------------------------------------------       -------------------
<S>                                   <C>             <C>            <C>           <C>          <C>          <C>
Land and buildings on the land        100,760         3,477                        104,237        81,438       81,445
Machinery and equipment               432,181        18,873          1,528         449,526       203,680      211,368
Vehicles                               23,003         2,702          3,348          22,357         9,503       10,099
Office furniture and equipment
   (including computers)               48,782         3,113                         51,895        13,674       15,403
Payments on account of
   machinery and equipment                                                                        17,346        7,522
                                      -------        ------          -----         -------       -------      -------
                                      604,726        28,165          4,876         628,015       325,641      325,837
                                      =======        ======          =====         =======       =======      =======
</TABLE>

                                                                 16
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 3 -  FIXED ASSETS (continued):

          b.

<TABLE>
<CAPTION>

                                                                                  December 31
                                                                             ---------------------
                                                                             2003             2002
                                                                             ----             ----
                                                                                 Adjusted NIS
                                                                                 in thousands
                                                                             ---------------------
<S>                                                                           <C>               <C>
                  The item is net of investment grants in respect
                  of investments in "approved enterprises"
                  (see notes 7a and 9a):
                     Cost                                                     490               490
                     Accumulated depreciation                                 459               458
</TABLE>

          c.   The Group's real estate is partly owned and partly leased - to
               the extent of adjusted NIS 44.5 million, in respect of which
               lease fees of approximately adjusted NIS 25.8 million have been
               capitalized. The leasehold rights are for 49-year periods ending
               in the years 2008 to 2059, with options to extend for an
               additional 49 years.

          d.   As of December 31, 2003 and 2002, the cost of fixed assets
               includes borrowing costs of adjusted NIS 1,007,000 capitalized to
               the cost of machinery and equipment.

          e.   Depreciation expenses amounted to adjusted NIS 28,165,000,
               adjusted NIS 26,726,000 and adjusted NIS 29,278,000, for the
               years ended December 31, 2003, 2002 and 2001, respectively.

          f.   As to pledges on assets - see note 9a.

NOTE 4 -  LONG-TERM LOANS AND OTHER LONG-TERM LIABILITIES:

          a.   Loans from banks:

               Composed as follows:

                                                                December 31
                                                          ----------------------
                                                          2003              2002
                                                          ----              ----
                                                                 Adjusted NIS
                                                                 in thousands
                                                          ----------------------
                       Linked to the Israeli CPI*          372             1,056
                       L e s s - current maturities        372               701
                                                           ---             -----
                                                          -,-                355
                                                           ===             =====

                * The weighted average annual interest rate as of December 31,
                  2003 is 4.9%.

                                       17
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 -  LONG-TERM LOANS AND OTHER LONG-TERM LIABILITIES (continued):

          b.   Notes

               The item represents two series of notes issued to institutional
               investors as follows:

                                                           December 31
                                                  ----------------------------
                                                         2003            2002
                                                  ------------------    ------
                                                    Adjusted NIS in thousands
                                                  ----------------------------
                                                   Series II        Series I
                                                  ----------- ----------------
               Balance                            200,000     39,629    43,580
               L e s s - current maturities                    6,590     6,214
                                                  -------     ------    ------
                                                  200,000     33,039    37,366
                                                  =======     ======    ======

               (1)  Series I - May 1992

                    The balance of the notes as of December 31, 2003 is
                    redeemable in six installments, due in June of each of the
                    years 2004-2009, each installment amounting to 6.66% of the
                    original par value of the notes, which is adjusted NIS
                    98,925,000; the unpaid balance of the notes bears annual
                    interest of 3.8%, payable each June. The notes - principal
                    and interest - are linked to the Israeli CPI of February
                    1992.

               (2)  Series II - December 2003

                    In December 2003, the Company made a private issuance to
                    institutional investors of notes with a par value of NIS 200
                    million. The notes are redeemable in seven equal annual
                    installments, due in December of each of the years
                    2007-2013. The unpaid balance of the notes bears annual
                    interest of 5.65%, payable in annual installments at
                    December of each year. The notes - principal and interest -
                    are linked to the Israeli CPI of November 2003.

          c.   Other liabilities:
<TABLE>
<CAPTION>
                                                                       December 31
                                                                 -------------------------
                                                                 2003              2002
                                                                 ----              ----
                                                                 Adjusted NIS in thousands
                                                                 -------------------------
<S>                                                             <C>                <C>
                Capital note to an associated company (1)       32,770             30,293
                Other liability (2)                              2,243              2,243
                                                                ------             ------
                                                                35,013             32,536
                                                                ======             ======
</TABLE>


               (1)  The capital note is unlinked and interest free. No repayment
                    date has been fixed, but the associated company does not
                    intend to demand the repayment of the capital note before
                    January 1, 2005.

               (2)  The loan was received from a supplier in 2000, to finance
                    acquisition of machinery and equipment in the amount of
                    adjusted NIS 2,409,000. The loan is linked to the dollar. No
                    repayment date has yet been fixed. The Company believes that
                    the repayment is not probable before January 1, 2005.

                                       18
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 -  EMPLOYEE RIGHTS UPON RETIREMENT:

          a.   Israeli labor laws and agreements require the company and its
               subsidiaries to pay severance pay to employees dismissed or
               leaving their employ under certain circumstances, computed on the
               basis of the number of years of service and, generally, the
               latest pay rate (one month's pay for each year of service) or a
               pension upon retirement.

               To cover the liability for employee rights upon retirement,
               pursuant to labor agreements in force and based on salary
               components which, in management's opinion, create entitlement to
               severance pay, deposits are made by the Company and its
               subsidiaries with various provident funds (including pension
               funds) or insurance policies for the benefit of employees.

               The severance pay and pension liability and the amounts funded as
               above are not reflected in the financial statements, as the
               pension and severance pay risks have been irrevocably transferred
               to the pension funds and the insurance companies, as allowed by
               the Severance Pay Law.

          b.   The expenses relating to employee rights upon retirement, which
               reflect the amounts that were deposited during the reported years
               with provident funds, pension funds and various insurance
               policies, are adjusted NIS 8,515,000, adjusted NIS 5,786,000 and
               adjusted NIS 6,315,000 in 2003, 2002, and 2001, respectively.

NOTE 6 -  SHAREHOLDERS' EQUITY:

          a.   Share capital

               Composed of ordinary registered shares of NIS 0.01 par value, as
               follows:
<TABLE>
<CAPTION>

                                                                   December 31
                                                             ------------------------
                                                             2003                2002
                                                             ----                ----
                                          Authorized             Issued and paid
                                          ----------             ---------------

<S>                                       <C>             <C>                 <C>
               Number of shares           20,000,000      3,968,295           3,918,710
                                          ==========      =========           =========
               Amount in NIS                 200,000         39,683              39,187
                                          ==========      =========           =========
</TABLE>

               The shares are traded on stock exchanges in Tel-Aviv and in the
               U.S. The quoted prices per share, as of December 31, 2003 are NIS
               239 and $ 53.5 (NIS 234.3), respectively.

          b.   Employee stock option plans:

               1)   The 1998 plan for senior officers in the Group

                    On January 11, 1998, the board of directors approved a stock
                    option plan for senior officers in the Group ("the 1998 plan
                    for senior officers").


                                       19
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 -  SHAREHOLDERS' EQUITY (continued):

                    In 2000, 1999 and 1998, 51,330, 51,335 and 52,833 options,
                    respectively, were granted under the 1998 plan for senior
                    officers (including 10,667 options in 2000 and 1999 and
                    10,666 options in 1998, to an employee who is an interested
                    party). All together, 155,498 options were granted.

                    The exercise price of the options granted as above, was
                    fixed at NIS 134.38. The exercise price is linked to the
                    dollar and is subject to adjustments in respect of the
                    distribution of dividends by the Company.

                    Each batch can be exercised within three years after two
                    years from the date of grant.

                    Notwithstanding the above, the number of shares resulted
                    from exercise of the options and the actual exercise price
                    were fixed as follows: Upon the receipt of an exercise
                    request from an option holder, a computation was made of the
                    difference between the quoted price of the Company's shares
                    at the beginning of that trading day and the exercise price;
                    that difference was then multiplied by the number of
                    exercisable options (hereafter - the benefit). The number of
                    shares that the Company actually issued to the option holder
                    was the number of shares the market value of which was equal
                    to the amount of the benefit computed as above. In
                    consideration for the shares, the option holder paid their
                    par value only.

                    The ordinary shares issued upon exercise of the options
                    conferred upon their holders the same rights as all other
                    ordinary shares, upon issuance.

                    In 2003, 2001 and 2000, 56,663, 46,002 and 51,335 options,
                    respectively, were exercised under the 1998 plan for senior
                    officers. 28,693, 28,149 and 35,990 shares of NIS 0.01 were
                    issued following the exercise, respectively. The unexercised
                    balance of 1,498 options granted expired in 2003.

                    The above plan was carried out according to the principles
                    set out in Section 102 of the Income Tax Ordinance, which
                    stipulates, inter-alia, the terms for recognition of the
                    expense to the Company and for determining the employees'
                    tax liability in respect of the profits attributed thereto
                    as benefits arising from the above plan.

                    The aforementioned expense is recognized in the tax year
                    that the benefit is credited to the employee.


                                       20
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 -  SHAREHOLDERS' EQUITY (continued):

          b.   Employee stock option plans (continued):

               2)   The 2001 plan for senior officers in the Group

                    On April 2, 2001, the Company's board of directors approved
                    a stock option plan for senior officers in the Group
                    (hereafter - the 2001 plan for senior officers). Under this
                    plan, 194,300 options were allotted on July 5, 2001 without
                    consideration. Each option is exercisable in purchase of one
                    ordinary share of NIS 0.01 par value of the Company. The
                    options will be exercisable in four equal annual batches.
                    The blocking period of the first batch is two years,
                    commencing on the date of grant; the blocking period of the
                    second batch is three years from the date of grant, and so
                    forth. Each batch is exercisable within two years from the
                    end of the blocking period.

                    The exercise price of the options granted as above was set
                    at NIS 217.00, linked to the CPI, on the basis of the CPI as
                    of April 2, 2001. The exercise price for each batch is
                    determined as the lesser of the aforementioned exercise
                    price or the average price of the Company's shares as quoted
                    on the Tel-Aviv Stock Exchange (hereafter - the Stock
                    Exchange) during thirty trading days preceding to the
                    effective date of each batch, less 10%. As stipulated by the
                    2001 plan for senior officers, the exercise price is to be
                    adjusted, following dividend distributions. Accordingly, the
                    exercise price as of December 31, 2003 is adjusted NIS
                    200.73 for the first batch, adjusted NIS 93.07 for the
                    second batch and adjusted NIS 148.97 for the third batch and
                    adjusted NIS 200.73 for the fourth batch.

                    The quoted price of the Company's shares on the Tel Aviv
                    Stock Exchange close to the time of the board of directors'
                    resolution to grant the options, was NIS 204.00. Prior to
                    the granting of the options, the price was NIS 185.8.

                    The fair value of each option - computed on the basis of the
                    Black-Scholes option-pricing model - as prescribed by the
                    regulations of the Tel-Aviv Stock Exchange - was
                    approximately adjusted NIS 56.69 on the date of grant.

                    Notwithstanding the above, the number of shares resulting
                    from exercise of the options and the actual exercise price
                    will be determined as follows: when an exercise request is
                    received from an option holder, a computation will be made
                    of the difference between the quoted price of the Company's
                    shares at the beginning of that trading day and the exercise
                    price; that difference is to be multiplied by the number of
                    exercisable options, as of the date of the exercise
                    (hereafter - the benefit). The number of shares that the
                    Company will actually issue to the option holder will be the
                    number of shares the market value of which is equal to the
                    amount of the benefit computed as above. In consideration
                    for the shares, the option holder will pay their par value
                    only.

                    The ordinary shares issued upon exercise of the options will
                    confer upon their holders the same rights as all other
                    ordinary shares, upon issuance.

                    In 2003, 1,550 options were exercised under the 2001 plan
                    for senior officers. 227 shares of NIS 0.01 were issued
                    following the exercise. The unexercised balance of the
                    options granted is 192,750.

                                       21
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 -  SHAREHOLDERS' EQUITY (continued):

                    The above plan is carried out according to the principles
                    set out in Section 102 of the Income Tax Ordinance, which
                    stipulates, inter-alia, the terms for recognition of the
                    expense to the Company and for determining the employees'
                    tax liability in respect of the profits attributed thereto
                    as benefits arising from the above plan.

                    The aforementioned expense will be recognized in the tax
                    year that the benefit is credited to the employee.

               3)   The 2001 employee plan

                    On August 29, 2001, the Company's board of directors
                    approved a stock option plan for employees in the Group,
                    according to a specification (hereafter - the 2001 employee
                    plan). Under this plan, up to 125,000 options will be
                    allotted without consideration. Each option is exercisable
                    in purchase of one ordinary share of NIS 0.01 par value of
                    the Company. The blocking period of the options is two years
                    from the date of grant. Each option is exercisable within
                    three years from the end of the blocking period.

                    On November 4, 2001, 81,455 options were granted under the
                    2001 employee plan.

                    The exercise price of all the options granted as above was
                    set at NIS 160.99, linked to the CPI, on the basis of the
                    CPI as of August 29, 2001. This price represents the average
                    price of the Company's shares as quoted on the Tel-Aviv
                    Stock Exchange during thirty trading days prior to the date
                    of the board of directors' approval, less 10%. As stipulated
                    by the 2001 employee plan, the exercise price has been
                    adjusted, following a dividend distribution and is adjusted
                    NIS 137.09 as of December 31, 2003.

                    The quoted price of the Company's shares on the Tel Aviv
                    Stock Exchange close to the time of the board of directors'
                    resolution to grant the options, was NIS 171.20. Prior to
                    the granting of the options, the price was NIS 138.80.

                    The fair value of each option - computed on the basis of the
                    Black-Scholes option-pricing model - as prescribed by the
                    regulations of the Tel-Aviv Stock Exchange - was
                    approximately adjusted NIS 64.11 on the date of grant.

                    Notwithstanding the above, the number of shares resulting
                    from exercise of the options and the actual exercise price
                    will be fixed as follows: when an exercise request is
                    received from an option holder, a computation will be made
                    of the difference between the quoted price of the Company's
                    shares at the beginning of that trading day and the exercise
                    price; that difference is to be multiplied by the number of
                    exercisable options, as of the date of the exercise
                    (hereafter - the benefit). The number of shares the that
                    Company will actually issue to the option holder will be the
                    number of shares the market value of which is equal to the
                    amount of the benefit computed as above. In consideration
                    for the shares, the option holder will pay their par value
                    only.

                    The ordinary shares issued upon exercise of the options will
                    confer upon their holders the same rights as all other
                    ordinary shares, upon issuance.

                                       22
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 -  SHAREHOLDERS' EQUITY (continued):

                    In 2003, 57,962 options were exercised under the 2001
                    employee plan. 20,665 shares of NIS 0.01 were issued
                    following the exercise. The unexercised balance of the
                    options granted is 23,493.

                    The above plan is carried out according to the principles
                    set out in Section 102 of the Income Tax Ordinance, which
                    stipulates, inter-alia, the terms for recognition of the
                    expense to the Company and for determining the employees'
                    tax liability in respect of the profits attributed thereto
                    as benefits arising from the above plan.

                    The aforementioned expense will be recognized in the tax
                    year that the benefit is credited to the employee.

NOTE 7 -  TAXES ON INCOME:

          a.   Tax benefits under the Law for the Encouragement of Capital
               Investments, 1959 (hereafter - the law)

               Under the law, by virtue of the "approved enterprise" status
               granted to certain of their production facilities, certain
               subsidiaries are entitled to various tax benefits (mainly reduced
               tax rates).

               During the period of benefits - mainly 7 years commencing in the
               first year in which the companies earn taxable income from the
               approved enterprises, provided the maximum period to which it is
               restricted by law has not elapsed - reduced tax rates or
               exemption from tax apply, as follows:

               1)   Corporate tax rate of 25%, instead of the regular tax rate
                    (see d. below).

               2)   Tax exemption on income from certain approved enterprises in
                    respect of which the companies have elected the "alternative
                    benefits" (involving waiver of government guaranteed loans);
                    the length of the exemption period is 4 years, after which
                    the income from these enterprises is taxable at the rate of
                    25% for 3 years.

               The part of the taxable income which is entitled to the tax
               benefits is determined on the basis of the ratio of the turnover
               attributed to the "approved enterprise" to the total turnover of
               these companies, taking into account the ratio of the "approved
               enterprise" assets to total assets of these companies. The
               turnover that is attributed to the "approved enterprise" is
               generally computed on the basis of the ratio of the increase in
               turnover to the "basic" turnover stipulated in the instrument of
               approval.

               The period of benefits in respect of the "approved enterprises"
               of these companies expired at the end of 2003.

               The entitlement to the above benefits is conditional upon the
               companies' fulfilling the conditions stipulated by the law,
               regulations published thereunder and the instruments of approval
               for the specific investments in "approved enterprises". In the
               event of failure to comply with these conditions, the benefits
               may be cancelled and the companies may be required to refund the
               amount of the benefits, in whole or in part, with the addition of
               linkage differences to the CPI and interest.

                                       23
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 7 -  TAXES ON INCOME (continued):

          b.   Measurement of results for tax purposes under the Income Tax
               (Inflationary Adjustments) Law, 1985 (hereafter - the
               inflationary adjustments law)

               Under the inflationary adjustments law, results for tax purposes
               are measured in real terms, having regard to the changes in the
               Israeli CPI. The Israeli companies in the Group are taxed under
               this law.

               As stated in note 1b, the financial statements are drawn up in
               NIS adjusted on the basis of the changes in the exchange rate of
               the dollar. The difference between the change in the Israeli CPI
               and the change in the exchange rate of the dollar - on an annual
               and cumulative basis - creates differences between the taxable
               income and the income reflected in the financial statements.

          c.   The Law for the Encouragement of Industry (Taxation), 1969

               The Company and certain subsidiaries are "industrial companies"
               as defined by this law. These companies claimed, depreciation at
               accelerated rates on equipment used in industrial activity as
               stipulated by regulations published under the inflationary
               adjustments law.

               The Company files consolidated tax returns with certain
               subsidiaries.

          d.   Tax rates applicable to income not derived from "approved
               enterprises"

               Income not eligible for the approved enterprise benefits
               mentioned in a. above is taxed at the regular rate - 36%.

          e.   Reform of the Israeli tax system

               In 2003, the provisions of the Amendment to the Income Tax
               Ordinance (No. 132), 2002 (hereafter - the tax reform law) came
               into effect. The tax reform law comprehensively reforms certain
               parts of the Israeli tax system. Certain provisions of the tax
               reform law and anticipated supplementary provisions will only be
               applied from later dates.

               In accordance with the provisions of the tax reform law, as from
               January 1, 2003, capital gains will be taxed at a reduced rate of
               25%, instead of the regular rate of 36% at which they were taxed
               until the aforementioned date; with regard to the sale of assets
               acquired prior to January 1, 2003, the reduced tax rate will be
               applicable only for the gain allocated to capital gains earned
               after the implementation of that law, which will be calculated as
               prescribed by the tax reform law. Furthermore, the tax reform law
               stipulates that carryforward capital losses may be utilized
               against capital gains without any time restriction (the time
               limitation for the utilization has been removed in respect of
               capital losses which arose in the tax year 1996 and thereafter).

          f.   Carryforward tax losses

               Carryforward tax losses of certain subsidiaries are adjusted NIS
               14,002,000 and adjusted NIS 12,198,000 as of December 31, 2003
               and 2002, respectively. Under the inflationary adjustments law,
               carryforward losses are linked to the Israeli CPI, and may be
               utilized indefinitely.

                                       24
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 -  TAXES ON INCOME (continued):

          g.   Deferred income taxes

               The composition of the deferred taxes, and the changes therein
               during 2003 and 2002, are as follows:
<TABLE>
<CAPTION>

                                                                   Among             Among              As a
                                                                  current         non-current       non-current
                                                                 assets (1)       assets (2)       liability (3)    Total
                                                                 ----------       ----------       -------------    -----
                                                                                   Adjusted NIS in thousands
                                                                 --------------------------------------------------------
<S>                                                                <C>             <C>               <C>           <C>
                  Balance at January 1, 2002                       (9,261)                           52,876        43,615
                  Changes in 2002 -
                      amounts carried to income                    (1,687)                            5,390         3,703
                                                                   ------          ------            ------        ------
                  Balance at December 31, 2002                    (10,948)                           58,266        47,318
                  Changes in 2003:
                      Reclassification                              3,885          (3,885)
                      Amounts carried to income                       (64)                            3,535         3,471
                                                                   ------          ------            ------        ------
                  Balance at December 31, 2003                     (7,127)         (3,885)           61,801        50,789
                                                                   ======          ======            ======        ======
</TABLE>


               (1)  In respect of inventories and provisions for doubtful
                    accounts, vacation and recreation pay and carryforward tax
                    losses.

               (2)  In respect of carryforward tax losses.

               (3)  Mainly in respect of depreciable fixed assets.

                    The deferred taxes are computed at the rate of 36%.

          h.   Taxes on income included in the income statements:

               1)   As follows*:

<TABLE>
<CAPTION>
                                                                                      2003          2002          2001
                                                                                      ----          ----          ----
                                                                                        Adjusted NIS in thousands
                          <S>                                                        <C>            <C>          <C>
                          For the reported year:
                              Current                                                 4,235         4,702
                              Deferred, see g. above                                  3,471         3,703         7,287
                                                                                      -----         -----         -----
                                                                                      7,706         8,405         7,287
                          For prior years - current                                                 1,387
                                                                                      -----         -----         -----
                                                                                      7,706         9,792         7,287
</TABLE>

                  *    The tax expenses, for all reported years, originate in
                       Israel.

                                       25
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 -  TAXES ON INCOME (continued):

               2)   Following is a reconciliation of the "theoretical" tax
                    expense, assuming all income is taxed at the regular rate,
                    as stated in d. above, and the actual tax expense:
<TABLE>
<CAPTION>

                                                           2003                       2002                       2001
                                                    -------------------       --------------------        -------------------
                                                              Adjusted                    Adjusted                   Adjusted
                                                               NIS in                      NIS in                     NIS in
                                                     %        thousands        %         thousands         %        thousands
                                                    ---       ---------       ---        ---------        ---       ---------
<S>                                                 <C>        <C>           <C>          <C>           <C>           <C>
Income before taxes on income, as reported
   in the statements of income                      100.0      32,204        100.0        30,525        100.0         26,723
                                                    =====      ======        =====        ======        =====         ======
Theoretical tax on the above amount                  36.0      11,593         36.0        10,989         36.0          9,620
Tax benefits arising from reduced tax rate
   for approved enterprises                          (1.5)       (487)        (1.0)         (305)        (1.2)          (327)
                                                    -----      ------        -----        ------        -----         ------
                                                     34.5      11,106         35.0        10,684         34.8          9,293
Increase in taxes resulting from computation
   of deferred taxes at a rate which is
   different from the theoretical rate                                                                    0.9            230
Tax deduction in respect of options
   exercised by employees according to
   section 102 of the Israeli
   Income Tax Ordinance                              (5.0)     (1,607)        (6.2)       (1,883)       (14.5)        (3,884)
Other - net                                          (5.6)     (1,793)        (1.3)         (396)         6.1          1,648
                                                    -----      ------        -----        ------        -----         ------
Taxes on income for the reported year                23.9       7,706         27.5         8,405         27.3          7,287
                                                    -----      ------        -----        ------        -----         ------
</TABLE>

          i.   Tax assessments

               The Company and most of its subsidiaries have received final tax
               assessments through the year ended December 31, 2000.


                                       26
<PAGE>


                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 -  LINKAGE TERMS OF MONETARY BALANCES:

          a.   As follows:

<TABLE>
<CAPTION>
                                                                   December 31, 2003                    December 31, 2002
                                                              ----------------------------          ----------------------------
                                                          In, or linked  Linked                 In, or linked  Linked
                                                           to, foreign   to the                  to, foreign   to the
                                                            currency    Israeli                   currency    Israeli
                                                         (mainly dollar)  CPI     Unlinked     (mainly dollar)  CPI     Unlinked
                                                              ------    -------    -------          ------     ------    -------
                                                               Adjusted NIS in thousands             Adjusted NIS in thousands
                                                              ----------------------------          ----------------------------
<S>                                                           <C>      <C>       <C>               <C>        <C>       <C>
Assets:
    Current assets:
       Cash and cash equivalents                               8,561               150,145           2,833                 2,627
       Short-term deposit                                                           20,000
       Receivables                                            48,457        215    210,560          48,865               191,629
    Investments in associated companies - long-term
       loans (2002 - including current maturities)            21,897     10,553     12,187          43,790      8,790      4,610
                                                              ------    -------    -------          ------     ------    -------
                                                              78,915     10,768    392,892          95,488      8,790    198,866
                                                              ======    =======    =======          ======     ======    =======

Liabilities:
    Current liabilities:
       Short-term credit from banks                                                144,617          24,872                79,138
       Accounts payables and accruals                         11,579               146,033           3,184               158,541
    Long-term liabilities (including current maturities):
       Loans from banks                                                     372                                 1,056
       Notes                                                            239,629                                43,580
       Other liabilities                                       2,243                32,770           2,243                30,293
                                                              ------    -------    -------          ------     ------    -------
                                                              13,822    240,001    323,420          30,299     44,636    267,972
                                                              ======    =======    =======          ======     ======    =======
</TABLE>


As to exposures relating to fluctuations in foreign currency exchange rates and
the use of derivatives for hedging purposes - see note 13a.


                                       27
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 -  LINKAGE TERMS OF MONETARY BALANCES (continued):

          b.   Data regarding the exchange rate and the Israeli CPI:

                                Exchange rate of
                                   one dollar        CPI*
                                   ----------        ----
                                       NIS          Points

               At end of year:
                    2003              4.379          178.6
                    2002              4.737          182.0
                    2001              4.416          170.9
                    2000              4.041          168.5

               Change in the year:
                    2003             (7.6%)           (1.9%)
                    2002              7.3%             6.5%
                    2001              9.3%             1.4%

          *   Based on the index for the month ending on each balance sheet
              date, on the basis of 1993 average = 100.

NOTE 9 -  COMMITMENTS AND LIABILITIES SECURED BY PLEDGES:

          a.   In respect of investment grants

               Under the Law for the Encouragement of Capital Investments, 1959,
               certain subsidiaries and an associated company have received
               investment grants from the State of Israel. In the event of
               failure to comply with the terms attached to the receipt of the
               grants, the companies may be required to refund the amount of the
               grants, in whole or in part, with linkage differences and
               interest from the date of receipt.

               The abovementioned subsidiaries have registered floating charges
               on all their assets in favor of the State of Israel as security
               for compliance with the terms of the investment grants received.
               In respect of the grant received by the associated company, the
               Company has provided a guarantee, with another associated
               company, for the repayment of the grant. As of December 31, 2003,
               the guarantee amounts to adjusted NIS 491,000.

          b.   In 1996, an associated company received a grant amounting to
               adjusted NIS 2,067,000 from the Fund for Preparation for Exposure
               of the Ministry of Industry and Trade. With respect to this
               grant, the Company has provided a bank guarantee of adjusted NIS
               2,018,000 in favor of the State of Israel.

          c.   The Company has provided guarantees of adjusted NIS 2,189,000 in
               favor of an associated company, in connection with the latter's
               participation in a tender. If the associated company does not win
               the tender, the guarantee will become null and void.

          d.   A subsidiary has provided a guarantee of adjusted NIS 1,291,000
               to a bank in respect of a loan extended to an associated company.


                                       28
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 9 -  COMMITMENTS AND LIABILITIES SECURED BY PLEDGES (continued):

          e.   On May 7, 2001, the Company's board of directors resolved to
               carry out a plan, which was approved by the shareholders'
               meeting, to remunerate the Company's chairman of the board of
               directors. According to the plan, a remuneration will be granted,
               equal to the increase in the value of 50,000 shares of the
               Company in the period from May 7, 2001 (share price - NIS 194.37,
               linked to the terms of the plan) to May 7, 2008. The remuneration
               will be spread over the period commencing two years from the
               resolution of the board of directors, until the end of seven
               years from said resolution. As of December 31, 2003 one quarter
               of the remuneration is exercisable. A liability was included in
               the financial statements in respect of the above plan, under
               current liabilities.

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

          Balance sheets:

          a.   Short-term deposit

               The deposit is for a period of one year, unlinked, and bears
               annual interest (payable monthly) at the rate of 5.5%.

<TABLE>
<CAPTION>
                                                                             December 31
                                                                         ------------------
                                                                          2003       2002
                                                                         -------    -------
                                                                            Adjusted NIS
                                                                            in thousands
                                                                         ------------------
<S>                                                                      <C>       <C>
          b.   Receivables:
               1)   Trade:
                      Open accounts                                      128,021    119,927
                      Checks collectible                                  12,975     11,809
                                                                         -------    -------
                                                                         140,996    131,736
                      The item is:
                          Net of allowance for doubtful accounts          13,696     12,752
                          Includes associated companies                   26,594     19,863

               2)   Other:
                      Employees and employee institutions                  3,060      2,336
                      Associated companies ( 2002 - including current
                          maturities)                                     89,691     96,047
                      Prepaid expenses                                     2,883      3,427
                      Advances to suppliers                                9,365      7,214
                      Deferred income taxes, see note 7g                   7,127     10,948
                      Income tax authority                                12,005      6,235
                      Interest receivable                                    257         19
                      Sundry                                               3,858      5,664
                                                                         -------    -------
                                                                         128,246    131,890
                                                                         =======    =======
          c.   Inventories:
               For industrial activities:
                   Finished goods                                         14,819     13,168
                   Raw materials and supplies                             10,426     10,387
                                                                         -------    -------
                                                                          25,245     23,555
                For commercial activities - purchased products            18,817     20,810
                                                                         -------    -------
                                                                          44,062     44,365
                Maintenance and sundry stores                             46,592     46,130
                                                                         -------    -------
                                                                          90,654     90,495
                                                                         =======    =======
</TABLE>


                                       29
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          d.   Credit from banks:

               1)   As follows:

<TABLE>
<CAPTION>
                                                                   December 31
                                                                ------------------
                                                                 2003        2002
                                                                -------    -------
                                                                    Adjusted NIS
                                                                    in thousands
                                                                ------------------
<S>                                                             <C>        <C>
          Short-term credit                                     144,617    104,010
          Current maturities of long-term loans, see note 4a        372        701
                                                                -------    -------
                                                                144,989    104,711
                                                                =======    =======
</TABLE>


               2)   Classified by currency of repayment, linkage terms and
                    interest rates, the amounts of short-term credit from banks
                    are as follows:

                             Weighted average
                              interest rate
                                    at           December 31
                                December 31, ------------------
                                   2003       2003        2002
                                  -------    -------    -------
                                       %         Adjusted NIS
                                       -         in thousands
                                             -------    -------
                    Unlinked          6.0    144,617     79,138
                    In dollars                           24,872
                                             -------    -------
                                             144,617    104,010
                                             =======    =======


          e.   Accounts payable and accruals - other:

                                                            December 31
                                                          ----------------
                                                           2003      2002
                                                          ------    ------
                                                            Adjusted NIS
                                                            in thousands
                                                          ----------------
               Payroll and related expenses               37,324    30,628
               Institutions in respect of employees       12,944    11,320
               Customs and value added tax authorities       728     1,262
               Associated company                            521       469
               Accrued interest                            2,127       953
               Accrued expenses                            7,825     5,728
               Sundry                                     11,541    12,110
                                                          ------    ------
                                                          73,010    62,470
                                                          ======    ======


                                       30
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
          Statements of income:

                                                                   2003        2002        2001
                                                                 -------      -------     -------
                                                                    Adjusted NIS in thousands
                                                                 --------------------------------
<S>                                                              <C>          <C>         <C>
          f.   Sales - net (1):

               Industrial activities (2)                         326,825      310,628     312,751
               Commercial activities                             138,267      145,147     156,958
                                                                 -------      -------     -------
                                                                 465,092      455,775     469,709
                                                                 =======      =======     =======
               (1) Including sales to associated companies       115,505      104,864     114,345
                                                                 =======      =======     =======
               (2) Including sales to export                      44,175       40,645      26,044
                                                                 =======      =======     =======

          g.   Cost of sales:
               Industrial activities:
                   Materials consumed                             72,292       61,649      69,267
                   Payroll and related expenses                   85,419       78,903      93,195
                   Depreciation                                   22,739       21,182      22,807
                   Other manufacturing costs                      80,709       77,765      89,330
                   Decrease (increase) in inventory of
                      finished goods                              (1,651)      12,585      (7,019)
                                                                 -------      -------     -------
                                                                 259,508      252,084     267,580
               Commercial activities - cost of products sold     102,677      111,687     116,244
                                                                 -------      -------     -------
                                                                 362,185      363,771     383,824
                                                                 =======      =======     =======
               Including purchases from associated
                   companies                                      26,374       29,423      32,036
                                                                 =======      =======     =======

          h.   Selling, marketing, administrative and
                 general expenses:
               Selling and marketing:
                   Payroll and related expenses                   15,225       14,692      16,986
                   Packaging, transport and shipping               5,719        5,689       5,842
                   Advertising                                       872
                   Commissions                                     2,733        1,605         902
                   Depreciation                                    1,595        1,659       1,410
                   Other                                           6,052        5,522       5,906
                                                                 -------      -------     -------
                                                                  31,324       29,167      31,918
                                                                 =======      =======     =======

               Administrative and general:
                   Payroll and related expenses                   36,360       31,927      38,166
                   Office supplies, rent and maintenance           1,938        1,750       2,526
                   Professional fees                                 486        1,010       1,174
                   Depreciation                                    2,814        3,884       4,865
                   Doubtful accounts and bad debts                   944        1,791         766
                   Other                                           5,858       10,148       8,830
                                                                 -------      -------     -------
                                                                  48,400       50,510      56,327
                   Less - rent and participation from
                      associated companies                        23,401       24,128      22,886
                                                                 -------      -------     -------
                                                                  24,999       26,382      33,441
                                                                 =======      =======     =======
</TABLE>


                                       31
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                                            2003      2002        2001
                                                                            -----    ------      -----
                                                                             Adjusted NIS in thousands
                                                                            --------------------------
         <S>                                                                <C>     <C>       <C>
          i.   Other income (expenses):

               From the sale of apartments (1)                              1,609
               From termination of an activity and
                   disposal of assets(2)                                             (2,942)
               From the issuance of shares of an associated
                   company to a third party                                                      1,095
                                                                            -----    ------      -----
                                                                            1,609    (2,942)     1,095
                                                                            =====    ======      =====
</TABLE>

               1)   In 2003, the Company sold apartments that it previously held
                    for the use of its employees.

               2)   In 2002, the Company terminated operations at some of its
                    sites, as follows:

                    a)   At the Molett site in Nahariya, the operation of the
                         old household paper machine was terminated, following
                         the introduction of a new tissue machine by
                         Hogla-Kimberly Ltd., an associated company.
                         Subsequently, the old paper machine was sold to a third
                         party (overseas).

                    b)   In order to comply with the requirements of the
                         Ministry of Environment, the operation of the old paper
                         machines at the Shafir site in Tel-Aviv were
                         terminated. The termination included dismissal of
                         employees, sale of maintenance stores, sale of the
                         machines to a third party (overseas) and other related
                         costs (including closing inventories).

                    c)   The Company sold real estate that it owned in Ashdod.

                         The effects of the restructuring resulting from the
                         termination of the operations are as follows:

<TABLE>
<CAPTION>
                                                                                      2002
                                                                                     -----
                                                                                  Adjusted NIS
                                                                                 in thousands
                                                                                     -----
<S>                                                                                  <C>
          Severance pay expenses                                                     (2,334)
          Other expenses, net of sale proceeds                                       (4,475)
          Gain on sale of real estate in Ashdod                                       3,867
                                                                                      -----
                                                                                     (2,942)
                                                                                     ======
</TABLE>



                                       32
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                                        2003        2002        2001
                                                                      -------      ------       -----
                                                                          Adjusted NIS in thousands
                                                                      -------------------------------
<S>                                                                   <C>          <C>        <C>
          j.   Financial income (expenses) - net*:
               Expenses:
                   In respect of long-term loans - net                  1,607
                   In respect of notes - including amortization
                      of deferred charges                               5,031       1,291
                   Erosion of operating monetary balances,
                      net of related hedges                                         2,289       1,502
                   In respect of short-term balances - net
                      (2002 -net of borrowing costs capitalized to
                      the cost of fixed assets)                        16,917       1,506
                                                                      -------      ------       -----
                                                                       23,555       5,086       1,502
                                                                      -------      ------       -----
               Income:
                   In respect of long-term loans - net                              2,098       2,290
                   In respect of notes - including amortization
                      of deferred charges                                                       1,892
                   In respect of increase in value of operating
                      monetary balances, net of related hedges          7,566
                   In respect of short-term balances - net                                      2,422
                                                                      -------      ------       -----
                                                                        7,566       2,098       6,604
                                                                      -------      ------       -----
                                                                      (15,989)     (2,988)      5,102
                                                                      =======      ======       =====
               *   Including financial income (expenses) in respect
                   of loans to associated companies                    (1,376)      2,207       2,260
                                                                      =======      ======       =====
</TABLE>


NOTE 11 - NET INCOME PER NIS 1 OF PAR VALUE OF SHARES:

          a.   The weighted average par value of shares used in computation of
               per share data is as follows:

                                                 NIS
                                                 ---
                    Year ended December 31:
                        2003                    40,197
                                                ======
                        2002                    39,557
                                                ======
                        2001                    39,474
                                                ======

          b.   In the reported years, plans for granting stock options to
               employees in the Group were taken into account in computing per
               share data, having regard to the quoted price of the Company's
               share at the end of each year.

                                       33
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 12 - INTERESTED PARTIES - TRANSACTIONS AND BALANCES:

          a.   Transactions:

               1)   Income (expenses):

                                            2003        2002        2001
                                           ------      ------     -------
                                              Adjusted NIS in thousands
                                           ------------------------------

                    Sales                  38,715      36,030      35,469
                                           ======      ======     =======
                    Costs and expenses     (7,009)     (6,038)    (14,373)
                                           ======      ======     =======

                    The amounts presented above represent transactions that the
                    Company carried out in the ordinary course of business with
                    interested parties (companies which are held by the
                    Company's principal shareholder), at terms and prices
                    similar to those applicable to non-affiliated customers and
                    suppliers.

               2)   Benefits to interested parties:

<TABLE>
<CAPTION>
                                                                  2003    2002      2001
                                                                 ------   -----    -----
                     <S>                                         <C>      <C>      <C>
                       Payroll to interested parties employed
                           by the Company - adjusted NIS
                           in thousands                          *3,364   2,000    1,699
                                                                 ======   =====    =====
                       Number of people to whom
                           the benefits relate                       2        1        1
                                                                 ======   =====    =====
                       Remuneration of directors who are not
                           employed by the Company -
                           adjusted NIS in thousands               444      324      477
                                                                 ======   =====    =====
                       Number of people to whom
                           the benefits relate                      13        9       11
                                                                 ======   =====    =====
</TABLE>

                       *   In 2003, includes the Chief Executive Officer
                           (hereafter - CEO) payroll (who was appointed in
                           April 2003), in addition to the payroll of the
                           Chairman of the Board of Directors (who served
                           earlier as the CEO).

               3)   In 2003, 2001 and 2000, an interested party employed by the
                    Company exercised 15,999, 5,334 and 10,666 options,
                    respectively, granted to him under the 1998 plan for senior
                    officers, into 8,529, 3,263 and 7,476 shares, respectively,
                    of NIS 0.01 par value each, upon payment of their par value.

               4)   As to the plan for the remuneration of the Company's
                    Chairman of the Board of Directors - see note 9e.


                                       34
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 12 - INTERESTED PARTIES - TRANSACTIONS AND BALANCES (continued):

          b.   Balances with interested parties:

                                                          December 31
                                                        ----------------
                                                         2003       2002
                                                        ------     -----
                                                          Adjusted NIS
                                                          in thousands
                                                        ----------------

          Accounts receivable - commercial activity*    10,440     8,942
                                                        ======     =====
          Accounts payables and accruals                 2,430        88
                                                        ======     =====

          * There were no significant changes in the balance during the year.

NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

          a.   Derivative financial instruments

               The Company has only limited involvement with derivative
               financial instruments. The Company uses these instruments as
               hedges. The Company utilizes derivatives, mainly forward exchange
               contracts and currency options, to protect its dollar cash flows
               in respect of existing assets and liabilities. As the
               counter-parties to these derivatives are Israeli banks, the
               Company considers the inherent credit risks remote. As at
               December 31, 2003 and 2002, there are no balances in respect of
               transactions in derivative financial instruments.

               In January 2004, the Company entered into a forward transaction
               for a period of one year, in order to hedge an amount of adjusted
               NIS 200 million against increases in the Israeli CPI.

          b.   Credit risks

               The Company and its subsidiaries' cash and cash equivalents and
               the short-term deposit as of December 31, 2003 are deposited
               mainly with major Israeli banks or with foreign banks controlled
               by those Israeli banks. The Company and its subsidiaries
               considers the credit risks in respect of these balances to be
               remote.

               Most of these companies sales are made in Israel, to a large
               number of customers. The exposure to credit risks relating to
               trade receivables is limited due to the relatively large number
               of customers. The Group performs ongoing credit evaluations of
               its customers to determine the required amount of allowance for
               doubtful accounts. An appropriate allowance for doubtful accounts
               is included in the financial statements.

                                       35
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):

          c.   Fair value of financial instruments

               The fair value of the financial instruments included in working
               capital of the Group is usually identical or close to their
               carrying value. The fair value of loans and other liabilities
               also approximates the carrying value, since they bear interest at
               rates close to the prevailing market rates, except as described
               below.

               The Company does not disclose the fair value of long-term loans
               and capital notes included under investments in associated
               companies as of December 31, 2003, aggregating adjusted NIS
               44,637,000 (see note 2b) and of a capital note to an associated
               company in the amount of adjusted NIS 32,770,000 (see note
               4c(1)), since their value cannot be reliably determined so long
               as they have no repayment dates.

NOTE 14 - SEGMENT INFORMATION:

          a.   Activities of the Company and its subsidiaries:

               1)   Manufacturing and marketing of paper and paper products
                    (packaging and household paper), including collection and
                    recycling of paper waste. The manufacturing of paper relies
                    mainly on paper waste as raw material.

               2)   Marketing of office supplies and paper, mainly to
                    institutions.

                    Most of the Group's sales are to the local market (Israel)
                    and of its assets are located in Israel.



                                       36
<PAGE>

                      AMERICAN ISRAELI PAPER MILLS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT INFORMATION (continued):

          b.   Business segment data:

<TABLE>
<CAPTION>
                                                          Paper and recycling               Marketing of office supplies
                                                    ---------------------------------     --------------------------------
                                                     2003         2002         2001        2003        2002         2001
                                                    -------      -------      -------     -------     -------      -------
                                                                          Adjusted NIS in thousands
                                                    ----------------------------------------------------------------------
<S>                                                 <C>          <C>          <C>         <C>         <C>          <C>
Sales - net(1)                                      332,124      314,636      316,375     132,968     141,139      153,334
                                                    =======      =======      =======     =======     =======      =======
Income (loss) from ordinary operations               46,282       37,488       21,646         302      (1,033)      (1,120)
                                                    =======      =======      =======     =======     =======      =======
Financial income (expenses), net
Other income (expenses)

Income before taxes on income

Segment assets (at end of year)                     497,811      482,833      478,144      59,480      65,234       67,774
Unallocated assets (at end of year) (2)

Consolidated total assets (at end of year)

Segment liabilities (at end of year)                 58,906       66,325       58,034      25,696      32,930       30,041
Unallocated liabilities (at end of year)

Consolidated total liabilities (at end of year)

Depreciation and amortization                        25,523       24,422       27,068       2,724       2,387        2,295
                                                    =======      =======      =======     =======     =======      =======
</TABLE>

       (1) Represents sales to external customers.

       (2) Including investments in associated companies.

<TABLE>
<CAPTION>
                                                                   Total
                                                     ---------------------------------
                                                       2003        2002         2001
                                                     ---------   ---------     -------
                                                         Adjusted NIS in thousands
                                                     ---------   ---------     -------
<S>                                                    <C>         <C>         <C>
Sales - net(1)                                         465,092     455,775     469,709
                                                     =========   =========     =======
Income (loss) from ordinary operations                  46,584      36,455      20,526

Financial income (expenses), net                       (15,989)     (2,988)      5,102
Other income (expenses)                                  1,609      (2,942)      1,095
                                                     ---------   ---------   ---------
Income before taxes on income                           32,204      30,525      26,723
                                                     =========   =========   =========
Segment assets (at end of year)                        557,291     548,067     545,918
Unallocated assets (at end of year) (2)                695,983     504,056     506,224
                                                     ---------   ---------   ---------
Consolidated total assets (at end of year)           1,253,274   1,052,123   1,052,142
                                                     =========   =========   =========
Segment liabilities (at end of year)                    84,602      99,255      88,075
Unallocated liabilities (at end of year)               554,442     301,918     329,594
                                                     ---------   ---------   ---------
Consolidated total liabilities (at end of year)        639,044     401,173     417,669
                                                     =========   =========   =========
Depreciation and amortization                           28,247      26,809      29,363
                                                     =========   =========   =========
</TABLE>

       (1) Represents sales to external customers.

       (2) Including investments in associated companies.


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



                                       37
<PAGE>

                                                                        Schedule

                      AMERICAN ISRAELI PAPER MILLS LIMITED

                Details of Subsidiaries and Associated Companies
                              At December 31, 2003

<TABLE>
<CAPTION>
                                                         Percentage of direct and
                                                        indirect holding in shares
                                                          conferring equity and
                                                               voting rights
                                                        --------------------------
                                                                    %
                                                                  -----
<S>                                                              <C>
Main subsidiaries:

    Amnir Recycling Industries Limited                            100.00
    Graffiti Office Supplies and Paper Marketing Ltd.             100.00
    Attar Marketing Office Supplies Ltd.                          100.00
    American Israeli Paper Mills Paper Industry (1995) Ltd.       100.00

Main associated companies:
    Hogla-Kimberly Ltd.                                            49.90
    Subsidiaries of Hogla-Kimberly Ltd.:
       Hogla-Kimberly Marketing Limited                            49.90
       Molett Marketing Limited                                    49.90
       Shikma Ltd.                                                 49.90
       Ovisan Sihhi Bez Sanai Ve Ticavet A.S                       49.90
       Hogla-Kimberly Holdings A.S                                 49.90
       H-K Overseas (Holland) B.V                                  49.90
    Neusiedler Hadera Paper Ltd.                                   49.90
    Subsidiaries of Neusiedler Hadera Paper Ltd.:
       Grafinir Paper Marketing Ltd.                               49.90
       Yavnir (1999) Ltd.                                          49.90
       Neusiedler Hadera Paper Marketing (1999) Ltd.               49.90
       Mitrani Paper Marketing 2000 (1998) Ltd.                    49.90
    Carmel Container Systems Limited                               26.25
    C.D. Packaging Systems Limited*                                63.20
    Barthelemi Holdings Ltd.                                       33.91
    T.M.M. Integrated Recycling Industries Ltd.**                  41.60
</TABLE>


*   C.D. Packaging Systems Limited is partly held through Carmel Container
    Systems Limited (an associated company); the holding in voting shares of
    C.D. Packaging Systems Limited is 63.05%.

**  T.M.M Integrated Recycling Industries Ltd. is partly held directly and
    partly through Barthelemi Holdings Ltd.


                                       38
<PAGE>


[AIPM LOGO]                                        Meizer street
                                                   Industrial Zone, P.O. Box 142
                                                   Hadera 38101, Israel
                                                   Tel: 972-4-6349402
                                                   Fax: 972-4-6339740
                                                   E-Mail: chq@aipm.co.il




Enclosed  please  find  the  financial  reports  of  the  following   associated
companies:

        -         Neusiedler Hadera Paper Ltd.
        -         Hogla-Kimberly Ltd.



The financial report of the following associated companies are not included:

        -         Carmel Containers Systems Ltd., according to section 44(c) of
                  the Securities (Periodic and Immediate Reports) Regulations.

        -         TMM Integrated Recycling Industries Ltd., a reporting
                  corporation.







[LOGO][LOGO]

<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                               2003 ANNUAL REPORT

<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                               2003 ANNUAL REPORT






                                TABLE OF CONTENTS

                                                                        PAGE

REPORT OF INDEPENDENT AUDITORS                                            2
FINANCIAL STATEMENTS - OF THE COMPANY AND
    CONSOLIDATED - IN ADJUSTED NEW ISRAELI SHEKELS (NIS):
    Balance sheets                                                       3-4
    Statements of income (loss)                                           5
    Statements of changes in shareholders' equity                         6
    Statements of cash flows                                             7-9
    Notes to financial statements                                       10-35
APPENDIX - DETAILS OF INVESTEE COMPANIES                                  36




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

<PAGE>

PricewaterhouseCoopers                       Kesselman & Kesselman
                                             Certified Public Accountants (Isr.)
                                             Trade Tower, 25 Hamered Street
                                             Tel Aviv 68125 Israel
                                             P.O Box 452 Tel Aviv 61003
                                             Telephone +972-3-7954555
                                             Facsimile +972-3-7954556


                         REPORT OF INDEPENDENT AUDITORS

To the shareholders of NEUSIEDLER HADERA PAPER LTD.


We have audited the financial statements of Neusiedler Hadera Paper Ltd.
(hereafter - the Company) and the consolidated financial statements of the
Company and its subsidiaries: balance sheets as of December 31, 2003 and 2002
and the related statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's board of
directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position - of the
Company and consolidated - as of December 31, 2003 and 2002 and the results of
operations, the changes in shareholders' equity and the cash flows - of the
Company and consolidated - for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel. Furthermore, in our opinion, the financial statements referred to
above are prepared in accordance with the Israeli Securities (Preparation of
Annual Financial Statements) Regulations, 1993.

As explained in note 1b, the financial statements referred to above are
presented in values adjusted for the changes in the exchange rate of the U.S.
dollar, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.



Tel-Aviv, Israel
    March 10, 2004
                                             /s/ Kesselman & Kesselman


                                       2
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                                 BALANCE SHEETS
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                             CONSOLIDATED              THE COMPANY
                                                                        --------------------      --------------------
                                                                             DECEMBER 31               DECEMBER 31
                                                                        --------------------      --------------------
                                                                NOTE      2003         2002         2003         2002
                                                               ------   -------      -------      -------      -------
                                                                                        IN THOUSANDS
                                                                        ----------------------------------------------
<S>                                                           <C>      <C>          <C>          <C>           <C>
                      ASSETS
          CURRENT ASSETS:                                        8
              Cash and cash equivalents                         1l       31,678       49,089       20,034       45,629
              Accounts receivable:                             10a
                 Trade                                                  147,748      154,995                     2,811
                 American Israeli Paper Mills Limited
                     and its subsidiaries - net                 1a(3)                             134,659       70,559
                 Subsidiaries                                                                                    8,815
                 Other                                                   11,296       12,796       13,458       13,732
              Inventories                                       10b      89,231       79,698       62,650       64,595
                                                                        -------      -------      -------      -------
                     Total  current assets                              279,953      296,578      230,801      206,141
                                                                        -------      -------      -------      -------
          INVESTMENT IN INVESTEE
              COMPANIES                                          2                                  6,932        7,505
                                                                                                  -------      -------
          FIXED ASSETS:                                          3
              Cost                                                      132,692      124,815      127,617      118,802
              Less - accumulated depreciation                            25,381       17,993       22,701       15,611
                                                                        -------      -------      -------      -------
                                                                        107,311      106,822      104,916      103,191
                                                                        -------      -------      -------      -------
          GOODWILL, net of accumulated amortization                       4,423        5,049
                                                                        -------      -------      -------      -------
                     Total assets                                       391,687      408,449      342,649      316,837
                                                                        =======      =======      =======      =======
</TABLE>


Date of approval of the financial statements: March 10, 2004

<TABLE>
<CAPTION>

<S>          <C>                            <C>
/s/ GUNTHER HASSLER                         )
-------------------------------------------
             GUNTHER HASSLER                ) CHAIRMAN OF THE BOARD OF DIRECTORS


/s/ YAKI YERUSHALM                          )
-------------------------------------------
             YAKI YERUSHALMI                ) VICE CHAIRMAN OF THE BOARD OF DIRECTORS


/s/ ELIAZ AMAR                              )
-------------------------------------------
               ELIAZ AMAR                   ) CHIEF FINANCIAL OFFICER
</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>
                                                                            CONSOLIDATED                     THE COMPANY
                                                                       -----------------------        -----------------------
                                                                             DECEMBER 31                     DECEMBER 31
                                                                       -----------------------        -----------------------
                                                         NOTE            2003           2002           2003            2002
                                                        ------         -------         -------        -------         ------
                                                                                             IN THOUSANDS
                                                                       ------------------------------------------------------
<S>                                                     <C>           <C>             <C>            <C>            <C>
         LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:                                       8
    Credit from banks                                     10c           15,108         14,670          15,108         14,652
    Current maturities of long-term
       capital note                                        5                           17,516                         17,516
    Accounts payable and accruals:                        10d
       Trade - open accounts                                           104,097         76,650          53,397         44,771
       American Israeli Paper Mills Limited
           and its subsidiaries - net                    1a(3)          52,968         54,685
       Subsidiaries                                                                                    52,671
       Other                                                            12,682         19,933          12,049         12,863
                                                                       -------         -------        -------        -------
           Total  current liabilities                                  184,855         183,454        133,225         89,802
                                                                       -------         -------        -------        -------
LONG-TERM LIABILITIES:
    Loans from bank                                        4            51,725         71,837          51,725         71,837
    Capital notes from shareholders (2002 - net
        of current maturities)                             5            43,790         70,064          43,790         70,064
    Deferred income taxes                                 7e            29,247         19,557          29,247         19,574
    Excess of losses of subsidiaries
       over the investments therein                        2                                            2,592          2,058
    Liability for employee rights upon
       retirement                                          6               145            131             145             96
                                                                       -------         -------        -------        -------
           Total long-term liabilities                                 124,907         161,589        127,499         63,629
                                                                       -------         -------        -------        -------
COMMITMENTS                                                9
                                                                       -------         -------        -------        -------
           Total  liabilities                                          309,762         345,043        260,724        253,431
                                                                       -------         -------        -------        -------
SHAREHOLDERS' EQUITY:
    Share capital (ordinary shares of NIS 1 par
       value: authorized - 38,000 shares;
       issued and paid - 1,000 shares)                                       1              1               1               1
    Capital surplus                                                     43,352         43,352          43,352          43,352
    Retained earnings                                                   38,572         20,053          38,572          20,053
                                                                       -------         -------        -------          ------
                                                                        81,925          63,406         81,925          63,406
                                                                       -------         -------        -------          ------
           Total  liabilities and
              shareholders' equity                                     391,687         408,449        342,649         316,837
                                                                       =======         =======        =======         =======
</TABLE>


    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.


                                       4
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                           STATEMENTS OF INCOME (LOSS)
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                               CONSOLIDATED                             THE COMPANY
                                                      ----------------------------------       --------------------------------
                                          NOTE         2003           2002         2001         2003           2002       2001
                                         ------       ------         ------       ------       ------         ------     ------
                                                                                    IN THOUSANDS
                                                      -------------------------------------------------------------------------
<S>                                       <C>        <C>           <C>           <C>          <C>           <C>         <C>
SALES - net                               10e        642,140       575,607       557,576      462,654       421,413     398,150
COST OF SALES                             10f        556,890      *489,962      *505,476      391,492      *359,129    *369,944
                                                     -------      ---------     --------      -------      ---------   --------
GROSS PROFIT                                          85,250        85,645        52,100       71,162        62,284      28,206
                                                     -------      ---------     --------      -------      ---------   --------
SELLING, MARKETING,
    ADMINISTRATIVE AND
    GENERAL EXPENSES:                     10g
    Selling and marketing                             42,892       *42,481       *40,418       32,330       *26,747     *25,189
    Administrative and general                         8,640        10,321         9,671        6,065         4,335       4,272
                                                     -------      ---------     --------      -------      ---------   --------
                                                      51,532        52,802        50,089       38,395        31,082      29,461
                                                     -------      ---------     --------      -------      ---------   --------
INCOME (LOSS) FROM
    ORDINARY OPERATIONS                               33,718         32,843        2,011       32,767         31,202     (1,255)
FINANCIAL EXPENSES - net                  10h          4,681         5,232        13,115        2,713         4,387      11,615
                                                     -------      ---------     --------      -------      ---------   --------
INCOME (LOSS) BEFORE

    TAXES ON INCOME                                   29,037         27,611      (11,104)      30,054         26,815    (12,870)
TAXES ON INCOME (TAX
    BENEFIT)                               7          10,518        11,534        (3,272)      10,275         9,800      (3,299)
                                                     -------      ---------     --------      -------      ---------   --------
INCOME (LOSS) AFTER

    TAXES ON INCOME                                   18,519         16,077       (7,832)      19,779         17,015     (9,571)

SHARE IN PROFITS (LOSSES)
    OF INVESTEE COMPANIES,
    net                                    2                                        (369)      (1,260)         (938)      1,370
                                                     -------      ---------     --------      -------      ---------   --------
NET INCOME (LOSS) FOR
    THE YEAR                                          18,519        16,077        (8,201)      18,519         16,077     (8,201)
                                                     =======      =========     ========      =======      =========   ========


                                                                                  ADJUSTED NIS

NET INCOME (LOSS) PER
    NIS 1 OF PAR VALUE OF
    SHARES                                 1m         18,519        16,077        (8,201)      18,519        16,077      (8,201)
                                                     =======      =========     ========      =======      =========   ========
</TABLE>

                                 * Reclassified.

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.


                                       5
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                             SHARE CAPITAL
                                                          -------------------          CAPITAL         RETAINED
                                                         NUMBER OF      AMOUNT         SURPLUS         EARNINGS       TOTAL
                                                          SHARES       -------         -------         ------        -------
                                                          -----                            IN THOUSANDS
                                                                       -----------------------------------------------------
<S>                                                       <C>               <C>        <C>            <C>            <C>
BALANCE AT JANUARY 1, 2001                                1,000             1          43,352         12,177         55,530
CHANGES DURING 2001 -
    loss                                                                                              (8,201)        (8,201)
                                                          -----        ------          ------         ------         ------
BALANCE AT DECEMBER 31, 2001                              1,000             1          43,352          3,976         47,329
CHANGES DURING 2002 -
    net income                                                                                        16,077         16,077
                                                          -----        ------          ------         ------         ------
BALANCE AT DECEMBER 31, 2002                              1,000             1          43,352         20,053         63,406

CHANGES DURING 2003 -
    net income                                                                                        18,519         18,519
                                                          -----        ------          ------         ------         ------
BALANCE AT DECEMBER 31, 2003                              1,000             1          43,352         38,572         81,925
                                                          =====        ======          ======         ======         ======
</TABLE>


    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.


                                       6
<PAGE>

                                                                 (Continued) - 1

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)
                            STATEMENTS OF CASH FLOWS
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                CONSOLIDATED                             THE COMPANY
                                                       ---------------------------------        --------------------------------
                                                       2003          2002         2001          2003         2002         2001
                                                       ------        ------       ------        ------      ------        ------
                                                                                    IN THOUSANDS
                                                       -------------------------------------------------------------------------
<S>                                                    <C>           <C>         <C>           <C>         <C>           <C>
CASH FLOWS FROM OPERATING
    ACTIVITIES:
    Net income (loss) for the year                     18,519        16,077       (8,201)       18,519      16,077        (8,201)
    Adjustments to reconcile net income
       (loss) to net cash provided
       by operating activities (a)                     37,698        31,659       55,377        29,887      26,772        51,770
                                                       ------        ------       ------        ------      ------        ------
    Net cash provided by operating
       activities                                      56,217         47,736      47,176        48,406      42,849        43,569
                                                       ------        ------       ------        ------      ------        ------

CASH FLOWS FROM INVESTING
    ACTIVITIES:
    Acquisition of a subsidiary consolidated
       for the first time (b)                                                     (2,208)                                 (2,208)
    Purchase of fixed assets                           (9,339)      (16,305)     (12,746)       (9,339)    (16,086)      (11,714)
    Proceeds from sale of fixed assets                    635           800          101           244         357            19
                                                       ------        ------       ------        ------      ------        ------
    Net cash used in investing activities              (8,704)      (15,505)     (14,853)       (9,095)    (15,729)      (13,903)
                                                       ------        ------       ------        ------      ------        ------

CASH FLOWS FROM FINANCING
    ACTIVITIES:
    Repayment of long-term loans                      (21,116)       (7,266)                   (21,116)     (7,266)
    Repayment of long-term capital notes
       from shareholders                              (43,790)                                 (43,790)
    Short-term credit from banks - net                    (18)       (4,147)      (5,257)                                 (4,646)
                                                       ------        ------       ------        ------      ------        ------
    Net cash used in financing
       activities                                     (64,924)      (11,413)      (5,257)      (64,906)     (7,266)       (4,646)
                                                       ------        ------       ------        ------      ------        ------
INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS                              (17,411)       20,818       27,066       (25,595)     19,854        25,020

BALANCE OF CASH AND CASH
    EQUIVALENTS AT THE
    BEGINNING OF YEAR                                  49,089        28,271        1,205        45,629      25,775           755
                                                       ------        ------       ------        ------      ------        ------

BALANCE OF CASH AND CASH
    EQUIVALENTS AT END OF YEAR                         31,678        49,089       28,271        20,034      45,629        25,775
                                                       ======        ======       ======        ======      ======        ======
</TABLE>



                                       7
<PAGE>

                                                                (Continued) - 2

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)
                            STATEMENTS OF CASH FLOWS
                           IN ADJUSTED ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                  CONSOLIDATED                              THE COMPANY
                                                        ---------------------------------        ----------------------------------
                                                         2003          2002         2001          2003          2002          2001
                                                        ------        ------       ------        ------        ------        ------
                                                                         IN THOUSANDS (EXCEPT PER SHARE DATA)
                                                        ---------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>           <C>            <C>            <C>
(A)    ADJUSTMENTS TO RECONCILE NET INCOME
        (LOSS) TO NET CASH PROVIDED BY
        OPERATING ACTIVITIES:
        Income and expenses not
          involving cash flows:
          Share in losses (profits) of
             investee companies - net                                                 369         1,260           938        (1,370)
          Depreciation and amortization                  8,626         8,077        6,501         7,252         6,484         5,156
          Deferred income taxes - net                   10,438        11,483       (2,538)       10,275         9,893        (2,572)
          Liability for employee
             rights upon retirement                         14             5           (6)           49            19            (5)
          Capital losses (gains) on
             sale of fixed assets - net                    215            84          189           118            37            (8)
          Linkage differences on (erosion of)
             long-term bank loans                        1,460          (134)      (2,138)        1,460          (134)       (2,138)
          Erosion of (linkage differences
             on) long-term loans to
             investee company                                                         112          (153)           14           180
                                                        ------        ------       ------        ------        ------        ------
                                                        20,753        19,515        2,489        20,261        17,251          (757)
                                                        ------        ------       ------        ------        ------        ------
        Changes in operating assets and
           liabilities:
           Decrease (increase) in accounts
               receivable:
               Trade                                     7,247          (696)      22,674         2,811        (2,455)          165
               American Israeli Paper Mills
                  Limited and its
                  subsidiaries - net                                                                          (41,232)      (29,326)
               Subsidiaries                                                                                    33,473       104,264
               Other                                       752         9,025       (1,678)         (328)        7,983        (2,213)
           Decrease (increase) in inventories           (9,533)       13,010       61,105         1,945         5,744        42,191
           Increase (decrease) in accounts
               payable and accruals:
               Trade                                    27,447         6,043       (3,953)        8,626         1,716         6,106
               American Israeli Paper Mills
                  Limited and its
                  subsidiaries - net                    (1,717)      (18,799)     (18,479)      (64,100)                    (65,388)
               Subsidiaries                                                                      61,486
               Other                                    (7,251)        3,561       (6,781)         (814)        4,292        (3,272)
                                                        ------        ------       ------        ------        ------        ------
                                                        16,945        12,144       52,888         9,626         9,521        52,527
                                                        ------        ------       ------        ------        ------        ------
                                                        37,698        31,659       55,377        29,887        26,772        51,770
                                                        ======        ======       ======        ======        ======        ======
</TABLE>


                                       8
<PAGE>

                                                                (Concluded) - 3


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)
                            STATEMENTS OF CASH FLOWS
                           IN ADJUSTED ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                                     CONSOLIDATED
                                                                                                   AND THE COMPANY
                                                                                                   ---------------
                                                                                                         2001
                                                                                                   ---------------
                                                                                                     IN THOUSANDS
                                                                                                   ---------------
<S>                                                                                                <C>
    (b)      ACQUISITION OF A SUBSIDIARY CONSOLIDATED FOR THE FIRST TIME: Fair
             value of assets and liabilities acquired, at acquisition date:
                Working capital deficiency (excluding cash and cash equivalents) - net                    3,887
                Fixed assets                                                                             (1,228)
                Liability for employee rights upon retirement                                                51
                Deferred income taxes - net                                                              (2,142)
             Investment in the associated company at acquisition date*                                    2,087
             Goodwill arising on acquisition**                                                           (6,141)
                                                                                                         ------
                                                                                                         (3,486)

             Less - amount recorded against debit balance of the former shareholder,
                see supplementary information (2) below                                                   1,278
                                                                                                         ------
                                                                                                         (2,208)
                                                                                                         ======

              *   See note 2a(2).
              ** Including goodwill balance at acquisition date.

</TABLE>


<TABLE>
                                                           CONSOLIDATED                             THE COMPANY
                                                  ------------------------------          -------------------------------
                                                   2003        2002        2001            2003        2002          2001
                                                  -----       -----        -----          -----       -----         -----
                                                                            IN THOUSANDS
<S>                                              <C>         <C>          <C>            <C>          <C>           <C>
SUPPLEMENTARY CASH FLOW
    INFORMATION:
    Interest paid                                 3,757       3,582        4,664          3,757       3,582         4,664
                                                  =====       =====        =====          =====       =====         =====
    Income taxes paid - net                       (480)         164          666                                      513
                                                  =====       =====        =====                                    =====
</TABLE>



SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING
CASH FLOWS:

1)   In July 2001, the long-term shareholders' loans were converted into capital
     notes. This conversion is not reflected among financing activities.

2)   On April 1, 2001 the Company increased its holdings in the associated
     company, from 33.3% to 100%. Part of the consideration - adjusted NIS
     1,278,000 - which was recorded against debit balance of the former
     shareholder (which is included among the current account of subsidiaries as
     of December 31, 2001), is not reflected among investing activities.

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.


                                       9
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES:

          The significant accounting policies, applied on a consistent basis,
          are as follows. As to the adoption for the first time in 2003 of the
          accounting for impairment of assets, see k. below.

          a.   GENERAL:

               1)   Incorporation and operations

                    Neusiedler Hadera Paper Ltd. (hereafter - the Company) was
                    incorporated and commenced operations on January 1, 2000.
                    The Company and its subsidiaries (hereafter - the Group),
                    are engaged in the production and sale of paper and paper
                    products - mainly in Israel, see also note 13.

                    Effective as of January 1, 2003, as part of a change in the
                    organizational structure of the Group, all marketing and
                    selling activities were transferred to one subsidiary with
                    three logistics sites. In the past, the Group's operations
                    in marketing were executed by four subsidiaries.
                    Accordingly, those subsidiaries' employees are now employed
                    by the Company and its inventories were transferred to the
                    remaining subsidiary.

                    Those subsidiaries continued operating in 2003,mainly for
                    collecting old debts.

                    As to agreements with AIPM (see (3) below), see note 11a(2).

               2)   Use of estimates in the preparation of financial statements

                    The preparation of financial statements in conformity with
                    generally accepted accounting principles requires management
                    to make estimates and assumptions that affect the reported
                    amounts of assets and liabilities and disclosure of
                    contingent assets and liabilities at balance sheet date and
                    the reported amounts of revenues and expenses during the
                    reported year. Actual results could differ from those
                    estimates.

               3)   Definitions:

                    The ultimate parent company - Anglo American Plc.

                    Subsidiaries - companies over which the Company has control
                    and over 50% of the ownership, the financial statements of
                    which have been consolidated with the financial statements
                    of the Company.

                    The associated company - Miterani Paper Marketing 2000
                    (1998) Ltd..

                    Investee companies - subsidiaries and the associated
                    company.

                    Shareholders - Neusiedler AG and American Israeli Paper
                    Mills Limited (hereafter - AIPM) which hold 50.1% and 49.9%
                    of the Company's share capital, respectively.

                    Interested parties - as defined in the Israeli Securities
                    (Preparation of Annual Financial Statements) Regulations,
                    1993.

                                       10
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          Affiliated company - companies in which AIPM exerts material
          influence. Material influence is deemed to exist when the percentage
          of holding in said company is 20% or more, unless there are
          circumstances that contradict this assumption.

          Goodwill - the difference between the cost of investment in an
          investee company and the Company's share in the fair value of its net
          underlying assets at time of acquisition, net of applicable taxes.

          B.   ADJUSTED FINANCIAL STATEMENTS:

               1)   The Company and its subsidiaries maintain their accounts in
                    nominal new Israeli shekels ("NIS") and in U.S. dollars
                    ("dollars"). All figures in the financial statements are
                    presented in NIS adjusted for the changes in the exchange
                    rate of the dollar (rather than the changes in the Israeli
                    consumer price index; hereafter - Israeli CPI).

                    As for discontinuance of adjusting financial statements for
                    the effects of inflation, with effect from January 1, 2004,
                    see also o. hereafter.

                    The adjusted NIS data are the product of the data in dollar
                    terms, multiplied by the representative exchange rate of the
                    dollar at December 31, 2003 - $1 = NIS 4.379 (see also note
                    8b).

                    Condensed nominal Israeli currency data of the Company are
                    presented in note 14.

               2)   Non-monetary balance sheet items have been adjusted on the
                    basis of the changes in the exchange rate of the dollar
                    since the related transactions were carried out. The income
                    statement components relating to these non-monetary balance
                    sheet items have been adjusted on the same basis as the
                    related balance sheet items.

                    The investment in the associated company and the Company's
                    share in its operating results have been determined based on
                    its financial statements, adjusted on the basis of the
                    changes in the exchange rate of the dollar. Income statement
                    components (except financing) relating to transactions
                    carried out in the reported year - sales, purchases, labour
                    costs, etc. - have been adjusted on the basis of the
                    exchange rates in effect on transaction dates.

                    Financial income and expenses represent such income and
                    expenses in real terms and the erosion of balances of
                    monetary items during the year.

               3)   The amounts of non-monetary items do not necessarily
                    represent realization value or any other economic value, but
                    only their original historical values adjusted on the basis
                    of the changes in the exchange rate of the dollar. In these
                    financial statements, the term "cost" signifies cost in
                    adjusted NIS.


                                       11
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          c.   PRINCIPLES OF CONSOLIDATION:

               1)   The consolidated financial statements include the accounts
                    of the Company and its subsidiaries. A list of the
                    subsidiaries is presented in the appendix to the financial
                    statements.

               2)   Intercompany transactions and balances, as well as
                    intercompany profits on sales which have not been realized
                    outside the Group, have been eliminated.

               3)   As to goodwill, see e(2) below.

          d.   INVENTORIES

               Raw materials and supplies, finished goods and goods in process,
               and purchased products are valued at the lower of cost or market
               (net of processing costs, where appropriate and after deduction
               of a provision for obsolescence), cost is determined on the
               moving average basis.

          e.   INVESTMENTS IN INVESTEE COMPANIES:

               1)   The investments in these companies (in the financial
                    statements of the Company) are accounted for by the equity
                    method.

               2)   Goodwill is amortized in equal annual installments, over a
                    period of 10 years, commencing in the year of acquisition.

          f.   FIXED ASSETS:

               1)   Fixed assets are stated at cost.

               2)   The assets are depreciated by the straight-line method on
                    basis of their estimated useful life, as follows:

                                                              YEARS
                                                              -----

                    Machinery and equipment            7-20 (mainly 10 and 20)
                    Vehicles                           5-7  (mainly 7)
                    Office furniture and equipment
                        (including computers)          3-5  (mainly 4)

         Leasehold improvements are amortized by the straight-line method over
         the expected term of the lease, which is shorter than the estimated
         useful life of the improvements.

                                       12
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

          g.   DEFERRED INCOME TAXES:

               1)   Deferred taxes are computed in respect of differences
                    between the amounts presented in these statements and those
                    taken into account for tax purposes. As to the main factors
                    in respect of which deferred taxes have been included - see
                    note 7e. Deferred tax balances are computed at the tax rate
                    expected to be in effect at time of release to income from
                    the deferred tax accounts. The amount of deferred taxes
                    presented in the income statements reflects changes in the
                    above balances during the reported years.

               2)   Taxes which would apply in the event of disposal of
                    investments in the investee companies have not been taken
                    into account in computing the deferred taxes, as the Company
                    intends to hold these investments, not to realize them.

          h.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

               The allowance for doubtful accounts is determined mainly for
               specific debts doubtful of collection (see note 12b).

          i.   REVENUE RECOGNITION

               Revenue from sale of products, net of discounts granted, is
               recognized upon shipment (date of transfer of title). Revenue
               from sale of products for export, net of discounts granted, is
               recognized upon shipment from port.

          j.   DERIVATIVES FINANCIAL INSTRUMENTS

               Gains and losses on and cash flows from derivatives that are
               hedging existing assets or liabilities are recognized in income
               and cash flows statements commensurate with the results from
               those assets and liabilities.

               Gains and losses related to derivatives that are hedging firm
               commitments are deferred, and ultimately recognized in income as
               part of the measurement of the results of the underlying hedged
               transactions.

          k.   IMPAIRMENT IN VALUE OF LONG-LIVED ASSETS

               In February 2003, Accounting Standard No. 15 of the Israeli
               Accounting Standards Board - (hereafter - IASB) "Impairment of
               Assets", became effective. This standard requires a periodic
               review to evaluate the need for a provision for the impairment of
               the company's non-monetary assets - fixed assets and identifiable
               intangibles, including goodwill, as well as investments in
               associated companies.

               Accordingly, commencing with the interim financial statements for
               the 3-month period ended March 31, 2003, the company assesses -
               at each balance sheet date - whether any events have occurred or
               changes in circumstances have taken place, which might indicate
               that there has been an impairment of one or more of the above
               assets. When such indicators of impairment are present, the
               company evaluates whether the carrying value of the asset in the
               company's accounts can be recovered from the cash flows
               anticipated from that asset.


                                       13
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES (continued):

               The recoverable value of an asset is determined according to the
               higher of the net selling price of the asset or its value in use
               to the Company. The value in use is determined according to the
               present value of anticipated cash flows from the continued use of
               the asset, including those expected at time of its future
               retirement and disposal.

               When it is not possible to assess whether an impairment provision
               is required for a particular asset on its own, the need for such
               a provision is assessed in relation to the recoverable value of
               the cash generating unit to which that asset belongs.

               Through December 31, 2002, the Group applied the provisions for
               assessing and recording impairment of assets, prescribed by the
               U.S. standard, FAS 121. The adoption of this standard has not had
               any effect on the Group.

          l.   CASH EQUIVALENTS

               The Group considers all highly liquid investments, which include
               short-term bank deposits (up to three months from date of
               deposit) that are not restricted as to withdrawal or use, to be
               cash equivalents.

          m.   NET INCOME (LOSS) PER NIS 1 OF PAR VALUE OF SHARES

               Net income (loss) per NIS 1 of par value of shares is computed in
               accordance with Opinion 55 of the Israeli Institute.

               The par value of shares used in computation of per share data is
               NIS 1,000.

          n.   ADVERTISING EXPENSES

               Advertising expenses are charged to income as incurred (as to the
               amount of the expenses, see note 10g).

          o.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

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

               The Company is currently assessing the effect, if any, of the
               adoption of this standard, thus, it expects the implementation of
               Standard No. 12 will mainly affect financing income and expenses
               items.

                                       14
<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 2 -  INVESTMENTS IN INVESTEE COMPANIES:

          A.   COMPOSED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                              THE COMPANY
                                                                         ----------------------
                                                                              DECEMBER 31
                                                                         ----------------------
                                                                          2003            2002
                                                                         ------          ------
                                                                               ADJUSTED NIS
                                                                              IN THOUSANDS
                                                                         ----------------------
<S>                                                                      <C>            <C>
               Shares:
                    Cost                                                  4,338           4,338
                    Share in accumulated losses                          (2,476)         (1,216)
                                                                         ------          ------
                                                                          1,862           3,122
               Long-term loan  (1)                                        2,478           2,325
                                                                         ------          ------
                                                                          4,340           5,447


               The investment is presented in the balance sheets as follows:

                 Among investments                                        6,932           7,505
                 Among long-term liabilities                             (2,592)         (2,058)
                                                                         ------          ------
                                                                          4,340           5,447
</TABLE>

               (1)      The loan is linked to the Israeli CPI and is interest
                        free. Repayment date has not yet been fixed.

               (2)      On April 1, 2001, the Company increased its holdings
                        in the associated company and reached control and
                        ownership of 100%.

          B.   The changes in the investments during 2003 are as follows:

<TABLE>
<CAPTION>
                                                                              THE COMPANY
                                                                              ------------
                                                                              ADJUSTED NIS
                                                                              IN THOUSANDS
                                                                              ------------
<S>                                                                             <C>
                  Balance at beginning of year                                     5,447
                  Changes during the year:
                     Share in losses, net                                         (1,260)
                     Erosion of long-term loans                                      153
                                                                                  ------
                  Balance at end of year                                           4,340
</TABLE>


                                       15
<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 3 -  FIXED ASSETS

          Composition of assets, grouped by major classifications, and changes
          therein during 2003, are as follows:
<TABLE>
<CAPTION>

                                                              COST
                                          -----------------------------------------------
                                                    CHANGES DURING THE YEAR
                                          -----------------------------------------------
                                        BALANCE AT
                                         BEGINNING                              BALANCE AT
                                            OF                                    END OF
                                           YEAR       ADDITIONS    RETIREMENTS     YEAR
                                          -------       -----         -----       -------
                                                    ADJUSTED NIS IN THOUSANDS
                                          -----------------------------------------------
<S>                                       <C>          <C>             <C>        <C>
             CONSOLIDATED:
       Machinery and equipment            111,743       7,620           820       118,543
       Vehicles                             2,421           6           642         1,785
       Office furniture and
       equipment
          (including computers)             2,426         367                       2,793
       Leasehold improvements               3,668          56                       3,724
       Payments on account of
          machinery and equipment           4,557       1,290                       5,847
                                          -------       -----         -----       -------
                                          124,815       9,339         1,462       132,692
                                          =======       =====         =====       =======

             THE COMPANY:
       Machinery and equipment             110,130       7,620          508       117,242
       Vehicles                                 81           6           16            71
       Office furniture and equipment
          (including computers)              1,462         367                      1,829
       Leasehold improvements                2,595          56                      2,651
       Payments on account of
          machinery and equipment            4,534       1,290                      5,824
                                          -------       -----         -----       -------
                                           118,802       9,339          524       127,617
                                          =======       =====         =====       =======
</TABLE>

<TABLE>
<CAPTION>
                                                     ACCUMULATED DEPRECIATION
                                   -------------------------------------------------------------
                                                      CHANGES DURING THE YEAR
                                   ------------------------------------------------------------
                                   BALANCE AT                                   BALANCE AT               DEPRECIATED BALANCE
                                   BEGINNING                                      END OF                     DECEMBER 31
                                      OF                                           YEAR                   2003        2002
                                     YEAR       ADDITIONS   RETIREMENTS            ----                   ----        ----
                                    ------        -----          ---                                         ADJUSTED NIS
                                       ADJUSTED NIS IN THOUSANDS        ADJUSTED NIS IN THOUSANDS            IN THOUSANDS
                                   -----------------------------------  -------------------------        -----------------
<S>                                <C>           <C>           <C>               <C>                   <C>          <C>
             CONSOLIDATED:
       Machinery and equipment      15,058        6,883          238              21,703                 96,840      96,685
       Vehicles                      1,214          375          374               1,215                    570       1,207
       Office furniture and
       equipment
          (including computers)        682          354                            1,036                  1,757       1,744
       Leasehold improvements        1,039          388                            1,427                  2,297       2,629
       Payments on account of
       machinery and equipment                                                                            5,847       4,557
                                    ------        -----          ---              ------                -------     -------
                                    17,993        8,000          612              25,381                107,311     106,822
                                    ======        =====          ===              ======                =======     =======

             THE COMPANY:
       Machinery and equipment      14,463        6,721          151               21,033                96,209      95,667
       Vehicles                         38           11           11                   38                    33          43
   Office furniture and equipment
          (including computers)        333          257                               590                 1,239       1,129
       Leasehold improvements          777          263                             1,040                 1,611       1,818
       Payments on account of
          machinery and equipment                                                                         5,824       4,534
                                    ------        -----          ---              -------               -------     -------
                                    15,611        7,252          162               22,701               104,916     103,191
                                    ======        =====          ===              =======               =======     =======

</TABLE>


                                       16
<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 4 -  LOANS FROM BANK:

<TABLE>
<CAPTION>

                                                              WEIGHTED
                                                              AVERAGE              CONSOLIDATED AND THE
                                                           INTEREST RATES                COMPANY
                                                           --------------          --------------------
                                                                                       DECEMBER 31
                                                                                   --------------------
                                                                                   2003            2002
                                                                                   --------------------
                                                                                        ADJUSTED NIS
                                                        -------------------        ---------------------
                                                                 %                      IN THOUSANDS
                                                        -------------------        ---------------------
<S>                                                           <C>                  <C>            <C>

               a)   Composed as follows:
                       Linked to the dollar                    3.08                44,755         63,175
                       Linked to the Israeli CPI               6.55                22,078         23,314
                                                               ----                ------         ------
                                                                                   66,833         86,489

                       Less - current maturities                                   15,108         14,652
                                                                                   ------         ------
                                                                                   51,725         71,837
                                                                                   ======         ======

               b)   The non-current portion of the loans matures as follows:
                       Second year                                                 15,297         14,817
                       Third year                                                  15,497         14,994
                       Fourth year                                                 11,332         15,183
                       Fifth year                                                   3,655         11,006
                       Sixth year and thereafter                                    5,944         15,837
                                                                                   ------         ------
                                                                                   51,725         71,837
                                                                                   ======         ======
</TABLE>

               c)   The Company is required, inter alia, to fulfill certain
                    operational conditions and to maintain certain financial
                    ratios. If the Company defaults on the covenants, the banks
                    are entitled to demand early repayment of the loans - in
                    whole or in part. The Company believes that it is in
                    compliance with all covenants stipulated by the banks.

               d)   As to a "negative pledge agreement" signed by the Company,
                    see note 9c.

NOTE 5 -  CAPITAL NOTES

          The capital notes, from shareholders, are linked to the dollar and
          bear no interest. Repayment date have not been fixed. In 2003, the
          Company paid the shareholders an aggregate amount of NIS 43,790,000 in
          respect of capital notes.


                                       17
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 6 -  EMPLOYEE RIGHTS UPON RETIREMENT:

          a.   Israeli labor laws and agreements require the Group to pay
               severance pay to employees dismissed or leaving their employ
               under certain circumstances, computed on the basis of the number
               of years of service and, generally, the latest pay rate (one
               month's pay for each year of service) or of a pension upon
               retirement.

               To cover the liability for employee rights upon retirement,
               pursuant to labor agreements currently in force and based on
               salary components which, in management's opinion, create
               entitlement to severance pay, deposits are made with various
               provident funds (including pension funds) or insurance policies
               in the name of the employees.

               The severance pay and pension liabilities and the amounts funded
               as above are not reflected in the financial statements, as the
               significant pension and severance pay risks have been irrevocably
               transferred to the pension funds and the insurance companies, as
               allowed by the Severance Pay Law.

               The liability presented in the balance sheets represents the
               severance pay liability in respect of temporary employees.

          b.   The expenses relating to employee rights upon retirement, which
               reflect the amounts that were deposited during the reported years
               with provident funds, pension funds and various insurance
               policies in respect of permanent employees, and severance
               payments made in respect of temporary employees, together amount
               to adjusted NIS 3,827,000, adjusted NIS 2,356,000 and adjusted
               NIS 2,497,000 in 2003, 2002 and 2001 respectively.

NOTE 7 -  TAXES ON INCOME:

          a.   MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX
               (INFLATIONARY ADJUSTMENTS) LAW, 1985 (hereafter - the
               inflationary adjustments law)

               Under the inflationary adjustments law, results for tax purposes
               are measured in real terms, having regard to the changes in the
               Israeli CPI. The companies in the Group are taxed under this law.

               As stated in note 1b, the financial statements are drawn up in
               NIS adjusted on the basis of the changes in the exchange rate of
               the dollar. The difference between the change in the Israeli CPI
               and the change in the exchange rate of the dollar - on an annual
               and cumulative basis - creates differences between the taxable
               income and the income reflected in the financial statements.

          b.   THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION), 1969

               The Company is an "industrial company" as defined by this law. As
               such, it is entitled to claim, and has in fact claimed,
               depreciation at accelerated rates on equipment used in industrial
               activity as stipulated by regulations published under the
               inflationary adjustments law.


                                       18
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 7 -  TAXES ON INCOME (continued):

          c.   REFORM OF THE ISRAELI TAX SYSTEM

               In 2003, the provisions of the Amendment to the Income Tax
               Ordinance (No. 132), 2002 (hereafter - the tax reform law) came
               into effect. The tax reform law comprehensively reforms certain
               parts of the Israeli tax system. Certain provisions of the tax
               reform law and anticipated supplementary provisions will only be
               applied from later dates.

               In accordance with the provisions of the tax reform law, as from
               January 1, 2003, capital gains will be taxed at a reduced rate of
               25%, instead of the regular rate of 36% at which they were taxed
               until the aforementioned date; with regard to the sale of assets
               acquired prior to January 1, 2003, the reduced tax rate will be
               applicable only for the gain allocated to capital gains earned
               after the implementation of that law, which will be calculated,
               as prescribed by the tax reform law.

               Furthermore, the tax reform law stipulates that carryforward
               capital losses may be utilized against capital gains, without any
               time restriction (the time limitation for the utilization has
               been removed in respect of capital losses which arose in the tax
               year 1996 and thereafter).

          d.   CARRYFORWARD TAX LOSSES

               Carryforward tax losses of the Group and the Company are adjusted
               NIS 14,997,000 and 14,528,000 at December 31, 2003, respectively.
               (December 31, 2002 - adjusted NIS 39,037,000). Under the
               inflationary adjustments law, the carryforward losses are linked
               to the Israeli CPI.


                                       19
<PAGE>



                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 7 -  TAXES ON INCOME (continued):

          e.   Deferred income taxes:

               1)   Composition of the deferred taxes, and the changes therein
                    during 2003 and 2002, are as follows:

<TABLE>
<CAPTION>
                                                                   PROVISIONS FOR EMPLOYEE
                                                                            RIGHTS
                                                                     ---------------------
                                                                                 VACATION     ALLOWANCE
                                                                                   AND            FOR      IN RESPECT OF
                                           DEPRECIABLE               SEVERANCE  RECREATION     DOUBTFUL     CARRYFORWARD
                                          FIXED ASSETS   INVENTORIES    PAY        PAY         ACCOUNTS      TAX LOSSES    TOTAL
                                          ------------   ----------- ---------  ----------     --------     ------------  -------
                                                                     ADJUSTED NIS IN THOUSANDS
                                          ----------------------------------------------------------------------------------------
<S>                                          <C>          <C>           <C>       <C>           <C>          <C>            <C>
CONSOLIDATED:
          Balance at January 1, 2002         (18,879)     (1,379)       44        1,636         1,281        18,571         1,274
          Changes in 2002 -
              amounts carried to income       (8,214)      1,274         4         (226)          197        (4,518)      (11,483)
                                             -------      ------        --        -----         -----         -----       -------
          Balance at December 31, 2002       (27,093)       (105)       48        1,410         1,478        14,053       (10,209)
          Changes in 2003 -
              amounts carried to income       (2,206)        649         4          108          (170)       (8,823)      (10,438)
                                             -------      ------        --        -----         -----         -----       -------
          Balance at December 31, 2003       (29,299)        544        52        1,518         1,308         5,230       (20,647)
                                             =======      ======        ==        =====         =====         =====       =======
</TABLE>


                                       20
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 7 -  TAXES ON INCOME (continued):

          e.   Deferred income taxes (continued):

<TABLE>
<CAPTION>
                                                                   PROVISIONS FOR EMPLOYEE
                                                                            RIGHTS
                                                                     ---------------------
                                                                                 VACATION
                                                                                   AND         IN RESPECT OF
                                           DEPRECIABLE               SEVERANCE  RECREATION      CARRYFORWARD
                                          FIXED ASSETS   INVENTORIES    PAY        PAY           TAX LOSSES        TOTAL
                                          ------------   ----------- ---------  ----------      ------------      -------
                                                                     ADJUSTED NIS IN THOUSANDS
                                          --------------------------------------------------------------------------------
<S>                                          <C>          <C>           <C>       <C>          <C>          <C>
THE COMPANY:
   Balance January 1, 2002                   (18,879)    (1,113)          27         1,354      16,644         (1,967)
   Changes in 2002 -
       amounts carried to income              (8,214)     1,074            7          (169)     (2,591)        (9,893)
                                             -------        ---           --         -----        -----       -------
   Balance at December 31, 2002              (27,093)       (39)          34         1,185      14,053        (11,860)
   Changes in 2003 -
       amounts carried to income              (2,206)       403           18           333      (8,823)       (10,275)
                                             -------        ---           --         -----        -----       -------
   Balance at December 31, 2003              (29,299)       364           52         1,518        5,230       (22,135)
                                             =======        ===           ==         =====        =====       =======
</TABLE>

The deferred taxes are computed at the rate of 36%.

                                       21
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 7 -  TAXES ON INCOME (continued):

          e.   Deferred income taxes (continued):

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

<TABLE>
<CAPTION>
                                              CONSOLIDATED                               THE COMPANY
                                    ---------------------------------         ---------------------------------
                                    AMONG         AS A                        AMONG        AS A
                                   CURRENT     NON-CURRENT                   CURRENT    NON-CURRENT
                                   ASSETS(1)   LIABILITY(2)    TOTAL          ASSETS(1)  LIABILITY (2)   TOTAL
                                    -----       -------       -------         -----       -------       -------
                                       ADJUSTED NIS IN THOUSANDS                   ADJUSTED NIS IN THOUSANDS
                                    ---------------------------------         ---------------------------------
<S>                                 <C>            <C>          <C>             <C>        <C>           <C>
Balance at January 1, 2002          1,533          (259)        1,274           241        (2,208)       (1,967)
Changes in 2002                     7,815       (19,298)      (11,483)        7,473       (17,366)       (9,893)
                                    -----       -------       -------         -----       -------       -------
Balance at December 31, 2002        9,348       (19,557)      (10,209)        7,714       (19,574)      (11,860)
Changes in 2003                      (748)       (9,690)      (10,438)         (602)       (9,673)      (10,275)
                                    -----       -------       -------         -----       -------       -------
Balance at December 31, 2003        8,600       (29,247)      (20,647)        7,112       (29,247)      (22,135)
                                    =====       =======       =======         =====       =======       =======
</TABLE>

               (1)  In respect of inventories, allowance for doubtful accounts,
                    carryforward tax losses, vacation and recreation pay.

               (2)  In respect of depreciable fixed assets, severance pay and
                    carryforward tax losses.

               (3)  The deferred taxes are computed at the rate of 36%.


                                       22
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 7 -  TAXES ON INCOME (continued):

          f.   Taxes on income included in the statements of income (loss):

               1)   As follows:

<TABLE>
<CAPTION>
                                          CONSOLIDATED                             THE COMPANY
                               ----------------------------------        ---------------------------------
                                2003          2002          2001          2003          2002         2001
                               ------        ------        ------        ------        -----        ------
                                                         ADJUSTED NIS IN THOUSANDS
                               ---------------------------------------------------------------------------
<S>                            <C>           <C>           <C>           <C>          <C>           <C>
 For the reported  year:
     Current                       80            51                                      (93)
     Deferred, see d
        above                  10,438        10,220        (1,761)       10,275        9,893        (1,792)
                               ------        ------        ------        ------        -----        ------
                               10,518        10,271        (1,761)       10,275        9,800        (1,792)
                               ------        ------        ------        ------        -----        ------
 For previous years:
     Current                                                 (733)                                    (729)
     Deferred                                 1,263          (778)                                    (778)
                               ------        ------        ------        ------        -----        ------
                               10,518        11,534        (3,272)       10,275        9,800        (3,299)
                               ======        ======        ======        ======        =====        ======
</TABLE>


<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.

                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 7 -  TAXES ON INCOME (continued):

          f.   Taxes on income included in the statements of income (loss)
               (continued):

               2)   Following is a reconciliation of the theoretical tax amount,
                    assuming all income (loss) is taxed at the regular rate, and
                    the actual tax amount:

<TABLE>
<CAPTION>
                                                                             CONSOLIDATED
                                                        -------------------------------------------------------
                                                             2003               2002                2001
                                                        --------------      --------------     ----------------
                                                               ADJUSTED           ADJUSTED              ADJUSTED
                                                                  NIS                NIS                   NIS
                                                                  IN                 IN                    IN
                                                          %    THOUSANDS      %   THOUSANDS      %      THOUSANDS
                                                        -----   ------      -----   ------     ------   -------
<S>                                                     <C>    <C>          <C>     <C>        <C>      <C>
Income (loss) before taxes on income, as
   reported  in the  statements  of  income (loss)      100.0   29,037      100.0   27,611     (100.0)  (11,104)
                                                        =====   ======      =====   ======     ======   =======
Theoretical  tax (tax benefit) on the above amount       36.0   10,453       36.0    9,940      (36.0)   (3,997)
Changes in taxes resulting from:
   Differences between Israeli CPI
     Adjusted tax returns and dollar-adjusted
     financial  statements - net  (see a above)           0.2       65        0.7      186       20.0     2,212
   Other - net                                                                0.5      145        0.2        24
                                                        -----   ------      -----   ------     ------   -------
Taxes on income (tax benefit) for the
    reported year                                        36.2   10,518       37.2   10,271      (15.8)   (1,761)
                                                        =====   ======      =====   ======     ======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                                             THE COMPANY
                                                        -------------------------------------------------------
                                                             2003               2002                2001
                                                        --------------      --------------     ----------------
                                                               ADJUSTED           ADJUSTED              ADJUSTED
                                                                  NIS                NIS                   NIS
                                                                  IN                 IN                    IN
                                                          %    THOUSANDS      %   THOUSANDS      %      THOUSANDS
                                                        -----   ------      -----   ------     ------   -------
<S>                                                     <C>    <C>          <C>     <C>        <C>      <C>

Income (loss) before taxes on income, as
   reported  in the  statements of income (loss)        100.0   30,054       100.0   26,815     (100.0)  (12,870)
                                                        =====   ======       =====   ======      =====    ======
Theoretical  tax (tax benefit) on the above amount       36.0   10,819        36.0    9,653      (36.0)   (4,633)
Changes in taxes resulting from:
   Differences between Israeli CPI
     Adjusted tax returns and dollar-adjusted
     financial  statements - net  (see a above)           1.8     (544)        0.3       78       22.0     2,774
   Other - net                                                                 0.3       69        0.1        67
                                                        -----   ------       -----   ------     ------    ------
Taxes on income (tax benefit) for the
    reported year                                        34.2   10,275        36.6    9,800        (14)   (1,792)
                                                        =====   ======       =====   ======     ======    ======
</TABLE>

         g.       Tax assessments

                  The Company and its subsidiaries have not been assessed for
                  tax purposes since incorporation.


                                       23
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 8 -  LINKAGE TERMS OF MONETARY BALANCES:

          a.   As follows:

<TABLE>
<CAPTION>
                                                                          CONSOLIDATED
                                                        -------------------------------------------------
                                                                        DECEMBER 31, 2003
                                                        -------------------------------------------------
                                                      IN, OR LINKED
                                                       TO, FOREIGN
                                                     CURRENCY (MAINLY       LINKED TO THE
                                                        THE DOLLAR)          ISRAELI CPI         UNLINKED
                                                        -----------          -----------         --------
                                                                   ADJUSTED NIS IN THOUSANDS
                                                        -------------------------------------------------
<S>                                                     <C>                  <C>              <C>
Assets:
    Current assets:
       Cash and cash equivalents                           24,492                                  7,186
          Accounts receivable:
           Trade                                           34,213                                113,535
           Other                                                                                     970
                                                         -------               ------            -------
       Long-term loan to subsidiary
                                                           58,705                                121,691
                                                          =======                                =======
Liabilities:
    Current liabilities -
       accounts payable and accruals:
           Trade                                           85,386                                 18,711
           AIPM and its subsidiaries - net                                                        52,968
           Other                                            2,881                                  9,543
    Long-term liabilities:
       Loans from bank (including current maturities)      44,755               22,078
       Capital notes from shareholders  (including
           current maturities)                            43,790
                                                         --------               ------           -------
                                                          176,812               22,078            81,222
                                                         ========               ======           =======
<CAPTION>
                                                                          THE COMPANY
                                                        -------------------------------------------------
                                                                        DECEMBER 31, 2003
                                                        -------------------------------------------------
                                                      IN, OR LINKED
                                                       TO, FOREIGN
                                                     CURRENCY (MAINLY       LINKED TO THE
                                                        THE DOLLAR)          ISRAELI CPI         UNLINKED
                                                        -----------          -----------         --------
                                                                   ADJUSTED NIS IN THOUSANDS
                                                        -------------------------------------------------
<S>                                                   <C>                   <C>                  <C>
Assets:
    Current assets:
       Cash and cash equivalents                          12,896                                    7,138
          Accounts receivable:
           AIPM and its subsidiaries - net                                                        134,659
           Other                                                                                    5,448
       Long-term loan to subsidiary                                             2,478
                                                         -------                -----            --------
                                                          12,896                2,478             147,245
                                                         =======                =====            ========
Liabilities:
    Current liabilities -
       accounts payable and accruals:                     37,826                                   15,571
           AIPM and its subsidiaries - net                                                         52,671
           Subsidiaries                                    2,881                                    9,168
           Other
    Long-term liabilities:                                44,755                22,078
       Loans from bank (including current maturities)
       Capital notes from shareholders  (including
          current maturities)                             43,790
                                                         -------                -----            --------
                                                         129,252                22,078             77,410
                                                         =======                =====            ========
</TABLE>

                                       24
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 8 -  LINKAGE TERMS OF MONETARY BALANCES (continued):

          b.   Data regarding the exchange rate and the Israeli CPI:

<TABLE>
<CAPTION>
                                                             EXCHANGE RATE OF
                                                                ONE DOLLAR             CPI*
                                                             ----------------         ------
                                                                    NIS               POINTS
                                                                    ---               ------
<S>                                                              <C>                  <C>
               At end of year:
                   2003                                          NIS 4.379             178.6
                   2002                                          NIS 4.737             182.0
                   2001                                          NIS 4.416             170.9
                   2000                                          NIS 4.041             168.5
               Increase (decrease) during the year:

                   2003                                           (7.6%)               (1.9%)
                   2002                                            7.3%                 6.5%
                   2001                                            9.3%                 1.4%
</TABLE>

               *        Based on the index for the month ending on each
                        balance sheet date, on the basis of the 1993 average
                        = 100.

NOTE 9 -  COMMITMENTS AND LIABILITIES SECURED BY PLEDGES:

          a.   The subsidiaries entered into operating lease agreements for the
               buildings they use. The agreements are for periods ending through
               2008. The projected annual rental payments for the next four
               years, based on rates in effect as of December 31, 2003,
               approximate adjusted NIS 1,579,000.

          b.   As to a lease agreement relating to the Company, see note 11a(2).

          c.   To secure bank loans and credits (the balance of which at
               December 31, 2003 is adjusted NIS 66,833,000), the Company signed
               a "negative pledge agreement," under which it is committed not to
               pledge its assets (of all kinds), excluding fixed pledges
               relating to assets financed by others.

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

          Balance sheets:

          a.   Accounts receivable:

                                       CONSOLIDATED               THE COMPANY
                                        DECEMBER 31               DECEMBER 31
                                    ------------------       -------------------
                                     2003        2002         2003         2002
                                    -------    -------       -------       -----
                                             ADJUSTED NIS IN THOUSANDS
                                    --------------------------------------------

1) Trade:
    Composed as follows:
  Open accounts                     111,796    119,080                     2,811
  Cheques receivable                 35,952     35,915
                                    -------    -------                     -----
                                    147,748    154,995                     2,811
                                    =======    =======                     =====
  The item includes (is net of):

Neusiedler AG, see note 1a(3)        18,957     34,200
                        = ==        =======    =======
Affiliated company                                2,811                    2,811
                                               ========                    =====
Allowance for doubtful accounts       3,630      4,106
                                    =======    =======


                                       25
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>

                                                                      CONSOLIDATED        THE COMPANY
                                                                     ---------------    ----------------
                                                                       DECEMBER 31         DECEMBER 31
                                                                     ---------------    ----------------
                                                                     2003      2002      2003      2002
                                                                     -----    ------    ------    ------
                                                                           ADJUSTED NIS IN THOUSANDS
                                                                     -----------------------------------
<S>                                                                  <C>       <C>       <C>       <C>
                  2) Other:
                             Institutions                               201       716                 363
                             Customs and value added tax
                                      (VAT) authorities*                                  4,922     3,695
                             Prepaid expenses                           990       504       329       250
                             Advances to suppliers                      736       451       569       451
                             Amounts accrued in respect of
                             forward transactions, see
                             note 12c                                             505                 505
                             Deferred income taxes, see note 7e       8,600     9,348     7,112     7,714
                             Sundry                                     769     1,272       526       754
                                                                     ------    ------    ------    ------
                                                                     11,296    12,796    13,458    13,732
                                                                     ======    ======    ======    ======

* Consolidated VAT returns are filed by the Group

          b.   Inventories:

               For industrial activities:

               Finished goods and goods in process                 32,584    38,317    31,262    36,561
               Raw materials and supplies                          31,389    28,034    31,388    28,034
                                                                   ------    ------    ------    ------
                                                                   63,973    66,351    62,650    64,595
               For commercial activities - purchased products      25,258    13,347
                                                                   ------    ------    ------    ------
                                                                   89,231    79,698    62,650    64,595
                                                                   ======    ======    ======    ======
               The item is net of provision for obsolescence          906     1,375       530       941
                                                                   ======    ======    ======    ======

          c.   Credit from banks:

               Composed as follows:

               Short-term credit                                                 18
               Current maturities of loans from bank, see note 4   15,108    14,652    15,108    14,652
                                                                   ------    ------    ------    ------
                                                                   15,108    14,670    15,108    14,652
                                                                   ======    ======    ======    ======
               Unutilized credit lines                             87,580    87,765    87,580    87,580
                                                                   ======    ======    ======    ======
</TABLE>

         In 2003 and 2002, the Company and its subsidiaries entered into an
         agreement for a bank credit facility, pursuant to which the Company and
         its subsidiaries may, from time to time, borrow an aggregate principal
         amount of up to adjusted NIS 87,580,000. Under the terms of the
         agreement, the credit facility has no time limit.


                                       26
<PAGE>



                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

          d.   Accounts payable and accruals:

               1)   Trade:

<TABLE>
<CAPTION>
                                                                              CONSOLIDATED               THE COMPANY
                                                                              ------------               -----------
                                                                              DECEMBER 31                DECEMBER 31
                                                                              -----------                -----------
                                                                           2003         2002         2003          2002
                                                                           ----         ----         ----          ----
                                                                                     ADJUSTED NIS IN THOUSANDS
                                                                           --------------------------------------------
<S>                                                                         <C>            <C>         <C>             <C>
                        The item includes:
                           Neusiedler AG                                    7,803          1,502       1,423           557
                                                                            ======        ======       ======       ======
                           Affiliated company                               1,733          3,943         467
                                                                            ======        ======       ======

               2)   Other:

                        Payroll and related expenses                         1,914         1,594        1,918        1,541
                        Provision for vacation and recreation pay            4,226         3,897        4,228        3,294
                        Customs and value added tax (VAT)
                           authorities*                                        368         1,008
                        Interest payable                                     2,882         3,416        2,882        3,416
                        Advances from customers                                258         5,032
                        Neusiedler AG                                          552         1,901          552        1,901
                        Sundry                                               2,482         3,085        2,469        2,711
                                                                            ------        ------       ------       ------
                                                                            12,682        19,933       12,049       12,863
                                                                            ======        ======       ======       ======
</TABLE>

                           * Consolidated VAT returns are filed by the Group.


              Statements of income (loss):

<TABLE>
<CAPTION>
                                                                CONSOLIDATED                        THE COMPANY
                                                                ------------                        -----------
                                                        2003        2002        2001        2003        2002        2001
                                                        ----        ----        ----        ----        ----        ----
                                                                           ADJUSTED NIS IN THOUSANDS
                                                        -----------------------------------------------------------------
<S>                                                    <C>         <C>         <C>         <C>         <C>         <C>
          e.   Sales - net (1):
                    Industrial activities (2)          455,927     424,195     406,035     462,654     421,413     398,150
                    Commercial activities              186,213     151,412     151,541
                                                       -------     -------     -------     -------     -------     -------
                                                       642,140     575,607     557,576     462,654     421,413     398,150
                                                       =======     =======     =======     =======     =======     =======
                   (1) Including sales to:

                        Investee companies                                      13,991     462,654     421,413     398,150
                                                                               =======     =======     =======     =======
                        Shareholders
                        and its subsidiaries           170,811     154,765     119,516
                                                       =======     =======     =======
                        Affiliated company                 320         832       1,278
                                                       =======     =======     =======
                   (2) Including export, see
                        note 13                        157,303     149,260     126,059
                                                       =======     =======     =======
</TABLE>


                                       27
<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                                  CONSOLIDATED                          THE COMPANY
                                                         ----------------------------------    ---------------------------------
                                                          2003         2002          2001       2003         2002         2001
                                                         -------     --------      --------    -------     --------     --------
                                                                              ADJUSTED NIS IN THOUSANDS
                                                         -----------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>          <C>         <C>         <C>
          f.   Cost of sales:
                 Industrial activities:
                  Materials consumed                     271,334      251,070       253,333    271,332      251,070      253,333
                  Payroll and related expenses            30,482     **25,608      **29,373     30,482     **25,608     **29,373
                  Energy costs                            43,166       36,539        34,335     43,164       36,539       34,335
                  Depreciation                             7,243        6,464         5,131      7,243        6,464        5,131
                  Other manufacturing
                   costs and
                   expenses (including rent)              34,758     **29,181      **33,580     33,972     **27,739     **32,040
                  Decrease (increase) in inventories
                   of finished goods
                    and goods in process
                    in process                            (7,269)      18,975       *30,719      5,299       11,709      *15,732
                                                         -------     --------      --------    -------     --------     --------
                                                         379,714      367,837       386,471    391,492      359,129      369,944
                  Commercial activities - cost of
                    products sold                        177,176      122,125       119,005
                                                         -------     --------      --------    -------     --------     --------
                                                         556,890      489,962       505,476    391,492      359,129      369,944
                                                         =======     ========      ========    =======     ========     ========

                  *      After deduction of adjusted NIS 8,625,000 - amounts refunded from insurance companies.
                  **     Reclassified.
</TABLE>


                                                           28
<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>

                                                                  CONSOLIDATED                           THE COMPANY
                                                       ----------------------------------       ------------------------------------
                                                        2003        2002           2001          2003           2002          2001
                                                        ----        ----           ----          ----           ----          ----
                                                                                ADJUSTED NIS IN THOUSANDS
                                                       -----------------------------------------------------------------------------
<S>                                                    <C>           <C>           <C>           <C>           <C>           <C>
          g.   Selling, marketing, administrative and general expenses:
                   Selling and marketing:
                    Payroll and related
                     expenses                          16,913       *18,190       *18,922        16,913       *12,033       *11,139
                    Packaging and
                     shipping                          17,460        14,740        11,709         9,714         9,419         9,822
                    Office and warehouse
                     rent and maintenance               4,144        *6,148        *6,094         4,139        *3,941        *3,210
                    Equipment and vehicle
                     maintenance                        1,178         1,427         2,098           399           315           345
                    Advertising                           180           153           245           180           116           145
                    Commissions                         1,865           176           298                         176           298
                    Subsistence and travel                337           311           153           337           311           153
                    Depreciation                          670           880           789            44            20            25
                    Other                                 145           456           110           604           416            52
                                                       ------        ------        ------        ------        ------        ------
                                                       42,892        42,481        40,418        32,330        26,747        25,189
                                                       ======        ======        ======        ======        ======        ======
                    Administrative and general:
                     Payroll and related
                      expenses                          3,821         3,310         3,841         3,821         2,090         2,124
                     Office supplies, rent
                      and maintenance                   1,496         2,339         1,843           933           635           630
                     Professional fees and
                      and maintenance fee               1,594         2,227         2,189         1,152         1,549         1,509
                     Depreciation and
                      amortization                        652           733           581
                     Doubtful accounts and
                      bad debts                           679         1,475           955
                     Other                                398           237           262           159            61             9
                                                       ------        ------        ------        ------        ------        ------
                                                        8,640        10,321         9,671         6,065         4,335         4,272
                                                       ======        ======        ======        ======        ======        ======
                           * Reclassified.
</TABLE>

                                       29

<PAGE>



                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>

                                                                   CONSOLIDATED                               THE COMPANY
                                                        --------------------------------          ----------------------------------
                                                        2003          2002          2001          2003          2002         2001
                                                        ----          ----          ----          ----          ----         ----
                                                                                ADJUSTED NIS IN THOUSANDS
                                                       -----------------------------------------------------------------------------
<S>                                                    <C>           <C>          <C>            <C>           <C>          <C>
          h.   Financial income expenses) - net:
                 Expenses:
                   In respect of long-term
                    loans                               3,254         4,208         5,771         3,254         4,206         5,771
                   Erosion of operating
                    monetary balances,
                    net of related hedges                               634         4,946         1,608         1,423         7,110
                  In respect of interest
                    and exchange differences
                    on customer's balances - net        3,770         1,147           875
                  In respect of short-term
                    balances - net                                                  1,253                                       753
                  Other                                                               270                                       186
                                                       ------        ------       -------        ------        ------       -------
                                                       (7,024)       (5,989)      (13,115)       (4,862)       (5,629)      (13,820)
                                                       ------        ------       -------        ------        ------       -------
                 Income:
                  In respect of increase
                    in value of cash
                    balances relating to
                    operating activity                                                                                        2,205
                  Erosion of operating
                    monetary balances, net of             350
                    related hedges
                  In respect of
                    short-term balances - net           1,993           473                       2,149           950
                  Other                                                 284                                       292
                                                       ------        ------       -------        ------        ------       -------
                                                        2,343           757                       2,149         1,242         2,205
                                                       ------        ------       -------        ------        ------       -------
                                                       (4,681)       (5,232)      (13,115)        2,713        (4,387)      (11,615)
                                                       ======        ======       =======        ======        ======       =======
</TABLE>

                                       30
<PAGE>



                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 11 - "INTERESTED PARTIES" - TRANSACTIONS AND BALANCES:

          a.   Transactions - expenses (income):

               1)   As follows:
<TABLE>
<CAPTION>

                                                     CONSOLIDATED                         THE COMPANY
                                            -------------------------------       ---------------------------
                                            2003          2002         2001       2003        2002       2001
                                            ----          ----         ----       ----        ----       ----
                                                                 ADJUSTED NIS IN THOUSANDS
                                            -----------------------------------------------------------------
<S>                                          <C>           <C>           <C>       <C>         <C>       <C>
           Sales                           (171,131)     (155,599)     (120,795)
                                            =======       =======       =======
           Costs and expenses                73,414        71,750        79,072    73,112      66,215    73,392
                                            =======       =======       =======    ======      ======    ======
           Financial - net                   13,759        (3,722)       (3,681)      858        (298)    3,166
                                            =======       =======       =======    ======      ======    ======
</TABLE>

               2)   The Company leases its premises from AIPM and uses services
                    (including electricity, water, maintenance and professional
                    services) rendered under agreements which are renewed every
                    year. The expenses in respect of the above agreements are
                    presented in (1) above.

               3)   The transactions as above represent transactions carried out
                    in the ordinary course of business, at terms and prices as
                    with non-affiliated customers and suppliers.

          b.   Balances with interested parties:
<TABLE>
<CAPTION>

                                                                             CONSOLIDATED                  THE COMPANY
                                                                         -------------------          ---------------------
                                                                             DECEMBER 31                   DECEMBER 31
                                                                         -------------------          ---------------------
                                                                         2003          2002           2003            2002
                                                                         ----          ----           ----            ----
                                                                                      ADJUSTED NIS IN THOUSANDS
                                                                         --------------------------------------------------
<S>                                                                     <C>           <C>           <C>             <C>
                     Current assets - accounts
                         receivable                                     18,957        37,011        134,659         73,370
                                                                        ======        ======        =======         ======
                         Current liabilities - accounts
                         payable and accruals                           62,504        62,578          1,900          3,004
                                                                        ======        ======        =======         ======
                     Capital notes and current maturities
                         of long-term capital notes                     43,790        87,580         43,790         87,580
                                                                        ======        ======        =======         ======
</TABLE>


                                       31
<PAGE>


                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

          a.   Derivative financial instruments

               The Company has only limited involvement with derivative
               financial instruments. The Company uses these instruments as
               hedges. The Company utilizes derivatives, mainly forward exchange
               contracts to protect its dollar cash flows in respect of existing
               assets and liabilities. As the counter-parties of these
               derivatives are Israeli banks, the Company considers the interest
               credit risks remote. As of December 31, 2003 there are no
               balances in respect of transactions in derivatives financial
               instruments.

          b.   Credit risks

               The Group's cash and cash equivalents are deposited mainly with
               major Israeli banks.

               Most of the Group's sales are made in Israel and Europe, to a
               large number of customers. The exposure to credit risks relating
               to trade receivables is limited due to the relatively large
               number of customers. The Group performs ongoing credit
               evaluations of its debtors and requires collaterals when
               appropriate. An appropriate allowance for doubtful accounts is
               included in the financial statements.

          c.   Fair value of financial instruments

               The financial instruments of the Group consist mainly of
               non-derivative assets and liabilities (which include working
               capital items, long-term loans to investee companies, long-term
               loans received and capital notes) and of some derivatives (see a.
               above).

               In view of their nature, the fair value of the financial
               instruments included in working capital of the Group is usually
               identical or close to their carrying value. The fair value of the
               long-term loans also approximates the carrying value, since they
               bear interest at rates close to the prevailing market rates.

               The Company does not disclose the fair value of capital notes
               from shareholders, included under current liabilities and
               long-term liabilities aggregating adjusted NIS 43,790 in
               thousands (see note 5), since their value cannot be reliably
               determined prior to determining their repayment dates.

               The fair value and the carrying value of derivatives at December
               31, 2002, is approximately adjusted NIS 505,000, and generally
               reflects the estimated amounts that the Group would receive or
               pay to terminate the contracts at the reporting dates.



                                       32
<PAGE>

NOTE 13 - BUSINESS AND GEOGRAPHICAL SEGMENTS

          Following are data regarding the distribution of the Group's
          consolidated sales by geographical market, regardless of where the
          goods were produced:

                                     2003           2002             2001
                                     ----           ----             ----
                                           ADJUSTED NIS IN THOUSANDS
                                    --------------------------------------
                Europe              139,791        129,416         110,005
                Israel              484,837        426,347         431,516
                Other                17,512         19,844          16,054
                                    -------        -------         -------
                                    642,140        575,607         557,575
                                    =======        =======         =======


                                       33
<PAGE>



                          NEUSIEDLER HADERA PAPER LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 14 - NOMINAL DATA OF THE COMPANY:

          a.   Balance sheet data:
<TABLE>
<CAPTION>
                                                                                                  NOMINAL NIS
                                                                                            ------------------------
                                                                                                  IN THOUSANDS
                                                                                                  DECEMBER 31
                                                                                            ------------------------
                                                                                             2003            2002
                                                                                            -------         -------
<S>                                                                                         <C>              <C>
                                               A S S E T S
                    Current assets:
                        Cash and cash equivalents                                            20,034          49,359
                        Accounts receivable:
                           Trade                                                                              3,041
                           American Israeli Paper Mills Limited and its
                               subsidiaries - net                                           134,659          76,327
                           Subsidiaries                                                                       9,536
                           Other                                                              6,328           6,454
                        Inventories                                                          63,651          69,751
                                                                                            -------         -------
                                                                                            224,672         214,468
                                                                                            -------         -------
                    Investments in investee companies                                         6,592           7,252
                                                                                            -------         -------
                    Fixed assets:
                        Cost                                                                123,564         114,341
                        L e s s - accumulated depreciation                                   21,749          14,853
                                                                                            -------         -------
                                                                                            101,815          99,488
                                                                                            -------         -------
                                                                                            333,079         321,208
                                                                                            =======         =======

                                  LIABILITIES AND SHAREHOLDERS' EQUITY
                    Current liabilities:
                        Credit from banks                                                    15,108          15,850
                        Current maturities of long-term capital loans                                        18,948
                        Accounts payable and accruals:
                           Trade                                                             53,397          48,432
                           Subsidiaries                                                      52,671
                           Other                                                             12,049          13,915
                                                                                            -------         -------
                                                                                            133,225          97,145
                    Long-term liabilities:

                        Loans from bank                                                      51,725          77,710
                        Capital notes from shareholders (net of
                           current maturities)                                               43,790          75,792
                        Excess of losses of subsidiaries over the
                           investments therein                                                3,738           4,325
                        Liability for employee rights upon retirement                           145             104
                                                                                            -------         -------
                                                                                             99,398         157,931
                                                                                            -------         -------
                               T o t a l  liabilities                                       232,623         255,076
                                                                                            -------         -------

                    Shareholders' equity, see c. below:
                        Share capital                                                             1               1
                        Capital surplus                                                      41,125          41,125
                        Retained earnings                                                    59,330          25,006
                                                                                            -------         -------
                                                                                            100,456          66,132
                                                                                            -------         -------
                                                                                            333,079         321,208
                                                                                            =======         =======
</TABLE>

                                       34
<PAGE>

                          NEUSIEDLER HADERA PAPER LTD.

                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)



NOTE 14 - NOMINAL DATA OF THE COMPANY (continued):

          b.   Operating results data:
<TABLE>
<CAPTION>
                                                                                        NOMINAL NIS IN THOUSANDS
                                                                                --------------------------------------
                                                                                  2003            2002            2001
                                                                                  ----            ----            ----
<S>                                                                             <C>              <C>            <C>
                    Sales - net                                                 480,764          452,986        382,166
                    Cost of sales                                               406,930         *378,990       *351,317
                                                                                -------          -------        -------
                    Gross profit                                                 73,834           73,996         30,849
                                                                                -------          -------        -------
                    Selling, marketing, administrative and
                        general expenses:
                        Selling and marketing                                    33,455          *28,769         *24,205
                        Administrative and general                                9,173            4,639          4,120
                                                                                -------          -------        -------
                                                                                 42,628           33,408         28,325
                                                                                -------          -------        -------
                    Income from ordinary operations                              31,206           40,588          2,524
                    Financial income (expenses) - net                            (3,152)          11,957         22,130
                                                                                -------          -------        -------
                    Income (loss) before taxes on income                         34,358           28,631        (19,606)
                    Tax benefit, see d. below                                                                      (669)
                                                                                -------          -------        -------
                    Income (loss) after taxes on income                          34,358           28,631        (18,937)
                    Share in losses of investee companies, net                       34              385            559
                                                                                -------          -------        -------
                    Net income (loss) for the year - nominal                     34,324           28,246        (19,496)
                                                                                =======          =======        =======

                           * Reclassified.
</TABLE>

          c.   Changes in shareholders' equity:
<TABLE>
<CAPTION>
                                                                                    NOMINAL NIS IN THOUSANDS
                                                                   -----------------------------------------------------
                                                                    SHARE         CAPITAL        ACCUMULATED
                                                                   CAPITAL        SURPLUS          DEFICIT        TOTAL
                                                                   -------        -------          -------        -----
<S>                                                                  <C>         <C>             <C>            <C>
                       Balance at January 1, 2001                     1           41,125          16,256         57,382
                       Changes during 2001 -
                           loss                                                                  (19,496)       (19,496)
                                                                   ------         ------          ------        -------
                       Balance at January 1, 2001                     1           41,125          (3,240)        37,886
                       Changes during 2002 -
                           net income                                                             28,246         28,246
                                                                   ------         ------          ------        -------
                       Balance at December 31, 2002                   1           41,125          25,006         66,132
                       Changes during 2003 -
                           net income                                                             34,324         34,324
                                                                   ------         ------          ------        -------
                       Balance at December 31, 2003                   1           41,125          59,330        100,456
                                                                   ======         ======          ======        =======
</TABLE>



          d.   For practical reasons, no deferred taxes are created in the
               nominal accounts.

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




                                       35
<PAGE>

                                                                        APPENDIX

                          NEUSIEDLER HADERA PAPER LTD.
                          DETAILS OF INVESTEE COMPANIES
                              AT DECEMBER 31, 2003


                                                             PERCENTAGE OF
                                                                HOLDING
                                                         IN SHARES CONFERRING
                                                              PROFIT AND
                                                             VOTING RIGHTS
                                                      --------------------------
                                                                   %
                                                                -------

SUBSIDIARIES:

    Grafinir Paper Marketing Ltd.                                100.00
    Yavnir (1999) Ltd.                                           100.00
    Neusiedler Hadera Paper Marketing (1999) Ltd.                100.00
    Miterani Paper Marketing 2000 (1998) Ltd.                    100.00





                                       36
<PAGE>


                               HOGLA-KIMBERLY LTD.
                              FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2003

                                TABLE OF CONTENTS


                                                                        PAGE
                                                                        ----

    INDEPENDENT AUDITORS' REPORT                                          1

    FINANCIAL STATEMENTS:

       Balance Sheets                                                     2

       Statements of Operations                                           3

       Statements of Changes in Shareholders' Equity                      4

       Statements of Cash Flows                                          5-6

       Notes to the Financial Statements                                 7-29



<PAGE>

                          INDEPENDENT AUDITORS' REPORT
                             TO THE SHAREHOLDERS OF
                               HOGLA-KIMBERLY LTD.

We have audited the accompanying balance sheets of HOGLA-KIMBERLY LTD. ("the
Company") as of December 31, 2003 and 2002, and the consolidated balance sheets
as of those dates, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the two years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audit.

The statements of operations, changes in shareholders' equity and cash flows -
of the Company and on a consolidated basis - for the year ended December 31,
2001 were audited by other auditors whose report, dated March 4, 2002, expressed
an unqualified opinion on those financial statements.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position - of the Company and on a
consolidated basis - as of December 31, 2003 and 2002, and the results of
operations, changes in shareholders' equity and cash flows - of the Company and
on a consolidated basis - for each of the two years in the period then ended, in
accordance with generally accepted accounting principles in Israel. In addition,
in our opinion, the financial statements referred to above are prepared in
accordance with the Israeli Securities Regulations (Preparation of Annual
Financial Statements), 1993.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
the financial position and results of operations as of the dates and for the
years presented to the extent summarized in Note 25.

As explained in Note 2A, the financial statements have been prepared on the
basis of historical cost adjusted for changes in the exchange rate of the U.S.
dollar in relation to the NIS, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.

Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu

Tel Aviv, March 8, 2004


                                      -1-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                                 BALANCE SHEETS
           (Adjusted for changes in the U.S. dollar vis-a-vis the NIS)

<TABLE>
<CAPTION>
                                                                         CONSOLIDATED                    COMPANY
                                                                     ----------------------        ----------------------
                                                                         DECEMBER 31,                  DECEMBER 31,
                                                                     ----------------------        ----------------------
                                                        NOTE           2003          2002            2003           2002
                                                        ----         -------        -------        -------        -------
                                                                       NIS IN THOUSANDS              NIS IN THOUSANDS
                                                                     ----------------------        ----------------------
CURRENT ASSETS
<S>                                                     <C>         <C>            <C>            <C>            <C>
   Cash and cash equivalents                              3           37,340         21,330         31,645         10,832
   Current maturities of long-term bank deposits          7            7,882          9,195          7,882          9,195
   Trade receivables                                      4          229,979        182,568         74,668         41,176
   Other receivables                                      5           14,222         10,574          7,879          6,719
   Inventories                                            6           92,664         86,427         58,539         42,292
                                                                     -------        -------        -------        -------
                                                                     382,087        310,094        180,613        110,214
                                                                     =======        =======        =======        =======
LONG-TERM INVESTMENTS
   Long-term deposits                                     7           70,064         77,946              -          7,882
   Capital note of shareholder                            8           32,770         30,294         32,770         30,294
   Investments in Subsidiaries                            9                -              -        196,037        158,619
                                                                     -------        -------        -------        -------
                                                                     102,834        108,240        228,807        196,795
                                                                     =======        =======        =======        =======

FIXED ASSETS                                             10
   Cost                                                              479,744        464,144        380,774        368,011
   Less - accumulated depreciation                                   210,176        193,428        164,163        151,639
                                                                     -------        -------        -------        -------
                                                                     269,568        270,716        216,611        216,372
                                                                     =======        =======        =======        =======

OTHER ASSETS - GOODWILL                                  9B           29,073         31,841              -              -
                                                                     -------        -------        -------        -------
                                                                     783,562        720,891        626,031        523,381
                                                                     =======        =======        =======        =======

CURRENT LIABILITIES
   Short-term bank credit                                              1,087              -          1,087              -
   Current maturities of long-term bank loans            13           15,147         24,960              -              -
   Trade payables                                        11          139,555        127,629        174,580         95,570
   Other payables and accrued expenses                   12           37,632         32,502         10,645         21,648
                                                                     -------        -------        -------        -------
                                                                     193,421        185,091        186,312        117,218
                                                                     =======        =======        =======        =======

LONG-TERM LIABILITIES
   Long-term bank loans                                  13           96,338         82,326              -              -
   Deferred taxes                                        22           29,428         19,644         26,738         16,592
                                                                     -------        -------        -------        -------
                                                                     125,766        101,970         26,738         16,592
                                                                     =======        =======        =======        =======

COMMITMENTS AND CONTINGENT LIABILITIES                   15

MINORITY INTEREST                                                     51,394         44,259              -              -
                                                                     =======        =======        =======        =======

SHAREHOLDERS' EQUITY
   Share capital                                         16           28,788         28,788         28,788         28,788
   Capital reserves                                                  156,799        156,799        156,799        156,799
   Retained earnings                                                 227,394        171,141        227,394        171,141
   Dividend declared
     after balance sheet date                                              -         32,843              -         32,843
                                                                     -------        -------        -------        -------
                                                                     412,981        389,571        412,981        389,571
                                                                     -------        -------        -------        -------
                                                                     783,562        720,891        626,031        523,381
                                                                     =======        =======        =======        =======
</TABLE>

<TABLE>
<S>                                 <C>                             <C>                      <C>
 --------------------                 --------------------          --------------------     --------------------
      T. DAVIS                            Y. YERUSHALMI                   A. MAGID                A. BRENNER
Chairman of the Board of            Vice-Chairman of the Board of     Financial Manager        Managing Director
      Directors                             Directors
</TABLE>

Approval date of the financial statements: March 8, 2004.
The accompanying notes are an integral part of the financial statements.


                                      -2-
<PAGE>



                               HOGLA-KIMBERLY LTD.
                            STATEMENTS OF OPERATIONS
           (Adjusted for changes in the U.S. dollar vis-a-vis the NIS)

<TABLE>
<CAPTION>
                                                          CONSOLIDATED                                COMPANY
                                               ------------------------------------     -------------------------------------
                                                     YEAR ENDED DECEMBER 31,                  YEAR ENDED DECEMBER 31,
                                               ------------------------------------     -------------------------------------
                                     NOTE        2003         2002          2001          2003           2002          2001
                                     ----      ---------   ----------   -----------     ---------     ---------     ---------
                                                        NIS IN THOUSANDS                          NIS IN THOUSANDS
                                               ------------------------------------     -------------------------------------
<S>                                   <C>        <C>        <C>           <C>           <C>           <C>           <C>
Net sales                             17         868,671      766,549       821,264       377,117       285,442       331,109

Cost of sales                         18         621,014      554,763       559,173       322,558       233,096       243,591
                                               ---------   ----------   -----------     ---------     ---------     ---------

    GROSS PROFIT                                 247,657      211,786       262,091        54,559        52,346        87,518

Selling expenses                      19         130,670   (*)123,955   (*) 131,133         7,538         5,373         5,352

General and
   administrative expenses            20          39,046    (*)29,941    (*) 33,379         4,381         5,368         6,172
                                               ---------   ----------   -----------     ---------     ---------     ---------
    OPERATING PROFIT                              77,941       57,890        97,579        42,640        41,605        75,994

Financing income
   (expenses), net                    21           5,517      (13,425)      (17,420)      (12,268)       (4,622)          293

Other income (expenses), net                         496           78          (550)          238           714           406
                                               ---------   ----------   -----------     ---------     ---------     ---------
    INCOME BEFORE INCOME
       TAXES                                      83,954       44,543        79,609        30,610        37,697        76,693

Income taxes                          22          20,566       19,232        36,477        11,775        16,076        28,378
                                               ---------   ----------   -----------     ---------     ---------     ---------
    INCOME AFTER INCOME TAXES                     63,388       25,311        43,132        18,835        21,621        48,315

Equity in net earnings (losses)
   of Subsidiaries                                     -            -             -        37,418         1,091        (6,714)

Minority interest in
   earnings of Subsidiary                         (7,135)      (2,599)       (1,531)             -            -             -
                                               ---------   ----------   -----------     ---------     ---------     ---------
    NET INCOME FOR THE YEAR                       56,253       22,712        41,601        56,253        22,712        41,601
                                               =========   ==========   ===========     =========     =========     =========

EARNINGS PER SHARE (IN NIS)                         6.81         2.75          5.03          6.81          2.75          5.03
                                               =========   ==========   ===========     =========     =========     =========
NUMBER OF SHARES USED IN
   COMPUTATION                                 8,263,473    8,263,473     8,263,473     8,263,473     8,263,473     8,263,473
                                               =========    =========     =========     =========     =========     =========
</TABLE>


(*) Reclassified.

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

                                      -3-
<PAGE>


                               HOGLA-KIMBERLY LTD.
                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
           (Adjusted for changes in the U.S. dollar vis-a-vis the NIS)

<TABLE>
<CAPTION>
                                                                                                 DIVIDEND
                                                                                                 DECLARED
                                                                                                   AFTER
                                                     SHARE          CAPITAL       RETAINED     BALANCE SHEET
                                                    CAPITAL         RESERVES      EARNINGS          DATE            TOTAL
                                                 --------------  --------------  -----------  ----------------  --------------
                                                                               NIS IN THOUSANDS

<S>                                                     <C>            <C>          <C>                               <C>
   BALANCE - JANUARY 1, 2001                            28,788         156,799      183,461                 -         369,048

CHANGES DURING 2001:

   Dividend declared
        after balance-sheet date                                                    (43,790)                          (43,790)
   Net income for the year                                                           41,601                            41,601
                                                 --------------  --------------  -----------  ----------------  --------------

   BALANCE - DECEMBER 31, 2001                          28,788         156,799      181,272                 -         366,859

CHANGES DURING 2002:

   Dividend declared
     after balance-sheet date                                                       (32,843)           32,843               -
   Net income for the year                                                           22,712                            22,712
                                                 --------------  --------------  -----------  ----------------  --------------

   BALANCE - DECEMBER 31, 2002                          28,788         156,799      171,141            32,843         389,571

CHANGES DURING 2003:

   Dividend paid                                                                                      (32,843)        (32,843)
   Net income for the year                                                           56,253                            56,253
                                                 --------------  --------------  -----------  ----------------  --------------

   BALANCE - DECEMBER 31, 2003                          28,788         156,799      227,394                  -        412,981
</TABLE>


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

                                      -4-
<PAGE>


                               HOGLA-KIMBERLY LTD.
                            STATEMENTS OF CASH FLOWS
           (Adjusted for changes in the U.S. dollar vis-a-vis the NIS)

<TABLE>
<CAPTION>
                                                                CONSOLIDATED                              COMPANY
                                                      ---------------------------------      ----------------------------------
                                                            YEAR ENDED DECEMBER 31,                YEAR ENDED DECEMBER 31,
                                                      ---------------------------------      ----------------------------------
                                                       2003         2002         2001         2003          2002          2001
                                                      -------      -------     --------      -------       -------      -------
                                                             NIS IN THOUSANDS                        NIS IN THOUSANDS
                                                      ---------------------------------      ----------------------------------
<S>                                                   <C>           <C>        <C>           <C>           <C>          <C>
CASH FLOWS - OPERATING ACTIVITIES
   Net income                                          56,253       22,712       41,601       56,253        22,712       41,601
   Adjustments to reconcile net income
     to net cash provided by operating
     activities (Appendix A)                            4,190       14,324       18,657        7,188        80,535       16,087
                                                      -------      -------     --------      -------       -------      -------
   NET CASH PROVIDED BY OPERATING
     ACTIVITIES                                        60,443       37,036       60,258       63,441       103,247       57,688
                                                      =======      =======     =========     =======       =======      =======

CASH FLOWS - INVESTING ACTIVITIES
   Investment in short-term bank deposit                    -            -      (57,069)           -             -            -
   Withdrawal of short-term bank deposit                    -       57,069            -            -             -            -
   Investment in long-term bank deposits                    -            -      (13,575)           -             -      (13,575)
   Withdrawal of long-term bank deposits                9,195        8,759            -       9,195          8,759            -
   Acquisition of fixed assets                        (26,953)     (76,523)     (47,729)     (20,351)      (66,375)     (41,520)
   Proceeds from sale of fixed assets                   1,092          456        1,321          284           161          955
                                                      -------      -------     --------      -------       -------      -------
   NET CASH USED IN INVESTING ACTIVITIES              (16,666)     (10,239)    (117,052)     (10,872)      (57,455)     (54,140)
                                                      =======      =======     =========     =======       =======      =======

CASH FLOWS - FINANCING ACTIVITIES
   Dividend paid                                      (32,843)     (43,790)           -      (32,843)      (43,790)           -
   Long-term loans received                            28,949       11,386       13,575            -             -            -
   Repayment of long-term loans                       (24,960)           -            -            -             -            -
   Short-term bank credit                               1,087            -            -        1,087             -            -
                                                      -------      -------     --------      -------       -------      -------
   NET CASH PROVIDED BY
     (USED IN) FINANCING ACTIVITIES                   (27,767)     (32,404)      13,575      (31,756)      (43,790)           -
                                                      =======      =======     =========     =======       =======      =======

INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                           16,010       (5,607)     (43,219)      20,813         2,002        3,548
CASH AND CASH EQUIVALENTS -
   BEGINNING OF YEAR                                   21,330       26,937       70,156       10,832         8,830        5,282
                                                      -------      -------     --------      -------       -------      -------
CASH AND CASH EQUIVALENTS
   - END OF YEAR                                       37,340       21,330        26,937      31,645        10,832        8,830
                                                      =======      =======     =========     =======       =======      =======
</TABLE>

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



                                      -5-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                     APPENDICES TO STATEMENTS OF CASH FLOWS
           (Adjusted for changes in the U.S. dollar vis-a-vis the NIS)

<TABLE>
<CAPTION>
                                                              CONSOLIDATED                             COMPANY
                                                      -------------------------------       --------------------------------
                                                         YEAR ENDED DECEMBER 31,               YEAR ENDED DECEMBER 31,
                                                      -------------------------------       --------------------------------
                                                       2003         2002        2001         2003         2002         2001
                                                      ------       ------      ------       ------       ------       ------
                                                            NIS IN THOUSANDS                      NIS IN THOUSANDS
                                                      -------------------------------       --------------------------------
<S>                                                  <C>         <C>          <C>         <C>           <C>          <C>
A.  ADJUSTMENTS TO RECONCILE NET INCOME
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES

    INCOME AND EXPENSES ITEMS
       NOT INVOLVING CASH FLOWS:
            Minority interest in
              earnings of Subsidiary                   7,135        2,599       1,531            -            -            -
            Equity in net losses
              (earnings) of Subsidiaries                   -            -           -      (37,418)      (1,091)       6,714
            Depreciation and amortization             25,213       22,086      21,262       14,789       12,093       11,153
            Deferred taxes, net                        8,251        1,072       3,028       10,417        1,046        2,508
            Loss (gain) from sale of fixed assets       (482)          81        (373)        (208)         (29)        (385)
            Effect of exchange rate
              differences, net                        (2,266)       2,202       3,015       (2,476)       2,202        3,015

    CHANGES IN ASSETS AND LIABILITIES:
       Decrease (increase) in trade receivables      (47,933)     (14,411)     (2,026)      (4,930)        (455)         446
       Decrease (increase) in other receivables       (2,115)       4,860      (7,055)      (1,431)      (1,395)      (2,098)
       Decrease (increase) in inventories             (6,237)     (16,362)      9,927      (16,247)     (10,406)      13,558
       Increase (decrease) in trade payables          27,544       18,343      (1,057)      13,628       15,495       (8,035)
       Net change in balances with
          related parties                            (10,050)       7,731       3,411       42,067       71,830       13,603
       Increase (decrease) in other
          payables and accrued expenses                5,130      (13,877)    (13,006)     (11,003)      (8,755)     (24,392)
                                                      ------       ------      ------       ------       ------       ------
                                                       4,190       14,324      18,657        7,188       80,535       16,087
                                                      ======       ======      ======       ======       ======       ======

B.  NON-CASH ACTIVITIES

     Dividend declared                                                         43,790                                 43,790
                                                                               ======                                 ======
     Acquisition of fixed assets on credit             8,661       13,707       2,382        8,460       13,707        2,382
                                                      ======       ======      ======       ======       ======       ======
</TABLE>

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

                                      -6-
<PAGE>


                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 -  GENERAL

          A.   DESCRIPTION

               Hogla  Kimberly Ltd.  ("the  Company") and its  Subsidiaries  are
               engaged  principally in the production and marketing of paper and
               hygienic  products.  The  Company's  results  of  operations  are
               affected  by  transactions   with   shareholders  and  affiliated
               companies (see Note 23).

               The Company is presently  owned by Kimberly Clark Corp.  ("KC" or
               the "Parent  Company") (50.1%) and  American-Israeli  Paper Mills
               Ltd. ("AIPM") (49.9%).


          B.   DEFINITIONS:

               THE COMPANY              -  Hogla-Kimberly Ltd.



               THE GROUP                -  the Company and its  Subsidiaries,  a
                                           list of whom is provided in Note 9D.



               SUBSIDIARIES             -  companies   in  which   the   Company
                                           exercises   over  50%  ownership  and
                                           control, directly or indirectly,  and
                                           whose financial  statements are fully
                                           consolidated   with   those   of  the
                                           Company.



               RELATED PARTIES          -  as defined  by Opinion  No. 29 of the
                                           Institute   of    Certified    Public
                                           Accountants in Israel.



               INTERESTED PARTIES       -  as defined in the Israeli  Securities
                                           Regulations      (Presentation     of
                                           Financial Statements), 1993.




               CONTROLLING SHAREHOLDER  -  as defined in the Israeli  Securities
                                           Regulations      (Presentation     of
                                           Transactions  between  a  Corporation
                                           and its  Controlling  Shareholder  in
                                           the Financial Statements), 1996.



               NIS                      -  New Israeli Shekel.

               CPI                      -  the Israeli consumer price index.

               DOLLAR                   -  the U.S. dollar.


          C.   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 reported  amounts
               of assets and liabilities and disclosure of contingent assets and
               liabilities as of the date of the financial  statements,  and the
               reported  amounts of revenues and expenses  during the  reporting
               periods. Actual results could differ from those estimates.


                                      -7-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 2 -  SIGNIFICANT ACCOUNTING POLICIES

          The  following are the principal  accounting  policies  applied in the
          preparation of the financial  statements in a manner  consistent  with
          previous years:

          A.   ADJUSTED FINANCIAL STATEMENTS

               (1)  GENERAL

                    In  accordance  with  pronouncements  of  the  Institute  of
                    Certified  Public   Accountants  in  Israel,  the  financial
                    statements,   including  comparative  figures  for  previous
                    years, are presented on the basis of nominal historical cost
                    adjusted for changes in the exchange rate of the U.S. dollar
                    in relation to the NIS.

                    The adjusted amounts of non-monetary  items presented in the
                    financial statements reflect their cost adjusted for changes
                    in the exchange rate of the U.S.  dollar  vis-a-vis the NIS,
                    and  do  not  necessarily  reflect  realization  or  current
                    economic value of these items.

                    The term  "cost"  in these  financial  statements  refers to
                    adjusted cost,  unless otherwise  indicated.  The term "NIS"
                    refers to adjusted NIS, unless otherwise stated.

                    The  Company's  condensed  financial  statements  in nominal
                    values,  on  the  basis  of  which  the  adjusted  financial
                    statements were prepared, are presented in Note 26.

               (2)  PRINCIPLES OF ADJUSTMENT

                    a.   BALANCE SHEET ITEMS

                         Non-monetary   items  (items  whose  balances   reflect
                         historical value at acquisition or upon  establishment)
                         have been  adjusted in  accordance  with the changes in
                         the exchange  rate of the U.S.  dollar from the date of
                         acquisition/establishment through December 31, 2003.

                         Investments in Subsidiaries and minority  interest were
                         determined  based  on  the  dollar  adjusted  financial
                         statements of these companies.

                         Monetary  items  (items  whose  balance  sheet  amounts
                         represent  current or realization  value at the balance
                         sheet  date) are  presented  in the  December  31, 2003
                         balance sheet at their nominal value as of that date.

                    b.   STATEMENT OF OPERATIONS ITEMS

                         Income and expenses reflecting transactions, other than
                         financial  income  and  expenses,   were  adjusted  for
                         changes in the  exchange  rate of the U.S.  dollar from
                         the date of the transaction to the balance sheet date.

                         Income and  expenses  arising from  non-monetary  items
                         (mainly depreciation,  amortization, deferred taxes and
                         changes  in  inventory)   were  adjusted  in  a  manner
                         corresponding  to the adjustment of the related balance
                         sheet items.

                         Financing  income  (expenses),  net reflect  income and
                         expenses  in  real  terms  and  include  exchange  rate
                         differences derived from monetary items.

                         The  Company's  share and the minority  interest in the
                         results of Subsidiaries  were  determined  based on the
                         dollar   adjusted   financial   statements   of   these
                         companies.


                                      -8-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 2 -  SIGNIFICANT ACCOUNTING POLICIES (cont.)

          A.   ADJUSTED FINANCIAL STATEMENTS (cont.)

               (2)  PRINCIPLES OF ADJUSTMENT (cont.)

                    c.   ADJUSTMENT  AND  TRANSLATION  OF  FOREIGN  SUBSIDIARIES
                         FINANCIAL STATEMENTS

                         The  financial  statements  of  Subsidiaries  operating
                         abroad,  which  act  as an  integral  operation  of the
                         Group, are prepared in U.S. dollars and translated into
                         NIS based on the  exchange  rate of the U.S.  dollar on
                         the balance sheet date.

          B.   PRINCIPLES OF CONSOLIDATION

               The consolidated  financial  statements include  consolidation of
               the  consolidated   financial  statements  of  all  Subsidiaries.
               Material  inter-company  balances and transactions of and between
               Subsidiaries have been fully eliminated.

               The data  included in the  consolidated  financial  statements is
               based  on  audited  financial   statements  of  the  Subsidiaries
               included therein.

               The excess cost of an  investment  in a Subsidiary in Turkey over
               the  net  book  value  upon  acquisition  of that  Subsidiary  is
               allocated to fixed assets and is amortized at the rate applicable
               to those  assets,  or upon  their  realization.  The  unallocated
               excess cost reflects goodwill,  which is presented in the balance
               sheet as "other assets" and amortized by the straight-line method
               over 15 years due to the unique economic  conditions  relating to
               that Subsidiary and the expected economic benefit period from its
               acquisition.

          C.   CASH AND CASH EQUIVALENTS

               Cash and cash  equivalents  include bank deposits,  available for
               immediate withdrawal, as well as unrestricted short-term deposits
               with  maturities  of less  than  three  months  from  the date of
               deposit.

          D.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

               The  allowance  for doubtful  accounts is  generally  computed as
               percentage from the relevant balances, on the basis of historical
               experience,  with the addition of a specific provision in respect
               of  accounts,  which  on  management  estimate  are  doubtful  of
               collection.

          E.   INVENTORIES

               Inventories  are  presented at the lower of cost or market,  with
               cost determined as follows:

               Finished products        -   Based on actual production cost.

               Raw, auxiliary
                  materials and other   -   Based on moving-average basis.


                                      -9-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 2 -  SIGNIFICANT ACCOUNTING POLICIES (cont.)

          F.   INVESTMENTS IN SUBSIDIARIES

               Investments in Subsidiaries are presented using the equity method
               based on their  audited  financial  statements.  In  relation  to
               excess cost of investment in Subsidiary in Turkey, see B above.

          G.   FIXED ASSETS

               Fixed assets are presented at cost less accumulated  depreciation
               and   amortization.   Depreciation   is   calculated   using  the
               straight-line  method at rates considered  adequate to depreciate
               the assets over their  estimated  useful lives.  Amortization  of
               leasehold  improvements  is computed over the shorter of the term
               of the lease,  including  any option  period,  where the  Company
               intends to exercise such option, or their useful life.


               The annual depreciation and amortization rates are:          %
                                                                            -

                        Buildings                                         2.5-4
                        Leasehold improvements                            10-25
                        Machinery and equipment                           5-10
                        Motor vehicles                                    15-20
                        Office furniture and equipment                    10-33

               IMPAIRMENT OF LONG-LIVED ASSETS

               Management reviews long-lived assets on a periodic basis, as well
               as  when  such  a  review  is   required   based  upon   relevant
               circumstances,   to  determine   whether  events  or  changes  in
               circumstances  indicate  that the carrying  amount of such assets
               may  not be  recoverable.  According  to the  Israeli  Accounting
               Standards  Board's  Standard  No.15,  "Impairment of Assets",  an
               asset's  recoverable  value  is the  higher  of the  asset's  net
               selling  price and the  asset's  value in use,  the latter  being
               equal  to  the  asset's   discounted   expected  cash  flows.  If
               applicable, an impairment loss is recorded at the amount in which
               the carrying amount of the asset exceeds its  recoverable  value.
               The adoption of Standard No. 15, which came effective  commencing
               January 1, 2003, had no impact on the Group's financial  position
               and results of operations.

          H.   OTHER ASSETS - GOODWILL

               Goodwill  derived from the acquisition of Subsidiary in Turkey is
               amortized  based on the  straight  line method over 15 years (see
               also  B  above).  Impairment  examinations  and  recognition  are
               performed and determined based on the accounting  policy outlined
               in G above.

          I.   DEFERRED INCOME TAXES

               The  Group  records   deferred  taxes  in  respect  of  temporary
               differences between the carrying values of assets and liabilities
               in the  financial  statements  and their values for tax purposes,
               including  depreciation  differences on leased property and fixed
               assets.  The Group  records  deferred-tax  assets in  respect  of
               temporary  difference as well as in respect of carry-forward  tax
               losses  so long  as it is  probable  that  those  assets  will be
               realized  in the  foreseeable  future.  The  deferred  taxes  are
               computed   by  the  tax  rates   expected  to  be  in  effect  at
               realization, as they are known at the balance sheet date.


                                      -10-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 2 -  SIGNIFICANT ACCOUNTING POLICIES (cont.)

          I.   DEFERRED INCOME TAXES (cont.)

               The  computation  of  deferred  taxes has not taken into  account
               taxes  that  would  have  been   applicable  in  case  of  future
               realization of investments in Subsidiaries,  since the Group does
               not  contemplate  such  realization  in the  foreseeable  future.
               Moreover, the computation also excludes deferred taxes in respect
               of  dividends  distribution  within  the Group for cases in which
               such dividend distributions are expected to be tax-exempt.

          J.   DIVIDENDS

               Dividends  proposed or declared  subsequent to the  balance-sheet
               date,  but prior to the financial  statements  approval date, are
               presented as a separate component of shareholders' equity.

          K.   REVENUE RECOGNITION

               Revenues  are  recognized  upon  shipment,  when  title  has been
               transferred and collectibility is reasonably assured.

               Revenues are net of sales incentives,  primarily: bonuses granted
               to chains as a  percentage  of their  purchases  (target  bonus);
               volume discounts;  and coupons distributed to customers entitling
               price discounts.

               An accrual for estimated returns and sales  incentives,  computed
               primarily on the basis of historical  experience,  is recorded at
               the time revenues are recognized and deducted from revenues.

          L.   EARNINGS PER SHARE

               Earnings  per share are computed  based on the  weighted  average
               number of paid up capital shares during the year.

          M.   EXCHANGE RATES AND LINKAGE BASIS

               (1)  Balances in foreign  currency or linked thereto are included
                    in the  financial  statements  based  on the  representative
                    exchange  rates,  as published  by the Bank of Israel,  that
                    were prevailing at the balance sheet date.

               (2)  Following  are the  changes in the  representative  exchange
                    rate of the U.S.  dollar  vis-a-vis  the NIS and the Turkish
                    Lira, and in the CPI:

<TABLE>
<CAPTION>
                                                             REPRESENTATIVE      TURKISH LIRA EXCHANGE        CPI
                                                                EXCHANGE           RATE WITH THE U.S.     "IN RESPECT
                                                           RATE OF THE DOLLAR           DOLLAR                 OF"
                    AS OF                                     (NIS PER $1)          (TL'000 PER $1)       (IN POINTS)
                                                              ------------          ---------------       -----------
                    <S>                                       <C>                     <C>                <C>
                    December 31, 2003                             4.379                   1,393              178.58
                    December 31, 2002                             4.737                   1,640              182.02
                    December 31, 2001                             4.416                   1,447              170.91

                    INCREASE (DECREASE)
                    DURING THE YEAR ENDED:                          %                      %                   %
                                                              ------------          ---------------       -----------
                    December 31, 2003                              (7.6)                 (15.0)              (1.9)
                    December 31, 2002                               7.3                   13.3                6.5
                    December 31, 2001                               9.3                   115.3               1.4
</TABLE>

               (3)  Exchange-rate  differences  are  charged  to  operations  as
                    incurred.


                                      -11-
<PAGE>


                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2 -  SIGNIFICANT ACCOUNTING POLICIES (cont.)

          N.   RECLASSIFICATION

               Certain  amounts in prior years'  financial  statements have been
               reclassified in order to conform to the 2003 presentation.

          O.   SUPPLIER DISCOUNTS

               Ongoing  discounts  granted  by  suppliers,  as well as year  end
               discounts,  in  respect  of which no  commitments  to meet  given
               targets are required by the Group,  are included in the financial
               statements  upon the execution of purchases  that grant the Group
               said discounts.  Supplier  discounts  contingent upon the Group's
               fulfillment of certain targets,  such as meeting a minimal annual
               volume (in  quantities  or amount),  or an increase in  purchases
               over previous periods,  are included in the financial  statements
               in  proportion to Group's  purchases  from  suppliers  during the
               reported  period,  which  advance  the Group  towards  the stated
               targets,  only  if it is  expected  that  those  targets  will be
               reached  and the  discounts  can  reasonably  be  estimated.  The
               estimate  of  meeting  the  targets  is  based,  inter-alia,   on
               historical experience, Group's relationships established with the
               suppliers  and the  estimated  volume  of  purchases  during  the
               remaining reported period.

          P.   RECENT ACCOUNTING  STANDARDS - CESSATION OF FINANCIAL  STATEMENTS
               ADJUSTMENT, AND EFFECT OF CHANGES IN EXCHANGE RATES

               In October 2001, the Israeli  Accounting  Standards  Board issued
               Standard No. 12,  Cessation of Financial  Statements  Adjustment.
               According  to this  Standard,  as amended by  Standard  No. 17 in
               November  2002,  the  adjustment  of  financial   statements  for
               inflation  or exchange  rate of foreign  currency  will cease for
               reporting periods  commencing  January 1, 2004.  Through December
               31, 2003, the Group prepared dollar-linked  financial statements,
               in  accordance  with  the  pronouncements  of  the  Institute  of
               Certified  Public  Accountants  in Israel.  The adjusted  amounts
               presented in the December  31, 2003  balance-sheet  will serve as
               the opening nominal balances as of January 1, 2004.

               In October 2001, the Israeli  Accounting  Standards  Board issued
               Standard No. 13, Effect of Changes in Foreign  Currency  Exchange
               Rates.  This Standard  addresses the  translation of transactions
               denominated in foreign  currency,  as well as the  translation of
               financial statements of a foreign operation, for inclusion in the
               financial  statements of the reporting company.  Standard No. 13,
               as amended by  Standard  No. 17 in  November  2002,  will  become
               effective for reporting periods subsequent to December 31, 2003.

               The  implementation of Standards No. 12 and 13 will mainly affect
               financing income and expenses items.


                                      -12-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 3 -  CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                      CONSOLIDATED              COMPANY
                                                   ------------------      ------------------
                                                                  DECEMBER 31,
                                                   ------------------------------------------
                                                    2003        2002        2003        2002
                                                   ------      ------      ------      ------
                                                    NIS IN THOUSANDS        NIS IN THOUSANDS
                                                   ------------------      ------------------
<S>                                               <C>         <C>         <C>         <C>
         In NIS                                       527         597         520         596
         In foreign currencies (primarily the
           U.S. dollar)                            36,813      20,733      31,125      10,236
                                                   ------      ------      ------      ------
                                                   37,340      21,330      31,645      10,832
                                                   ------      ------      ------      ------
</TABLE>

NOTE 4 -  TRADE RECEIVABLES

<TABLE>
<CAPTION>
                                                          CONSOLIDATED                 COMPANY
                                                      --------------------       -------------------
                                                                        DECEMBER 31,
                                                      ----------------------------------------------
                                                        2003        2002          2003         2002
                                                      -------      -------       ------       ------
                                                        NIS IN THOUSANDS           NIS IN THOUSANDS
                                                      --------------------       -------------------
<S>                                                   <C>         <C>         <C>         <C>
          COMPOSITION:
          Domestic
            Open accounts                             154,617      133,529            -            -
            Checks receivable                          34,421       29,827            -            -
            Related parties                               348          359       60,820       33,392
                                                      -------      -------       ------       ------
                                                      189,386      163,715       60,820       33,392
          Foreign
            Open accounts                              47,697       23,016        5,699          778
            Related parties                               206          717        8,191        7,057
                                                      -------      -------       ------       ------
                                                      237,289      187,448       74,710       41,227
          Less - allowance for doubtful accounts        7,310        4,880           42           51
                                                      -------      -------       ------       ------
                                                      229,979      182,568       74,668       41,176
                                                      =======      =======       ======       ======
</TABLE>
          The Company's products are marketed principally by its Subsidiaries.

NOTE 5 -  OTHER RECEIVABLES

<TABLE>
<CAPTION>
                                                   CONSOLIDATED              COMPANY
                                               ------------------      ------------------
                                                                DECEMBER 31,
                                               ------------------------------------------
                                                2003        2002        2003        2002
                                               ------      ------      ------      ------
                                               NIS IN THOUSANDS        NIS IN THOUSANDS
                                               ------------------      ------------------
<S>                                            <C>         <C>         <C>         <C>
          Deferred taxes (Note 22D)             5,518       3,985       1,769       2,040
          Prepaid expenses                      2,908       3,021       1,570       1,373
          Advances to suppliers                 3,074         837       2,128         837
          Value added taxes                       236           -           -           -
          Income tax advances, net              1,467       1,226         878           -
          Loans to supplier and employees         477       1,077         262         915
          Other                                   542         428       1,272       1,554
                                               ------      ------      ------      ------
                                               14,222      10,574       7,879       6,719
                                               ======      ======       =====       =====
</TABLE>

                                      -13-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 6 -  INVENTORIES

<TABLE>
<CAPTION>
                                              CONSOLIDATED              COMPANY
                                           ------------------      ------------------
                                                          DECEMBER 31,
                                           ------------------------------------------
                                            2003        2002        2003        2002
                                           ------      ------      ------      ------
                                           NIS IN THOUSANDS        NIS IN THOUSANDS
                                           ------------------      ------------------
<S>                                        <C>         <C>         <C>         <C>
          Raw and auxiliary materials      48,482      36,708      34,293      22,428
          Finished goods                   29,087      38,546      10,969       9,786
          Spare parts and other            15,095      11,173      13,277      10,078
                                           ------      ------      ------      ------
                                           92,664      86,427      58,539      42,292
                                           ======      ======      ======      ======
</TABLE>

NOTE 7 -  LONG-TERM DEPOSITS

<TABLE>
<CAPTION>

                                                                         CONSOLIDATED              COMPANY
                                                                     ---------------------    ---------------------
                                                                                     DECEMBER 31,
                                                   INTEREST          ----------------------------------------------
                                                     RATE              2003        2002        2003          2002
                                                   --------          -------      --------    ------      ---------
                                                     % (*)             NIS IN THOUSANDS          NIS IN THOUSANDS
                                                   --------          ---------------------    ---------------------
<S>                                                 <C>           <C>            <C>          <C>           <C>
          A.   COMPOSITION

               Linked to the U.S. dollar            1.16-2.69        77,946        87,141      7,882        17,077

               Less - current maturities                              7,882         9,195      7,882         9,195
                                                                     ------        ------      -----         -----
                                                                     70,064        77,946          -         7,882
                                                                     ======        ======      =====         =====
</TABLE>

               (*)      Annual average interest rate as of December 31, 2003.

                                  -14-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 -  LONG-TERM DEPOSITS (cont.)

          B.   The balance of the long-term  deposits as of December 31, 2003 is
               repayable as follows:

                                                               NIS IN
                                                              THOUSANDS
                                                              ---------
                  2004 - current maturities                     7,882
                  Thereafter - see D below                     70,064
                                                               ------
                                                               77,946

          C.   The deposits are held as collateral for long-term  loans received
               by Subsidiaries (see Note 15C).

          D.   The deposit is linked to the U.S.  dollar and bears interest at a
               rate of 0.994% as of December 31, 2003. The deposit is subject to
               re-deposit every two years.

NOTE 8 -  CAPITAL NOTE OF SHAREHOLDER

          The capital note of AIPM,  denominated  in NIS, is not linked and does
          not bear interest.  Repayment  date will be mutually  agreed upon. The
          erosion  or  increase  in value of the  capital  note was  charged  to
          capital  reserves  until March 31, 2000 (the date on which AIPM ceased
          to be the controlling shareholder).

NOTE 9 -  INVESTMENTS IN SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                    COMPANY
                                                                          ---------------------------
                                                                                   DECEMBER 31,
                                                                          ---------------------------
                                                                            2003               2002
                                                                          -------             -------
                                                                               NIS IN THOUSANDS
                                                                          ---------------------------
          A.   COMPOSITION
<S>                                                                         <C>                 <C>
               Cost of shares                                                 972                 972
               Equity in post-acquisition earnings, net                   190,860             153,442
               Capital notes (*)                                            4,205               4,205
                                                                          -------             -------
                                                                          196,037             158,619
                                                                          =======             =======
</TABLE>

               (*)  The non-interest bearing capital notes,  denominated in U.S.
                    dollar, are considered part of the Company's  investments in
                    the   Subsidiaries.   Repayment  dates  have  not  yet  been
                    determined. For purpose of the adjusted financial statements
                    (see  Note  2A),   the  capital   notes  are  treated  as  a
                    non-monetary item.


                                      -15-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 9 -  INVESTMENTS IN SUBSIDIARIES (cont.)

<TABLE>
<CAPTION>
                                                                                  CONSOLIDATED
                                                                          ---------------------------
                                                                                   DECEMBER 31,
                                                                          ---------------------------
                                                                            2003               2002
                                                                          -------             -------
                                                                               NIS IN THOUSANDS
                                                                          ---------------------------
         <S>                                                              <C>                 <C>
          B.   GOODWILL:
               Cost                                                       41,532               41,532
               Less - accumulated amortization                            12,459                9,691
                                                                          ------               ------
                                                                          29,073               31,841
                                                                          ======               ======
</TABLE>


          C.   INVESTMENT IN OVISAN

               As of December 31, 2003,  the Group's  investment  in the Turkish
               Subsidiary amounted to NIS 66,933 thousand (including goodwill in
               the net amount of NIS 29,073 thousand).

          D.   CONSOLIDATED SUBSIDIARIES

               The  consolidated  financial  statements as of December 31, 2003,
               include the financial statements of the following Subsidiaries:

<TABLE>
<CAPTION>
                                                                                 OWNERSHIP AND
                                                                                 CONTROL AS OF
                                                                                  DECEMBER 31,
                                                                                      2003
                                                                                  ------------
                                                                                        %

<S>                                                                             <C>
               Rakefet Marketing and Trade Services Ltd. ("Rakefet")              (*)  79.7
               Subsidiaries of Rakefet:
                   Hogla-Kimberly Marketing Ltd. ("Marketing")                   (**)  99.5
                   Shikma Ltd. ("Shikma")                                        (**)  99.0
               Mollet Marketing Ltd. ("Mollet")                                       100.0
               H-K Overseas (Holland) B.V                                             100.0
               Subsidiaries of H-K Overseas (Holland) B.V.:
                   Ovisan Sihhi Bez Sanai ve Ticaret Anonim Sirketi ("Ovisan")        100.0
                   Hogla-Kimberly Holding Anonim Sirketi                              100.0
</TABLE>

               (*)  The  remaining  ownership and control of Rakefet are held by
                    AIPM group (10.1%) and by KC (10.2%).

               (**) The remaining  ownership and control of Marketing and Shikma
                    are held by the Company.


                                      -16-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 10 - FIXED ASSETS

<TABLE>
<CAPTION>
                                                                                             OFFICE
                                                              MACHINERY                    FURNITURE
                                                LEASEHOLD        AND           MOTOR          AND
CONSOLIDATED                    BUILDINGS (1)  IMPROVEMENTS   EQUIPMENT       VEHICLES      EQUIPMENT      TOTAL (2)
                                   ------         -----        -------         ------         ------        -------
                                                                 NIS IN THOUSANDS
<S>                                <C>            <C>          <C>            <C>            <C>           <C>
COST:
Balance - January 1, 2003          54,619         8,941        367,463         21,168         11,953        464,144
Changes during 2003:
Additions                             250           517         19,452            588          1,100         21,907
Dispositions                            -          (190)        (2,297)        (2,708)        (1,112)        (6,307)
                                   ------         -----        -------         ------         ------        -------
Balance - December 31, 2003        54,869         9,268        384,618         19,048         11,941        479,744
                                   ======         =====        =======         ======         ======        =======


ACCUMULATED DEPRECIATION:
Balance - January 1, 2003          14,855         4,771        150,568         14,651          8,583        193,428
Changes during 2003:
Additions                             530           514         17,947          2,749            705         22,445
Dispositions                            -          (188)        (2,024)        (2,417)        (1,068)        (5,697)
                                   ------         -----        -------         ------         ------        -------
Balance - December 31, 2003        15,385         5,097        166,491         14,983          8,220        210,176
                                   ======         =====        =======         ======         ======        =======

NET BOOK VALUE:
December 31, 2003                  39,484         4,171        218,127          4,065          3,721        269,568
                                   ======         =====        =======         ======         ======        =======
December 31, 2002                  39,764         4,170        216,895          6,517          3,370        270,716
                                   ======         =====        =======         ======         ======        =======

COMPANY

COST:
Balance - January 1, 2003          25,209         5,893        330,217          3,688          3,004        368,011
Changes during 2003:
Additions                               -           219         14,631             53            201         15,104
Dispositions                            -             -         (1,759)          (582)             -         (2,341)
                                   ------         -----        -------         ------         ------        -------
Balance - December 31, 2003        25,209         6,112        343,089          3,159          3,205        380,774
                                   ======         =====        =======         ======         ======        =======

ACCUMULATED DEPRECIATION:
Balance - January 1, 2003          11,812         3,518        130,439          3,492          2,378        151,639
Changes during 2003:
Additions                               -           215         14,189            153            232         14,789
Dispositions                            -             -         (1,696)          (569)             -         (2,265)
                                   ------         -----        -------         ------         ------        -------
Balance - December 31, 2003        11,812         3,733        142,932          3,076          2,610        164,163
                                   ======         =====        =======         ======         ======        =======

NET BOOK VALUE:
December 31, 2003                  13,397         2,379        200,157             83            595        216,611
                                   ======         =====        =======         ======         ======        =======
December 31, 2002                  13,397         2,375        199,778            196            626        216,372
                                   ======         =====        =======         ======         ======        =======
</TABLE>


(1)      Buildings include industrial buildings on lands leased by the Company
         from AIPM (until 2004).
(2)      The major fixed assets of the Group are located in Israel.


                                      -17-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 11 - TRADE PAYABLES

<TABLE>
<CAPTION>
                                       CONSOLIDATED                 COMPANY
                                   --------------------      --------------------
                                                    DECEMBER 31,
                                   ----------------------------------------------
                                     2003         2002         2003         2002
                                   -------      -------      -------       ------
                                      NIS IN THOUSANDS         NIS IN THOUSANDS
                                   --------------------      --------------------
<S>                                <C>          <C>         <C>           <C>
          In Israeli currency
            Open accounts           78,509       66,279       34,206       30,159
            Related parties         13,682       10,840      114,455       46,310
          In foreign currency
            Open accounts           37,294       26,509       20,804       15,953
            Related parties         10,070       24,001        5,115        3,148
                                   -------      -------      -------       ------
                                   139,555      127,629      174,580       95,570
                                   =======      =======      =======       ======
</TABLE>


NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES

                                               CONSOLIDATED         COMPANY
                                              ---------------   --------------
                                                        DECEMBER 31,
                                              --------------------------------
                                               2003     2002     2003    2002
                                              ------   ------   ------  ------
                                             NIS IN THOUSANDS   NIS IN THOUSANDS
                                              ---------------   --------------
    Accrued income taxes,
      net of advances                          8,663    9,042        -   9,817
    Accrued payroll and related expenses      20,531   19,925   10,474  11,713
    Value Added Tax                            4,779      547        -       -
    Advances from customers                    1,085    1,610       32      30
    Other                                      2,574    1,378      139      88
                                              ------   ------   ------  ------
                                              37,632   32,502   10,645  21,648
                                              ======   ======   ======  ======

NOTE 13 - LONG-TERM BANK LOANS

                                            INTEREST       CONSOLIDATED
                                              RATE         DECEMBER 31,
                                             ------    -------------------
                                              % (*)     2003          2002
                                             ------    ------       ------
                                                        NIS IN THOUSANDS
                                                       -------------------
          A.   COMPOSITION
               In U.S. dollar (**)             1.74   108,858      107,286
               In Euro                         3.75     2,627            -
               Less - current maturities               15,147       24,960
                                                       ------       ------
                                                       96,338       82,326
                                                       ======       ======

               (*)       Annual average interest rate as of December 31,
                         2003

               (**)      As of December 31, 2003, NIS 38,794 thousand bear
                         interest based on Libor plus 1.55%.

          B.   MATURITIES (NIS in thousands)

               2004 - current maturities                           15,147
               2005                                                26,274
               Thereafter - see C below                            70,064
                                                                  -------
                                                                  111,485
                                                                  =======

          C.   Subject to renewal every two years - see Note 7D.

          D.   Liens - see Note 15C.


                                      -18-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 14 - SEVERANCE PAY

          Obligations of the Group for severance pay to its employees are
          covered by current payments to pension and severance funds.
          Accumulated amounts in the pension and severance funds are not under
          the control or administration of the Group, and accordingly, neither
          those amounts nor the corresponding accruals are reflected in the
          financial statements.

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES

          A.   COMMITMENTS

               (1)  The Group is obligated to pay  royalties to a  shareholder -
                    see Note 23B.

               (2)  The  Company  and its  Subsidiaries  lease  certain of their
                    facilities  under operating  leases for varying periods with
                    renewal options. Future minimum lease rentals as of December
                    31, 2003 are as follows:

                                                   CONSOLIDATED         COMPANY
                                                   -----------          -------
                                                          NIS IN THOUSANDS
                                                   ----------           -------
                         2004                          13,918            6,477
                         2005                           6,430                -
                         2006                           6,430                -
                         2007                           6,430                -
                         2008 and thereafter           28,936                -
                                                   ----------           -------
                                                       62,144            6,477
                                                   ==========           =======

          B.   GUARANTEES

               (1)  The Company is contingently liable in respect of a guarantee
                    securing bank loans provided to a Subsidiary, the balance of
                    which  as of  December  31,  2003  amounted  to  NIS  33,280
                    thousand.

               (2)  As part of their normal course of business, the Subsidiaries
                    provided  third  parties with bank  guarantees  for contract
                    performance,  the balance of which as of  December  31, 2003
                    amounted to NIS 2,022 thousand.

          C.   LIENS

               As a collateral for long-term  loans given to  Subsidiaries,  the
               Group recorded a lien on its bank deposits,  in the amount of NIS
               77,946 thousand as of December 31, 2003.

          D.   LEGAL ISSUES

               In  December  2003,   certain  customers  filed  a  class  action
               complaint against the Company,  alleging that the Company reduced
               the number of items in each certain product packages. The Company
               has filed a detailed defense motion, presenting its arguments for
               denying the lawsuit from being  recognized as a class action.  As
               of the approval date of the financial statements,  court hearings
               have not yet begun.  Based on the opinion of the Company's  legal
               counsel for this matter, due to the very preliminary stage of the
               proceedings, management is unable, at this stage, to estimate the
               possible  outcome  of the  lawsuit.  However,  based on the legal
               counsels,   management   believes  that  the  Company  has  valid
               arguments to oppose the lawsuit and reasonable  basis for denying
               it from being recognized as a class action.

                                      -19-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 16 - SHARE CAPITAL

          A.   As of December  31, 2003 and 2002,  share  capital is composed of
               ordinary  shares  of  NIS  1.00  par  value  each.  Authorized  -
               11,000,000 shares; issued and paid up - 8,263,473 shares.

          B.   Holders of ordinary shares are entitled to participate equally in
               the payment of cash  dividends  and bonus share (stock  dividend)
               distributions  and,  in  the  event  of  the  liquidation  of the
               Company,  in the  distribution  of assets after  satisfaction  of
               liabilities to creditors.  Each ordinary share is entitled to one
               vote on all matters to be voted on by shareholders.

NOTE 17 - NET SALES

<TABLE>
<CAPTION>
                                                                       CONSOLIDATED
                                                    ---------------------------------------------------
                                                                  YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------------
                                                    2003                   2002                    2001
                                                    ----                   ----                    ----
                                                      %                       %                      %
                                                    ----                   ----                    ----
<S>                                               <C>                    <C>                      <C>
          A.   SALES TO MAJOR CUSTOMERS
               Customer A                            8.9                    11.1                    11.9
               Customer B                           10.1                    11.8                    12.0
</TABLE>

<TABLE>
<CAPTION>
                                                     NIS                    NIS                     NIS
                                                    ----                   ----                    ----
                                                                        IN THOUSANDS
                                                    ---------------------------------------------------
<S>                                                <C>                    <C>                    <C>
          B.   SALES FROM COMMERCIAL OPERATIONS    376,974                311,360                319,277
                                                   =======                =======                =======

          C.   FOREIGN SALES (PRINCIPALLY TURKEY)  106,935                 80,184                 84,979
                                                   =======                 ======                 ======
</TABLE>

NOTE 18 - COST OF SALES

<TABLE>
<CAPTION>
                                                          CONSOLIDATED                                    COMPANY
                                              -------------------------------------        -------------------------------------
                                                     YEAR ENDED DECEMBER 31,                      YEAR ENDED DECEMBER 31,
                                              -------------------------------------        -------------------------------------
                                               2003            2002           2001          2003            2002          2001
                                              -------        -------        -------        -------        -------        -------
                                                        NIS IN THOUSANDS                             NIS IN THOUSANDS
                                              -------------------------------------        -------------------------------------
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Purchases (*)                                 446,008        425,365        441,782        178,339        122,861        130,930
Salaries and related expenses                  67,516         55,999         57,349         56,812         46,389         49,618
Manufacturing expenses                         79,810         55,834         51,245         73,281         51,229         47,662
Depreciation                                   18,221         14,207         12,764         15,309         11,423         10,739
                                              -------        -------        -------        -------        -------        -------
                                              611,555        551,405        563,140        323,741        231,902        238,949
Change in finished
   goods inventory                              9,459          3,358         (3,967)        (1,183)         1,194          4,642
                                              -------        -------        -------        -------        -------        -------
                                              621,014        554,763        559,173        322,558        233,096        243,591
                                              =======        =======        =======        =======        =======        =======
</TABLE>


(*)  The  purchases  of the  Company are  related to  manufacturing  operations.
     Consolidated purchases in excess of Company purchases relate principally to
     commercial operations.


                                      -20-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 19 - SELLING EXPENSES

<TABLE>
<CAPTION>
                                               CONSOLIDATED                               COMPANY
                                     ---------------------------------        -------------------------------
                                           YEAR ENDED DECEMBER 31,                 YEAR ENDED DECEMBER 31,
                                     ---------------------------------        -------------------------------
                                      2003        2002        2001             2003        2002          2001
                                     -------   ----------   ----------        -----        -----        -----
                                              NIS IN THOUSANDS                         NIS IN THOUSANDS
                                     ---------------------------------        -------------------------------
<S>                                   <C>       <C>          <C>              <C>             <C>         <C>
Salaries and related expenses         46,887    (*)39,656    (*)43,049            -           16          744
Maintenance and
   transportation expenses            26,596       24,332       22,966        5,810        3,868        2,703
Advertising and sales promotion       30,371       38,591       41,337           86           46          168
Commissions to distributors            4,571        2,007        3,644            -          453          629
Royalties to a shareholder            15,642       12,220       12,158        1,500          673          561
Depreciation                           3,778        4,188        4,741          142          317          547
Other                                  2,825        2,961        3,238            -            -            -
                                     -------   ----------   ----------        -----        -----        -----
                                     130,670   (*)123,955   (*)131,133        7,538        5,373        5,352
                                     =======   ==========   ==========        =====        =====        =====
</TABLE>

(*)       Reclassified


NOTE 20 - GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                           CONSOLIDAD                               COMPANY
                                   ------------------------------       -----------------------------
                                       YEAR ENDED DECEMBER 31,              YEAR ENDED DECEMBER 31,
                                   ------------------------------       -----------------------------
                                    2003       2002        2001          2003        2002         2001
                                   ------   ---------   ---------       -----       -----       -----
                                              NIS IN THOUSANDS                         NIS IN THOUSANDS
                                   ------------------------------       -----------------------------
<S>                               <C>       <C>          <C>           <C>         <C>         <C>
Salaries and related expenses      18,283   (*)13,481   (*)15,913       2,567       2,423       2,404
Administrative and computer
   services                         6,287       6,210       7,380       1,190       1,188       1,636
Services provided by
   Shareholder                      1,161       1,161       1,180         215         736         818
Office maintenance                  5,376       2,990       2,961         207         228         254
Depreciation                          718         588         751           2           4           4
Goodwill amortization               2,768       2,768       2,768           -           -           -
Other                               4,453       2,743       2,426         200         789       1,056
                                   ------   ---------   ---------       -----       -----       -----
                                   39,046   (*)29,941   (*)33,379       4,381       5,368       6,172
                                   ======   =========   =========       =====       =====       =====
</TABLE>

(*)  Reclassified.


NOTE 21 - FINANCING INCOME (EXPENSES), NET

<TABLE>
<CAPTION>
                                                         CONSOLIDATED                                COMPANY
                                               ---------------------------------         --------------------------------
                                                     YEAR ENDED DECEMBER 31,                   YEAR ENDED DECEMBER 31,
                                               ---------------------------------         --------------------------------
                                               2003          2002          2001           2003        2002          2001
                                               -----        ------        ------         -----       ------        ------
                                                     NIS IN THOUSANDS                         NIS IN THOUSANDS
                                               ---------------------------------         --------------------------------
<S>                                           <C>           <C>           <C>            <C>           <C>           <C>
Long-term loans                               (2,111)       (2,794)       (4,821)             -           -             -
                                               =====        ======        ======         =====       ======        ======
Exchange rate differences
   derived from capital note                   2,476        (2,202)       (3,015)        2,476       (2,202)       (3,015)
                                               =====        ======        ======         =====       ======        ======
Long-term and
  short-term deposits                           1,357        1,804         8,504           486           31         1,445
                                               =====        ======        ======         =====       ======        ======
</TABLE>


                                      -21-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 22 - INCOME TAXES

A.   The Company and its Israeli  Subsidiaries are subject to the Income Tax Law
     (Inflationary  Adjustments),  1985. Non-Israeli Subsidiaries are subject to
     income tax  provisions of their home country.  The Company is an industrial
     company  in  conformity  with  the Law for the  Encouragement  of  Industry
     (Taxes),  1965. The principal benefit that the Company is entitled to under
     this law is accelerated depreciation rates and reduced tax rates.

     During 2002, the Company's  program for the establishment of a new facility
     for  manufacturing   paper  was  granted  Approved   Enterprise  status  in
     accordance with the Law for the Encouragement of Capital Investments, 1959,
     under  "alternative  benefits"  track.  The  approval  program is for total
     investments of approximately NIS 80 million.  According to the terms of the
     program, income derived from the Approved Enterprise will be tax-exempt for
     a  period  of 10 years  commencing  in the year in  which  the  program  is
     substantially completed.  Distribution of dividends from tax exempt profits
     of the Approved Enterprise will be subject to income tax at a rate equal to
     the income tax rate of the Approved  Enterprise had the Company not elected
     the  alternative  benefits  track.  The Company  completed the  investments
     relating to the new facility and commenced its operations during 2003.

<TABLE>
<CAPTION>
                                                   CONSOLIDATED                                COMPANY
                                         ---------------------------------        ---------------------------------
                                             YEAR ENDED DECEMBER 31,                   YEAR ENDED DECEMBER 31,
                                         ---------------------------------        ---------------------------------
                                          2003         2002          2001          2003         2002          2001
                                         ------       ------        ------        ------       ------        ------
 B.       COMPOSITION                            NIS IN THOUSANDS                       NIS IN THOUSANDS
                                         ---------------------------------        ---------------------------------
<S>                                      <C>          <C>           <C>         <C>            <C>           <C>
          Current taxes                  10,878       18,904        34,150             -       15,774        26,421
          Taxes in
            respect of prior years        1,437         (744)         (701)        1,358         (744)         (551)
          Deferred taxes                  8,251        1,072         3,028        10,417        1,046         2,508
                                         ------       ------        ------        ------       ------        ------
                                         20,566       19,232        36,477        11,775       16,076        28,378
                                         ======       ======        ======        ======       ======        ======
</TABLE>


                                      -22-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 22 - INCOME TAXES (cont.)

C.   RECONCILIATION OF THE STATUTORY TAX RATE TO THE EFFECTIVE TAX RATE:

<TABLE>
<CAPTION>
                                                        CONSOLIDATED                                  COMPANY
                                              ----------------------------------        ----------------------------------
                                                    YEAR ENDED DECEMBER 31,                   YEAR ENDED DECEMBER 31,
                                              ----------------------------------        ----------------------------------
                                               2003          2002          2001          2003          2002          2001
                                              ------        ------        ------        ------        ------        ------
                                                       NIS IN THOUSANDS                         NIS IN THOUSANDS
                                              ----------------------------------        ----------------------------------
<S>                                           <C>           <C>           <C>           <C>           <C>           <C>
          Income before
            income taxes                      83,954        44,543        79,609        30,610        37,697        76,693
                                              ======        ======        ======        ======        ======        ======
          Tax computed by
            statutory tax rate (36%)          30,223        16,035        28,659        11,020        13,570        27,609

          TAX INCREMENTS
            (SAVINGS)DUE TO:
          Reduced tax rate (mainly
            for approved enterprise(          (1,185)       (1,397)       (2,882)         (918)       (1,397)       (2,882)
          Non-deductible expenses              1,874      (*)1,840      (*)2,586           434           248           262
          Non-taxable income                     (65)    (*)(2,198)    (*)(3,348)           -             -              -
          Unrecorded deferred
            taxes in connection
            with tax loss carry forward            -      (*)1,074      (*)2,397             -             -             -
          Utilization of prior
            years unrecorded
            deferred taxes in
            connection with tax loss
            carry forward                     (3,471)            -             -             -             -             -
          Unrecorded deferred
             taxes in connection
             with submitting
             consolidated tax
             returns                               -             -             -         2,053             -             -
          Differences arising from
            basis of measurement (**)         (7,629)        3,883         7,449        (1,753)        3,737         2,615
          Income taxes for prior years         1,437          (744)         (701)        1,358          (744)         (551)
          Other differences, net                (618)          739         2,317          (419)          662         1,325
                                              ------        ------        ------        ------        ------        ------
                                              20,566        19,232        36,477        11,775        16,076        28,378
                                              ======        ======        ======        ======        ======        ======
</TABLE>

(*)  Reclassified.

(**)      U.S. dollar for financial reporting purposes vis-a-vis the Consumer
          Price Index in Israel and the Turkish Lira for tax purposes.

                                      -23-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 22 - INCOME TAXES (cont.)

D.   DEFERRED INCOME TAXES

<TABLE>
<CAPTION>
                                                   CONSOLIDATED                                COMPANY
                                          ----------------------------------       ----------------------------------
                                             YEAR ENDED DECEMBER 31,                   YEAR ENDED DECEMBER 31,
                                          ----------------------------------       ----------------------------------
                                           2003          2002          2001         2003          2002          2001
                                          ------        ------        ------       ------        ------        ------
                                                    NIS IN THOUSANDS                         NIS IN THOUSANDS
                                          ----------------------------------       ----------------------------------
<S>                                       <C>           <C>          <C>          <C>           <C>           <C>
     Balance as of
       beginning of year                  15,659        14,587        11,559       14,552        13,506        10,998
     Changes during the year               8,251         1,072         3,028       10,417         1,046         2,508
                                          ------        ------        ------       ------        ------        ------
     Balance as
       of end of year                     23,910        15,659        14,587       24,969        14,552        13,506
                                          ======        ======        ======       ======        ======        ======
</TABLE>


<TABLE>
<CAPTION>
                                                                         CONSOLIDATED                  COMPANY
                                                                      -------------------        --------------------
                                                                                       DECEMBER 31,
                                                                      -----------------------------------------------
                                                                       2003         2002          2003          2002
                                                                      ------       ------        ------        ------
                                                                        NIS IN THOUSANDS            NIS IN THOUSANDS
                                                                      -------------------        --------------------
<S>                                                                   <C>         <C>           <C>          <C>
     DEFERRED TAXES ARE PRESENTED IN THE
       BALANCE SHEETS AS FOLLOWS:

         Long-term liabilities (in respect of
           depreciable assets)                                        29,428       19,644        26,738        16,592
         Other receivables and prepayments
           (in respect of temporary
           differences) - Note 5                                      (5,518)      (3,985)       (1,769)       (2,040)
                                                                      ------       ------        ------        ------
                                                                      23,910       15,659        24,969        14,552
                                                                      ======       ======        ======        ======
</TABLE>


     Deferred taxes are computed at rates between 32% and 36%.

E.   The Company and one of its  subsidiaries,  are  "Industrial  Companies"  as
     defined in the Israeli Law for the Encouragement of Industry  (Taxes)-1969.
     Based on this Law, the Company and that  subsidiary file  consolidated  tax
     returns.

F.   The Company  and its Israeli  Subsidiaries  possess  final tax  assessments
     through 2001.

NOTE 23 - RELATED PARTIES AND INTERESTED PARTIES

A.   BALANCES WITH RELATED PARTIES

<TABLE>
<CAPTION>
                                                                          CONSOLIDATED                  COMPANY
                                                                      -------------------        --------------------
                                                                                        DECEMBER 31,
                                                                      -----------------------------------------------
                                                                       2003         2002          2003          2002
                                                                      ------       ------        ------        ------
                                                                        NIS IN THOUSANDS            NIS IN THOUSANDS
                                                                      -------------------        --------------------
<S>                                                                   <C>        <C>           <C>             <C>
      Trade receivables (*)                                              554        1,076         8,354           242
                                                                      ======       ======        ======        ======

      Capital note - shareholder                                      32,770       30,294        32,770        30,294
                                                                      ======       ======        ======        ======

      Capital notes - Subsidiaries                                         -            -         4,205         4,205
                                                                      ======       ======        ======        ======

      Trade payables (*)                                              23,752       34,841        24,097        15,965
                                                                      ======       ======        ======        ======
</TABLE>

          (*)       Company - excludes Subsidiaries


                                      -24-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 23 - RELATED PARTIES AND INTERESTED PARTIES (cont.)

B.   TRANSACTIONS WITH RELATED PARTIES AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                CONSOLIDATED                             COMPANY
                                                      ---------------------------------       -------------------------------
                                                           YEAR ENDED DECEMBER 31,                YEAR ENDED DECEMBER 31,
                                                      ---------------------------------       -------------------------------
                                                        2003         2002         2001         2003        2002        2001
                                                      -------      -------      -------       ------      ------       ------
                                                              NIS IN THOUSANDS                      NIS IN THOUSANDS
                                                      ---------------------------------       -------------------------------
<S>                                                 <C>         <C>          <C>           <C>         <C>          <C>
                 Sales to related parties             6,103       17,646       23,026        4,169       15,247       21,713

                 Sales to Subsidiaries                    -            -            -      358,767      266,614      302,669

                 Cost of sales                      169,469      224,682      207,087       61,703       63,723       51,671

                 Royalties                           15,642       12,220       12,158        1,500          673          561

                 Other selling expenses (*)               -        2,413        3,578            -          451          630

                 General and
                   administrative expenses (*)        8,201        7,380        8,435        1,428        2,167        2,454

                 Financing income, net (*)            3,314        2,076        2,339        2,526        1,381        1,268
 </TABLE>


                 (*)       Company - excludes Subsidiaries

                 (**)      The sales to and purchases from related parties
                           are in the ordinary course of business at market
                           prices and customary credit terms.

NOTE 24 - DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS

A.   CREDIT RISK

     The  revenues of the Group's  principal  Subsidiaries  are derived from two
     major  customers  and a  large  number  of  smaller  customers.  Management
     regularly  monitors  the  balance of trade  receivables  and the  financial
     statements include an allowance for doubtful accounts based on management's
     estimation.  Taking the aforementioned into consideration,  the exposure to
     credit risk from trade receivables is immaterial.

     Cash and cash  equivalents  and long-term  deposits  (including  amounts in
     foreign  currency)  are  deposited  with major  banks in Israel and abroad.
     Therefore,  it is not  expected  that such  banks  will fail to meet  their
     obligations.

B.   FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying  value of financial  instruments  (cash and cash  equivalents,
     deposits,  receivables, trade and other payables) did not materially differ
     from their fair value, unless stated otherwise.


                                      -25-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 25 - RECONCILIATION TO US GAAP

          The  consolidated  financial  statements  of  the  Company  have  been
          prepared in accordance with generally accepted  accounting  principles
          applicable  in Israel  (Israeli  GAAP).  The  following  describes the
          effects on the Company's financial statements had the Company prepared
          its  financial  statements in accordance  with  accounting  principles
          generally accepted in the United States of America (US GAAP).

          A.   BALANCE SHEETS

               According to Israeli GAAP,  goodwill is to be amortized  over the
               expected  estimated  economic life of the asset  acquired,  while
               according to US GAAP (SFAS 142), commencing January 2002 goodwill
               is no longer  amortized but rather is reviewed  annually (or more
               frequently  if  impairment   indicators  arise)  for  impairment.
               Following are the  corresponding  balance-sheet  items  presented
               according to US GAAP with regard to the goodwill  associated with
               the  acquisition  of  Ovisan  (see  Note 9B) and the  other  GAAP
               differences outlined in B. below:

                                                 As of December 31, 2003
                                           -----------------------------------
                                              AS                        AS PER
                                           REPORTED     ADJUSTMENT     US GAAP
                                           --------     ----------     -------
                                                     NIS IN THOUSANDS
                                           -----------------------------------
               Other assets - Goodwill       29,073        5,536        34,609
               Shareholders' equity         412,981       (3,003)      409,978



                                                 As of December 31, 2003
                                           -----------------------------------
                                              AS                        AS PER
                                           REPORTED     ADJUSTMENT     US GAAP
                                           --------     ----------     -------
                                                     NIS IN THOUSANDS
                                           -----------------------------------
               Other assets - Goodwill      31,841        2,768         34,609
               Shareholders' equity        389,571       13,060        402,631


          B.   STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     CONSOLIDATED AND COMPANY
                                                                ----------------------------------
                                                                       YEAR ENDED DECEMBER 31,
                                                                ----------------------------------
                                                                 2003          2002          2001
                                                                ------        ------        ------
                                                                        NIS IN THOUSANDS
                                                                ----------------------------------
<S>                                                             <C>           <C>           <C>
               Net income under Israeli GAAP                    56,253        22,712        41,601
               Effect of material differences between
                 Israeli GAAP and US GAAP:
                      Change in basis of measurement
                         from adjusted NIS to nominal NIS       (5,694)       19,321        19,601
                      Amortization of goodwill                   2,768         2,768             -
                      Deferred taxes                            (4,458)       (1,016)         (483)
                                                                ------        ------        ------
               Net income under US GAAP                         48,869        43,785        60,719
                                                                ======        ======        ======
</TABLE>


                                      -26-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 25 - RECONCILIATION TO US GAAP (cont.)

          C.   CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP

<TABLE>
<CAPTION>
                                                                           NIS IN THOUSANDS
                                                                           ----------------
<S>                                                                             <C>
               Shareholders' equity under US GAAP as of January 1, 2003         402,631
               Dividend                                                         (36,499)
               Translation adjustments                                           (5,023)
               Net income for the year under US GAAP                             48,869
                                                                                -------
               Shareholders' equity under US GAAP as of December 31, 2003       409,978
                                                                                =======
</TABLE>

NOTE 26 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES

          A.   BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          COMPANY
                                                                    --------------------
                                                                        DECEMBER 31,
                                                                    --------------------
                                                                     2003          2002
                                                                    -------      -------
               CURRENT ASSETS                                          NIS IN THOUSANDS
                                                                    --------------------
<S>                                                                  <C>          <C>
                 Cash and cash equivalents                           31,645       11,718
                 Current maturities of long-term bank deposits        7,882        9,947
                 Trade receivables                                   74,668       44,542
                 Other receivables                                    6,139        5,085
                 Inventories                                         58,539       45,749
                                                                    -------      -------
                                                                    178,873      117,041
                                                                    =======      =======
               LONG-TERM INVESTMENTS

                 Long-term deposit                                        -        8,527
                 Capital note from shareholder                       32,770       32,770
                 Investments in Subsidiaries                        189,340      159,658
                                                                    -------      -------
                                                                    222,110      200,955
                                                                    =======      =======

               FIXED ASSETS, NET                                    203,572      200,933
                                                                    =======      =======
                                                                    604,555      518,929
                                                                    =======      =======
               CURRENT LIABILITIES

                 Short-term bank credit                               1,087            -
                 Trade payables                                     174,580      103,384
                 Other payables and accrued expenses                 10,645       23,418
                                                                    -------      -------
                                                                    186,312      126,802
                                                                    =======      =======

               SHAREHOLDERS' EQUITY                                 418,243      392,127
                                                                    -------      -------
                                                                    604,555      518,929
                                                                    =======      =======
</TABLE>


                                      -27-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 26 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES (cont.)

          B.   STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         ------------------------------------
                                                           2003           2002          2001
                                                         -------        -------       -------
                                                                   NIS IN THOUSANDS
                                                         ------------------------------------
<S>                                                      <C>            <C>           <C>
               Net sales                                 387,019        308,566       318,000

               Cost of sales                             334,764        245,936       229,517
                                                         -------        -------       -------

                   GROSS PROFIT                           52,255         62,630        88,483

               Selling expenses                            7,827          6,038         5,151

               General and administrative expenses         4,327          5,762         6,035
                                                         -------        -------       -------

                   OPERATING PROFIT                       40,101         50,830        77,297

               Financing income (expenses), net           (5,995)         3,676         8,283

               Other income, net                             255            254           515
                                                         -------        -------       -------

                   INCOME BEFORE INCOME TAXES             34,361         54,760        86,095

               Income taxes                                1,428         16,344        25,154
                                                         -------        -------       -------

                   INCOME AFTER INCOME TAXES              32,933         38,416        60,941

               Equity in net earnings
                  of Subsidiaries                         29,682          8,881         1,080
                                                         -------        -------       -------

                   NET INCOME FOR THE YEAR                62,615         47,297        62,021
                                                         =======        =======       =======
</TABLE>


                                      -28-
<PAGE>

                               HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 26 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES (cont.)

          C.   STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                    DIVIDEND
                                                                                                    DECLARED
                                                                                                      AFTER
                                                             SHARE      CAPITAL       RETAINED       BALANCE
                                                            CAPITAL     RESERVES      EARNINGS      SHEET DATE      TOTAL
                                                             -----      -------        -------        ------       -------
                                                                                    NIS IN THOUSANDS
                                                             -------------------------------------------------------------
<S>                                                          <C>        <C>            <C>           <C>         <C>
               BALANCE - JANUARY 1, 2001                     8,263      132,127        189,116             -       329,506

               CHANGES DURING 2001:

               Dividend declared                                                       (44,160)                    (44,160)
               Net income for the year                                                  62,021                      62,021
                                                             -----      -------        -------        ------       -------

               BALANCE - DECEMBER 31, 2001                   8,263      132,127        206,977             -       347,367

               CHANGES DURING 2002:
               Dividend declared after
                    balance-sheet date                                                 (35,528)       35,528             -
               Exchange rate differences of prior
                  year declared dividend                                                (2,537)                     (2,537)
               Net income for the year                                                  47,297                      47,297
                                                             -----      -------        -------        ------       -------

               BALANCE - DECEMBER 31, 2002                   8,263      132,127        216,209        35,528       392,127

               CHANGES DURING 2003:
               Dividend paid                                                                         (35,528)      (35,528)
               Exchange rate differences of prior
                  year declared dividend                                                  (971)                       (971)
               Net income for the year                                                  62,615                      62,615
                                                             -----      -------        -------        ------       -------

               BALANCE - DECEMBER 31, 2003                   8,263      132,127        277,853             -       418,243
                                                             =====      =======        =======        ======       =======
</TABLE>

                                      -29-
<PAGE>

ERNST & YOUNG                    Kost Forer Gabbay &        Phone: 972-3-6232525
                                 Kasierer                      Fax:972-3-5622555
                                 3 Aminadav St.
                                 Tel-Aviv 67067, Israel


                         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,
2002 and 2003, 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, 2003. 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 subsidiaries whose assets included in the consolidation constitute
approximately 10% and 10% of total consolidated assets as of December 31, 2002
and 2003, respectively, and whose revenues included in the consolidation
constitute approximately 29%, 9% and 9% of total consolidated revenues for the
years ended December 31, 2001, 2002 and 2003, respectively. Those financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for those
subsidiaries is based on the report of the other auditors. The financial
statements for the year ended December 31, 2001 of one of the subsidiaries
referred to above whose revenues included in the consolidation constitute
approximately 9% of total consolidated revenues for the years ended December 31,
2001, were audited by Luboshitz Kasierer, a member of Andersen Worldwide, who
issued an unqualified opinion in their report dated January 28, 2002. Andersen
Worldwide has ceased operating as a member of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 audit 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, 2002 and 2003, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel, which differ in certain respects from accounting principles generally
accepted in the United States (see Note 21 to the consolidated financial
statements).


                                              /s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
March 9, 2004                                   A Member of Ernst & Young Global



    Kost Forer Gabbay & Kasierer is a member practice of Ernst & Young Global

<PAGE>

ERNST & YOUNG


                                AUDITORS' REPORT

                             To the Shareholders of

                    TMM INTEGRATED RECYCLING INDUSTRIES LTD.

       We have audited the balance sheets of TMM Integrated Recycling Industries
Ltd. ("the Company") as of December 31, 2003 and 2002 and the consolidated
balance sheets as of such dates and the related statements of operations,
changes in shareholders' equity, and cash flows - of the Company and
consolidated - for each of the two years in the period ended December 31, 2003
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of the Company and consolidated for the year ended December 31, 2001
were audited by other auditors whose report dated March 4, 2002, expressed an
unqualified opinion on those statements.

       We did not audit the financial statements of certain subsidiaries, whose
assets included in consolidation constitute approximately 4% and 8.4% of total
consolidated assets as of December 31, 2003 and 2002, respectively, and whose
revenues included in consolidation constitute approximately 7% and 11% of total
consolidated revenues for each of the years ended on those dates, respectively.
Furthermore, we did not audit the financial statements of an affiliate, the
investment in which on the equity basis of accounting totaled approximately NIS
19,829 thousand as of December 31, 2003 and the Company's share in its losses
totaled approximately NIS 14 thousand for the year then ended. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based on the reports of the other auditors.

       We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and in Israel, including
those prescribed by the Auditors' Regulations (Auditor's Mode of Performance),
1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes 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 financial statements referred to above present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 2003 and 2002, and the results of operations and cash flows - of
the Company and consolidated - for each of the two years in the period ended
December 31, 2003, in conformity with generally accepted accounting principles
in Israel. Furthermore, in our opinion, the financial statements referred to
above are prepared in accordance with the Securities Regulations (Preparation of
Annual Financial Statements), 1993.

       As explained in Note 2a, the financial statements referred to above are
presented in values adjusted for the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.


                                              /s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
March 3, 2004                                   A Member of Ernst & Young Global


                                      -1-
<PAGE>

ERNST & YOUNG


                REPORT OF INDEPENDENT AUDITORS ON RECONCILIATION

                          OF ISRAELI GAAP TO U.S. GAAP


T.M.M. Integrated Recycling Industries Ltd.
Tel Aviv


We have audited the consolidated financial statements of T.M.M. Integrated
Recycling Industries Ltd. ("the Company") as of December 31, 2003 and 2002, and
for each of the two years in the period ended December 31, 2003, (not presented
separately herein) and have issued our report thereon dated March 3, 2004
(included elsewhere in this Form 20-F). Our audits also included the
Reconciliations of Israeli GAAP to U.S. GAAP for each of the two years in the
period ended December 31, 2003 (not presented separately herein). These
Reconciliations are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. We did not audit
the financial statements of certain subsidiaries, whose assets included in
consolidation constitute approximately 4% and 8.4% of total consolidated assets
as of December 31, 2003 and 2002, respectively, and whose revenues included in
consolidation constitute approximately 7% and 11% of total consolidated revenues
for each of the years ended on those dates, respectively. Furthermore, we did
not audit the financial statements of an affiliate, the investment in which on
the equity basis of accounting totaled approximately NIS 19,829 thousand as of
December 31, 2003 and the Company's share in its losses totaled approximately
NIS 14 thousand for the year then ended. We have been furnished with the reports
of other auditors with respect to the Reconciliations of the aforementioned
subsidiaries and affiliate.

In our opinion, based on our audits and the reports of other auditors, the
Reconciliations referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.


                                              /s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
March 3, 2004                                   A Member of Ernst & Young Global


                                      -2-
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
T.M.M. Integrated Recycling Industries Ltd.

We have audited the accompanying balance sheets of T.M.M. Integrated Recycling
Industries Ltd. ("the Company") as of December 31, 2001 and 2000 and the
consolidated balance sheets as of those dates, and the statements of operations,
changes in shareholders' equity and cash flows - of the Company and on a
consolidated basis - for each of the years then ended. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

The Company's financial statements as of December 31, 1999 were audited by other
auditors, whose unqualified report was issued on March 30, 2000.

We did not audit the financial statements of proportionately consolidated
subsidiaries, whose assets included in consolidation constitute 7.3% and 7.5% of
total consolidated assets at December 31, 2001 and 2000, respectively, and whose
revenues included in consolidation constitute 9.2% and 9.6% of total
consolidated revenues for the years then ended 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 solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing standards
in the United States of America and in Israel, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the 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, based on our audit and the reports of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position - of the Company and on a consolidated basis as of
December 31, 2001and 2000, and the results of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the years then ended, in conformity with generally accepted
accounting principles. In addition, in our opinion, these financial statements
are presented in accordance with the Israeli Securities Regulations (Preparation
of Annual Financial Statements), 1993.

As explained in Note 2A, these financial statements have been prepared in values
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.


/s/ Brightman Almagor & Co.
---------------------------
Brightman Almagor & Co.
Certified Public Accountants

Tel Aviv, March 4, 2002

<PAGE>

ERNST & YOUNG

                                AUDITORS' REPORT

                             To the Shareholders of

                            BARTHELEMI HOLDINGS LTD.

       We have audited the balance sheets of Barthelemi Holdings Ltd. ("the
Company") as of December 31, 2003 and 2002 and the consolidated balance sheets
as of such dates and the related statements of operations, changes in
shareholders' equity, and cash flows - of the Company and consolidated - for
each of the two years in the period ended December 31, 2003 (not presented
separately herein). 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 consolidation constitute approximately 4% and 7.4% of total
consolidated assets as of December 31, 2003 and 2002, respectively, and whose
revenues included in consolidation constitute approximately 7% and 11% of total
consolidated revenues for each of the years ended on those dates, respectively.
Furthermore, we did not audit the financial statements of an affiliate, the
investment in which on the equity basis of accounting totaled approximately NIS
19,829 thousand as of December 31, 2003 and the Company's equity in its losses
totaled approximately NIS 14 thousand for the year then ended. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based on the reports of the other auditors.

       We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and accordance with generally
accepted accounting standards in Israel, including those prescribed by the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes 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 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 financial statements referred to above present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 2003 and 2002, and the results of operations, changes in equity and
cash flows - of the Company and consolidated - for each of the two years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in Israel which differ in certain respects from those
followed in the United States, as described in Note 23 to the financial
statements.

       As explained in Note 2a, the financial statements referred to above are
presented in values adjusted for the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.


                                              /s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
March 3, 2004                                   A Member of Ernst & Young Global

<PAGE>
                   BAR-LEV, MERRARI, GEVA & CO. C.P.A (ISR.)


To the shareholders of
EFFEH Landfill Ltd


We have audited the financial statements of EFFEH Landfill Ltd. (hereafter - the
Company): balance sheets as of December 31, 2003 and the related statements of
income, changes in shareholders' equity and cash flows for the year ended
December 31, 2003. These financial statements are the responsibility of the
Company's board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2003 and the results of operations, the changes in
shareholders' equity and the cash flows of the Company for the year ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel.

As explained in note 2, the financial statements referred to above are presented
in values adjusted for the change in the general purchasing power of the Israel
currency, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have no significant affected the
determination of the results of operations for the year ended December 31, 2003.

The above opinion is a mere translation of the Hebrew version of the opinion as
given in the aforementioned date.


/s/ BAR-LEV, MERRARI, GEVA & CO.
BAR-LEV, MERRARI, GEVA & CO.
Certified Public Accountants (Israel)                Tel Aviv, February 9,  2004

<PAGE>

A  MEMBER  OF
DFK                                         MUALEM GLEZER INBAR JUNIO & Co
INTERNATIONAL                               CERTIFIED PUBLIC ACCOUNTANTS (Isr.).

TEL AVIV, 30 Yavets St.    P.O.B. 29145 Tel- Aviv, 61291     Tel: 972-3-5100124,
                 Fax: 5176024           E-mail : cpa@netvision.net.il
--------------------------------------------------------------------------------

To the shareholders of
M.M.M United Landfill Industries (1998)  Ltd


We have audited the financial statements of M.M.M United Landfill Industries
(1998) Ltd. (hereafter - the Company): balance sheets as of December 31, 2003
and 2002 and the related statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2003 and 2002 and the results of operations, the changes in
shareholders' equity and the cash flows of the Company for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel.

As explained in note 2b, the financial statements referred to above are
presented in values adjusted for the change in the general purchasing power of
the Israel currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have no significant affected the
determination of the results of operations for the three years in the period
ended December 31, 2003.

The above opinion is a mere translation of the Hebrew version of the opinion as
given in the aforementioned date.

/s/ Mualem Glezer Inbar Junio & Co.
Mualem Glezer Inbar Junio & Co.
Certified Public Accountants (Israel)                 Tel Aviv, January 28, 2004

<PAGE>

ANDERSEN

                                                              Luboshitz Kasierer

                      AUDITORS' REPORT TO THE SHAREHOLDERS

                                       OF

                               HOGLA-KIMBERLY LTD.


We have audited the accompanying balance sheets of HOGLA-KIMBERLY LTD (the
Company) and the consolidated balance sheets of the Company and its subsidiaries
as of December 31, 2001 and 2000, and the related statements of income, changes
in shareholders' equity and cash flows - Company and consolidated - 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 in 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 and on a
consolidated basis - as of December 31, 2001 and 2000, and the results of
operations, changes in shareholders' equity and cash flows - of the Company and
on a consolidated basis - for each of the three years in the period ended
December 31, 2001, in conformity with generally accepted accounting principles
in Israel (as to reconciliation to generally accepted accounting principles in
the United States, see Note 25). Also, in our opinion, the financial statements
referred to above are prepared in conformity with the Securities Regulations
(Preparation of Annual Financial Statements), 1993.

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 as measured by the changes in the exchange rate of the U.S.
dollar in relation to the shekel, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

Without qualifying our opinion, we draw attention to Note 2L(2) to the financial
statements regarding the presentation of a dividend declared subsequent to
balance sheet date.

                                             /s/ Luboshitz Kasierer
                                             -----------------------------------
                                                     Luboshitz Kasierer
                                             Certified Public Accountants (Isr.)

Tel-Aviv, March 4, 2002