---

# 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, 2005

_________________

# 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:

|Title of each class
Ordinary Shares par value NIS .01 per share | Name of each exchange on which registered
American Stock Exchange
|--------------------------------------------------------------- | -----------------------------------------------------------------

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:

# 4,002,205 Ordinary
Shares, par value NIS .01 per share

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes    No.

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    No   .

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non- accelerated
filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Cheek one)

|Large accelerated filer | Accelerated filer | Non- accelerated filer
|----------------------- | ----------------- | ----------------------

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



---

# 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

American
Israeli Paper Mills Ltd. (AIPM or 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 17 below.

The following selected financial data
is derived from the audited consolidated financial statements of the Company.

The financial data is presented in
New Israeli Shekel (NIS) as follows:AIPM made a transition to reporting in
nominal New Israeli Shekels (NIS) in 2004, pursuant to the directives of Standard 12 of
the Financial Accounting Standards Board in Israel. In the past AIPMs reports were
in NIS, adjusted to changes in the exchange rate of the U.S. dollar against the NIS.

The
comparison figures for the years 2000  2003 are the dollar figures, as reported in
the past, multiplied by the exchange rate of the U.S. dollar as at December 31, 2003, the
day of the transition to NIS-based reporting pursuant to Standard 12 ($1 = NIS 4.379). See
also note 1b to the financial statements.

2



---

# Five Fiscal Year
Financial Summary

|According to Israeli GAAP
(In Thousands of NIS Except Per Share Amounts) | Year Ended December 31 | 
|------------------------------------------------------------------------ | ---------------------- | 
|
|Sales                                                                    |                        | 
|Income from ordinary operations                                          |                        | 
|Share in profits of associated companies, net                            |                        | 
|Net income                                                               |                        | 
|Selected balance sheet data:                                             |                        | 
|Total assets                                                             |                        | 
|Fixed assets                                                             |                        | 
|Long-term debt                                                           |                        | 
|Shareholders' equity                                                     |                        | 
|Per Share Data:                                                          |                        | 
|Shares outstanding at end of year                                        |                        | 
|Amount in NIS                                                            |                        | 
|Net income per NIS 1 par value:                                          |                        | 
|Primary                                                                  |                        | 
|Fully diluted                                                            |                        | 
|Dividend per share                                                       |                        | 

---

|* |  | Reclassified
|- |  | ------------

|** |  | Consists
of two dividends that were declared in 2005 (see comment 2 below)
|-- |  | --------------------------------------------------------------------------

|(1) |  | The
net income includes a material non-recurring gain in the years 2005, 2004 and 2003 (in
the sum of NIS 8,000 thousands, NIS 14,440 thousands and
NIS 2,700 thousands respectively, originated from certain tax benefits - see "net income"
on page 20)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 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).Dividend
for 2003 in the sum of NIS 25.12 per share ($5.54 per share) was declared in August 2004
and paid in September 2004.Dividend for 2005 in the sum of NIS 12.50  per share ($2.71
per share) was declared in August 2005 and paid in September 2005.Additional dividend for
2005 in the sum of NIS 12.49 per share ($2.71 per share) was declared in December 2005
and paid in January 2006.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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# According to U.S. GAAP

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

|                                              | Year ended December 31 | 
|--------------------------------------------- | ---------------------- | 
|
|Sales                                         |                        | 
|Income from ordinary operations               |                        | 
|Share in profits of associated companies, net |                        | 
|Net income                                    |                        | 
|Total assets                                  |                        | 
|Fixed assets                                  |                        | 
|Long-term debt                                |                        | 
|Shareholders' equity                          |                        | 
|Per Share Data: (re-measured NIS)             |                        | 
|Shares outstanding at end of year             |                        | 
|Amount in NIS                                 |                        | 
|Net income per share:                         |                        | 
|Basic                                         |                        | 
|Diluted                                       |                        | 
|Dividend per share                            |                        | 

For further information about the
effect of application of U.S. GAAP, see Item 17.

---

|* |  | Reclassified
|- |  | ------------

|** |  | Consists
of two dividends that were declared in 2005 (see comment 2 below)
|-- |  | --------------------------------------------------------------------------

|(1) |  | The
net income includes a material non-recurring loss in the years 2005 and 2003, in the sum
of NIS 10,000 thousands and NIS 16,986 thousands respectively, [representing other than temporary impairment of investment in
associated companies (see Item 17-e)].
A material non-recurring gain was included in the years 2005, 2004 and 2003, in the sum of
NIS 8,000 thousands, NIS 14,440 thousands and NIS 2,700 thousands respectively, originated
from certain tax benefits (see "net income" on page 20).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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).
Dividend for 2003 in the sum of NIS 25.12 per share ($5.54 per share) was declared in August 2004
and paid in September 2004.
Dividend for 2005 in the sum of NIS 12.50  per share ($2.71 per share) was declared in August 2005
and paid in September 2005.
Additional dividend for 2005 in the sum of NIS 12.49 per share ($2.71 per share) was declared in
December 2005 and paid in January 2006.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



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# Exchange Rates

The
exchange rate between the NIS and U.S. dollar published by the Bank of Israel was NIS
4.518 to the dollar on May 31, 2006. The high and low exchange rates between the NIS and
the U.S. dollar during the six months of December 2005 through May 2006, as published by
the Bank of Israel, were as follows:

|Month         | High
1 U.S. dollar = | Low
1 U.S. dollar =
|------------- | -------------------- | -------------------
|December 2005 | 4.662 NIS            | 4.579 NIS          
|January 2006  | 4.658 NIS            | 4.577 NIS          
|February 2006 | 4.725 NIS            | 4.664 NIS          
|March 2006    | 4.717 NIS            | 4.658 NIS          
|April 2006    | 4.671 NIS            | 4.503 NIS          
|May 2006      | 4.522 NIS            | 4.428 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, 2001 - December 31, 2001 | 4.219NIS/$1  
|January 1, 2002 - December 31, 2002 | 4.736NIS/$1  
|January 1, 2003 - December 31, 2003 | 4.512NIS/$1  
|January 1, 2004 - December 31, 2004 | 4.483NIS/$1  
|January 1, 2005 - December 31, 2005 | 4.878NIS/$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 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 (the Company refers to these
factors as Cautionary Statements). Any forward-looking statements contained
in this Annual Report speak only as of the date hereof, and the Company cautions
potential investors not to place undue reliance on such statements. The Company
undertakes no obligation

5

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to update or revise any
forward-looking statements. All subsequent written or oral forward-looking statements
attributable to the company or persons acting on the companys 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
|-- |  | ------------

# Macro-economic risk
factors

A slowdown in the market
may result in a reduction of profitability

A
slowdown in the global markets as well as in the Israeli market may cause: a decrease in
the demand for the Companys and its associated companies products, an increase
in the competition with imported products and a decrease in the profitability of export
and that could result in a reduction in the Groups* sales and a decline
in its profitability.

Future legal restriction
may negatively affect the results of operations

The
Companys activities and its subsidiaries and associated companies activities
are imposed by legal restrictions (such as government policy on various subjects,
different demands made by the authorities supervising environmental regulations and
governmental decisions to raise minimum wages) . These restrictions may affect the results
of operations of these companies.

Any future rise in the
inflation rate may negatively affect business

Since
the Company possesses a significant amount of CPI-linked liabilities, a high inflation
rate may cause significant financial expenses. Consequently, the Company makes hedges from
time to time to cover the exposure due to the liabilities. A high inflation rate may also
affect wage expenses, which, at the long run, tend to be adjusted to the changes in the
CPI.

Changes in the foreign
exchange rates may cause erosion in profitability

The
Company, its subsidiaries and associated companies are exposed to risks due to changes in
the foreign exchange rates, either due to importing raw materials and finished products or
due to exporting to international markets. Change in the foreign exchange rates of the
different currencies compared to the New Israeli Shekel may cause erosion in profitability
and cash flow, especially in the associated companies.

# Risk Factors relating to
the Company

The company faces
significant competition in the markets the Company operates in

The
Company operates in the packaging paper and office supplies industries, both of which are
highly competitive. In the packaging paper industry the Company faces competition from
imported paper. In the office equipment sector the Company faces competition from many
suppliers that operate in the Companys markets. The associated companies are also
exposed to competition in all of their operations. This competition may negatively affect
the future results.

_________________

* The Group  The Company and
its subsidiaries and associated companies

6



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For further information see the
section titled  Competition.

The Company is exposed to increases in the cost of raw materials.

The increase
in the activity of the paper machines, which are based on paper waste as a recycled fiber,
makes it necessary to increase collection of paper waste and to add more expensive
resources. The lack of enforcement of the Israeli recycling laws, which require waste
recycling, makes it difficult to find alternative resources at a competitive cost.

There
is an exposure in the associated companies resulting from fluctuation of prices of raw
material and of the imported products, which arrive to Israel without customs or entry
barriers. Exceptional price increase of raw materials and imported products may have an
adversary effect on these Companies profitability.

The Company is dependent
on energy prices.

AIPMs
activities are highly dependent on the consumption of energy and therefore are influenced
by fuel and electricity prices. AIPMs profitability may suffer if there is an
exceptional increase in energy prices.

Credit Risks

Most
of the Companys and its subsidiaries sales are made in Israel to a large
number of customers. Part of the sales is made without full security of payment. The
exposure to credit risks relating to trade receivables is usually limited, due to the
relatively large number of our customers. The Company 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.

The operations in Turkey may
suffer as a result of the Turkish economy.

The
Company is exposed to various risks related to its activities in Turkey, where
Hogla-Kimberly Ltd (H-K) operates through its subsidiary, Kimberly Clark
Turkey (KCTR). These risks result from economic instability and high inflation
rates, which have characterized the Turkish economy during the past years, and may be
repeated and adversely affect KCTRs activities.

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 largest 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
organizational structure of the Company and certain subsidiaries 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

7



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and separated, including printing and
writing paper and packaging paper. For each of them a separate management team 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, 2006, the
          Group held 26.25% of the shares of Carmel. Other major shareholders in this
          company are Kraft Group LLC (an American shareholder) (35.46%) and Ampal Ltd.
          (21.75%). Carmel shares were traded in AMEX and were deregistrated and delisted
          in 2005.

2.       
          In 1996, Kimberly Clark Ltd. (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 (H-K). H-K
          is engaged in the production and marketing of household paper products, hygiene
          products, disposable diapers and complementary kitchen products. The partnership
          was intended to expand the local production base in Israel, in order to serve
          both local and regional demand, and to offer H-K access to international
          markets. In 1999, H-K purchased Ovisan, which was renamed to
          Kimberly Clark Turkey (KCTR), a Turkish manufacturer and
          marketer of diapers and paper products.. On March 31, 2000, KC increased its
          holdings in H-K to 50.1%.

3.       
          Effective January 1, 2000, AIPM entered into a joint venture agreement with
          Neusiedler AG (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
          Neusiedler Hadera Paper (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 NHP $10 million in cash and loaned to NHP $10 million. NHP was
          renamed in 2004 and is now called Mondi Business Hadera Paper (Mondi
          Hadera).

4.       
          Amnir Recycling Industries Ltd. (Amnir) (a wholly owned subsidiary of AIPM),
          which is engaged in the collection and recycling of paper and plastic waste and
          in the confidential data destruction, 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. As of May 31, 2006, Amnir
          owned 30.18% of Cycle-Tec.

In
2004 Amnir established a new company in Switzerland for data destruction through the
operation of mobile shredder trucks at customers sites, in which the Amnir held 75%
together with a partner that held 25%. In the end of 2005, the Group signed an agreement,
for the sale of all its 75% shares in the company, to the other partner.

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 did 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 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

8



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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% as of May 31, 2006. AIPM
holds directly and indirectly 43.08% of TMMs shares and CGEA holds 44.92% of
TMMs shares.

7.       
          In June 2005, C.D. Packaging Systems Limited (C.D., an associated
          company of AIPM, held jointly with Carmel), which is engaged, in the designing,
          manufacturing and marketing of consumers packages, acquired the business
          activity of Frenkel and sons Ltd., in exchange for allocation of shares in C.D.,
          and was renamed to Frenkel- CD Ltd.. Both companies are engaged in the field of
          folding boxes. The goal of the new entity is to join the activities in the field
          and create a significant entity in the competitive market, while combining the
          advantages of the two companies and fulfilling the potential of saving costs, as
          a result of the synergy between the activities. The merger is effective as of
          January 01 2006.

# Capital Expenditures and
Divestitures

# 2005

The investments in fixed assets
totaled about NIS 71.1 million (about $15.4 million). These investments included:

        Investments of approximately
NIS 4.6 million ($1.0 million) in environmental issues.        An investment of
approximately NIS 1.8 million ($0.4 million) in a gas turbine.        Investments of
approximately NIS 36.8 million ($8 million) in real estate in Hadera an Naharia.
        Investments totaling NIS 27.9 million ($6 million) in buildings, equipment, transportation and information technology.

# 2004:

The investments in fixed
assets of the Company totaled about NIS 31.0 million in 2004 (about $6.9 million). These
investments included:

        Investments of approximately
NIS 2.2 million ($0.5 million) in environmental issues.
        An investment of approximately NIS 2.2 million ($0.5 million) in a machine for the
manufacturing of cores based on Cycle-Tec technology.
        Investments totaling NIS 26.6 million ($5.9 million) in buildings, equipment, transportation and information technology.

# 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
information technology.

|B. |  | Business
Overview
|-- |  | -----------------

| | I. |  | The
Groups Operations and Principal Activities
| | -- |  | -----------------------------------------------

The
Company is engaged through its subsidiaries in the manufacture and sale of packaging
paper, in the collection and recycling of paper and plastic waste and in the marketing of
office supplies, mainly to the institutional and business sector. The Company also holds
interests in associated

9



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companies that deal in the
manufacture and marketing of printing and writing paper, household paper products, hygiene
products, disposable diapers, complementary kitchen products, corrugated board containers
and packaging for consumer goods and the handling of solid waste.

In
order to serve the paper production activities, the Company, through a wholly owned
subsidiary, is supplying engineering services, maintenance, steam and energy, water
supply, sewage treatment etc. to the different paper machines located in the main site of
the Company in Hadera in return for cost sharing.

The
Company operates in its main production site in Hadera according to the following
standards:

ISO
9001/2000  quality management

ISO
14001  environmental regulations

Israeli
Standard 18001 - safety

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

| |  |  | Grades
of Paper and Board
| | - |  | -------------------------

Printing
and writing paper, publication papers in reels, coated paper, carbonless 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.

| |  |  | Packaging
Products
| | - |  | ------------------

Folding
 cartons, corrugated containers, consumer packages solid board containers and
pallets.

| |  |  | Household
Products
| | - |  | ------------------

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

| |  |  | 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,
cups and plates.

| |  |  | Other
Products
| | - |  | --------------

Aluminum
food wraps, cling-film wraps, garbage bags, oven baking and cooking trays, office supplies
and computer products, 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 packaging products are sold mostly to four main customers in Israel, which
operate in the corrugated board sector with whom the Group has a long business relations.

The
Groups office supplies products are sold to thousands of customers in the Business
to Business sector and to institutions such as governmental offices and banks. About 25%
of the sales are

10

---

made through tenders.

The
Groups paper grades products are sold to publishers, big and medium size printers,
converters, and wholesalers some of which are part of the Group, as well as other direct
customers.

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

The
Groups packaging products are sold to a wide range of customers in different sectors
(e.g., industry, agriculture, food and beverage industry), including direct marketing to
ultimate customers through subcontractors and agents.

The
Groups waste disposal services are provided mostly to municipalities through tenders
and directly to other customers. The Group also operates landfills and transfer stations
for the handling of solid waste.

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

| | (a) |  | Maintaining
its existing dominant share in the Israeli market of paper grades           and household
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) |  | Meeting
the growing and changing requirements of the market by adding new           products and
improving the quality of existing grades of paper in order to meet           the
technological changes required by new printing equipment and the needs of           the
customers.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Exploring
new business opportunities in Israel and abroad and increasing the           range of its
products and the production capacity.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------

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

|** |  | AIPM
made the transition to reporting in nominal New Israeli Shekels (NIS) in 2004, pursuant
to the directives of Standard 12 of the Financial Accounting Standards Board in Israel.
In the past, AIPMs reports were in NIS, adjusted to changes in the exchange rate of
the US dollar against the NIS.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
comparison figures for the years 2003  2002 are the dollar figures, as reported in
the past, multiplied by the exchange rate of the US dollar as at December 31, 2003, the
day of the transition to NIS-based reporting pursuant to Standard 12 ($1 = NIS 4.379).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Packaging Paper
Manufacturing
and Recycling (1) | Marketing Office
Supplies (2) | Total
|----------------------------------------------- | ----------------------------- | -----
|2005                                            | 2004                          | 2003 
|368.9                                           | 367.4                         | 332.1

The above mentioned segments include
the following activities:

|1. |  | Packaging
paper manufacturing and recycling  manufacturing and marketing                of
packaging paper, including collecting and recycling of paper waste. The
               manufacturing of packaging paper relies 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

11



---

suppliers in Scandinavia, the United
States, Portugal, Austria, Germany, Brazil and Spain on a regular basis. The bulk of the
pulp tonnage purchased is secured by revolving long-term agreements renewed on a yearly
basis. All of the pulp for the printing and writing paper manufactured by Mondi Hadera is
purchased by Mondi Business Paper (the Austrian parent company), which purchases pulp for
its subsidiaries around the world. This ensures fluent supply and better prices.

The
pulp for the household products is being imported by H-K with the assistance of K-C.

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. The production of packaging and
wrapping paper is based mostly on recycled fibers. Therefore, the main raw material used
for the production of packaging and wrapping paper is paper waste most of which is
collected from various sources by Amnir, a wholly owned subsidiary of the Company.
Approximately 200,000 tons per year of waste paper are collected and handled by Amnir,
most of which are used by the Group for the production of paper and some of which is sold
to tissue paper manufacturers. Apart from the waste paper collected by Amnir there is a
use of residue which is created during the production of packages and purchased from the
manufacturers of corrugated board.

The
main raw material required for the manufacture of corrugated board is board paper. Carmel
purchases paper from two main suppliers which are also shareholders of Carmel.

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. In 2004 an
agreement was signed between Mondi Hadera and Omya International AG for the supply of PCC
for a period of fourteen years commencing in April 2006. Omya constructed and operates a
PCC plant in Israel. The PCC purchased from Omya replaced the PCC purchased from SMI and
is expected to be cost saving.

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

# 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 fine
paper from other countries are in the range of 0% -12%.

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

In
the market for office supplies that are sold directly to institutions and businesses there
are numerous local suppliers that compete with the company.

The
Group collection and paper recycling operation is exposed to local competition by local
companies which operate all over the country.

The
competition has influence over the selling prices that the Group can charge. The Group
competes with the imported products by emphasizing the advantages of having a local
supplier by ensuring the customers uninterrupted supply and service on short notice and
excellent quality of products.

12



---

|C. |  | Organizational
Structure
|-- |  | ------------------------

As
of May 29, 2006, Clal Industries and Investment Ltd. (Clal) beneficially owned 38.04% of
the ordinary shares of the Company and
Discount Investment Corporation Ltd. (DIC) beneficially owned 21.49% of the ordinary
shares of the Company.  Clal and DIC agreed to coordinate and pool their voting power in
the Company.  To our knowledge, IDB Development Corporation Ltd. owns 74.19% of DIC and
61.98% of Clal.  See "Item 7 - Major Shareholders and Related Party Transactions."

# Significant
subsidiaries and associated companies

|Name of the Company                                                   | Ownership and Voting | Country of
Incorporation
|--------------------------------------------------------------------- | -------------------- | ------------------------
|
|
|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                  
|Kimberly -Clark Tuketim Mallari Sanayi Ve Ticaret A.S. ("KCTR") (held | 49.90%               | Turkey                  
|through H-K)                                                         
|Mondi Business Paper Hadera Ltd.                                      | 49.90%               | Israel                  
|Barthelemi Holdings Ltd.                                              | 35.98%               | Israel                  
|T.M.M. Integrated Recycling Industries Ltd. (direct and indirect)     | 43.08%               | Israel                  
|Carmel Containers Systems Ltd.                                        | 26.25%               | Israel                  
|Frenkel- CD Ltd. (formerly "C.D. Packaging Systems Limited")          | 35.16*               | Israel                  
|(direct and indirect through Carmel)                                 
|Cycle-Tec Recycling Technology Ltd.                                   | 30.18%               | Israel                  

D.     Property, Plants and
Equipment

The
Groups principal executive offices and manufacturing and warehouse facilities are
located on approximately 87.5 acres of land in Hadera, Israel, which is 31 miles south of
Haifa, a major seaport, 28 miles north of Tel Aviv. The Company owns 69.5 acres, out of
which 18.5 acres were purchased in 2005, for the amount of $4.4 million, 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 from 2007 until 2053. Some
of this land is rented to associated companies, which operate in Hadera.

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 owned by H-K is located in a 10-acre
plot in Afula, a city in northern Israel. H-K is leasing from the Israel Land
Administration in Nahariya, in northern Israel, approximately 6 acres, which are rented to
an associated company. In September 2002, the Company signed an agreement with

_________________

* The holding in voting shares is
35.11%

13



---

the
Tel Aviv Municipality for the extension of the lease period of a 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 Company. The Company is investigating several
options for using the land. According to the lease Agreement, the Company is obliged to
utilize its building permits until September 2009.

The
Group also owns a warehouse containing 50,000 square feet situated on three acres in the
Tel Aviv area rented to third party, and a two-acre parcel in the industrial zone of Bnei
Brak, near Tel-Aviv, which is used for waste paper collection.

H-Ks
headquarters and logistic center, which are leased 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.

Associated
companies rent plants 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
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 320,000 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 two other plants for handling and recycling urban waste in Petah Tikva and
Rishon Le Zion, 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 about
$14 million. The operation of the power plant, situated in Hadera, 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.

The
Company is promoting a project for establishing a combined cycle co-generation plant based
on natural gas at Hadera. In addition, the Company is preparing for the conversion of its
energy-generation systems to natural gas, once the transportation infrastructure of
natural gas to Hadera is completed. The conversion is planned for the end of 2006.This
conversation is expected to enable savings in production costs, while further improving
environmental compliance. The capacity of the new plant is expected to enable the Company
to sell electricity to external users, including the Israel Electric Company.

In
October 2004 a wholly owned subsidiary of the Company, American Israeli Paper Mills Paper
Industry (1995) Ltd., was granted by the Minister of National Infrastructure a basic
permit to generate electricity by means of power and heat systems (co-generation). In
addition, in December 2004 the project was announced as a National Infrastructure
Project.

14



---

| | Environmental
 Regulation Matters
| | ---------------------------------

The
business license of the main production site of the Group in Hadera includes conditions
regarding sewage treatment, effluent quality, air quality and the handling of waste and
chemicals. In addition, the site has to operate according to the conditions of the Israeli
water commission regarding effluent disposal. To the best knowledge of the Company, the
site operates according to the requirements of the authorities, and in the events of
deviations, the Company acts for the repairment of the deviations, jointly with the
authorities.

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.

During
the years 2000-2005 the Group invested approximately $7 million in projects intended to
enable it to comply with the strict environmental regulations applicable to it out of
which $1 million was invested during 2005. In addition, during 2005 the Group had
installed and began operating a sand filter as tertiary treatment for its effluent in the
site in Hadera. The investment in this project was approximately $400,000.

In
2006 the Group intends an investment of approximately $800,000, in a unit for the removal
of phosphor and softening the effluent after the paper mills wastewater treatment
plant.

The
Company is preparing for the conversion of its energy-generation systems to natural gas,
in an investment of approximately $5 million, once the transportation infrastructure of
natural gas to Hadera is completed. The conversion is planned for the end of 2006, subject
to the completion of the transportation infrastructure of natural gas to Hadera. This
project is expected to contribute and improve the environmental compliance since the
Company will use natural gas instead of fuel oil.

In
2005 all plants at the main Hadera site successfully passed various environmental
inspections.

# ITEM 4A 
UNRESOLVED STAFF COMMENTS

None.

# ITEM 5  OPERATING
AND FINANCIAL REVIEW AND PROSPECTS

# Critical Accounting
Policies and Estimates

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 17). 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.



15

---

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.

Spare
parts of the machinery and equipment that are not for current use, are presented under
fixed assets.

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, the Companys 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.

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 be 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.

16



---

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 impairment regarding 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.

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 (hereinafter
 Standard 12), which provided for the discontinuance of adjusting financial
statements for the effects of inflation, as of January 1, 2003. In
December 2002, Accounting Standard No. 17 was issued that postponed the date
from which Accounting Standard No. 12 is to be applied until January 1, 2004.

The
Companys financial statements were drawn up in NIS adjusted for the changes in the
dollar (as allowed by section 29(b) of Opinion 36 of the Israeli Institute) until December
31, 2003. Based on Standard 12 and the provisions in paragraph 4 to Israeli Accounting
Standard No. 13, with effect from January 1, 2004, the Company is no longer able to
measure its operations in dollars, and its operations are measured in NIS. The
inflation-adjusted NIS amounts as of December 31, 2003, are the base for the
nominal-historical financial reporting following January 1, 2004.

See also note 1b to the financial
statements.

As
for information regarding the effects of new Israeli accounting standards  see note
1q to the financial statements.

General

On March 7, 2006, T.M.M (an
associated company) announced that the Israeli Securities Authority had addressed T.M.M
with regard to an investigation the authority is conducting. At this stage, T.M.M is
unable to estimate the impact of the investigation on the Company.

17



---

# 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

|                                             | Year ended 12/31/05 | Year ended 12/31/04
|-------------------------------------------- | ------------------- | -------------------
|
|
|
|
|Net sales                                    |                     | (393)              
|Cost of sales                                |                     | 7,275              
|                                             |                     |                    
|Gross profit                                 |                     | (7,668)            
|Selling, administrative and general expenses |                     | (1,520)            
|                                             |                     |                    
|Income from ordinary operations              |                     | (6,148)            
|Financial expenses - net                     |                     | 628                
|Other income                                 |                     |                    
|                                             |                     |                    
|Income before taxes on income                |                     | (5,520)            
|Taxes on income                              |                     | (2,839)            
|                                             |                     |                    
|Income from operation of the Company and the |                    
|consolidated subsidiaries                    |                     | (8,359)            
|Share in profits of associated companies     |                     | (8,658)            
|                                             |                     |                    
|Net income                                   |                     | (17,017)           
|                                             |                     |                    

The
statements of income for the years ended December 31, 2005, 2004 and 2003 are presented in
New Israeli Shekels as explained in Note 1 to the Consolidated Financial Statements (See
footnote).

The
number of New Israeli Shekels which were exchangeable for 1 U.S. dollar increased
(decreased) over the prior year by (-7.6%), (-1.6%) and 6.8% in 2003 ,2004 and 2005
respectively. See Note 1 to the financial statements attached and Item 17 for anticipated
effect of adoption of accounting pronouncements that have been issued but are not yet
required to be adopted.

# 2005 Compared to 2004

# I.        Overview of Results
of Operations

1.        Consolidated Data

Sales amounted to NIS 482.5 million
during 2005, as compared with NIS 482.9 million in 2004.

Operating profit in 2005 amounted to
NIS 47.8 million, as compared with NIS 53.9 million in 2004.

_________________

1    
AIPM made the transition to reporting in nominal New Israeli Shekels (NIS) in
2004, pursuant to the directives of Standard 12 of the Financial Accounting
Standards Board in Israel. In the past AIPMs reports were in NIS, adjusted
to changes in the exchange rate of the US dollar against the NIS.

The comparison figures for the year
2003 are the dollar figures, as reported in the past, multiplied by the exchange rate of
the US dollar as at December 31, 2003, the day of the transition to NIS-based reporting
pursuant to Standard 12 ($1 = NIS 4.379).

18



---

Profit after taxes and before
AIPMs share in the earnings of associated companies for 2005, amounted to NIS 29.3
million, as compared with NIS 37.7 million in 2004.

2.     Net income

Net
income amounted to NIS 45.7 million during 2005, as compared with NIS 62.7 million in
2004.

Net
income during 2005 included a tax benefit of NIS 8 million (including the Companys
share in the benefit of associated companies) on account of the impact of the tax law
reforms that were passed by the Knesset (Israeli parliament) on July 25th 2005,
that serve to gradually lower the corporate tax rate to a level of 25% by 2010.

The
net income before non-recurring items mentioned above amounted to NIS 37.7 million in 2005, as compared
with NIS 48.3 million in 2004.

Earnings
per share in 2005 amounted to NIS 1,127 per NIS 1 par value ($2.45 per share), as compared
with NIS 1,544 per NIS 1 par value ($3.58per share) in 2004. The return on
shareholders equity amounted to 7.9% in 2005, as compared with10.2% in 2004.

# II.    The Business
Environment

The
year 2005 was characterized by economic growth in Israel (approximately 5%), increased
demand on the part of the public sector and more moderate growth in private consumption.

The
Groups results in 2005 were significantly affected by the unusual rise in energy
prices, that began in 2004 and accelerated in 2005.

This
price increase included fuel oil and diesel prices that rose by an extraordinary average
of 38% in relation to 2004. Water and electricity prices also rose in 2005 as compared
with 2004 (by an average of 10% and 13%, respectively).

The
impact of these price increases on the Groups aggregate operating profit results
amounts to approximately NIS 40 million.

In
parallel, the prices of the principal raw materials used by the Group companies in their
various activities also continued to rise. The impact is an additional NIS 60 million to
the Groups costs in the aggregated operations profit, compared with 2004.

The
downturn in the European paper industry, originating from surplus supply due to the
recession, has resulted in competing imports into Israel, at low prices, that rendered it
impossible to raise prices, as warranted from the said rise in input prices.

In
view of the said market conditions and the fierce competition which the Group is facing,
and with the intention of dealing with the said rise in input prices, the Group
accelerated its efficiency programs at all the companies, operating intensively to cut
costs across all expense areas  in parallel to maintaining the quality of products
and the market share figures.

As
part of the said operations, the Company is initiating measures to achieve synergy between
the Group companies, thereby allowing the Group to enjoy economies of scale, while
bringing about greater efficiency and savings in various costs, including energy and raw
material costs. The said plans include

19



---

among others the anticipated savings
from the expected transition to the use of natural gas at the Hadera plant, as described
below.

Concurrently,
the Group is implementing some cross-organization plans: The Talent Management plan for
the development of the Groups managers and the creation of managerial reserve, the
WOW Program for enhancing the perceived added value of the companies with the customers
and improving loyalty premium and price based on differentiation of products and service,
Kimberly Clarks global Centerlining program aimed at improving production lines
(operating a methodology that creates a joint agenda for all elements impacting
operations, including: engineering, maintenance, technology and operations, while
constantly measuring the variation of selected parameters, thereby creating a process of
constant improvement in quality and efficiency).

In
addition, the Group raised the selling prices of its products, albeit only partially and
not to the extent warranted by the increase in input prices  due to the economic
conditions outlined above, the more moderate demand and the escalating competition against
both imports and local manufacturers.

The
said efficiency measures, together with the partial rise in prices, rendered it possible
to significantly reduce the heavy impact of the rising input prices on the results.

The
Group is currently continuing its efforts to improve selling prices, on the one hand,
while extending the efficiency measures on the other hand, in order to compensate for the
said increased input prices.

It is impossible to estimate the
impact of the above steps on the Groups profitability, at this stage.

A
trend has been identified in early 2006 whereby the gap between supply and demand in the
European paper market seems to be narrowing, given the economic growth in the EU. This
trend is leading to announcements regarding increases paper prices in Europe and in the
USA.

As
part of the Companys endeavors to cut manufacturing costs and to achieve additional
environmental improvements, the Company is continuing to promote the energy-generation
plant project in Hadera, using natural gas.

The
Company is initially preparing for the conversion of its energy-generation systems from
the use of fuel oil to natural gas, once the transportation infrastructure of natural gas
to Hadera is completed. The transition is planned for the second half of 2006, subject to
the arrival of the gas to Hadera.

In
this capacity, the Company signed an agreement in London on July 29, 2005, with the Thetis
Sea Group, for the purchase of natural gas. The gas that will be purchased is intended to
fulfill the Companys requirements in the coming years, for the operation of the
existing energy co-generation plant at Hadera that will be converted for the use of
natural gas, instead of the current use of fuel oil. The overall financial volume of the
transaction totals $40 million over the term of the agreement (5 years from the initial
supply of gas, but no later than July 1, 2011).

The
transition from fuel oil to natural gas will allow for significant savings, due to the
significant differences between the current price of fuel oil versus the gas price and
will serve to improve the Groups competitiveness and profitability.

The
exchange rate of the NIS compared to the USD was devaluated by 6.8% during 2005, as
compared with a revaluation of 1.6% in 2004.

The
inflation rate during 2005 amounted to 2.4%, as compared with an inflation rate of 1.2% in
2004.

20



---

# III.    Analysis of
Operations and Profitability

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

| | 1.     Sales
| | ------------

| |  | The consolidated
sales amounted to NIS 482.5 million in 2005, as compared with NIS 482.9 million in 2004.
| |  | ---------------------------------------------------------------------------------------------------------

| |  | The  change
in the turnover in 2005 originated from a certain growth in sales of packaging paper and
paper waste, along with an insignificant decrease in the sales of office equipment sector
due to the implementation of a reorganization process in this sector.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.     
Cost of Sales
| | ---------------------

| | The
cost of sales amounted to NIS 383.2 million in 2005, representing 79.4% of sales, as
compared with NIS 375.9 million, or 77.9% of sales in 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The gross
margin amounted to 20.6% in 2005, as compared with 22.1% in 2004.
| |  | ---------------------------------------------------------------------------

| | The
decrease in the gross margin originated primarily from the erosion of the gross profit due
to the increase in raw material prices (approximately 9% for paper waste), the unusual
rise in energy prices (approximately 38% for fuel oil and approximately 13% for
electricity) and water (approximately 10%). This was partially offset by a certain
quantitative growth in sales of packaging and paper waste, a certain rise in selling
prices (that failed to compensate for the said rise) and the continuing efficiency
measures across all areas of operation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.     
Labor Wages
| | -------------------

| | The
labor wages in the cost of sales, in selling expenses and in General and Administrative
expenses, amounted to NIS 149.7 million in 2005, as compared with NIS 143.5 million in
2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
increase in wages is attributed to a certain rise in manpower due to the quantitative
growth, coupled with the preservation of a real level of wages, in CPI terms.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.     
Selling, General and Administrative Expenses
| | ----------------------------------------------------

| | The
selling, general and administrative expenses (including wages) amounted to NIS 51.5
million in 2005, 10.7% of sales, as compared with NIS 53.0 million, 11.0% of sales, in
2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
decrease in selling and General and administrative expenses originated from continuing
efficiency and cost-cutting measures.
| | --------------------------------------------------------------------------------------------------------------------------------

| | 5.     
Operating Profit
| | ------------------------

| | The
operating profit amounted to NIS 47.8 million in 2005, representing 9.9% of sales, as
compared with NIS 53.9 million, or 11.2% of sales in 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | The
decrease in the operating profit in the paper and recycling sector in 2005 as compared
with 2004 originated primarily from the said erosion of margins, due to the sharp rise in
input prices (primarily energy, electricity and water) on the one hand, along with the
difficulty in raising prices  as warranted by the said rise in input prices due
to competing imports.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The substantial
decrease in the office supplies sector loss in 2005 as compared with 2004 resulted
| |  | --------------------------------------------------------------------------------------------------

21



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| |  | from the
reorganization process implemented in this sector, along with extensive efficiency
measures and operations in order to increase sales.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 6.     Financial
Expenses
| | -------------------------

| | The
financial expenses amounted to NIS 12.5 million in 2005, as compared with NIS 13.1
million in 2004.
| | -------------------------------------------------------------------------------------------------------

| | The
total average of the companys net, interest-bearing liabilities grew by
approximately NIS 58 million, as a comparison between 2005 and 2004. The growth originated
primarily from the payment of NIS 100 million in dividends in September 2004 and NIS 50
million in September 2005, coupled with investments in fixed assets, net of dividend
received from a consolidated subsidiary (NIS 21.8 million) and net of the positive cash
flows from operating activities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Moreover,
the cost of the transaction for hedging the Series 2 notes against a rise in the CPI has
risen to 1.3% per annum in 2005, as compared with 0.92% per annum in 2004 and resulted in
an increase in costs related to the notes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nevertheless,
since the Consumer Price Index (CPI) rose by an actual 2.4% in 2005, the hedging
transaction of 1.3% resulted in savings of NIS 2.7 million on additional financing costs
on account of the CPI-linked notes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Despite
the aforesaid, the devaluation in 2005, that served to increase the financial revenues
from the Companys dollar-denominated assets, as compared with the revaluation that
took place in 2004, resulted in net financial expenses that were lower in 2005 than in
2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7.     
Taxes on Income
| | -----------------------

| | Expenses
for taxes on income from current operations totaled NIS 10.2 million in 2005, as compared
with NIS 13.2 million in 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | The
principal factors responsible for the decrease in tax expenses in 2005 as compared with
2004 include the decrease in pre-tax earnings this year and the lower tax rate this year,
in relation to last year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
tax benefit of NIS 4.2 million was recorded in 2005 on account of the impact of the tax
reforms that were passed by the Knesset in July this year (gradually lowering the
corporate tax rate to 25% by 2010) on the companys deferred taxes. The financial
statements in 2004 included a tax benefit of NIS 5.8 million on account of the impact of
the change in the corporate tax rate that was passed in 2004 on the companys
deferred taxes, coupled with an additional tax benefit of NIS 4.2 million on account of
the exercise of options by employees.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax expenses, including the said benefits, amounted to NIS 6.0 million in 2005, as
compared with NIS 3.2 million in 2004.
| | -----------------------------------------------------------------------------------------------------------------------------

| | 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: Mondi Hadera, Hogla-Kimberly, Carmel and TMM.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys share in the earnings of associated companies (before non-recurring items)
amounted to NIS 12.6 million in 2005, as compared with NIS 20.7 million in 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22



---

| | The
following principal changes were recorded in the Companys share in the earnings of
associated companies, (before non-recurring items):
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

| |  |  | The
Companys share in the net earnings of Mondi Hadera (49.9%) decreased by NIS 10.1
million in 2005, as compared with 2004 (2004  gain, 2005  loss). Most of the
change in profit in 2005 as compared with 2004 originates from the decrease in operating
income between the years, as a result of the rebuild that was carried out on the paper
machine this year. The massive rebuild, that was intended to improve the output of the
machine and the quality of the paper, necessitated discontinuing the manufacturing
process during the rebuild and was accompanied by a subsequent learning curve, as is
normal during such a significant project. The unusual increase in raw material, energy
and water prices also adversely affected the profitability of Mondi Hadera. The economic
slowdown in Europe and the surplus of paper led to an erosion of imported paper prices
and rendered it difficult for Mondi Hadera to raise prices, as warranted from the said
price hikes both in local markets and especially in export markets. Mondi Hadera is
nevertheless continuing with its efforts to raise prices (in parallel to announcing
higher prices in Europe in late 2005) and is intensifying its efficiency and cost-cutting
measures.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Companys share in the net earnings of Hogla-Kimberly (49.9%) increased by NIS 2.9
million in 2005, as compared with 2004. The stronger marketing operations and the
fortification of brands, in combination with the increase in prices and effective
efficiency measures, served to compensate in 2005 for the sharp rise in input prices (raw
materials and energy) and improved the operating income. Hogla-Kimberly continues to
improve the quality of its products, while strengthening its brands, including Mollett
Hearts toilet paper, Kotex hygiene products and Nikol (complementary kitchen products).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
net loss of NIS 3.5 million was recorded in the second quarter of 2005 on account of
AIPMs share in a supplemental provision for doubtful debts, that was recorded by
Hogla-Kimberly on account of the debts of Club Market, that is in a stay of proceedings
and is currently  subsequent to its acquisition by Supersol  undergoing a
settlement of debts. The settlement was approved by the court, but has yet to be
finalized. The sum of the settlement is yet unknown.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Companys share in the losses of Kimberly Clark Turkey, a wholly-owned
Hogla-Kimberly subsidiary that is consolidated in its financial statements (hereinafter:
KCTR, formerly Ovisan) (49.9%) has decreased by NIS 6.6 million
in 2005, as compared with 2004. In 2005, KCTR has continued its preparation for the
expansion of operations in the Turkish market and for the introduction of Kimberly Clarks
international premium products into the Turkish market, as part of the multi-annual
program (that is being formulated in conjunction with Kimberly Clark). In this capacity,
the local management team was reinforced, to enable the realization of the said plan.
KCTR has started the introduction of the Kotex® line of feminine hygiene products in
late 2005 and is expected to introduce Huggies® diapers in 2006. KCTR recorded a
significant loss in 2004, since the deployment of its distribution network on the one
hand, and fierce competition in the Turkish market, on the other hand, resulted in the
need to adjust the value of inventories to the prevailing market prices at the end of
that year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Companys share in the net earnings of the Carmel Group (26.25%) decreased by NIS
2.8 million in 2005 as compared with 2004. The change in 2005 originated from a decrease
in operating profit and a rise in financial expenses (due to devaluation differentials).
The decrease in operating profit, despite the quantitative increase in sales, originated
primarily from the sharp rise in raw material prices, that was only partially offset by
the rise in selling prices (in view of the escalating competition in the corrugator
market), leading to a consequent erosion in the gross margin. In 2005, Carmel began
making investments as part of the strategic move to improve the corrugation base with the
intention of rendering the manufacturing process more efficient. At the end of this
process, the output capacity will reach 100 thousand tons. The investment will be
completed in 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23



---

| |  |  | The
Company's share in the net earnings of TMM (43.08%) decreased by NIS
4.6 million in 2005 as compared with 2004 (2004  gain, 2005  loss). TMM
recorded a sharp decrease in operating profit in 2005 as compared with 2004, due to the
significant rise in transportation costs (originating from a significant average rise of
32% in diesel prices as compared with 2004  an impact of NIS 8 million). This
unusual increase in diesel prices was not sufficiently compensated for in the selling
prices, due to the fact that most of the agreements are linked to the Consumer Price Index
(CPI), that rose by only 2.4% this year. TMM is intensively carrying out efficiency
measures and is attempting to modify some of the agreements, so as to reflect the
extraordinary increase in diesel prices. 
We note that some of the customers began responding to the price changes in late 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Companys share in the earnings of associated companies in 2005 includes its share
in the tax benefits recorded by these companies, following the change in tax rates (in
the amount of NIS 3.9 million) amounts to NIS 16.4 million, as compared with NIS 25.1
million in 2004 (including a tax benefit of NIS 4.4 million).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2004 Compared to 2003

# I.     Overview of Results
of Operations

1.     Consolidated Data

Sales amounted to NIS 482.9 million
during 2004, as compared with NIS 465.1 million in 2003.

Operating profit in 2004 amounted to
NIS 53.9 million, as compared with NIS 46.6 million in 2003.

Profit after taxes and before
AIPMs share in the earnings of associated companies for 2004, amounted to NIS 37.7
million, as compared with NIS 24.5 million in 2003.

2.     Net income

Net
income amounted to NIS 62.7 million during 2004, as compared with NIS 60.0 million in
2003.

Net
income during 2004 includes non-recurring earnings on account of a NIS 14.4 million tax
benefit, originating from the influence of the decrease of the corporate tax rate on the
reserve for deferred taxes at AIPM and at its associated companies (from 36% to 30% by
2007), along with a tax benefit on account of the exercise of options by employees.

Net
income in 2003 included NIS 2.7 million in non-recurring capital gains and in a tax
benefit on account of the exercise of options by employees.

Earnings
per share in 2004 amounted to NIS 1,544 per NIS 1 par value ($3.58 per share), as compared
with NIS 1,494 per NIS 1 par value ($3.41 per share) in 2003. The return on
shareholders equity amounted to 10.2% in 2004, as compared with 9.2% in 2003.

# II.     The Business
Environment

A
turnaround took place in the Israeli economy since the beginning of 2004, as the economy
rebounded, following a severe recession that lasted several years. The recovery was
expressed by positive growth rates (approx. 4% in 2004, up from 1.3% in 2003), higher
demand and a more optimistic outlook in the markets.

Israel
has also experienced a certain calm in the security situation lately, which may positively

24



---

affect the economy, although this
calm is not yet reflected in the results in the financial statements presented herein.

AIPM
is exposed to competition in all its areas of operation, both from locally-produced goods
and from imports. The level of competition is constantly escalating.

Despite
this competition, the Group is successfully preserving the profitability of its Israeli
operations, while recording continued growth in the volume of operations.

AIPM
is preparing for the conversion of its energy-generation system to natural gas, once the
transportation infrastructure of natural gas to Hadera is completed. This conversion is
expected to enable savings in production costs, while further improving environmental
compliance.

The
exchange rate of the NIS compared to the USD was revaluated by 1.6% during 2004, as
compared with a 7.6% in 2003.

The
inflation rate during 2004 amounted to 1.2%, as compared with a negative inflation rate of
-1.9% in 2003.

# III.     Analysis of
Operations and Profitability

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

1.     Sales

Consolidated
sales amounted to NIS 482.9 million during 2004, as compared with NIS 465.1 million in
2003. The growth in sales is attributed to a quantitative increase in packaging paper and
in the sale of paper waste to external entities, coupled with an improvement in the prices
of fluting and paper waste and a change in the sales mix. On the other hand, the decrease
in Graffiti sales served to offset part of this growth.

2.      Cost of Sales

Cost
of sales amounted to NIS 375.9 million during 2004, as compared with NIS 362.2 million in
2003.

The
gross margin  as a percentage of sales  reached 22.1% during 2004 and is
similar to 2003.

AIPM
managed to maintain a gross margin similar to 2003, despite the rise in raw material
prices (paper waste by 13%), energy prices (4%), and water (5%). This was accomplished
through growth in sales, higher sales prices and the continued efficiency process in all
sectors of operation.

3.      Labor Wages

Wages
and salaries included in the cost of sales and in the selling, general and administrative
expenses, amounted to NIS 142.4 million in 2004, as compared with NIS 137.0 million in
2003.

However,
since the figures in 2003 were reported in accordance with the U.S. dollar and due to the
influence of changes in the exchange rate of the U.S. dollar on the reporting of 2003 with
the transition to reporting according to Standard 12, the adjusted cost of wages in 2003,
as presented above, was NIS 3.7 million lower than the nominal cost at the time that
amounted to NIS 140.7 million.

Most
of the growth compared to 2003 originated from an increase in wages by an average

25



---

of 3% that was mostly offset by a
reduction in personnel and by differences in other payments  primarily bonuses.

4.      Selling, General and
Administrative Expenses

Selling,
general and administrative expenses (including wages) amounted to NIS 53.0 million 
or 11.0% of sales in 2004, as compared with NIS 56.3 million  or 12.1% of
sales  in 2003.

5.      Operating Profit

Operating
profit amounted to NIS 53.9 million  or 11.2% of sales  in 2004, as compared
with NIS 46.6 million  or 10.0% of sales  in 2003.

6.      Financial Expenses

Financial
expenses amounted to NIS 13.1 million during 2004, as compared with NIS 16.0 million in
2003.

AIPMs
linkage bases includes a surplus of dollar-linked monetary assets on the one hand, and a
surplus of NIS-denominated monetary liabilities, on the other hand.

The
financial expenses in 2003 were influenced by the sharp revaluation of the New Israeli
Shekel against the dollar (7.6%), which caused a significant increase in the financial
expenses during 2003 when financial reporting was adjusted to the dollar.

In
2004, with the transition to reporting in nominal shekels in accordance with Standard 12,
AIPMs financial expenses grew slightly, as a result of the effects of the small
revaluation this year (1.6%) on AIPMs surplus dollar assets.

The
average increase of NIS 60 million in net financial liabilities  compared to 2003
 resulted in an increase in financial expenses during 2004. This growth was
partially offset by the decrease in the average interest rate on short-term credit (5% in
2004 as compared with 7.9% in 2003).

7.      Taxes on Income

Taxes
on income amounted to NIS 3.2 million in 2004, as compared with NIS 7.7 million in 2003.

Taxes on
income from current operations amounted to NIS 13.2 million in 2004, as compared with NIS
8.8 million in 2003.

The
principal factors behind the growth in tax expenses in 2004 as compared with in 2003
include the growth in earnings before taxes in 2004, as opposed to the tax benefit that
was recorded in 2003 on account of the sharp revaluation (erosion of the reserve), due to
reporting adjusted to the changes in the exchange rate of the dollar.

In
June 2004 a law was passed in Israel, effective retroactively from January 1, 2004, that
serves to lower the corporate tax rate (36% prior to the amendment) to 35% in 2004 and
gradually down to 30% by 2007.

26



---

The
effect of this change on AIPMs deferred taxes during 2004 (in the consolidated
report) amounted to NIS 5.8 million (primarily due to future tax liabilities which were
deferred in respect of timing differences in depreciation, which were calculated at an
accelerated pace in the tax reports).

Moreover,
a tax benefit of NIS 4.2 million was recorded in 2004, on account of the exercise of
options by employees.

In
view of the above, the tax expenses during 2004, as reported in the financial statements,
amounted to NIS 3.2 million.

8.    
          Profit After Taxes and Prior to AIPMs Share in the Earnings of
          Associated Companies

Profit
after taxes and before AIPMs share in the earnings of associated companies for
2004, amounted to NIS 37.7 million, as compared with NIS 24.5 million in 2003.

9.     AIPMs
Share in Earnings of Associated Companies

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

AIPMs
share in the earnings of associated companies amounted to NIS 25.1 million in 2004
(including NIS 4.4 million as our share in a non-recurring benefit recorded in respect of
the change in the corporate tax rate on the deferred earnings of the companies), as
compared with NIS 35.5 million in 2003.

The
following principal changes were recorded in AIPMs share in the earnings of
associated companies (2004  not including the aforementioned tax benefit), compared
to 2003:

| |  |  | AIPMs
share in the net income of Mondi Hadera (49.9%) decreased by NIS 3.0 million. Most of the
change in the earnings is associated with a decrease in operating profit between the
years, that originated primarily from lower margins in exports to Europe, coupled with
increased financial expenses in 2004 as a result of the repayment of shareholder loans
over the past two years that led to an increase in Mondi Haderas debt balance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | AIPMs
share in the net earnings of Hogla-Kimberly Israel (49.9%) increased by approximately NIS
1.2 million, primarily due to the ongoing improvement in operating profit at
Hogla-Kimberly Israel, as compared with 2003. This improvement was achieved primarily as
a result of better prices and quantitative growth, coupled with the continuing efficiency
measures, both in logistics and in production, and particularly as a result of the
expanded production of Huggies® diapers in Afula. The said increase was offset by
lower financial revenues in 2004 as compared with 2003, due to the transition to
reporting according to Standard 12 and the effects of revaluation differentials on the
NIS compared to the USD, on Hoglas linkage balance sheet.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | AIPMs
share in the net loss of Ovisan (Hoglas subsidiary in Turkey) (49.9%) amounted to
NIS 15.4 million in 2004. Ovisan made considerable efforts to increase its volume of
operations in the Turkish market during 2004, while tapping into Unilevers
nationwide distribution network, which includes a wide logistic network that covers all
of Turkey in a wide national spread, as a necessary condition for the preparations for
the continued development of Ovisan and the creation of a platform for introducing the
Kimberly-Clark Groups international brands. In this capacity, a significant
quantitative increase was recorded in 2004 in the Ovisan sales  both to the
domestic
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

| | market
and to exports (up about 40% quantitatively)  accompanied by a significant increase
in selling and advertising expenses. The Ovisan loss during 2004 was caused as a result of
the said change in the Ovisan distribution and sales network, coupled with escalating
competition in the Turkish market due to the arrival of additional competitors into the
sector, which resulted in lower prices and a need to adjust the value of inventories to
the market prices on the balance sheet date. The difficulties that were created in the
assimilation of the new reporting system, which accompanied the change in the distribution
system, resulted in delays in receiving the data and in difficulties in providing an
immediate response to changing market conditions in reducing the losses, as mentioned
above.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | AIPMs
share in the net profits of the Carmel Group (26.25%) increased by NIS 3.6 million, due
to the continuing improvement in the operating profit. The improvement is attributed to
the comprehensive efficiency measures being initiated by Carmel, coupled with the growth
in the volume of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | AIPMs
share in the TMM earnings (41.6%) increased by NIS 1.3 million. The improvement
originates from a significant decrease in TMMs elevated financial expenses during
2004, compared to 2003. Among other factors, this is attributed to a decrease in the
interest rate over the two years, coupled with financial revenues from local
municipalities (with which an agreement was reached) due to considerable arrears in their
payments. TMM managed to preserve its operating margin during 2004, despite the
considerable increase in transportation costs, due to the significant increase in diesel
prices (up by an average of 40% compared to 2003) which was not compensated by selling
prices since most of the companys agreements are linked to the consumer price index
which rose during 2004 by only 1.2% .
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# B.     Liquidity and capital
resources

# 1.     Cash Flows

The
cash flows from operating activities in 2005 (excluding dividends from an associated
companies) amounted to NIS 66.8 million, as compared with NIS 47.1 million in 2004
(including the dividends received from an associated companies, the cash flows in 2005
amounted to NIS 88.6 million). The improvement in the cash flows from operating activities
in 2005 originated primarily from a decrease in working capital.

The
dividend that was declared in December 2005, in the amount of NIS 50 million, was paid in
January 2006.

# 2.      Financial Liabilities

The
Company believes that its existing credit lines and cash flow from operations 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 debt or long-term debt, to
finance anticipated investments.

On
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 at the time). 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.

28



---

The
long-term liabilities (including current maturities) of the Companies amounted to NIS
267.4 million as at December 31, 2005 as compared with NIS 267.9 million as at December
31, 2004.

The
Company uses loans from local financial institutions, mostly banks, to finance its
activities. As of December 31, 2005, these loans consisted of the following:

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

2.       
          Notes  see Note 4a to the financial statements attached.

3.       
          Other liabilities  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 90
million (of which the Companys share of the additional tax is NIS 15 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.

29



---

# E.     Off Balance sheet
Arrangements

The
Company does not have any material off balance sheet arrangements, as defined in Item 5E
of the instructions to Form 20-F.

# F.     Contractual
Obligations**

|                            |       |                  |           |           |                  
|--------------------------- | ----- | ---------------- | --------- | --------- | -----------------
|In NIS in million           | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years
|                           
|Long term debt obligations* | 295.2 | 19.4             | 140.6     | 70.9      | 64.3             
|                           
|                           

*Including interest
** Not including contractual obligations from the natural gas agreement with Thetis Sea Group (See page 45)

# 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:

|NAMEDirectors:    | DIRECTOR SINCE | AGE | POSITION                                                                                                            
|----------------- | -------------- | --- | --------------------------------------------------------------------------------------------------------------------
|Ronit Blum        | 2005           | 54  | Director                                                                                                            
|Nochi Dankner     | 2003           | 52  | Director                                                                                                            
|Avi Fischer       | 2004           | 50  | Director                                                                                                            
|Oren Lieder       | 2003           | 58  | Director (until May 11, 2006)                                                                                       
|Ari Bronshtein    | 2006           | 37  | Director (from May 11, 2006)                                                                                        
|Zvi Livnat        | 2003           | 53  | Chairman of the Board since April 02, 2006                                                                          
|Amir Makov        | 2005           | 72  | Director                                                                                                            
|Isaac Manor       | 2003           | 65  | Director                                                                                                            
|Amos Mar-Haim     | 1984           | 68  | Director                                                                                                            
|Adi Rozenfeld     | 2004           | 52  | Director                                                                                                            
|Avi Yehezkel      | 2003           | 48  | Director                                                                                                            
|Yaacov Yerushalmi | 1998           | 64  | Chairman of the Board since January 1999 (until April 02, 2006), CEO of the Company from June 1990 until April 2003.

30



---

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

Ms. 
          Ronit Blum is Director of Association of Friends, Tel Aviv Sourasky Medical
          Center.

Mr. 
          Ari Bronshteinis Vice President of Discount Investments Corporation Ltd.
          Serves as director at various companies. Formerly served as Deputy CEO of
          Economics and Business Development of Bezeq, the Israeli Telecom Company Ltd.

Mr. 
          Nochi DanknerisChairman and Chief Executive Officer of IDB Holdings
          Corporation Ltd., Chairman of IDB Development Ltd., Discount Investments Ltd.
          and of Clal Industries and Investments Ltd. He serves or served as Chairman and
          Director in public and private companies of Ganden Group, Mr. Avi Fischer
          is Director and Co-CEO of Clal Industries and Investments Ltd. and Deputy
          Chairman of IDB Development Ltd, Deputy CEO of IDB Holdings Corporation Ltd.,
          director of 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. 
          Zvi Livnatis Chairman of the Board of the Company since April 2006, Co-CEO
          of Clal Industries and Investments Ltd. , Deputy CEO of Commerce of Taavura
          Holding Group Ltd.,director and Deputy CEO of IDB Holdings Corporation, Deputy
          Chairman of IDB Development Ltd., director in Discount Investments Ltd., and
          other public and private companies.

Mr. 
          Amir Makovis the Chairman of The Israel Institute of Petroleum & Energy
          and a director in the following companies: ICL Fertilizers (Dead Sea Works,
          Rotem Amfert Negev), ICL Industry Products (Dead Sea Bromine Company, Dead Sea
          Periclase), Granite Hacarmel Investments Ltd. and an external director in
          Wolfman Industries and Ludan Engineering Co. Ltd. Mr. Makov served as an
          external director of the Company between 1996-2001.

Mr. 
          Isaac Manoris a director of 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 and Co-CEO and Chairman of companies in the David Lubinsky
          Group Ltd.

Mr. Amos Mar-Haimis a member of the Israel Accounting Standards Board and a
          director of various companies and formerly Vice Chairman of the Israeli
          Corporation Ltd.

Mr.
          Adi Rozenfeldis a businessman, consultant to companies and a representative
          of Activa Holdings BV in Israel. He is also the Honorary Consul of Slovenia in
          Israel and a director of various companies.

Mr.
          Avi Yehezkelis 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 was Chairman of the Board of the Company since January
          1999 until April 02, 2006, and Chief Executive Officer of the Company from June
          1990 until April 2003. Mr. Yerushalmi, announced on 6 March 2006 his
          intention to retire after 37 years of work at AIPM

31



---

# Senior Management (as
of May 31, 2006)

|Name            | Age | Position                                                                                                                                                
|--------------- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Avi Brener      | 53  | Chief Executive Officer since January 1, 2005                                                                                                           
|Israel Eldar    | 61  | Corporate Controller and responsible for risks and business interruption management. A director of subsidiaries and affiliated companies of the Company.
|Ofra Gorni      | 53  | Business Development Manager and a director of subsidiaries and affiliated companies of the Company.                                                    
|Lea Katz        | 56  | Legal counsel and Corporate Secretary .                                                                                                                 
|Gabi Kenan      | 62  | Senior Manager                                                                                                                                          
|Pinhas Rimon    | 66  | General manager of Packaging Paper and Recycling Division. A director of subsidiaries and affiliated companies of the Company.                          
|Gideon Liberman | 56  | General Manager of Development and Infrastructure Division                                                                                              

# Senior Management in
Subsidiaries and Affiliated Companies (as of May 31, 2006)

|Name           | Age | Position in the Company                                         
|-------------- | --- | ----------------------------------------------------------------
|Arik Schor     | 50  | General Manager, Hogla-Kimberly Ltd.                            
|Avner Solel    | 52  | General Manager, Mondi Business Paper Hadera Ltd.               
|Moshe Riani    | 47  | General Manager, Graffiti Office Supplies & Paper Marketing Ltd.
|Rafi Alon      | 59  | President, T.M.M. Integrated Recycling Industries Ltd.          
|Shalom Elkayam | 57  | General Manager, T.M.M. Integrated Recycling Industries Ltd.    
|Uzi  Carmi     | 50  | General Manager, Amnir Recycling Industries Ltd.                
|Doron Kempler  | 56  | General Manager, Carmel Container Systems Ltd.                  

32



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# 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 2005 was
approximately NIS 11,124,000 (approximately $2,416,740). 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 2005 was approximately NIS 1,226,600
(approximately $266,480).

Out
of the above mentioned remuneration, the remuneration paid by the Company in 2005 to Mr.
Yerushalmi, the Companys Chairman of the Board, for services provided by him to the
Company during 2005, was NIS 2,919,590 (approximately $634,270).

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 adjusted according to 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 seventh anniversary of such resolution.

Remuneration
of Directors

The
remuneration of the directors (including the external directors) for 2005 was approved at
the 2005 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 29,038 and NIS 47,181, plus an additional fee
for each meeting attended which must be between NIS 1,022 and NIS 1,815. The Board
approved that the remuneration of each director for the year 2005, including the external
directors, be fixed at NIS 40,000 plus an additional NIS 1,550 for each meeting attended.

# 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.

33

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# 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.
Currently the external directors are Ms. Blum and Mr. Makov.

# 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 have a Nominating Committee nor a
Compensation Committee.

The
role of the Audit Committee under the American law is: (i) to oversee on behalf of the
Board- (a) the integrity of the financial statements; (b) the appointment, compensation,
qualification and work of the Independent Auditors; (c) compliance with legal and
regulatory requirements applicable to the internal controls and reporting of publicly
traded companies; (d) performance of Internal Auditor and internal controls functions; and
(ii) to evaluate potential or existing deficiencies in the administration, by consulting
with the management, and make proposal to the Board; and (iii) to review matters referred
to them under the Whistleblower process of the Companys Code of Conduct
and Ethics.

The
Companys Audit Committee members are: Amos Mar-Haim, Chairman, Ronit Blum, and Amir
Makov. All members are independent directors, as that term is defined in the
American Stock Exchange listing standards.

|D. |  | Employees
|-- |  | ---------

As
of April 30, 2006, the Group had 3,453 employees in Israel. The Company and its
subsidiaries had 753 employees in Israel of whom 151 were engaged in the office supplies
activities, 584 in packaging paper and recycling division, and 18 were management and
clerical personnel at the Companys headquarters in Hadera. The associated companies
had 2,700 employees in Israel of whom 970 were engaged in the household paper activities,
301 in the printing and writing paper activities, 632 in the waste management and 797 in
the corrugated board containers activities.

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 and 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 by
July 2001. Each option is

34



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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
2005, 13,877 options were exercised under the 2001 plan and 4,307 shares were
          issued following the exercise of options.

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. The blocking period of the options is two years from the
data of grant. Each option is exercisable within three years from the end of the blocking
period. For further information regarding the 2001 employee plan, see Note 6 of the Notes
to the Consolidated Financial Statements.

In
2005 2,405 options were exercised under the 2001 employee plan and 1,224 shares were
issued following the exercise of options.

35



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# ITEM 7  MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# A.      Major shareholders

The
following table sets forth, as of May 29, 2006, the number of Ordinary Shares of the
Company beneficially owned 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:

|Name and Address:
Principal Shareholders:                     | Amount Beneficially Owned
Directly or Indirectly* | Percent of Class
Outstanding
|------------------------------------------------------------- | ------------------------------------------------- | ----------------------------
|Clal Industries Ltd. ("Clal")                                 | 1,531,128(1)                                      | 38.04(1)                    
|3 Azrieli Center, the Triangle Tower,  Tel Aviv, Israel      
|Discount Investments Corporation Ltd. ("DIC")                 | 865,014(1)                                        | 21.49(1)                    
|3 Azrieli Center, the Triangle Tower, Tel Aviv, Israel       
|Bank Leumi Le Israel Ltd.                                     | 222,419                                           | 5.53                        
|P.O.B 2, Tel Aviv, Israel (through trust and provident funds)
|All officers and directors as a group                         | **                                                | **                          
|                                                             

---

*Beneficial ownership is calculated
in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.

** The officers and
directors of the Company own, in the aggregate, less than 1% of the Companys
outstanding ordinary shares, except for Nochi Dankner, Isaac Manor and Zvi Livnat whose
ownership is set forth in footnote (1) below.

1 IDB Holding
Corporation Ltd. (IDBH) holds 71.81% of the equity of and 72.01% of the
voting power in IDB Development Corporation Ltd. (IDBD), which, in turn,
holds 74.19% of the equity of and voting power in DIC and 61.98% of the equity of and
voting power in Clal. IDBH, IDBD, Clal and DIC are public companies traded on the Tel
Aviv Stock Exchange.

Since May 19, 2003 approximately
51.7% of the outstanding share capital of IDBH, is held by 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 holds 31.02% of the equity of and
voting power in IDBH; (ii) Manor Investments-IDB Ltd. (Manor), a private
Israeli company controlled by Isaac and Ruth Manor which holds approximately 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 and Zvi
Livnat which holds approximately 10.34% of the equity of and voting power in 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.

In addition: (a) Ganden Holdings
Ltd., the parent company of Ganden, directly holds approximately 11.38% of the equity and
voting power in IDBH and Ganden directly holds approximately 6.71% of the equity and
voting power in IDBH ; (b) Manor Holdings B.A. Ltd., the parent company of Manor,
directly holds approximately 0.03% of the equity and voting power in IDBH; (c) Avraham
Livnat Ltd., the parent company of Livnat, directly holds approximately 0.04% of the
equity and voting power in IDBH; and (d) Shelly Bergman owns, through a private company
wholly owned by her, approximately 7.23% of the equity and voting power in IDBH
(hereinafter jointly: additional holdings).It should be noted, that the
additional holdings, are not included in the shareholders agreement between Ganden, Manor
and Livnat, relating, among other things, to their joint control of IDBH. Nochi Dankner
is Chairman and CEO of IDBH and chairman of IDBD, Clal and DIC., Isaac Manor (the husband
of Ruth Manor), and Zvi Livnat (the son of Avraham Livnat) are directors of each of IDBH,
IDBD, and DIC. Isaac Manor is also director of Clal.

36



---

In
1980 DIC and Clal agreed for a period of ten years (subject to renewal for additional ten
year periods) to coordinate and pool their voting power in the Company in order to appoint
an equal number of each partys nominees to the Board of Directors of the Company,
and in order to elect their designees to the Boards Committees. They also agreed to
vote en bloc in General Meetings of the Company on the subject of dividend distributions.
This agreement has been extended to the year 2010.

The
Company estimates that as of April 30, 2006, 9.84% of its outstanding ordinary shares were
held in the United States by 932 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 4b to the attached financial statements.
For transactions and balances with related parties see Note 13 to the attached financial
statements.

For
further information see also Note 9f and 9g to the financial statements attached.

# C.     Interests of Experts
and Counsel

Not
applicable to annual reports.

# ITEM 8  FINANCIAL
INFORMATION

# A.      Consolidated
Statements and Other Financial Information

See
the financial statements included in Item 17.

# 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:

37



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Last
full five fiscal years

|                  | American Stock Exchange | Tel Aviv Stock Exchange
|----------------- | ----------------------- | -----------------------
|
|
|Calendar Year2005 |                         | 57.98                  
|                 
|2004              |                         | 60.73                  
|                 
|2003              |                         | 54.66                  
|                 
|2002              |                         | 40.50                  
|                 
|2001              |                         | 64.25                  
|                 

Quarters during last two full fiscal
years and first quarter of 2006:

|                          | American Stock Exchange | Tel Aviv Stock Exchange
|------------------------- | ----------------------- | -----------------------
|
|
|June 30(through June- 18) |                         | 52.12                  
|                         
|March 31                  |                         | 49.23                  
|                         

|2005 Quarter Ended | High |       | Low |       | High |        | Low |        | High |       | Low |      
|------------------ | ---- | ----- | --- | ----- | ---- | ------ | --- | ------ | ---- | ----- | --- | -----
|
|March 31           |      | 57.98 |     | 48.25 |      | 246.90 |     | 214.80 |      | 56.42 |     | 49.42
|                  
|June 30            |      | 52.00 |     | 42.13 |      | 227.60 |     | 187.50 |      | 52.21 |     | 41.30
|                  
|September 30       |      | 45.73 |     | 40.50 |      | 207.90 |     | 183.80 |      | 45.60 |     | 40.56
|                  
|December 31        |      | 44.00 |     | 37.50 |      | 200.20 |     | 176.90 |      | 43.61 |     | 38.24
|                  

_________________

|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.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

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|             | American Stock Exchange | Tel Aviv Stock Exchange
|------------ | ----------------------- | -----------------------
|
|
|March 31     |                         | 60.73                  
|            
|June 30      |                         | 57.25                  
|            
|September 30 |                         | 56.40                  
|            
|December 31  |                         | 59.00                  
|            

|             | American Stock Exchange | Tel Aviv Stock Exchange
|------------ | ----------------------- | -----------------------
|
|
|March 31     |                         | 35.50                  
|            
|June 30      |                         | 46.12                  
|            
|September 30 |                         | 47.20                  
|            
|December 31  |                         | 54.66                  
|            

Last full six months prior to filing
of this report:

|              | American Stock Exchange | Tel Aviv Stock Exchange
|------------- | ----------------------- | -----------------------
|
|
|May 2006      |                         | 52.12                  
|             
|April 2006    |                         | 47.99                  
|             
|March 2006    |                         | 45.15                  
|             
|February 2006 |                         | 48.44                  
|             
|January 2006  |                         | 49.23                  
|             
|December 2005 |                         | 44.00                  
|             

_________________

|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



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# 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.

The Memorandum of Association and
Articles of Association are attached as exhibits 1.1, 1.2 to this Annual Report.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.

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

40



---

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.

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 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 the Company is under a duty to act in
fairness toward the Company. The Israeli

41



---

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 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 twenty-one 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

42



---

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.

Each
shareholder holding at least one percent (1%) of the voting rights is entitled to request
the Board to include in the agenda any issue, provided that this issue is suitable to be
discussed in a General Meeting.

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 (25%) 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
canceled.

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 or by proxy card. 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.

43



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According
to an amendment in the Israeli Companies Law , a shareholder is also entitled, in certain
issues, to vote by a proxy card.

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

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 voting at the
general meeting, 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 30 days have passed
from the data that the merger was approved at the general meeting of all the merging
companies and at least 50 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 45% 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 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 and any change in his holding to the Israeli Securities Authority.

# C.     Material Contracts

| |  |  | In
the beginning of 2006, companies in the Group signed a three year agreement with Delek,
for the purchase of fuel and oil for current use, in an aggregated amount of NIS 60
million per year for all the companies in the Group. This agreement will replace former
agreements in similar amounts.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44



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| |  |  | On
July 29, 2005 the Company signed an agreement in London, with the Thetis Sea Group, for
the purchase of natural gas. The gas that will be purchased is intended to fulfill the
Companys requirements in the coming years, for the operation of the existing energy
co-generation plant at Hadera that will be converted for the use of natural gas, instead
of the current use of fuel oil. The overall financial volume of the transaction totals
$40 million over the term of the agreement (5 years from the initial supply of gas, but
no later than July 1, 2011).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
2004 the Company granted an undertaking of indemnification to officers and directors of
the Company, pursuant to which the Company is undertaking to indemnify them according to
the conditions specified in a Letter of Indemnification provided, that the amount of
indemnification will not exceed a cumulative amount that is the equivalent of 25% of the
Companys equity according to the last (consolidated) financial statements that will
be published before the date of the de facto grant of indemnification.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 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

The
following information is regarding the Israeli laws only.

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.

On
July 24, 2002, the Israeli Knesset enacted income tax reform legislation, commonly
referred to as the 2003 Tax Reform. The 2003 Tax Reform has introduced
fundamental and comprehensive changes into Israeli tax laws. Most of the legislative
changes took effect on January 1, 2003. The 2003 Tax Reform has introduced a transition
from a primarily territorial-based tax system to a personal-based system of taxation with
respect to Israeli residents. The Tax 2003 Reform has also resulted in significant
amendment of the international taxation provisions, and new provisions concerning the
taxation of capital markets including the abolishment of currently exempt investment
routes (e.g., capital gains generated by Israeli individuals from the sale of
securities traded on the Tel-Aviv Stock Exchange).

Relatively
short time after the 2003 Tax Reform, the Israeli Parliament approved on July 25, 2005 an
additional income tax reform legislation (the 2006 Tax Reform) pursuant to the
recommendations of a committee appointed by the Israeli Minister of Finance, which
incorporated additional fundamental changes in Israeli tax law. Inter alia, The 2006 Tax
Reform includes a gradual reduction of income tax rates for both individuals and
corporations over the years through 2010, and outlined a path towards uniformity in the
taxation of interest, dividend and capital gains derived from securities. Most of the
amendments to the tax law are effective as of January 1, 2006, subject to certain
exceptions. Transition rules apply in certain circumstances.

Various
issues related to the 2003 Tax Reform and the 2006 Tax Reform remain unclear in view of
the legislative language utilized and the lack of authoritative interpretations at this
stage. The analysis
below is therefore based on our current understanding of the new legislation.

45



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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
(non-Approved Enterprise) by the Company to a non-resident shareholder are generally
subject to withholding tax of 20%. The portion of dividends paid out of profits earned
under an Approved Enterprise tax status of the Company is subject to withholding tax at
the rate of 15% (in excess of the tax paid by the company when the dividend is paid of
these profits  25% tax).

Generally,
under the Tax Treaty Between the Government of the United States of America and the
Government of the State of Israel with Respect to Taxes on Income (US Treaty)
the maximum rate of withholding tax on dividends paid to a shareholder who is a resident
of the United States (as defined in the US Treaty) will be 25%. Due to the fact that a tax
rate of 25% is higher than the maximum Israeli tax rate on dividends pursuant to the 2006
Tax Reform, the maximum tax rate should be 20%. . 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 on Dividends
Distributed by the Company to Israeli Residents

The
distribution of dividend income to Israeli residents will generally be subject to income
tax at a rate of 20% for individuals and will be exempt from income tax for corporations.
The portion of dividends paid out of profits earned under an Approved Enterprise tax
status of the Company, to both individuals and corporations, is subject to withholding tax
at the rate of 15% (in excess of the tax paid by the company when the dividend is paid of
these profits  25% tax).

In addition, If an Individual Israeli
shareholder is considered a principal shareholder at any time during the
12-month period preceding such sale, i.e., such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in the company, the tax rate
on the dividend (not source from Approved Enterprise income) will be 25%. The withholding
tax by the Company on such dividend would remain 20%.

46



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# Tax on Capital Gains of
Shareholders  General

Israeli
law imposes a capital gains tax on the sale of capital assets by an Israeli resident and
on the sale of capital assets located in Israel or the sale of direct or indirect rights
to assets located in Israel. The Israeli Tax Ordinance distinguishes between Real
Gain and Inflationary Surplus. Real Gain is the excess of the total
capital gain over Inflationary Surplus computed on the basis of the increase in the
Israeli CPI between the date of purchase and the date of sale. The Real Gain accrued at
the sale of an asset purchased on or after January 1, 2003 is generally taxed at a 20%
rate for individuals and 25% for corporations. Inflationary Surplus, that accrued after
December 31, 1993, is exempt from tax.

In
July 2005 the Israeli Parliament approved a Reform in the Israeli taxation law, which among
other decreases the corporate tax gradually from 31% in 2006 to 25% in 2010.

Pursuant
to this amendment the Israeli Income Tax Ordinance that was enacted in July 2005, the
corporate tax rate is to be gradually reduced from 31% to 25%, in the following manner:
the tax rate for 2006 will be  31%, , in 2007  29% in 2008  27%, in 2009
 26%, in 2010 and onwards  25%. The maximum tax rate for individuals is 49%
and shall also be gradually reduced to 44% in 2010 and onwards. 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.

# Capital gains 
Israeli Individuals

The
shareholder will generally be subject to tax at 20% rate on realized real capital gain
accrued from January 1, 2003 and thereafter. To the extent that the shareholder claims a
deduction of financing expenses, the gain will be subject to tax at a rate of 25% (until
otherwise stipulated in bylaws that may be published in the future).

If
such shareholder is considered a principal shareholder at any time during the
12-month period preceding such sale, i.e., such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in the company, the tax rate
will be 25%.

The
tax basis of shares acquired prior to January 1, 2003 will be determined in accordance
with the average closing share price in the three trading days preceding January 1, 2003.
However, a taxpayer may elect the actual adjusted cost of the shares as the tax basis
provided he can provide sufficient proof of such adjusted cost.

It
should be noted hat different taxation rules may apply to shareholders who purchased their
shares prior to the listing on the Tel Aviv Stock Exchange. They should consult with their
tax advisors for the precise treatment upon sale.

# Capital gains 
Israeli Corporations

It
should be noted that different taxation rules may apply to shareholders who purchased
their shares prior to the listing on the Tel Aviv Stock Exchange. They should consult with
their tax advisors for the precise treatment upon sale.

Corporations which are subject to the
Inflationary Adjustments Law

The shareholder will be subject to
tax at the corporate tax rate on realized real capital gain (currently 31% in 2006).

47



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# Corporations which are
not subject to the Inflationary Adjustments Law

Generally, the shareholder will be
subject to tax at the corporate tax rate of 25% on realized real capital gains.

# Capital gains 
non-Israeli residents (Individuals and Corporations)

Non-Israeli
residents are generally exempt from capital gains tax on any gains derived from the sale
of shares publicly traded on the Tel Aviv Stock Exchange provided, however, that such
capital gains are not derived from a permanent establishment in Israel, that such
shareholders are not subject to the Inflationary Adjustment Law and that such shareholders
did not acquire their shares prior to an initial public offering. In addition, non-Israeli
companies will not be entitled to such exemption if an Israeli resident (i) has a
controlling interest of 25% or more in such non-Israeli company, or (ii) is the
beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli
company, whether directly or indirectly.

It
should be noted hat different taxation rules may apply to shareholders who purchased their
shares prior to the listing on the Tel Aviv Stock Exchange. They should consult with their
tax advisors for the precise treatment upon sale.

Notwithstanding
the foregoing with respect to both Israeli and non-Israeli residents, dealers (both
individuals and corporation) in securities in Israel are generally 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 NW,
Washington, D.C. 20549. 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.

48



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# 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 and
changes in raw material and energy prices. These changes possess an influence on 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 changes in various currencies and
in the Consumer Price Index on the Companys cash flows and on its financial
statements.

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

Furthermore,
limited use is made of derivative financial instruments, which the Company employs for
hedging the cash flows, 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.

As
of December 31, 2005 AIPM owns CPI-linked long-term loans (notes) in the total sum of
about NIS 235 million. The interest on such loans is not higher than the market interest
rate. In the event that the inflation rate shall rise significantly, a loss may be
recorded in AIPMs financial statements, due to the surplus of CPI-linked
liabilities.

In
order to hedge this exposure, AIPM has entered into forward transactions, as at December
31, 2005 for hedging NIS 230 million against a rise in the CPI until December 2006. These
transactions serve to replace hedging transactions of NIS 200 million that terminated in
late 2005.

# Credit Risks

The
Companys and its subsidiaries cash and cash equivalents and the short-term
deposits as of December 31, 2005 are deposited mainly with major Israeli banks. The
Company and its subsidiaries consider 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. The Company believes
that an appropriate allowance for doubtful debts is included in the financial statements.

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.

49



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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, 2005, aggregating NIS
72,331,000 (see note 2b) and of a capital note to an associated company in the amount
of NIS 32,770,000 (see note 4b), since their value cannot be reliably determined
so long as they have no repayment dates.

Quantitative Information
Regarding Market Risk

The
following are the balance-sheet components by linkage bases at December 31, 2005:

|                                                 | Unlinked | CPI-linked | In foreign
currency, or
linked
thereto
(primarily
US$) | Non-monetary items | Total  
|------------------------------------------------ | -------- | ---------- | ------------------------------------------------------ | ------------------ | -------
|Assets                                           |          |            |                                                        |                    |        
|Cash and cash equivalents                        | 2.6      |            | 5.7                                                    |                    | 8.3    
|Short-term deposits and invest                   | 11.4     |            |                                                        |                    | 11.4   
|Other accounts receivable                        | 189.9    | 0.2        | 55.3                                                   | 11.1               | 256.5  
|Inventories                                      |          |            |                                                        | 64.0               | 64.0   
|Investments in associated companies              | 63.1     |            | 9.2                                                    | 356.7              | 429.0  
|Deferred taxes on income                         |          |            |                                                        | 5.7                | 5.7    
|Fixed assets, net                                |          |            |                                                        | 379.9              | 379.9  
|Deferred expenses, net of accrued amortization   |          |            |                                                        | 1.0                | 1.0    
|                                                 |          |            |                                                        |                    |        
|Total assets                                     | 267.0    | 0.2        | 70.2                                                   | 818.4              | 1,155.8
|                                                 |          |            |                                                        |                    |        
|Liabilities                                     
|Short-term credit from banks and from others     | 93.2     |            |                                                        |                    | 93.2   
|Accounts payable                                 | 214.1    | 0.9        | 11.0                                                   |                    | 226.0  
|Deferred taxes on income                         |          |            |                                                        | 45.8               | 45.8   
|Notes (bonds) - including current maturities     |          | 234.6      |                                                        |                    | 234.6  
|Other liabilities - including current maturities | 32.8     |            |                                                        |                    | 32.8   
|Shareholders' equity, funds and retained         |         
|earnings                                         |          |            |                                                        | 523.4              | 523.4  
|                                                 |          |            |                                                        |                    |        
|Total liabilities and equity                     | 340.1    | 235.5      | 11.0                                                   | 569.2              | 1,155.8
|                                                 |          |            |                                                        |                    |        
|Surplus financial assets (liabilities) as at     |         
|December 31, 2005                                | (73.1)   | (235.3)    | 59.2                                                   | 249.2              | -      
|                                                 |          |            |                                                        |                    |        
|                                                

# 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.

50



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# 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. As of the end of the period covered by 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 Audit Committee Financial
Experts 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 itsofficers 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

51



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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 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
2005 were reported to, and the services proposed to be provided by them during 2006
pre-approved by the Audit Committee, 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, amounted to $120 thousand in 2005, similar to 2004.

The
Companys independent auditor provided additional services in 2005, related to
consulting and guidance regarding the establishment of processes pursuant to Section 404
of the Sarbanes Oxley Act in the USA, in return for which a fee of $30 thousand was paid.

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

Not
applicable.

# 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 2005.

52



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# PART III

# ITEM 17  FINANCIAL
STATEMENTS

The
Company prepares its financial statements in accordance with Israeli GAAP. The differences
between Israeli GAAP and U.S. GAAP, as it relates to the Company, are 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 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);
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.

As
to the discontinuance of the adjustment of the financial statements under Israeli GAAP,
to the exchange rate of the dollar as from January 2004, see not 1b to the financial
statements.

| | b. |  | Deferred
income taxes
| | -- |  | ---------------------

Under
Israeli GAAP, no deferred taxes have been provided through December 31, 2004 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.
Following the adoption of Israeli Standard No. 19 in 2005, except for land that originated
from business combinations consummated prior to January 1, 2005, these differences no
longer exist.

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.

53



---

As
from 2000, due to changes in certain of the Companys investments from subsidiaries
to associated 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.

As to new accounting pronouncement
relating to share-based compensation see (L) bellow.

# 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:

|                                                                | Year ended December 31
|--------------------------------------------------------------- | ----------------------
|
|
|Net income, as reported under U.S. GAAP                         |                       
|Add (deduct):                                                   |                       
|stock based employee compensation expense (reversal), included  |                       
|in reported  net income, net of related tax effect              |                       
|                                                                |                       
|Deduct:                                                         |                       
|stock based employee compensation expense determined under fair |                       
|value  method for all awards, net of related tax effects        |                       
|Pro forma net income -under U.S. GAAP                           |                       
|Earnings per share - under U.S. GAAP:                           |                       
|Basic - as reported                                             |                       
|Basic - pro forma                                               |                       
|Diluted - as reported                                           |                       
|Diluted - pro forma                                             |                       

54



---

The shares are traded on stock
exchanges in Tel-Aviv and in the U.S. ("AMEX"). The quoted prices per share, as of
December 31, 2005, are NIS 195.4 and $ 42.51 (NIS 195.67), respectively.

A
summary of the status of the Companys plans as of December 31, 2005, 2004 and 2003,
and changes during the years ended on those dates, is presented below:

|                                   | 2005 | 2004    | 2003
|---------------------------------- | ---- | ------- | ----
|
|Options outstanding at             |      | Number  |     
|beginning of year                  |      | 152,103 |     
|Changes during the year:           |     
|Exercised                          |      | (16,282 | )   
|Expired                            |      | (8,250  | )   
|                                   |      |         |     
|Options outstanding at end of year |      | 127,571 |     
|                                   |      |         |     
|Options exercisable at year-end    |      | *78,996 |     
|                                   |      |         |     

|* |  | Represents
the number of options fully vested as of December 31, 2005. Based upon the Companys
share market value as of December 31, 2005, this reflects potentially 43,583 shares
regarding the options exercisable at year-end.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
fair value of the options granted was 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 5-5.5 years.

The following table summarizes
information about options outstanding at December 31, 2005.

|Options outstanding |        
|------------------- | -------
|
|
|45.57               | 18,948 
|91.16               | 12,473 
|103.43              | 47,575 
|180.37              | 48,575 
|                   
|                    | 127,571
|                    |        
|                   

55



---

|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:

|                                                   | 2005      | 2004      | 2003     
|-------------------------------------------------- | --------- | --------- | ---------
|Weighted average number of shares used in the      |           |           |          
|computation of basic earnings per share            | 3,999,910 | 3,978,339 | 3,938,035
|Net additional shares from the assumed exercise of
|employee stock options                             | 51,700    | 65,375    | 31,673   
|Weighted average number of shares used in the     
|computation of diluted earnings per share          | 4,051,610 | 4,043,714 | 3,969,708

|e. |  | Investment
in marketable equity securities accounted for by the equity                method
(associated company)  Carmel ContainerSystems (Carmel) and T.M.M. Integrated Recycling Industries Ltd (TMM)
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 1h to the financial statements). Based on the
provisions of this Standard, and as explained in note 2f to the financial statements, the
Company determined that the recoverable value of the investment in Carmel 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 was recognized as a realized loss in
2003, establishing a new carrying value for the investment. Factors considered in
determining that a decline is other than temporary included, 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 December 31, 2003.

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 was the significant factor in determining other than
temporary decline. Accordingly, for U.S.GAAP reporting, since the decline in the market
value of Carmel was 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).

56



---

Under
US GAAP- Since there is no goodwill or non amortizable assets, the impairment is
attributed only to Carmels fixed assets; therefore the Company amortizes the
impairment at the rates applicable to Carmels fixed assets. The amortization of the
impairment, as above, resulted in an increase in the share in profits of the associated
company amounting to NIS 1,699 thousands in 2005.

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 1h to the financial statements). Based on the
provisions of this Standard, and as explained in note 2g to the financial statements, the
Company determined that the recoverable value of the investment in TMM based on an outside
appraiser 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 was recognized as a realized loss in
2005, establishing a new carrying value for the investment. Factors considered in
determining that a decline is other than temporary included, mainly, 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 December 31, 2005.

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 TMM shares was the significant factor in determining other than
temporary decline. Accordingly, for U.S.GAAP reporting, since the decline in the market
value of TMM was long and extensive, the Company reduced the carrying value of this
investment to its market value as of December 31, 2005 and recorded an impairment loss
amounting NIS 10,000,000 (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, 2003, under other income  gain from sale of apartments.

Under
U.S. GAAP, income from 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).

FIN 45 applies to guarantees either
granted or amended after December 31, 2002. Applying FIN 45 has not had material effect on
the Company.

57



---

|h. |  | Other
Information
|-- |  | -----------------

| | 1. |  | Supplemental
disclosure on employee rights upon retirement
| | -- |  | ----------------------------------------------------------

The
Company and its subsidiaries expects to contribute in 2006 NIS 8,813 thousands to the
provident funds and to the insurance companies in respect of its severance pay
obligations.

| | 2. |  | Reclassification
| | -- |  | ----------------

During 2005, the Company reclassified inventory of NIS 23,262 thousands (2004-NIS 20,833 thousands) to fixed assets
on the basis that the spare
parts for the machinery and equipment were not for current use and should be classified as non-current assets.
The company has not changed the accounting for such inventory, other than to reclassify for all periods presented.

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

| |  | 1) |  | Consolidated
statement of income figures:
| |  | -- |  | -----------------------------------------

|                                                                                       | Year ended December 31
|-------------------------------------------------------------------------------------- | ----------------------
|
|
|Net income, as reported  according to Israeli GAAP                                     | 45,715                
|Effect of treatment of the following items in accordance with U.S. GAAP:              
|Functional currency                                                                    | 6,490                 
|Deferred income taxes - net                                                            | (3,961)               
|Reconciliation resulting from our share in the adjustments of the associated companies | 80                    
|Other then temporary impairment of an investment in associated companies               | (10,000)              
|Amortization of other then temporary impairment of an investment in                   
|an associated company                                                                  | 1,699                 
|Applying APB 25 in respect of employee stock options:                                 
|Gross amount                                                                           | 3,093                 
|Deferred taxes                                                                         | (1,255)               
|Net income under U.S. GAAP                                                             | 41,861                
|Earnings per share:                                                                   
|                                                                                      
|Under Israeli GAAP - net income per NIS 1 of par value of shares - Primary*            | 1,127                 
|Under U.S. GAAP - per share:                                                          
|Basic                                                                                  | 10.47                 
|Diluted                                                                                | 10.33                 

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

58



---

| |  | 2) |  | Shareholders equity:
| |  | -- |  | ---------------------

|                                                                             | December 31
|---------------------------------------------------------------------------- | -----------
|
|
|Shareholders' equity according to Israeli GAAP                               | 523,384    
|Effect of treatment of the following items in accordance with US GAAP:      
|Functional currency                                                          | (45,840)   
|Other then temporary impairment of an investment in an associated companies,
|net of amortization                                                          | (23,588)   
|Deferred income taxes                                                        | 7,450      
|                                                                             |            
|Shareholders' equity under US GAAP                                           | 461,406    
|                                                                             |            

*   Reclassified

| |  | 3) |  | Consolidated
balance sheet figures:
| |  | -- |  | -----------------------------------

|                                     | D e c e m b e r   3 1
|------------------------------------ | ---------------------
|
|
|
|
|Inventories                          | 63,999               
|                                     |                      
|Investment in associated companies   | 428,957              
|                                     |                      
|Fixed assets - net                   | 379,934              
|Liabilities and shareholders' equity
|Deferred taxes - net                 | 33,022               
|Shareholders' equity                 | 523,384              

| |  |  | * |  | Reclassified
| |  |  | - |  | ------------

59



---

|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, 2003, 2004 and
2005 is presented below:

|                                                    | 2005 | 2004    | 2003
|--------------------------------------------------- | ---- | ------- | ----
|
|
|Net cash provided by operating activities           |      | 94,143  |     
|Net cash used in investing activities               |      | (19,868 | )   
|Net cash provided by (used in) financing activities |      | (73,770 | )   
|Effect of inflation and exchange difference  on     |     
|cash and cash equivalent                            |      |         |     
|                                                    |      |         |     
|Increase (decrease) in cash and cash                |     
|Equivalents                                         |      | 505     |     
|Balance of cash and cash equivalents                |     
|at beginning of year                                |      | 7,813   |     
|                                                    |      |         |     
|Balance of cash and cash equivalents                |     
|at end of year                                      |      | 8,318   |     
|                                                    |      |         |     

| |  |  | * |  | Reclassified
| |  |  | - |  | ------------

Under
Israeli GAAP, cash flows relating to investments in, and proceeds from the sale of,
marketable securities classified as a current investment are presented as
investing activities in the statements of cash flows, while under U.S. GAAP, these
securities should be classified as operating activities.

|k. |  | Reporting
comprehensive Income
|-- |  | ------------------------------

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

|                                                 | Year Ended December 31
|------------------------------------------------ | ----------------------
|
|
|Net income under U.S. GAAP                       | 41,861                
|Differences from translation of foreign currency
|financial statements of an investee company      | 2,195                 
|Comprehensive income                             | 44,056                

| | As
of December 31, 2005 the accumulated other comprehensive income aggregates to 825
re-measured NIS, in thousands.
| | -------------------------------------------------------------------------------------------------------------------

| | Under
Israeli GAAP, translation differences are carried as a separate component in the balance
sheet among shareholders equity, while under U.S. GAAP such differences
are included in other comprehensive income under the provisions of
FAS 130.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

60



---

|L. |  | Recently
issued accounting pronouncements in the United States:
|-- |  | ---------------------------------------------------------------

|1) |  | FAS
123 (revised 2004)Share-based Payment
|-- |  | -----------------------------------------

In
December 2004, the Financial Accounting Standards Board (FASB) issued the
revised Statement of Financial Accounting Standards (FAS) No. 123, Share-Based
Payment (FAS 123R), which addresses the accounting for share-based payment
transactions in which the Company obtains employee services in exchange for (a) equity
instruments of the Company or (b) liabilities that are based on the fair value of the
Companys equity instruments or that may be settled by the issuance of such equity
instruments. In March 2005, the SEC issued staff Accounting Bulletin No. 107. (SAB 107)
regarding the SECs interpretation of FAS 123R.

This Statement eliminates the ability
to account for employee share-based payment transactions using APB 25, and requires
instead that such transactions be accounted for using the grant-date fair value based
method. This Statement will be effective as of the beginning of the first annual reporting
period that begins after June 15, 2005. Early adoption of FAS 123R is encouraged. The
company decided to adopt this statement on January 1, 2006. This Statement applies to all
awards granted or modified after the Statements effective date. In addition,
compensation cost for the unvested portion of previously granted awards that remain
outstanding on the Statements effective date shall be recognized on or after the
effective date, as the related services are rendered, based on the awards grant-date
fair value as previously calculated for the pro-forma disclosure under FAS 123 (see also
c. above).

The
Company expects that upon the adoption of FAS 123R, it will apply the modified prospective
application transition method, as permitted by the statement. Under such transition
method, upon the adoption of FAS 123R, the new standard will be implemented as from the
first quarter of 2006, with no restatement of prior periods. Taking into account the
transition method adopted by the Company, the Company expects that the effect of applying
this statement on the Companys results of operations in 2006 as it relates to
existing option plans would not be materially different from the FAS 123 pro forma effect
previously reported. The balance of unamortized compensation before taxation and any
adjustment for forfeitures of options at
December 31, 2005 amounted to approximately 300 thousands NIS. The cumulative effect
upon adoption is not expected to be material to the Companys financial statements
and results from operations.

|2) |  | FAS
151 Inventory Costs  an amendment of ARB 43, Chapter 4
|-- |  | -----------------------------------------------------------

In November 2004, the FASB issued FAS
No. 151, Inventory Costs  an amendment of ARB 43, Chapter 4 (FAS 151).
This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. This Statement requires that those items be
recognized as current-period charges. In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. This Statement will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005 (January 1, 2006 for the
Company). Earlier application of FAS 151 is permitted. The provisions of this Statement
shall be applied prospectively. The Company does not expect this Statement to have a
material effect on the Companys financial statements or its results of operations.

|3) |  | FAS
154  Accounting Changes and Error Corrections  a replacement of           APB
Opinion No. 20 and FASB Statement No. 3
|-- |  | ---------------------------------------------------------------------------------------------------------------------------

In June 2005, the Financial
Accounting Standards Board issued FAS No. 154,Accounting Changes and Error
Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement generally requires retrospective application to prior periods
financial statements of changes in accounting principle. Previously, Opinion No. 20
required that most voluntary changes in accounting principle were recognized by including
the cumulative effect of changing to the new accounting principle in net income of the
period of the change. FAS 154 applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should be
followed. This Statement shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005 (January 1, 2006 for the
company). The Company does not expect the adoption of this statement will have a material
impact on the Companys financial statements or its results of operations.

61



---

|4) |  | FAS
155  Accounting for certain Hybrid Financial Instruments, an amendment           of
FASB statements No.133 and 140
|-- |  | -----------------------------------------------------------------------------------------------------------------------

In February 2006, the FASB issued
FAS 155, accounting for certain Hybrid Financial Instruments, an amendment of FASB
statements No.133 and 140. This statement permits fair value measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would require
bifurcation. This statement is effective for all financial instruments acquired or issued
after the beginning of an entitys first fiscal year that begins after September 15,
2006. Earlier adoption is permitted as of the beginning of an entitys fiscal year,
provided that no interim period financial statements have been issued for the financial
year. The Company is currently evaluating the impact of this statement if any, on the
Companys financial statements or its results of operations.

|5) |  | FAS
156  Accounting for servicing of Financial Assets  an amendment           of
FASB Statement No. 140
|-- |  | ---------------------------------------------------------------------------------------------------------

In March 2006 the Financial
Accounting Standards Board (the FASB) issued Statement of Financial Reporting
No. 156 (SFAS 156). This Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and servicing
liabilities, and is effective for financial periods beginning after September 15, 2006.
The Company does not currently engage in transfers of financial fixed assets
and accordingly does not anticipate that the adoption of this statement will have a
material impact on its financial statements.

|6) |  | EITF
04-13 Accounting for Purchases and Sales of Inventory with the Same
          Counterparty
|-- |  | -------------------------------------------------------------------------------------------------

In September 2005, the EITF issued
EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same
Counterparty.  EITF 04-13 provides guidance as to when purchases and
sales of inventory with the same counterparty should be accounted for as a single
exchange transaction.  EITF 04-13 also provides guidance as to when a non
monetary exchange of inventory should be accounted for at fair value.  EITF
04-13 will be applied to new arrangements entered into, and modifications or renewals of
existing arrangements occurring as of the beginning of the first interim or annual
reporting period after March 15, 2006.  The application of EITF 04-13 is not
expected to have a significant impact on the Companys financial statements.

62



---

# Schedule 
Valuation and Qualifying Accounts

# Three Years Ended
December 31, 2005

# (NIS in thousands)

|Column A                         | Column B                      | Column C                                 | Column D   | Column E               
|-------------------------------- | ----------------------------- | ---------------------------------------- | ---------- | -----------------------
|                                 | Balance at beginningof period | Additions (reductions)charged toexpenses | Deductions | Balance atend of period
|Allowance for doubtful accounts:
|Year ended December 31, 2005     | 16,148                        | 840                                      | (74)       | 16,914                 
|                                 |                               |                                          |            |                        
|Year ended December 31, 2004     | 13,696                        | 3,102                                    | (650)      | 16,148                 
|                                 |                               |                                          |            |                        
|Year ended December 31, 2003     | 12,752                        | 944                                      | --         | 13,696                 
|                                 |                               |                                          |            |                        

63

---

# 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,
2005 (including Reports of Independent Registered Public Accounting           Firms).
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | Financial
statements of Mondi Business Paper Hadera Ltd. for the year ended           December 31,
2005.
| | ---- |  | --------------------------------------------------------------------------------------------------------

| | (iii) |  | Financial
statements of Hogla-Kimberly Ltd. for the year ended December 31,           2005.
| | ----- |  | -------------------------------------------------------------------------------------------

| | (iv) |  | Report
of Independent Registered Public Accounting Firms on Schedule on Valuation and Qualifying           Accounts and
Schedule.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------

| | (v) |  | Report
of Independent Registered Public Accounting Firms 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.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Certification
of Chief Executive Officer pursuant to 17 CFR  240.13a-14(a),  as adopted pursuant
toss.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 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.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | Filed herewith.
|-- |  | ---------------

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

64



---

# 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 28, 2006

65



---

# 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.
|31.1   | Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.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 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.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | Filed herewith.
|-- |  | ---------------

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

66



---

Exhibit 19(a)(i)

# AMERICAN ISRAELI PAPER
MILLS LIMITED

# 2005 CONSOLIDATED
FINANCIAL STATEMENTS



---

# AMERICAN ISRAELI PAPER
MILLS LIMITED

# 2005 CONSOLIDATED
FINANCIAL STATEMENTS

# TABLE OF CONTENTS

|                                                        | PAGE 
|------------------------------------------------------- | -----
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 2    
|CONSOLIDATED FINANCIAL STATEMENTS:                     
|Balance sheets                                          | 3-4  
|Statements of income                                    | 5    
|Statements of changes in shareholders' equity           | 6    
|Statements of cash flows                                | 7-9  
|Notes to financial statements                           | 10-44
|SCHEDULE - DETAILS OF SUBSIDIARIES AND                 
|ASSOCIATED COMPANIES                                    | 45   



---

Report of Independent Registered Public Accounting Firm

To the shareholders ofAMERICAN 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, 2005 and 2004 and the consolidated statements of income,
changes in shareholders equity and cash flows for each of the three years in the
period ended December 31, 2005. These financial statements are the responsibility of the
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, 2005 and 2004 is NIS 352.7 million and
NIS 353.1 million, respectively, and the Companys share in excess of profits over
losses of which is a net amount of NIS 19.2 million, NIS 25 million and NIS 28.2 million
for the years ended December 31, 2005, 2004 and 2003, respectively. The financial
statements of those companies were audited by other Independent registered Public Accounting Firm 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 auditing standards generally accepted in Israel, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973 and 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 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 auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the reports of the other 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, 2005 and 2004 and the consolidated results of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2005 in conformity with accounting principles
generally accepted (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 (see also note
1).

As explained in note 1b, the
financial statements, as of dates and for reporting periods subsequent to December 31,
2003, are presented in new Israeli shekels, in conformity with accounting standards issued
by the Israel Accounting Standards Board. The financial statements as of dates and for
reporting periods ended prior to, or on, the above date are presented in values that have
been adjusted for the changes in the exchange rate of the U.S. dollar through that date,
in accordance with pronouncements of the Institute of Certified Public Accountants in
Israel.

/s/ Kesselman & Kesselman

Tel-Aviv, Israel
March 16, 2006

2



---

# AMERICAN ISRAELI PAPER
MILLS LIMITED

# CONSOLIDATED BALANCE
SHEETS

|                                    |  | DECEMBER 31 |       
|----------------------------------- |  | ----------- | ------
|
|
|
|CURRENT ASSETS:                     |  |             | 8     
|Cash and cash equivalents           |  |             | 1o    
|Short-term investments              |  |             | 10a;1f
|Accounts receivable:                |  |             | 10b   
|Trade                               |  |             |       
|Other                               |  |             |       
|Inventories                         |  |             | 10c   
|                                    |  |             |       
|Total current assets                |  |             |       
|                                    |  |             |       
|INVESTMENTS AND LONG-TERM           |  |            
|RECEIVABLES:                        |  |            
|Investments in associated companies |  |             | 2;8   
|Deferred income taxes               |  |             | 7f    
|                                    |  |             |       
|                                    |  |             |       
|                                    |  |             |       
|FIXED ASSETS:                       |  |             | 3     
|Cost                                |  |             |       
|Less - accumulated depreciation     |  |             |       
|                                    |  |             |       
|                                    |  |             |       
|                                    |  |             |       
|DEFERRED CHARGES,                   |  |            
|net of accumulated amortization     |  |             | 1i    
|                                    |  |             |       
|Total assets                        |  |             |       
|                                    |  |             |       

*Reclassified

|/s/ Yaki Yerushalmi | ) |                                   
|------------------- | - | ----------------------------------
|YAKI YERUSHALMI     | ) | CHAIRMAN OF THE BOARD OF DIRECTORS
|/s/ Avi Brener      | ) |                                   
|AVI BRENER          | ) | CHIEF EXECUTIVE OFFICER           
|/s/ Israel Eldar    | ) |                                   
|ISRAEL ELDAR        | ) | CONTROLLER                        

Date of approval of the financial
statements: March 16, 2006

3



---

|                                                       |  | DECEMBER 31 |    
|------------------------------------------------------ |  | ----------- | ---
|
|
|
|CURRENT LIABILITIES:                                   |  |             | 8  
|Credit from banks                                      |  |             | 10d
|Current maturities of long-term notes                  |  |             | 4a 
|Accounts payable and accruals:                         |  |             | 10e
|Trade                                                  |  |             |    
|Dividend payable                                       |  |             |    
|Other                                                  |  |             |    
|                                                       |  |             |    
|Total current liabilities                              |  |             |    
|                                                       |  |             |    
|LONG-TERM LIABILITIES:                                 |  |            
|Deferred income taxes                                  |  |             | 7f 
|Loans and other liability                              |  |            
|(net of current maturities):                           |  |             | 4;8
|Notes                                                  |  |             |    
|Other liability                                        |  |             |    
|                                                       |  |             |    
|Total long-term liability                              |  |             |    
|                                                       |  |             |    
|COMMITMENTS AND CONTINGENT LIABILITIES                 |  |             | 9  
|Total liabilities                                      |  |             |    
|                                                       |  |             |    
|SHAREHOLDERS' EQUITY:                                  |  |             | 6  
|Share capital (ordinary shares of NIS 0.01 par value:  |  |             |    
|authorized - 20,000,000 shares; issued and paid:       |  |            
|December 31, 2005 and 2004 - 4,002,205 and             |  |            
|3,996,674 shares, respectively)                        |  |            
|Capital surplus                                        |  |             |    
|Capital surplus resulting from tax benefit on exercise |  |            
|of employee options                                    |  |             |    
|Differences from translation of foreign currency       |  |            
|financial statements of associated companies           |  |             |    
|Retained earnings                                      |  |             |    
|                                                       |  |             |    
|                                                       |  |             |    
|                                                       |  |             |    
|Total liabilities and shareholders' equity             |  |             |    
|                                                       |  |             |    

*Reclassified

THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

4



---

AMERICAN ISRAELI PAPER
MILLS LIMITED

CONSOLIDATED STATEMENTS OF INCOME

|                                   | NOTE |  | 2005   |  | 2004 |  | 2003    | 
|---------------------------------- | ---- |  | ------ |  | ---- |  | ------- | 
|
|SALES - net                        |      |  | 10f;14 |  |      |  | 482,461 | 
|COST OF SALES                      |      |  | 10g    |  |      |  | 383,179 | 
|                                   |      |  |        |  |      |  |        
|GROSS PROFIT                       |      |  |        |  |      |  | 99,282  | 
|                                   |      |  |        |  |      |  |        
|SELLING, MARKETING, ADMINISTRATIVE |      | 
|AND GENERAL EXPENSES:              |      |  | 10h    |  |      |  |         | 
|Selling and marketing              |      |  |        |  |      |  | 30,482  | 
|Administrative and general         |      |  |        |  |      |  | 21,018  | 
|                                   |      |  |        |  |      |  |        
|                                   |      |  |        |  |      |  | 51,500  | 
|                                   |      |  |        |  |      |  |        
|INCOME FROM ORDINARY OPERATIONS    |      |  |        |  |      |  | 47,782  | 
|FINANCIAL EXPENSES - net           |      |  | 10i    |  |      |  | 12,490  | 
|OTHER INCOME                       |      |  | 10j    |  |      |  |         | 
|                                   |      |  |        |  |      |  |        
|TAXES ON INCOME                    |      |  | 7      |  |      |  | 5,991   | 
|                                   |      |  |        |  |      |  |        
|INCOME FROM OPERATIONS OF THE      |      | 
|COMPANY AND ITS SUBSIDIARIES       |      |  |        |  |      |  | 29,301  | 
|SHARE IN PROFITS OF ASSOCIATED     |      | 
|COMPANIES - net                    |      |  | 2      |  |      |  | 16,414  | 
|                                   |      |  |        |  |      |  |        
|NET INCOME FOR THE YEAR            |      |  |        |  |      |  | 45,715  | 
|                                   |      |  |        |  |      |  |        

|                                  |  | NIS |      
|--------------------------------- |  | --- | -----
|NET INCOME PER NIS 1 OF PAR VALUE |  |     |      
|OF SHARES                         |  |     | 1p;11
|                                  |  |     |      

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

5



---



# AMERICAN ISRAELI PAPER
MILLS LIMITEDSTATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                      | SHARE
CAPITAL |  | CAPITAL
SURPLUSES |         | CAPITAL
SURPLUS
RESULTING
FROM TAX
BENEFIT ON
EXERCISE OF
EMPLOYEE
OPTIONS |  | DIFFERENCES
FROM
TRANSLATION
OF
FOREIGN
CURRENCY
FINANCIAL
STATEMENTS OF
ASSOCIATED
COMPANIES |  | RETAINED
EARNINGS |     | TOTAL | 
|------------------------------------- | ------------- |  | ----------------- | ------- | -------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ----------------- | --- | ----- | 
|
|BALANCE AT JANUARY 1, 2003            |               |  |                   | 125,256 |                                                                            |  | 90,060                                                                                        |  |                   |     |       | 
|CHANGES IN 2003:                      |               | 
|Net income                            |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|Dividend paid                         |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|Exercise of employee options          |               | 
|into shares                           |               |  |                   | 1       |                                                                            |  |                                                                                               |  |                   |     |       | 
|Differences from currency             |               | 
|translation resulting from            |               | 
|translation of financial              |               | 
|statements of associated companies    |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|                                      |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|BALANCE AT DECEMBER 31, 2003          |               |  |                   | 125,257 |                                                                            |  | 90,060                                                                                        |  |                   |     |       | 
|CHANGES IN 2004:                      |               | 
|Net income                            |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|Dividend paid                         |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|Exercise of employee options          |               | 
|into shares                           |               |  |                   | *       |                                                                            |  |                                                                                               |  |                   |     |       | 
|Differences from currency translation |               | 
|resulting from translation of         |               | 
|financial statements of associated    |               | 
|companies                             |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|                                      |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|BALANCE AT DECEMBER 31, 2004          |               |  |                   | 125,257 |                                                                            |  | 90,060                                                                                        |  |                   |     |       | 
|CHANGES IN 2005:                      |               | 
|Net income                            |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|Dividend **                           |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|Exercise of employee options          |               | 
|into shares                           |               |  |                   | *       |                                                                            |  |                                                                                               |  |                   | 401 |       | 
|Differences from currency translation |               | 
|resulting from translation of         |               | 
|financial statements of               |               | 
|associated companies                  |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|                                      |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 
|BALANCE AT DECEMBER 31, 2005          |               |  |                   | 125,257 |                                                                            |  | 90,060                                                                                        |  |                   | 401 |       | 
|                                      |               |  |                   |         |                                                                            |  |                                                                                               |  |                   |     |       | 

|* |  | Represents
an amount less than NIS 1,000.
|- |  | -----------------------------------------

|** |  | Includes a dividend, declared in December 2005 and paid in January 2006, amounting to
approximately NIS 50 million.
|-- |  | -------------------------------------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

6



---

(Continued)  1

# AMERICAN ISRAELI PAPER
MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                 | 2005 |  | 2004 |         | 2003 | 
|---------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | 
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                            |      |  |      |         |      | 
|Net income for the year                                          |      |  |      | 45,715  |      | 
|Adjustments to reconcile net income to                           |      | 
|net cash provided by operating activities (A)                    |      |  |      | 42,845  |      | 
|                                                                 |      |  |      |         |      | 
|Net cash provided by operating activities                        |      |  |      | 88,560  |      | 
|                                                                 |      |  |      |         |      | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                            |      | 
|Purchase of fixed assets                                         |      |  |      | (71,080 | )    | 
|Short-term investments                                           |      |  |      | 51,003  |      | 
|Associated companies:                                            |      | 
|Granting of loans                                                |      |  |      | (2,744  | )    | 
|Collection of loans                                              |      |  |      |         |      | 
|Proceeds from sale of subsidiary consolidated in the past (B)    |      |  |      | 2,004   |      | 
|Proceeds from sale of fixed assets                               |      |  |      | 6,532   |      | 
|                                                                 |      |  |      |         |      | 
|Net cash used in investing activities                            |      |  |      | (14,285 | )    | 
|                                                                 |      |  |      |         |      | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                            |      | 
|Notes issuance, net of issuance expenses of NIS 800,000          |      |  |      |         |      | 
|Consideration in respect of the exercise of options by employees |      |  |      |         |      | 
|Receipt of long-term loans from others                           |      |  |      | 1,746   |      | 
|Repayment of long-term loans from banks and others               |      |  |      | (277    | )    | 
|Redemption of notes                                              |      |  |      | (6,680  | )    | 
|Dividend paid                                                    |      |  |      | (49,946 | )    | 
|Short-term credit from banks - net                               |      |  |      | (18,613 | )    | 
|                                                                 |      |  |      |         |      | 
|Net cash provided by (used in) financing activities              |      |  |      | (73,770 | )    | 
|                                                                 |      |  |      |         |      | 
|INCREASE (DECREASE) IN CASH AND                                  |      | 
|CASH EQUIVALENTS                                                 |      |  |      | 505     |      | 
|BALANCE OF CASH AND CASH EQUIVALENTS AT                          |      | 
|BEGINNING OF YEAR                                                |      |  |      | 7,813   |      | 
|                                                                 |      |  |      |         |      | 
|BALANCE OF CASH AND CASH EQUIVALENTS AT                          |      | 
|END OF YEAR                                                      |      |  |      | 8,318   |      | 
|                                                                 |      |  |      |         |      | 

7



---

(Continued)  2

# AMERICAN ISRAELI PAPER
MILLS LIMITEDCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                   | 2005 |  | 2004 |         | 2003 | 
|------------------------------------------------------------------ | ---- |  | ---- | ------- | ---- | 
|
|(A)    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                     |      |  |      | (16,414 | )    | 
|Dividend received from associated company                          |      |  |      | 21,761  |      | 
|Depreciation and amortization                                      |      |  |      | 31,604  |      | 
|Deferred income taxes - net                                        |      |  |      | (7,671  | )    | 
|Capital losses (gains) on:                                         |      | 
|Sale of fixed assets                                               |      |  |      | (3,570  | )    | 
|Sale of subsidiary consolidated in the past (B)                    |      |  |      | (874    | )    | 
|Losses (gains) on short-term deposits and investments              |      |  |      | 45      |      | 
|Linkage and exchange differences (erosion) on principal of         |      | 
|long-term loans from banks and others - net                        |      |  |      | (111    | )    | 
|Linkage differences on principal of notes                          |      |  |      | 6,171   |      | 
|Linkage differences on principal of long-term loans granted        |      | 
|to associated companies                                            |      |  |      | (975    | )    | 
|Appreciation of a long-term capital note granted to                |      | 
|an associated company                                              |      |  |      |         |      | 
|                                                                   |      |  |      |         |      | 
|                                                                   |      |  |      | 29,966  |      | 
|                                                                   |      |  |      |         |      | 
|Changes in operating asset and liability items:                    |      | 
|Increase in trade receivables                                      |      |  |      | (7,162  | )    | 
|Increase in other receivables                                      |      | 
|(excluding deferred income taxes)                                  |      |  |      | (1,587  | )    | 
|Decrease (increase) in inventories                                 |      |  |      | (1,612  | )    | 
|Increase (decrease) in trade payables                              |      |  |      | 3,018   |      | 
|Increase (decrease) in other payables and accruals                 |      |  |      | 20,222  |      | 
|                                                                   |      |  |      |         |      | 
|                                                                   |      |  |      | 12,879  |      | 
|                                                                   |      |  |      |         |      | 
|                                                                   |      |  |      | 42,845  |      | 
|                                                                   |      |  |      |         |      | 
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:                 |      | 
|Income taxes paid                                                  |      |  |      | 1,559   |      | 
|                                                                   |      |  |      |         |      | 
|Interest paid                                                      |      |  |      | 15,828  |      | 
|                                                                   |      |  |      |         |      | 

8

---

(Concluded)  3

# AMERICAN ISRAELI PAPER
MILLS LIMITEDCONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                                           | 2005 | 
|------------------------------------------------------------------------------------------ | ---- | 
|
|(B)  PROCEEDS FROM SALE OF SUBSIDIARY CONSOLIDATED IN THE PAST - see also note 10h:        |      | 
|Assets and liabilities of the subsidiary consolidated in the past at the date of its sale: |      | 
|Working capital (excluding cash and cash equivalents)                                      |      | 
|Fixed assets                                                                               |      | 
|Long-term liabilities                                                                      |      | 
|Capital gain from the sale                                                                 |      | 
|                                                                                           |      | 
|                                                                                           |      | 
|                                                                                           |      | 
|                                                                                           |     

|(C) |  | INFORMATION
ON ACTIVITIES NOT INVOLVING CASH FLOWS:
|--- |  | ---------------------------------------------------

| | 1) |  | Dividend
declared by the Company in December 2005, in the amount of           approximately NIS 50
million, was paid in January 2006.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | 2) |  | Dividend
declared by an associated company in December 2005 was not paid yet.           The Companys
share in this dividend amounts to NIS 2,650,000.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) |  | In
2004, equipment, which the Company had found to be unsuitable for its use,           was
retired. The retirement was made against the cancellation of the loan made
          available by the supplier in respect of said equipment. The retirement amounted
          to NIS 1,079,000.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

9

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES

| | The
financial statements are drawn up in conformity with accounting principles generally
accepted in Israel and in accordance with the Israeli Securities (Preparation of Annual
Financial Statements) Regulations, 1993. The Companys financial statements are
presented separately from these consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
significant accounting policies, which, except for the changes required by the transition
to nominal financial reporting in 2004 (see b below), and the implementation for the
first time of Clarification No. 7 in 2005 (see j(7) below), were applied on a consistent
basis, are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. |  | GENERAL:
| | -- |  | --------

| |  | 1) |  | Activities
of the Group
| |  | -- |  | -----------------------

| | American
Israeli Paper Mills Limited and its subsidiaries (hereafter  the Company) are
engaged in the production and sale of paper packaging, in paper recycling activities and
in the marketing of office supplies. The Company also has holdings in associated
companies that are engaged in the production and sale of paper and paper products
including the handling of solid waste (the Company and its investee companies  hereafter
the Group). Most of the Groups sales are made on the local (Israeli) market.
For segment information, 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.
| | -------------------------------------------------------------------------------------------------------------------------

10



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | B. |  | BASIS
OF PRESENTATION OF THE FINANCIAL STATEMENTS
| | -- |  | -------------------------------------------------

| | The
Company draws up and presents its financial statements in Israeli currency (hereafter
 shekels or NIS).
| | ------------------------------------------------------------------------------------------------------------

| |  | 1) |  | Transition
to nominal financial reporting in 2004
| |  | -- |  | -------------------------------------------------

| | With
effect from January 1, 2004, the Company has adopted the provisions of Israel Accounting
Standard No. 12 -Discontinuance of Adjusting Financial Statements for Inflation  of
the Israel Accounting Standards Board (hereafter -the IASB) and, pursuant thereto, the
Company has discontinued, from the aforesaid date, the adjustment of its financial
statements for the changes in the exchange rate of the U.S. dollar (hereafter  the
dollar) against the shekel.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amounts adjusted for the changes in the exchange rate of the dollar against the shekel
(see (2) below), presented in the financial statements as of December 31, 2003 (hereafter
 the transition date), were used as the opening balances for the
nominal financial reporting as of January 1, 2004. Additions made after the transition
date have been included in the financial statements at their nominal values.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
the amounts reported for 2003, as well as reported amounts for subsequent periods, that
relate to non-monetary assets (including the depreciation and amortization thereon),
investments in associated companies and equity items, which originate from the period
that preceded the transition date, are based on the data adjusted for the changes in the
exchange rate of the dollar, on the basis of the exchange rate at December 31, 2003, as
previously reported. All the amounts originating from the period after the transition
date are included in the financial statements at their nominal values.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | Through
December 31, 2003, the Company prepared its financial statements on the basis of
historical cost adjusted for the changes in the exchange rate of the dollar, (see also
note 8b) as permitted under Opinion 36 of the Institute of Certified Public Accountants
in Israel (hereafter  the Israeli Institute).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
2003, the components of the income statements were, for the most part, adjusted as
follows: the components relating to transactions carried out during the reported period
 sales, purchases, labor costs, etc.  were adjusted on the basis of the date
on which the transaction was carried out, while those relating to non-monetary balance
sheet items (mainly  changes in inventories and depreciation) were adjusted on the
same basis as the related balance sheet item. The financing component represents
financial income and expenses in real terms and the erosion of balances of monetary items
during the year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investment in some of the associated companies (whose operations constitute an integral
part of the Companys operations) and the Companys share in their operating
results are recorded on the basis of the adjusted financial statements (in accordance
with the provisions of Standard No. 12, as described above) of these companies. As to
associated companies whose financial statements were adjusted until December 31, 2003 on
the basis of the changes in the Israeli CPI, see (3) below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2) |  | The
amounts of non-monetary assets do not necessarily represent realization           value
or current economic value, but only the reported amounts of such assets,           as
described in (1) above. In these financial statements, the term           cost signifies
cost in reported amounts.
| |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3) |  | 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, until December 31, 2003, 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 (differences from
translation of foreign currency financial statements of associated companies).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | As
from January 1, 2004, no additional differences have been included in respect of said
companies, in view of their transition to reporting under Standard 12, as also applied by
the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 profits on intercompany           sales that 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
materials (including spare parts) 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spare
parts of the machinery and equipment that are not for current use, are presented under
fixed assets.
| | ----------------------------------------------------------------------------------------------------------

| | E. |  | INVESTMENTS
IN ASSOCIATED COMPANIES:
| | -- |  | ------------------------------------

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

| | According
to this method, the Company records, in its statement of income, its share in the profits
and losses of these companies that were created after acquisition, and, in its statement
of changes in shareholders equity, its share in changes in capital surpluses
(mostly translation differences relating to their investments in subsidiaries that
present their financial statements in foreign currency) that were created after
acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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) |  | The
Company reviews  at each balance sheet date  whether any events
          have occurred or changes in circumstances have taken place, which might
indicate           that there has been an impairment of its investments in associated
companies            see h. 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%.
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | F. |  | MARKETABLE
SECURITIES
| | -- |  | ---------------------

| | These
securities are stated at market prices.
| | ---------------------------------------------

| | The
changes in value of the above securities are carried to financial income or expense.
| | ----------------------------------------------------------------------------------------

| | G. |  | 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 indirect production costs.
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | 4) |  | The
assets are depreciated by the straight-line method on the 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)        

| | H. |  | IMPAIRMENT
OF ASSETS
| | -- |  | --------------------

| | 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 non-monetary assets, mainly fixed assets and investments in
associated companies. When such indicators of impairment are present, the Company
evaluates whether the carrying value of the asset is recoverable from the cash flows
expected from that asset. See note 2g.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | I. |  | DEFERRED
CHARGES
| | -- |  | ----------------

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

| | As
to the change from January 1, 2006 in the method of presenting and amortizing these
charges  see q(1) below.
| | ----------------------------------------------------------------------------------------------------------------

| | J. |  | DEFERRED
INCOME TAXES:
| | -- |  | ----------------------

| |  | 1) |  | Commencing
January 1, 2005, the Company applies the IASBs Accounting           Standard No. 19
 Taxes on Income that prescribes the           accounting treatment
(recognition criteria, measurement, presentation and           disclosure) required for
taxes on income.
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the most part, the provisions of this standard are the same as the accounting principles
that the Company applied prior to implementing the new standard.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2) |  | In
accordance with the standard and with prior years policy, the Company
          recognizes deferred taxes in respect of temporary differences between the
          amounts of assets and liabilities as reported in the consolidated financial
          statements and those taken into account for tax purposes; the standard requires
          that full recognition be given to deferred taxes in respect of all taxable
          temporary differences, except for the temporary difference resulting from the
          initial recognition of goodwill and the temporary difference resulting from the
          initial recognition of an asset or a liability that has no effect on the profit
          or loss, whether for accounting or tax purposes, at that time (unless the
          temporary difference results from the initial recognition of a business
          combination).
| |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets are recognized for all temporary differences that are tax deductible, up to
the amount of the differences that are expected to be utilized in the future, against
taxable income. As to the main types of differences, in respect of which deferred taxes
have been included  see note 7f.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3) |  | Deferred
tax balances are computed at the tax rates expected to be in effect at           the time
the deferred tax asset is utilized or the deferred tax liability is           settled,
based on the tax rates and the tax laws enacted, or substantively           enacted, by
the balance sheet date.
| |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4) |  | The
current taxes, as well as the changes in the deferred tax balances, are
          included in the tax expenses or income in the reporting period, except for
taxes           derived from the initial recognition of business combinations and except
for the           tax in respect of transactions that are recognized directly in
          shareholders equity (in such instances, the applicable tax is taken
          directly to shareholders equity).
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 5) |  | Taxes
that 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 it is the Companys policy to hold these investments,           not to
realize them.
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| |  | 6) |  | The
Group may incur an additional tax liability in the event of an 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 dividends, which would
involve           an additional tax liability to the Group in the foreseeable future.
| |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 7) |  | In
April 2005, the IASB issued Clarification No. 7  Accounting
          Treatment of the Tax Benefits, in Respect of Capital Instruments Granted to
          Employees, For Which No Compensation was Recognized. The provisions of
          this clarification apply to such tax benefits, which have not been allowed as a
          deduction through December 31, 2004. The clarification stipulates that,
          commencing on January 1, 2005, the tax benefit derived by the Company from the
          exercise of options granted to employees is to be carried to shareholders          equity,
in the period in which the benefit to the employees is allowed as a           deduction
for tax purposes. Formerly, the aforesaid tax saving was credited to           the
statement of income, as part of the taxes on income item.
| |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. |  | REVENUE
RECOGNITION
| | -- |  | -------------------

| | Revenue
from sale of products on the local market and for export, net of discounts granted, is
recognized upon the transfer of ownership to the buyer (in accordance with the sale
conditions).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. |  | SHIPPING
AND HANDLING COSTS
| | -- |  | ---------------------------

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

| | M. |  | ALLOWANCE
FOR DOUBTFUL ACCOUNTS
| | -- |  | -------------------------------

| | The
allowance is determined mainly in respect of specific debts doubtful of collection (see
note 12b).
| | ------------------------------------------------------------------------------------------------------

| | N. |  | DERIVATIVE
FINANCIAL INSTRUMENTS
| | -- |  | --------------------------------

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

16



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | 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 ACCOUNTING PRONOUNCEMENTS IN ISRAEL
| | -- |  | ---------------------------------------------------

| |  | 1) |  | In
August 2005, the IASB issued Israel Accounting Standard No. 22           Financial
Instruments: Disclosure and Presentation, which is based           on International
Accounting Standard No. 32. This standard prescribes the rules           for the
presentation of financial instruments and the proper disclosure required
          therefor. The standard prescribes the rules pursuant to which financial
          instruments are to be classified and are to be presented as a liability (while
          broadening the definition of a financial liability) or as an equity instrument
          (presented within shareholders equity). The standard also prescribes
rules           for bifurcating and classifying compound financial instruments (that
include           both an equity component and a liability component), the circumstances
under           which the offsetting of financial assets and financial liabilities is
permitted,           and the treatment of the costs of issuing financial instruments. The
standard           also prescribes that interest, dividends, losses and gains relating to
financial           instruments shall be recorded as income or expense in the income
statements when           the instrument is classified as a financial liability, or an as
an equity           movement when the instrument is classified as an equity instrument,
          respectively.
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
accounting standard is to be applied to financial statements for periods commencing on or
after January 1, 2006, and is to be applied prospectively. Upon initial implementation of
the standard, all the financial instruments existing at the transition date will be
classified and presented in accordance with the classification and presentation rules
prescribed by the standard; compound financial instruments will be bifurcated into their
components, prior to said classification, in accordance with the transitional provisions
prescribed by the standard. Comparative data will not be restated.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
the standard takes effect, the Israeli Institutes Opinion 48  Accounting
Treatment of Option Warrants, and Opinion 53  Accounting Treatment of
Convertible Liabilities will be revoked.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of deferred issuance costs relating to the notes, which at December 31, 2005
amounted to NIS 946,000 will be reclassified at the time of the standard taking effect
and will be presented as a deduction from the amount of the liability to which such
expenses relate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
costs will be amortized, in future reporting periods, according to the interest method.
The change in the amortization method will not have a material effect on operating
results in future reporting periods.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| |  | 2) |  | In
September 2005, the IASB issued Accounting Standard Israel No. 24           Share-based
Payment. This standard prescribes the recognition and           measurement
principles, as well as the disclosure requirements, relating to           share-based
payment transactions. Prior to the issuance of said standard, no           mandatory
directives were in place in Israel for the measurement and recognition           of
share-based payment transactions, with the exception of certain disclosure
          requirements. Accordingly, in the past, equity instrument grants to Company
          employees did not have recognition or measurement implications on the
          Companys financial statements.
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
new standard is applicable to transactions whereunder a company acquires goods or
receives services in consideration for equity instruments of the company (hereafter  equity
grant), or cash (or other assets) consideration, where the amount of the consideration is
based on the price or value of equity instruments of the company (hereafter liability
grant). The standard requires the recognition of such transactions at fair value. The
standard is applicable to share-based payment transactions with employees and
non-employees.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
respect to equity grants to employees, the standard stipulates that the value of the
labor services received from them in return is to be measured on the day of the grant,
based on the fair value of the equity instruments that were granted to the employees. The
value of the transactions, measured in the above manner, is to be expensed over the
period that the employees right to exercise or receive the underlying equity
instruments vests; commensurate with the recognition of the expense, a corresponding
increase is to be recorded as a capital surplus under the companys shareholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the provisions of the standard, the initial measurement of the fair value of liability
grants is to be made on the date of the grant and recognized as a liability in the companys
balance sheet; thereafter, the liability is to be remeasured at each balance sheet date
until said liability is settled. The changes in the amount of the liability are carried
to the income statement on a current basis. The standard also sets out guidelines for the
allocation of income taxes in respect of share-based payments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
Standard No. 24 is to be applied to financial statements covering periods commencing on,
or after, January 1, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------

| | The
transitional provisions of the standard make a distinction between equity grants and
liability grants:
| | ----------------------------------------------------------------------------------------------------------

| |  |  | a) |  | For
equity grants, the standard prescribes that its provisions are to be           applied to
all grants that are made subsequent to March 15, 2005, which had not           yet vested
at the effective date of the standard. As a result, upon the standard           taking
effect, the financial statements for 2005 will need to be restated in           order to
reflect such grants.
| |  |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b) |  | The
provisions of the standard shall be retroactively applicable to liabilities
          relating to liability grants existing at the effective date. As a result, upon
          the standard taking effect, the financial statements for all prior periods will
          need to be restated in order to reflect these grants.
| |  |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | The
transitional provisions of the standard further stipulate that any modifications to the
terms of existing grants executed subsequent to March 15, 2005 shall be subject to the
provisions of the standard, even if the grants themselves are not. As a result, upon the
standard taking effect, the financial statements for 2005 will need to be restated in
order to reflect such modifications.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company intends to implement the provisions of the standard starting from 2006. The
Company has a liability in respect of a liability grant, regarding which the effect of
the retroactive implementation of the provisions of the standard, for each of the
relevant years and cumulatively, is immaterial.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, new grants of options or shares to employees or service providers of the
Company, would result, in the following reporting periods, in the recording of payroll
expenses or expenses relating to the cost of the services, at their fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3) |  | In
February 2006, the IASB issued Israel Accounting Standard No. 21           Earnings
per Share, which is based on International Accounting           Standard No. 33.
Accounting Standard No. 21 provides rules for the computation           of earnings per
share data and their presentation in the financial statements,           and is to
supersede, starting from its effective date, the existing rules           relating to the
computation and presentation of such data, which are based on           Opinion 55 of the
Israeli Institute; the standard is to be applied in financial           statements for
periods commencing on or after January 1, 2006.
| |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the standard, the computation of basic earnings per share is generally based on the
earnings available for distribution to holders of ordinary shares, which is divided by
the weighted average number of ordinary shares outstanding during the period. This
computation no longer takes into account the effect relating to potential shares that may
derive from the expected conversion of convertible financial instruments, or the
performance of contracts that confer rights to shares upon their holders.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
computing the diluted earnings or loss per share, the weighted average number of shares
to be issued is to be added to the average number of ordinary shares used in the
computation of the basic earnings per share data, assuming that all dilutive potential
shares will be converted into shares. The potential shares are taken into account, as
above, only when their effect is dilutive (reducing the earnings or increasing the loss
per share from continuing activities); for the purpose of the computation of the weighted
average, dilutive potential ordinary shares shall be deemed to have been converted into
ordinary shares at the beginning of the period or, if later, the date of the issue of the
potential ordinary shares. The standard also revises the treatment of the effect on the
earnings resulting from the expected conversion of potential shares, and makes certain
adjustments to the Companys share in the operating results of associated companies
and consolidated subsidiaries for the purpose of their inclusion in earnings used for the
computation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
the initial adoption of the standard, and in accordance with the transitional provisions
stipulated therein, the comparative earnings per share data are to be restated in the
financial statements, in order to reflect, with retroactive effect, the computation of
the earnings per share under the new directives.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | In
the opinion of the Company, the implementation of this standard is not expected to have a
material effect on the earnings per share data included in these financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4) |  | In February 2006, the IASB issued Israel Accounting Standard No. 25           Revenue,
which is based on International Accounting Standard No. 18.           This standard
prescribes recognition, measurement, presentation and disclosure           criteria for
revenues originating from the sale of goods purchased or           manufactured by the
company, the provision of services, as well as revenues           deriving from the use
of the companys assets by others (interest income,           royalties or
dividends).
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
principal issue in accounting for revenue is determining the timing of revenue
recognition. Revenue from the sale of goods shall be recognized when all the following
conditions have been satisfied: (a) the significant risks and rewards of ownership of the
goods have been transferred to the buyer; (b) the company retains neither continuing
managerial involvement to the degree usually associated with ownership nor effective
control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it
is probable that the economic benefits associated with the transaction will flow to the
company; and (e) the costs incurred or to be incurred in respect of the transaction can
be measured reliably.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from the provision of services shall be recognized by reference to the stage of
completion of the transaction at the balance sheet date, subject to the satisfaction of
conditions (c) through (e) above, and only when the stage of completion of the
transaction at the balance sheet date can be measured reliably.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
clarification of said standard was issued by the IASB in February 2006: Clarification No.
8  Reporting of Revenue on a Gross or Net Basis. According to the
clarification, a company acting as an agent or an intermediary, without bearing the risks
and rewards resulting from the transaction, will present its revenue on a net basis (as
profit or commission). However, a company that acts as a principal supplier and bears the
risks and rewards resulting from the transaction will present its revenue on a gross
basis, distinguishing the turnover from the related expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Standard
25 shall be applicable to financial statements for periods commencing on or after January
1, 2006. The standard is to be applied prospectively; nevertheless, in accordance with
the transitional provisions of the standard, the classification and presentation of
revenue on a gross or net basis, as above, shall be applied with retroactive effect,
including the restatement of revenues and expenses appearing in the comparative figures
in the financial statements for periods commencing on the effective date of the standard.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Until
the publication of said standard and the related clarification, there were no accounting
pronouncements, and the accounting treatment of this issue was mostly based on generally
accepted accounting practices and foreign accounting pronouncements. The company is
currently examining the effect of the implementation of this standard on its financial
statements in future periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 2  INVESTMENTS
IN ASSOCIATED COMPANIES:

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

| | B. |  | COMPOSED
AS FOLLOWS:
| | -- |  | --------------------

|                                                               | DECEMBER 31 | 
|-------------------------------------------------------------- | ----------- | 
|
|
|Shares:                                                        |             | 
|Cost                                                           |             | 
|Excess of cost of investment - net                             |             | 
|Less - accumulated amortization                                |             | 
|Gain on issuance of shares of an associated                    |             | 
|company to a third party                                       |             | 
|Adjustments resulting from translation of foreign currency     |             | 
|financial statements                                           |             | 
|Share in profits (after deduction of losses) accumulated since |             | 
|acquisition                                                    |             | 
|                                                               |             | 
|                                                               |             | 
|Long-term loans and capital notes *                            |             | 
|                                                               |             | 
|                                                               |             | 
|                                                               |             | 

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

|                                 | WEIGHTED AVERAGE
INTEREST RATE |  | DECEMBER 31 | 
|-------------------------------- | ------------------------------ |  | ----------- | 
|
|
|
|In dollars                       |                                |  |             | 
|Linked to the Israeli CPI***     |                                |  |             | 
|Unlinked loans and capital notes |                                |  | 2.2%        | 
|                                 |                                |  |             | 
|                                 |                                |  |             | 
|                                 |                                |  |             | 

| |  |  | ** |  | Reclassified.
| |  |  | -- |  | -------------

| |  |  | *** |  | In
2005, the terms of the loans linked to the Israeli CPI were changed and these loans
became unlinked loans.
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, the repayment dates of the balance of the loans and capital notes
have not yet been determined.
| | ------------------------------------------------------------------------------------------------------------------------

21



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# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 2  INVESTMENTS
IN ASSOCIATED COMPANIES (continued):

| | C. |  | THE
CHANGES IN THE INVESTMENTS DURING 2005 ARE AS FOLLOWS:
| | -- |  | ----------------------------------------------------------

|                                                               | NIS IN THOUSANDS | 
|-------------------------------------------------------------- | ---------------- | 
|Balance at beginning of year                                   |                  | 
|                                                               |                  | 
|Changes during the year:                                       |                  | 
|Share in profits of associated companies - net                 |                  | 
|Dividend from associated companies                             |                  | 
|Adjustments resulting from translation of foreign currency     |                  | 
|financial statements                                           |                  | 
|Increase in balance of long-term loans and capital notes - net |                  | 
|                                                               |                  | 
|Balance at end of year                                         |                  | 
|                                                               |                  | 

| | D. |  | MONDY
BUSINESS PAPER HADERA LTD. (hereafter  Mondy Hadera; formerly            Neusiedler
Hadera Paper Ltd.  NHP):
| | -- |  | ---------------------------------------------------------------------------------------------------------------------

| | Mondy
Hadera 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, Mondy Hadera 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 to sell to the Company its holdings in Mondy
Hadera, at a price that 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
prolonged, extraordinary circumstances that preclude the operation of Mondy Hadera in
Israel. The Company believes that the likelihood of such circumstances is very remote.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | HOGLA-KIMBERLY
LTD. (hereafter  Hogla-Kimberly)
| | -- |  | ------------------------------------------------

| | Hogla-Kimberly
is held to the extent of 49.9% by the Company and to the extent of 50.1% by Kimberly
Clark Corporation (hereafter- KC).
| | --------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | INVESTMENT
IN CARMEL CONTAINER SYSTEMS LIMITED (HEREAFTER  CARMEL)
| | -- |  | -------------------------------------------------------------------

| | The
investment in Carmels shares, as of December 31, 2005 and 2004, amounts to NIS
32,897,000 and NIS 32,300,000, respectively, which represents a holding of 26.25%. Carmels
shares are traded in the United States on the AMEX Stock Exchange.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 2  INVESTMENTS
IN ASSOCIATED COMPANIES (continued):

| | In
November 2004, Carmels board of directors decided to take measures to withdraw
Carmels shares from trade on the AMEX Stock Exchange in the United
States and also to deregister with the SEC. Accordingly, trade in Carmels shares on
the AMEX was suspended from November 30, 2004 and in July 2005 the process of
deregistering the shares from being traded and with the SEC was finalized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of Carmel are drawn up in accordance with the provisions of
Accounting Standard No. 12 of the IASB. Until December 31, 2003, the financial statements
were drawn up on the basis of 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 the consolidated financial statements up to said date, Carmels
financial statements were adjusted on the basis of the changes in the exchange rate of
the dollar.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. |  | INVESTMENT
IN T.M.M INTEGRATED RECYCLING INDUSTRIES LTD. (HEREAFTER           T.M.M.)
| | -- |  | --------------------------------------------------------------------------------------

| | As
of December 31, 2005, the Companys share in T.M.M. (directly and through another
associated company) is 43.08%
| | ------------------------------------------------------------------------------------------------------------------

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

| | As
of December 31, 2005 and 2004, the direct investment in the shares of T.M.M is NIS
13,703,000 and NIS 15,726,000, respectively. The market value of these shares as of
December 31, 2005 and 2004 is NIS 10,436,000 and NIS 11,338,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys management examined the value of its investment in T.M.M. for impairment,
which is not temporary in nature. The Company used the services of an outside appraiser
in determining the value in use to the Company. Based on this, the Companys
management believes that the investment does not need to be written down.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 3  FIXED
ASSETS:

| | A. |  | COMPOSITION
OF ASSETS AND THE ACCUMULATED DEPRECIATION THEREON, GROUPED BY           MAJOR
CLASSIFICATIONS, AND CHANGES THEREIN DURING 2005, ARE AS FOLLOWS:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | COST | 
|------------------------------ | ---- | 
|
|
|Land and buildings thereon     |      | 
|Machinery and equipment        |      | 
|Vehicles                       |      | 
|Office furniture and equipment |      | 
|(including computers)          |      | 
|Payments on account of         |      | 
|machinery and equipment        |      | 
|Spare parts - not current      |      | 
|                               |      | 
|                               |      | 
|                               |      | 

|                               | ACCUMULATED DEPRECIATION |  | DEPRECIATED BALANCE |        
|------------------------------ | ------------------------ |  | ------------------- | -------
|
|
|
|Land and buildings thereon     |                          |  |                     | 107,585
|Machinery and equipment        |                          |  |                     | 467,827
|Vehicles                       |                          |  |                     | 19,884 
|Office furniture and equipment |                          | 
|(including computers)          |                          |  |                     | 54,760 
|Payments on account of         |                          | 
|machinery and equipment        |                          |  |                     |        
|Spare parts - not current      |                          |  |                     |        
|                               |                          |  |                     |        
|                               |                          |  |                     | 650,056
|                               |                          |  |                     |        

| | *Reclassified.
| | --------------

24

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 3  FIXED
ASSETS (continued):

| | B. |  | The
item is net of investment grants in respect of investments in           approved
enterprises (see notes 7a and 9a).
| | -- |  | -------------------------------------------------------------------------------------------------------------------------

| | C. |  | The
Companys real estate is partly owned and partly leased  to the
          extent of NIS 44.5 million, in respect of which lease fees of approximately 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, 2005 and 2004, the cost of fixed assets includes borrowing
          costs of NIS 1,007,000 capitalized to the cost of machinery and equipment.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | Depreciation
expenses amounted to NIS 31,444,000 NIS 28,472,000 and NIS           28,165,000, for the
years ended December 31, 2005, 2004 and 2003, respectively.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | As
to pledges on assets  see note 9a.
| | -- |  | --------------------------------------

25

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 4  NOTES AND
OTHER LONG-TERM LIABILITIES:

| | A. |  | NOTES
| | -- |  | -----

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

|                          | DECEMBER 31 | 
|------------------------- | ----------- | 
|
|
|
|Balance                   |             | 
|Less - current maturities |             | 
|                          |             | 
|                          |             | 
|                          |             | 

| |  | 1) |  | Series
I  May 1992
| |  | -- |  | -------------------

| | The
balance of the notes as of December 31, 2005 is redeemable in four installments, due in
June of each of the years 2006-2009, each installment amounting to 6.66% of the original
par value of the notes, which is NIS 102,501,000, in December 2005 terms; the unpaid
balance of the notes bears annual interest of 3.8%, payable annually each June. The notes
 principal and interest  are linked to the Israeli CPI of February 1992.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2) |  | Series
II  December 2003
| |  | -- |  | -------------------------

| | The
balance of the notes as of December 31, 2005 is redeemable in 7 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 annually each December. The notes  principal
and interest  are linked to the Israeli CPI of November 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the change from January 2006 in the presentation of deferred issuance costs  see
note 1q (1) above.
| | ----------------------------------------------------------------------------------------------------------

| | B. |  | OTHER
LIABILITY:
| | -- |  | ----------------

| | The
capital note to an associated company 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, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES 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, 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 that, 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 the 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 NIS 8,710,000 NIS           8,368,000,and NIS
8,515,000 in 2005, 2004, and 2003, respectively.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 6  SHAREHOLDERSEQUITY:

| | A. |  | SHARE
CAPITAL
| | -- |  | -------------

| | Composed
of ordinary registered shares of NIS 0.01 par value, as follows:
| | -------------------------------------------------------------------------

|                 |  |  | DECEMBER 31 |           
|---------------- |  |  | ----------- | ----------
|
|
|Number of shares |  |  |             | 20,000,000
|                 |  |  |             |           
|Amount in NIS    |  |  |             | 200,000   
|                 |  |  |             |           

| | The
shares are traded on stock exchanges in Tel-Aviv and in the U.S. (AMEX). The
quoted prices per share, as of December 31, 2005 are NIS 195.4 and $ 42.51 (NIS 195.67),
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).
| | ------------------------------------------------------------------------------------------------------------------------------------------------

27



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 6  SHAREHOLDERSEQUITY
(continued):

| | In
1998-2000, 155,498 options were granted under the 1998 plan for senior officers.
| | -----------------------------------------------------------------------------------

| | The
number of shares resulting from the exercise of the options and the actual exercise price
were determined as follows: Upon 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2000-2003, 154,000 options were exercised under the 1998 plan for senior officers. 92,832
shares of NIS 0.01 were issued following the exercise. The unexercised balance of 1,498
options granted expired in 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Immediately
upon issuance, the ordinary shares issued upon exercise of the options have all the same
rights as other ordinary shares of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 can be exercised to purchase one ordinary share of NIS 0.01 par value of the
Company. The options are 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 known CPI on 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 the 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
of unexercised options is to be adjusted, in the event of cash dividend distributions.
Accordingly, the exercise price as of December 31, 2005 is NIS 45.5 for the second batch,
NIS 103.43 for the third batch and NIS 157.02 for the fourth batch. In May 2005, the
remaining options from the first batch expired.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
quoted price of the Companys shares on the Tel Aviv Stock Exchange, immediately
prior to the date of the board of directors resolution to grant the options, was
NIS 204.00. Immediately prior to the granting of the options, the price was NIS 185.8.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 6  SHAREHOLDERSEQUITY
(continued):

| | 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 NIS 56.69 on the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Notwithstanding
the above, the number of shares resulting from the exercise of the options and the actual
exercise price will be determined as follows: Upon receipt of an exercise request 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 (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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Immediately
upon issuance, the ordinary shares issued upon exercise of the options will have all the
same rights as other ordinary shares of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, 2004 and 2003, 13,877, 55,525 and 1,550 options, respectively, were exercised under
the 2001 plan for senior officers, and 4,307, 24,295 and 227 shares of NIS 0.01,
respectively, were issued following the exercise of the options, as above. 8,250 options
expired in 2005 (from the first batch). As of December 31, 2005, the unexercised balance
of the options granted is 115,098.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
plan is designed to be governed by the terms stipulated by Section 102 of the Israeli
Income Tax Ordinance. Inter alia, these terms provide that the Company is allowed to
claim, as an expense for tax purposes, the amounts credited to the employees as a benefit
in respect of shares or options granted under the plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount allowed as an expense for tax purposes, at the time the employee utilizes such
benefit, is limited to the amount of the benefit that is liable to tax as labor income,
in the hands of the employee; all being subject to the restrictions specified in Section
102 of the Income Tax Ordinance.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since,
in accordance with Israeli accounting principles, the Company does not recognize the
expense in its accounts with respect to the salary benefit embodied in these grants, then
under Clarification No. 7 of the IASB (See note 1j(7)), the Company credited the tax
saving derived from the exercise of benefits by employees in 2005 to capital surplus.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 can be exercised to purchase 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.
| | ------------------------------------------------------------------------------

29



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 6  SHAREHOLDERSEQUITY
(continued):

| | 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 known CPI on August 29, 2001. This price represents the average
price of the Companys shares as quoted on the Tel-Aviv Stock Exchange during the
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, as a
result of dividend distributions, and it is NIS 91.16 as of December 31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
quoted price of the Companys shares on the Tel Aviv Stock Exchange, immediately
prior to the date of the board of directors resolution to grant the options, was
NIS 171.20. Immediately 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 NIS 64.11 on the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Notwithstanding
the above, the number of shares resulting from the exercise of the options and the actual
exercise price will be determined as follows: Upon receipt of an exercise request 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 options to be exercised (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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Immediately
upon issuance, the ordinary shares issued upon exercise of the options will have all the
same rights as other ordinary shares of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, 2004 and 2003, 2,405, 8,615 and 57,962 options, respectively, were exercised under
the 2001 employee plan, and 1,224, 4,084 and 20,665 shares of NIS 0.01, respectively,
were issued following the exercise of options, as above. As of December 31, 2005, the
unexercised balance of the options granted is 12,473.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
plan is designed to be governed by the terms stipulated by Section 102 of the Israeli
Income Tax Ordinance. Inter alia, these terms provide that the Company is allowed to
claim, as an expense for tax purposes, the amounts credited to the employees as a benefit
in respect of shares or options granted under the plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount allowed as an expense for tax purposes, at the time the employee utilizes such
benefit, is limited to the amount of the benefit that is liable to tax as labor income,
in the hands of the employee; all being subject to the restrictions specified in Section
102 of the Income Tax Ordinance.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since,
in accordance with Israeli accounting principles, the Company does not recognize the
expense in its accounts (with respect to the salary benefit embodied in these grants),
then under Clarification No. 7 of the IASB (See note 1j(7)), the Company credited the tax
saving derived from the exercise of benefits by employees in 2005 to capital surplus.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# 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 were entitled to various tax benefits
(mainly reduced tax rates) until 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 instead of the tax exemption); 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 CPI linkage differences and interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Company and its subsidiaries are
taxed under this law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 7  TAXES ON
INCOME (continued):

| | C. |  | THE
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION), 1969
| | -- |  | ----------------------------------------------------------

| | The
Company and certain consolidated 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 also files consolidated tax returns with certain consolidated subsidiaries as
permitted under this law.
| | -------------------------------------------------------------------------------------------------------------------

| | D. |  | TAX
RATES APPLICABLE TO INCOME NOT DERIVED FROM APPROVED           ENTERPRISES
| | -- |  | --------------------------------------------------------------------------------

| | The
income of the Company and its Israeli subsidiaries (other than income from approved
enterprises, see a. above) is taxed at the regular rate. Through to December 31,
2003, the corporate tax was 36%. In July 2004, an amendment No. 140, to the Income Tax
Ordinance was published fixing, among others that corporate tax rate is gradually reduced
from 36% to 30%. In August 2005, an additional amendment (No. 147) to the Income Tax
Ordinance was published which makes a further revision to the corporate tax rates
prescribed by Amendment No. 140. As a result of the aforementioned amendments, the tax
rates for 2004 and thereafter are as follows: 2004  35%, 2005  34%, 2006
 31%, 2007  29%, 2008  27%, 2009  26% and 2010 and thereafter
 25%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the said changes in the tax rates, the Company adjusted  in each of the
years 2004 and 2005  at the time the aforementioned amendments were made, its
deferred tax balances, in accordance with the tax rates expected to be in effect in the
coming years; the effect of the change has been carried to income in these years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Capital
gains (except for the real capital gain from the sale of marketable securities  to
which the regular tax rates will apply) are taxed at a reduced tax rate of 25% on capital
gains that arose after January 1, 2003, and at the regular corporate tax rate on income
that arose until that date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | CARRYFORWARD
TAX LOSSES
| | -- |  | -----------------------

| | Carryforward
tax losses in subsidiary companies are NIS 22,470,000 and NIS 20,239,000 as of December
31, 2005 and 2004, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | The
Company examines on each balance sheet date the possibility of recording deferred taxes
in respect of carryforward tax losses based on an assessment of all evidence, both
positive and negative, regarding the likelihood of their being taxable income in the
foreseeable future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the inflationary adjustments law, carryforward losses are linked to the Israeli CPI, and
may be utilized indefinitely.
| | ----------------------------------------------------------------------------------------------------------------------------

32



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 7  TAXES ON
INCOME (continued):

| | F. |  | DEFERRED
INCOME TAXES
| | -- |  | ---------------------

| | The
composition of the deferred taxes at balance sheet dates, and the changes therein during
the years 2005 and 2004 , are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------

|                             | In respect of balance sheet items
                        Provisions for employee rights | 
|---------------------------- | ---------------------------------------------------------------------------------------- | 
|
|
|Balance at January 1, 2004   |                                                                                          | 
|Changes in 2004:             |                                                                                          | 
|Amounts carried to income    |                                                                                          | 
|                             |                                                                                          | 
|Balance at December 31, 2004 |                                                                                          | 
|Changes in 2005:             |                                                                                          | 
|Amounts carried to income    |                                                                                          | 
|                             |                                                                                          | 
|Balance at December 31, 2005 |                                                                                          | 
|                             |                                                                                          | 

| | The
deferred taxes are computed at the rate of 25%-31%.
| | -------------------------------------------------------

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

|                                   | DECEMBER 31 | 
|---------------------------------- | ----------- | 
|
|
|Among current assets               |             | 
|Among long-term asset balances     |             | 
|Among long-term liabilities        |             | 
|                                   |             | 
|Balance - liability  (asset) - net |             | 
|                                   |             | 

33



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# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 7  TAXES ON
INCOME (continued):

| | G. |  | TAXES
ON INCOME INCLUDED IN THE INCOME STATEMENTS:
| | -- |  | --------------------------------------------------

| |  | 1) |  | As follows: <PRE>
| |  | -- |  | -----------------

|                                    | 2005 |  | 2004 |        | 2003 | 
|----------------------------------- | ---- |  | ---- | ------ | ---- | 
|
|For the reported year:              |      |  |      |        |      | 
|Current                             |      |  |      | 13,662 |      | 
|Deferred, see f. above:             |      | 
|In respect of changes to tax rates, |      | 
|see d. above                        |      |  |      | (4,166 | )    | 
|In respect of the reporting period  |      |  |      | (3,505 | )    | 
|                                    |      |  |      |        |      | 
|                                    |      |  |      | 5,991  |      | 
|                                    |      |  |      |        |      | 

| | Current
taxes in 2005 were computed at an average tax rate of 34%, 2004  35% and 2003 34.5%,
see (2) below.
| | -------------------------------------------------------------------------------------------------------------

| |  | 2) |  | Following
is a reconciliation of the theoretical tax expense,           assuming all
income is taxed at the regular rate applicable to companies in           Israel, as
stated in d. above, and the actual tax expense:
| |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | 2005 |  | 2004 |       | 2003 | 
|---------------------------------------------- | ---- |  | ---- | ----- | ---- | 
|
|Income before taxes on income, as reported     |      |  |      |       |      | 
|in the statements of income                    |      |  |      | 100.0 |      | 
|                                               |      |  |      |       |      | 
|Theoretical tax on the above amount            |      |  |      | 34.0  |      | 
|Tax benefits arising from reduced tax rate     |      | 
|for approved enterprises                       |      |  |      |       |      | 
|                                               |      |  |      |       |      | 
|                                               |      |  |      | 34.0  |      | 
|Decrease in taxes resulting from computation   |      | 
|of deferred taxes at a rate which is           |      | 
|different from the theoretical rate            |      |  |      | (0.9  | )    | 
|Decrease in taxes resulting from adjustment to |      | 
|deferred tax balances due to changes           |      | 
|in tax rates, see d. above                     |      |  |      | (11.8 | )    | 
|Tax deduction in respect of options            |      | 
|exercised by employees according to            |      | 
|Section 102 of the Israeli Income              |      | 
|Tax Ordinance (2005 - see note 1j(7))          |      |  |      |       |      | 
|Other - net                                    |      |  |      | (4.3  | )    | 
|                                               |      |  |      |       |      | 
|Taxes on income for the reported year          |      |  |      | 17.0  |      | 
|                                               |      |  |      |       |      | 

| | H. |  | TAX
ASSESSMENTS
| | -- |  | ---------------

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

34



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# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 8  LINKAGE
TERMS OF MONETARY BALANCES:

| | A. |  | AS
FOLLOWS:
| | -- |  | -----------

|                                      | DECEMBER 31, 2005 |  | DECEMBER 31, 2004 |       
|------------------------------------- | ----------------- |  | ----------------- | ------
|
|
|Assets:                               |                   |  |                   |       
|Current assets:                       |                   | 
|Cash and cash equivalents             |                   |  |                   | 5,740 
|Short-term investments                |                   |  |                   |       
|Receivables                           |                   |  |                   | 55,307
|Investments in associated companies - |                   | 
|long-term loans and capital notes     |                   |  |                   | 9,206 
|                                      |                   |  |                   |       
|                                      |                   |  |                   | 70,253
|                                      |                   |  |                   |       
|Liabilities:                          |                   | 
|Current liabilities:                  |                   | 
|Short-term credit from banks          |                   |  |                   |       
|Accounts payables and accruals        |                   |  |                   | 11,062
|Long-term liabilities (including      |                   | 
|current maturities):                  |                   | 
|Notes                                 |                   |  |                   |       
|Other liability                       |                   |  |                   |       
|                                      |                   |  |                   |       
|                                      |                   |  |                   | 11,062
|                                      |                   |  |                   |       

| | As
to exposures relating to fluctuations in foreign currency exchange rates and the use of
derivatives for hedging purposes  see note 12a.
| | -------------------------------------------------------------------------------------------------------------------------------------------

35



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 8  LINKAGE
TERMS OF MONETARY BALANCES (continued):

| | B. |  | DATA
REGARDING THE EXCHANGE RATE AND THE ISRAELI CPI:
| | -- |  | -----------------------------------------------------

|     | CHANGE RATE OF
ONE DOLLAR | CPI*  
|---- | ------------------------- | ------
|
|
|2005 | 4.603                     | 185.0 
|2004 | 4.308                     | 180.7 
|2003 | 4.379                     | 178.6 
|     |                           |       
|
|2005 | 6.8%                      | 2.4%  
|2004 | (1.6%)                    | 1.2%  
|2003 | (7.6%)                    | (1.9%)

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

# NOTE 9 - COMMITMENTS,
CONTINGENT LIABILITIES 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 thereof.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
abovementioned subsidiaries have registered floating charges on all their assets in favor
of the State of Israel in order to secure 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, 2005, the grant was repaid in full, as agreed with the
Investment Center.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. |  | In
1996, an associated company received a grant amounting to 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 NIS
          2,091,000 in favor of the State of Israel.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. |  | The
Company has provided guarantees of NIS 2,301,000 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. |  | Subsidiaries
provided guarantees to various entities, in connection with           tenders, in the
aggregate amount of approximately NIS 2,232,000.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

36



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE  9  COMMITMENTS,
CONTINGENT LIABILITIES 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,
          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. Up to December
          31 2005, one quarter of the remuneration was exercised. An additional quarter
          was exercised in January 2006, after the balance sheet date. A liability was
          included in the financial statements in respect of the above plan, under
current           liabilities.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | In
accordance with the Companies Law, 1999, the Company issued new letters of
          indemnity to its officers in 2004, pursuant to which the Company undertakes to
          indemnify the officers for any liability or expense, for which indemnification
          may be paid under the law, that may be incurred by the officers in connection
          with actions performed by them as part of their duties as officers in the
          Company, which are directly or indirectly related to the events specified in
the           addendum to the letters of indemnity, provided that the total amount of
          indemnification payable to the officers, shall not exceed 25% of the
          Companys shareholders equity as per its latest financial statements
          published prior to the actual indemnification. The liability of officers in
          connection with the performance of their duties, as above, is partly covered by
          an insurance policy.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. |  | The
Company is preparing for the conversion of its energy-generation plant to           using
natural gas, instead of fuel oil. The transition is planned for the second           half
of 2006, subject to the arrival of the gas in Hadera.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
this capacity, the Company signed an agreement in London on July 29, 2005, with the
Thetis Sea Group, for the purchase of natural gas. The gas that will be purchased is
intended to fulfill the Companys requirements in the coming years, for the
operation of the existing energy generation plants using cogeneration at the Hadera
plant, when it will be converted for the use of natural gas, instead of the current use
of fuel oil. The overall financial scope of the transaction totals $ 40 million over the
term of the agreement (5 years from the initial supply of gas, but no later than July 1,
2011).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
this capacity the Company also contracted with Alstom Power Boiler Service gmbh, a
manufacturer of equipment in the energy industry, in an agreement worth approximately
(euro) 1.74 million, for the purchase of the systems needed for the conversion and
assistance with their installation at the plant in Hadera.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 10  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION:

| |  |  |  | BALANCE SHEETS:
| |  |  |  | ---------------

|                                               | WEIGHTED AVERAGE |  | DECEMBER 31 | 
|---------------------------------------------- | ---------------- |  | ----------- | 
|
|
|A.    SHORT-TERM INVESTMENTS:                  |                  |  |             | 
|Short term deposit - linked to the CPI         |                  |  |             | 
|Marketable securities                          |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|B.    RECEIVABLES:                             |                  | 
|1) Trade:                                      |                  | 
|Open accounts                                  |                  |  |             | 
|Checks collectible                             |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|The item is:                                   |                  | 
|Net of allowance for doubtful accounts         |                  |  |             | 
|                                               |                  |  |             | 
|Includes associated companies                  |                  |  |             | 
|                                               |                  |  |             | 
|2) Other:                                      |                  | 
|Employees and employee institutions            |                  |  |             | 
|Associated companies - current debt            |                  |  |             | 
|Prepaid expenses                               |                  |  |             | 
|Advances to suppliers                          |                  |  |             | 
|Deferred income taxes, see note 7f             |                  |  |             | 
|Income tax authority                           |                  |  |             | 
|Interest receivable                            |                  |  |             | 
|Sundry                                         |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|C.    INVENTORIES:                             |                  | 
|For industrial activities:                     |                  | 
|Finished goods                                 |                  |  |             | 
|Raw materials and supplies                     |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|For commercial activities - purchased products |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|Maintenance and spare parts **                 |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|D.    CREDIT FROM BANKS:                       |                  | 
|Unlinked                                       |                  |  | 5.3%        | 
|Swiss francs                                   |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 
|                                               |                  |  |             | 

|* |  | Reclassified.
|- |  | -------------

|** |  | Including
inventories for the use of associated companies.
|-- |  | ----------------------------------------------------------

38



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 10  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION (continued):

| | E. |  | ACCOUNTS
PAYABLE AND ACCRUALS  OTHER:
| | -- |  | --------------------------------------

|                                        | DECEMBER 31 | 
|--------------------------------------- | ----------- | 
|
|
|1) Trade:                               |             | 
|Open accounts                           |             | 
|Checks payable                          |             | 
|                                        |             | 
|                                        |             | 
|                                        |             | 
|2) Other:                               |             | 
|Payroll and related expenses            |             | 
|Institutions in respect of employees    |             | 
|Income tax authority                    |             | 
|Customs and value added tax authorities |             | 
|Accrued interest                        |             | 
|Accrued expenses                        |             | 
|Sundry                                  |             | 
|                                        |             | 
|                                        |             | 
|                                        |             | 

| | STATEMENTS
OF INCOME:
| | ---------------------

|                                              | 2005 |  | 2004 |         | 2003 | 
|--------------------------------------------- | ---- |  | ---- | ------- | ---- | 
|
|F. SALES - net (1):                           |      |  |      |         |      | 
|Industrial operations (2)                     |      |  |      | 364,539 |      | 
|Commercial operations                         |      |  |      | 117,922 |      | 
|                                              |      |  |      |         |      | 
|                                              |      |  |      | 482,461 |      | 
|                                              |      |  |      |         |      | 
|(1) Including sales to associated companies   |      |  |      | 115,262 |      | 
|                                              |      |  |      |         |      | 
|(2) Including sales to export                 |      |  |      | 43,356  |      | 
|                                              |      |  |      |         |      | 
|G. COST OF SALES:                             |      |  |      |         |      | 
|Industrial operations:                        |      |  |      |         |      | 
|Materials consumed                            |      |  |      | 80,740  |      | 
|Payroll and related expenses                  |      |  |      | 96,370  |      | 
|Depreciation                                  |      |  |      | 27,396  |      | 
|Other manufacturing costs                     |      |  |      | 94,517  |      | 
|Decrease (increase) in inventory of           |      | 
|finished goods                                |      |  |      | (4,894  | )    | 
|                                              |      |  |      |         |      | 
|                                              |      |  |      | 294,129 |      | 
|Commercial operations - cost of products sold |      |  |      | 89,050  |      | 
|                                              |      |  |      |         |      | 
|                                              |      |  |      | 383,179 |      | 
|                                              |      |  |      |         |      | 
|Including purchases from associated           |      | 
|companies                                     |      |  |      | 37,747  |      | 
|                                              |      |  |      |         |      | 

|* |  | Reclassified.
|- |  | -------------

39



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 10  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION (continued):

|                                                            | 2005 |  | 2004 |        | 2003 | 
|----------------------------------------------------------- | ---- |  | ---- | ------ | ---- | 
|
|H. SELLING, MARKETING, ADMINISTRATIVE AND GENERAL EXPENSES: |      |  |      |        |      | 
|Selling and marketing:                                      |      | 
|Payroll and related expenses                                |      |  |      | 13,641 |      | 
|Packaging, transport and shipping                           |      |  |      | 7,866  |      | 
|Commissions                                                 |      |  |      | 2,699  |      | 
|Depreciation                                                |      |  |      | 1,145  |      | 
|Other                                                       |      |  |      | 5,131  |      | 
|                                                            |      |  |      |        |      | 
|                                                            |      |  |      | 30,482 |      | 
|                                                            |      |  |      |        |      | 
|Administrative and general:                                 |      | 
|Payroll and related expenses                                |      |  |      | 39,727 |      | 
|Office supplies, rent and maintenance                       |      |  |      | 1,241  |      | 
|Professional fees                                           |      |  |      | 991    |      | 
|Depreciation                                                |      |  |      | 2,903  |      | 
|Doubtful accounts and bad debts                             |      |  |      | 840    |      | 
|Capital loss (gain) from sale of fixed assets               |      |  |      | (3,570 | )    | 
|Other**                                                     |      |  |      | 3,327  |      | 
|                                                            |      |  |      |        |      | 
|                                                            |      |  |      | 45,459 |      | 
|Less - rent and participation from                          |      | 
|associated companies                                        |      |  |      | 24,441 |      | 
|                                                            |      |  |      |        |      | 
|                                                            |      |  |      | 21,018 |      | 
|                                                            |      |  |      |        |      | 

| |  | * |  | Reclassified.
| |  | - |  | -------------

| |  | ** |  | 2005
- includes gain from sale of subsidiary consolidated in the past, in
the amount of NIS 874,000.
| |  | -- |  | ----------------------------------------------------------------------------------------------------

|                                                  |  |  |  |         |   | 
|------------------------------------------------- |  |  |  | ------- | - | 
|
|I.FINANCIAL INCOME (EXPENSES) - NET*:             |  |  |  |         |   | 
|EXPENSES:                                         |  | 
|In respect of long-term loans - net               |  |  |  |         |   | 
|In respect of notes - including amortization      |  | 
|of deferred charges and net of related hedges     |  |  |  | 16,516  |   | 
|In respect of short-term balances - net           |  |  |  | 3,559   |   | 
|                                                  |  |  |  |         |   | 
|                                                  |  |  |  | 20,075  |   | 
|                                                  |  |  |  |         |   | 
|INCOME:                                           |  | 
|In respect of increase in value of operating      |  | 
|monetary balances                                 |  |  |  | 3,294   |   | 
|In respect of short-term balances - net           |  |  |  | 4,291   |   | 
|                                                  |  |  |  |         |   | 
|                                                  |  |  |  | 7,585   |   | 
|                                                  |  |  |  |         |   | 
|                                                  |  |  |  | (12,490 | ) | 
|                                                  |  |  |  |         |   | 
|*Including financial income (expenses) in respect |  | 
|of loans to associated companies                  |  |  |  | 975     |   | 
|                                                  |  |  |  |         |   | 

40

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 10  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION (continued):

| |  | J. |  | OTHER
INCOME
| |  | -- |  | ------------

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

# 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:
| | -- |  | -------------------------------------------------------------------------------------------------------

| | Year
ended December 31:
| | -----------------------

|     |  | 
|---- |  | 
|2005 |  | 
|     |  | 
|2004 |  | 
|     |  | 
|2003 |  | 
|     |  | 

| | B. |  | In
the reported years, shares that will be allocated upon exercise of           unexercised
stock options granted to employees 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 12  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT:

| | A. |  | DERIVATIVE
FINANCIAL INSTRUMENTS
| | -- |  | --------------------------------

| | The
Company has limited involvement with derivative financial instruments. The Company uses
these instruments as hedges. The Company utilizes derivatives, mainly forward exchange
contracts, to protect its expected cash flows in respect of existing assets and
liabilities denominated in currencies other than the functional currency of the Company
or that are linked to the CPI. As the counter-parties to these derivatives are Israeli
banks, the Company considers the inherent credit risks remote.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November-December 2004, the Company entered into forward transactions for a period of one
year, in order to hedge an amount of NIS 200 million against increases in the Israeli
CPI.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, the Company entered into forward transactions for a period of one year, in
order to hedge an amount of NIS 230 million against increases in the CPI, following the
termination of the aforementioned transaction.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41



---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 12  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT (continued):

| | B. |  | CREDIT
RISKS
| | -- |  | ------------

| | The
Company and its subsidiaries cash and cash equivalents and the short-term deposit
as of December 31, 2005 and 2004 are deposited mainly with major banks. The Company and
its subsidiaries consider 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. |  | FAIR
VALUE OF FINANCIAL INSTRUMENTS
| | -- |  | -----------------------------------

| | The
fair value of the financial instruments included in the working capital of the Company 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, 2005, aggregating NIS
72,331,000 (see note 2b) and of a capital note to an associated company in the amount of
NIS 32,770,000 (see note 4b), since their value cannot be reliably determined so long as
they have no repayment dates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 13  INTERESTED
PARTIES  TRANSACTIONS AND BALANCES:

| | A. |  | TRANSACTIONS:
| | -- |  | -------------

| |  | 1) |  | Income
(expenses):
| |  | -- |  | ------------------

|                   | 2005 |  | 2004 |         | 2003 | 
|------------------ | ---- |  | ---- | ------- | ---- | 
|
|Sales              |      |  |      | 46,396  |      | 
|                   |      |  |      |         |      | 
|Costs and expenses |      |  |      | (13,997 | )    | 
|                   |      |  |      |         |      | 
|Financial expenses |      |  |      | (1,731  | )    | 
|                   |      |  |      |         |      | 

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 13 - INTERESTED
PARTIES - TRANSACTIONS AND BALANCES (continued)

| |  | 2) |  | Benefits
to interested parties:
| |  | -- |  | -------------------------------

|                                       | 2005 |  | 2004 |        | 2003 | 
|-------------------------------------- | ---- |  | ---- | ------ | ---- | 
|Payroll to interested parties employed |      |  |      |        |      | 
|by the Company - NIS  in thousands     |      |  |      | *5,181 |      | 
|                                       |      |  |      |        |      | 
|Number of people to whom               |      | 
|the benefits relate                    |      |  |      | 2      |      | 
|                                       |      |  |      |        |      | 
|Remuneration of directors who are not  |      | 
|employed by the Company -              |      | 
|NIS in thousands                       |      |  |      | 485    |      | 
|                                       |      |  |      |        |      | 
|Number of people to whom               |      | 
|the benefits relate                    |      |  |      | 12     |      | 
|                                       |      |  |      |        |      | 

| | *In
2005 including the CEO and the Chairman of the Board of Directors. In 2004 and 2003 a CEO
was in a position only part of the year. In 2005 includes a special bonus to the Chairman
of the Board of Directors, at a sum of NIS 800,000, subject to the general meetings
approval.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3) |  | In
2003, an interested party employed by the Company (the chairman of the board           of
directors) exercised 15,999 options granted to him under the 1998 plan for
          senior employees. 8,529 shares of NIS 0.01 par value have been issued at par
          value against the exercise of said options.
| |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4) |  | At
December 31, 2005, an interested party employed by the Company (the CEO)           held
3,950 options under the 2001 plan for senior employees in the group (see           note
6b(2)). In January 2006, after the balance sheet date, the interested party
          exercised 1,975 of said options.
| |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 5) |  | As
to the plan for the remuneration of the Companys chairman of the board           of
directors  see note 9e.
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------

| | B. |  | BALANCES
WITH INTERESTED PARTIES:
| | -- |  | ---------------------------------

|                                             | DECEMBER 31 | 
|-------------------------------------------- | ----------- | 
|
|
|Accounts receivable - commercial operations* |             | 
|                                             |             | 
|Accounts payables and accruals               |             | 
|                                             |             | 
|Notes                                        |             | 
|                                             |             | 

| | *
There were no significant changes in the balance during the year.
| | -------------------------------------------------------------------

# NOTE 14  SEGMENT
INFORMATION:

| | A. |  | Activities
of the Company and its subsidiaries:
| | -- |  | -----------------------------------------------

| |  | 1) |  | Manufacturing
and marketing of packaging 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 sales are on the local (Israeli) market and most of the assets are located in
Israel.
| | -------------------------------------------------------------------------------------------------

43

---

# AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 14  SEGMENT
INFORMATION (continued):

| | B. |  | BUSINESS
SEGMENT DATA:
| | -- |  | ----------------------

|                                     | PAPER AND RECYCLING |  | MARKETING OF OFFICE SUPPLIES |         | T O T A L | 
|------------------------------------ | ------------------- |  | ---------------------------- | ------- | --------- | 
|
|
|Sales - net(1)                       |                     |  |                              | 368,884 |           | 
|                                     |                     |  |                              |         |           | 
|Income (loss) from ordinary          |                     | 
|operations                           |                     |  |                              | 48,662  |           | 
|                                     |                     |  |                              |         |           | 
|Financial expenses, net              |                     |  |                              |         |           | 
|Other income                         |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Income before taxes on income        |                     |  |                              |         |           | 
|Taxes on income                      |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Income from operations of the        |                     | 
|Company and its subsidiaries         |                     |  |                              |         |           | 
|Share in profits of associated       |                     | 
|companies - net                      |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Net income                           |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Segment assets (at end of year)      |                     |  |                              | 536,965 |           | 
|Unallocated corporate assets         |                     | 
|(at end of year) (2)                 |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Consolidated total assets            |                     | 
|(at end of year)                     |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Segment liabilities (at end of year) |                     |  |                              | 57,754  |           | 
|Unallocated corporate liabilities    |                     | 
|(at end of year)                     |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Consolidated total liabilities       |                     | 
|(at end of year)                     |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 
|Depreciation and amortization        |                     |  |                              | 29,795  |           | 
|                                     |                     |  |                              |         |           | 
|                                     |                     |  |                              |         |           | 

|* |  | Reclassified.
|- |  | -------------

|(1) |  | Represents
sales to external customers.
|--- |  | ---------------------------------------

|(2) |  | Including
investments in associated companies.
|--- |  | ----------------------------------------------

44



---

SCHEDULE

# DETAILS OF
SUBSIDIARIES AND ASSOCIATED COMPANIES

# AT DECEMBER 31, 2005

|                                                        | PERCENTAGE OF DIRECT AND
INDIRECT HOLDING IN SHARES
CONFERRING EQUITY AND
VOTING RIGHTS
|------------------------------------------------------- | ---------------------------------------------------------------------------------------
|
|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 For Personal Comfort Ltd.                        | 49.90                                                                                  
|Ovisan Sihhi Bez Sanai Ve Ticavet A.S                   | 49.90                                                                                  
|Mondy Business Paper Hadera Ltd.                        | 49.90                                                                                  
|Subsidiariy of Mondy Business Paper Hadera Ltd.:       
|Mondy Business Paper Hadera Marketing Ltd.              | 49.90                                                                                  
|Carmel Container Systems Limited                        | 26.25                                                                                  
|C.D. Packaging Systems Limited**                        | 63.20                                                                                  
|Barthelemi Holdings Ltd.                                | 35.98                                                                                  
|T.M.M. Integrated Recycling Industries Ltd.***          | 43.08                                                                                  

|* |  | Not
including dormant companies.
|- |  | --------------------------------

|** |  | 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

45



---

Exhibit 19(a)(ii)

# 

# MONDI BUSINESS PAPER
HADERA LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005



---

# 

# MONDI BUSINESS PAPER
HADERA LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005

# TABLE OF CONTENTS

|                                                        | 
|------------------------------------------------------- | 
|                                                        | 
|                                                        | 
|                                                        | 
|Report of Independent Registered Public Accounting Firm | 
|                                                        | 
|Financial Statements:                                   | 
|                                                        | 
|Balance Sheets                                          | 
|                                                        | 
|Statements of Operations                                | 
|                                                        | 
|Statements of Changes in Shareholders' Equity           | 
|                                                        | 
|Statements of Cash Flows                                | 
|                                                        | 
|Notes to the Financial Statements                       | 



---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders OfMondi
Business Paper Hadera Ltd.

We have audited the accompanying
balance sheet of Mondi Business Paper Hadera Ltd.("the Company") as of December 31,
2005 and 2004, and the consolidated balance sheets as of such dates, and the related
statements of operations, changes in shareholders' equity and cash flows - of
the Company and on a consolidated basis - for each of the two years in the period
ended December 31, 2005. These financial statements are the responsibility of the
Company's Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial statements of
the Company and on a consolidated basis as of December 31, 2003 and for the year then
ended were audited by other auditors whose report, dated March 10, 2004, expressed an
unqualified opinion on those financial statements.

We  conducted  our audit in
 accordance  with  standards  of the Public  Company Accounting  Oversight Board (United
States) and with generally accepted auditing standards  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.  The Company
is not  required to have,  nor were we engaged to perform,  an audit of its  internal
 control  over financial reporting.  Our audit included  consideration of internal
control over financial  reporting  as  a  basis  for  designing  audit  procedures  that
 are appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in the
 financial   statements,   assessing  the  accounting  principles  used  and significant
estimates made by the Board of Directors and management,  as well as evaluating the
overall  financial  statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated
 financial statements referred to above present fairly, in all material respects, the
financial position - of the Company and on a  consolidated  basis - as of  December  31,
 2004 and 2005 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 ended December 31, 2005, 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.

As explained in Note 2A, the
financial  statements as of dates and for reporting periods  commencing  January 1, 2004,
 are  presented  at reported  amounts,  in accordance with accounting  standards of the
Israeli Accounting Standards Board. The  financial  statements  for the year  ended
 December  31,  2003,  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, Israel March 5,
2006

---

# Report of Independent
Registered Public Accounting Firm

To the shareholders of

MONDI BUSINESS PAPER HADERA
LTD (formerly: Neusiedler Hadera Paper Ltd.)

We have audited the statements of
income, changes in shareholders equity and cash flows for the year ended December
31, 2003 of Mondi business paper Hadera Ltd. (formerly: Neusiedler Hadera Paper Ltd,
hereafter - the Company) and its subsidiaries. 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 in 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 the Companys board of directors and management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the results of
operations, the changes in shareholders equity and the cash flows  of the
Company and consolidated  for the year ended December 31, 2003, in conformity with
accounting principles generally accepted (GAAP) 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.

/s/ Kesselman & Kesselman

Tel-Aviv,
Israel     March 10, 2004



---

MONDI BUSINESS PAPER
HADERA LTD.BALANCE SHEETS(NIS in thousands; Reported Amounts)

|                                       | Consolidated | Company
|-------------------------------------- | ------------ | -------
|
|
|Current Assets                         |              |        
|Cash and cash equivalents              |              | 3      
|Trade receivables                      |              | 4      
|American Israeli Paper Mills           |              |        
|Group, net                             |              |        
|Other receivables                      |              | 5      
|Inventories                            |              | 6      
|                                       |              |        
|                                       |              |        
|                                       |              |        
|Long-term Investments                  |              |        
|Investments in Subsidiaries            |              | 7      
|Fixed Assets                           |              | 8      
|Cost                                   |              |        
|Less - accumulated depreciation        |              |        
|                                       |              |        
|                                       |              |        
|Long -Term Assets                      |              |        
|Goodwill                               |              | 7B     
|                                       |              |        
|                                       |              |        
|                                       |              |        
|                                       |              |        
|                                       |              |        
|                                       |             
|Current Liabilities                    |              |        
|Short term bank credit                 |              |        
|Current maturities of long-term        |              |        
|bank loans                             |              | 11     
|Capital notes to shareholders          |              | 12     
|Trade payables                         |              | 9      
|American Israeli Paper Mills           |              |        
|Group, net                             |              |        
|Subsidiaries                           |              |        
|Other payables and accrued expenses    |              | 10     
|                                       |              |        
|                                       |              |        
|                                       |              |        
|Long-term Liabilities                  |              |        
|Long-term bank loans                   |              | 11     
|Capital notes to shareholders          |              | 12     
|Deferred taxes                         |              | 21     
|Accrued severance pay, net             |              | 13     
|                                       |              |        
|                                       |              |        
|                                       |              |        
|Commitments and Contingent Liabilities |              | 14     
|                                       |             
|Shareholders' Equity                   |              |        
|Share capital                          |              | 15     
|Premium                                |              |        
|Retained earnings                      |              |        
|                                       |              |        
|                                       |              |        
|                                       |              |        
|                                       |              |        
|                                       |              |        

|                                        |                                                                       |                                                                       
|--------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------------
|/s/ A. MagidA. Magid
Financial Director | /s/ A. Solel             
                   A. Solel
General Manager | /s/ Y. YerushalmiY. Yerushalmi
Vice Chairman of the Board of Directors
|                                        |                                                                       |                                                                       

Approval date of the financial
statements: March 5, 2006.

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

-2-



---

MONDI BUSINESS PAPER
HADERA LTD.STATEMENTS OF OPERATIONS(NIS in thousands; except per share data)

|                            |  | Consolidated | Company
|--------------------------- |  | ------------ | -------
|
|
|
|
|Net sales                   |  | 16           |        
|                            | 
|Cost of sales               |  | 17           |        
|                            |  |              |        
|                            | 
|Gross profit                |  |              |        
|                            | 
|Selling expenses            |  | 18           |        
|General and                 | 
|administrative expenses     |  | 19           |        
|                            |  |              |        
|                            | 
|Operating profit (loss)     |  |              |        
|                            | 
|Financing expenses, net     |  | 20           |        
|                            | 
|Other income                | 
|(expenses), net             |  |              |        
|                            |  |              |        
|                            | 
|Income (loss) before income | 
|taxes                       |  |              |        
|                            | 
|Income taxes (tax           | 
|benefits)                   |  | 21           |        
|                            |  |              |        
|                            | 
|Income (loss) after         | 
|Income taxes (tax           | 
|benefits)                   |  |              |        
|                            | 
|Equity in net earnings      | 
|(losses) of                 | 
|Subsidiaries                |  |              |        
|                            |  |              |        
|                            | 
|Net income (loss) for       | 
|the year                    |  |              |        
|                            |  |              |        
|Earnings (loss)             | 
|per share (in NIS)          |  |              |        
|                            |  |              |        
|Number of shares            | 
|used in computation         |  |              |        
|                            |  |              |        

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
 for  changes in the  exchange  rate of the U.S.  dollar as of          December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------

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

-3-



---

MONDI BUSINESS PAPER
HADERA LTD.STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NIS in thousands)

|                            | Share
Capital | Premium | Retained
Earnings | Total 
|--------------------------- | ------------- | ------- | ----------------- | ------
|Balance - January 1, 2003   |               |         |                   |       
|(Adjusted Amounts (2))      |               | 1       |                   | 43,352
|                            |               |         |                   |       
|Changes During 2003:        |              
|Net income for the year     |               | -       |                   | -     
|                            |               |         |                   |       
|Balance - December 31, 2003 |              
|(Adjusted Amounts (2))      |               | 1       |                   | 43,352
|                            |               |         |                   |       
|Changes During 2004:        |              
|Net income for the year     |               | -       |                   | -     
|                            |               |         |                   |       
|                            |               |         |                   |       
|Balance - December 31, 2004 |              
|(Reported Amounts (2))      |               | 1       |                   | 43,352
|                            |               |         |                   |       
|Changes During 2005:        |              
|Loss for the year           |               | -       |                   | -     
|                            |               |         |                   |       
|                            |               |         |                   |       
|Balance - December 31, 2005 |              
|(Reported Amounts (1))      |               | 1       |                   | 43,352
|                            |               |         |                   |       

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
 for  changes in the  exchange  rate of the U.S.  dollar as of          December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------

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

-4-



---

MONDI BUSINESS PAPER
HADERA LTD.STATEMENTS OF CASH FLOWS
(NIS in thousands)

|                                   | Consolidated | Company
|---------------------------------- | ------------ | -------
|
|
|
|
|Cash flows - operating activities  |              |        
|                                   |             
|Net income (loss) for the year     |              | (3,406 
|Adjustments to reconcile net       |             
|income (loss) to net cash provided |             
|by (used in) operating activities  |             
|(Appendix A)                       |              | (29,625
|                                   |              |        
|Net cash provided by (used in)     |             
|operating activities               |              | (33,031
|                                   |              |        
|                                   |             
|Cash flows - investing activities  |             
|                                   |             
|Acquisition of fixed assets        |              | (51,323
|Proceeds from sale of fixed assets |              | 248    
|                                   |              |        
|Net Cash Used in Investing         |             
|activities                         |              | (51,075
|                                   |              |        
|                                   |             
|Cash flows - financing activities  |             
|Short-term bank credit, net        |              | 87,004 
|Repayment of long-term bank  loans |              | (13,702
|Repayment of long-term capital     |             
|notes to shareholders              |              | -      
|                                   |              |        
|                                   |             
|Net cash provided by (used in)     |             
|financing activities               |              | 73,302 
|                                   |              |        
|                                   |             
|Increase (decrease) in             |             
|cash and cash equivalents          |              | (10,804
|                                   |             
|Cash and cash equivalents-         |             
|beginning of year                  |              | 10,804 
|                                   |              |        
|Cash and cash equivalents -        |             
|end of year                        |              | -      
|                                   |              |        

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
 for  changes in the  exchange  rate of the U.S.  dollar as of          December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------

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

-5-



---

MONDI BUSINESS PAPER
HADERA LTD.APPENDICES TO STATEMENTS OF CASH FLOWS(NIS in thousands)

|                                                                        | Consolidated | Company
|----------------------------------------------------------------------- | ------------ | -------
|
|
|
|
|                                                                        |              |        
|A.  Adjustments to reconcile net     income (loss) to net cash provided |             
|by (used in) operating activities                                       |             
|                                                                        |              |        
|Income and expenses items                                               |             
|not involving cash flows:                                               |             
|Equity in net losses (earnings) of                                      |             
|Subsidiaries                                                            |              | -      
|Depreciation and amortization                                           |              | 10,722 
|Deferred taxes, net                                                     |              | (8,470 
|Increase (decrease) in liability for                                    |             
|severance pay, net                                                      |              | (36    
|Capital loss (gain)                                                     |             
|from sale of fixed assets                                               |              | (65    
|Effect of exchange rate and linkage                                     |             
|differences of long-term bank                                           |             
|loans and long-term loan to                                             |             
|Subsidiary                                                              |              | (738   
|Effect of exchange rate                                                 |             
|differences of long-term                                                |             
|capital notes to shareholders                                           |              | 1,179  
|                                                                        |             
|Changes in assets and liabilities:                                      |             
|Decrease (increase)                                                     |             
|in trade receivables                                                    |              | (3,060 
|Decrease (increase)                                                     |             
|in other receivables                                                    |              | (345   
|Decrease (increase)                                                     |             
|in inventories                                                          |              | (26,468
|Increase (decrease) in trade                                            |             
|payables                                                                |              | (4,235 
|Increase (decrease) in                                                  |             
|American Israeli Paper Mills                                            |             
|Group, net                                                              |              | 4,821  
|Increase (decrease) in Subsidiaries                                     |              | -      
|Increase (decrease) in other                                            |             
|payables and accrued expenses                                           |              | (2,930 
|                                                                        |              |        
|                                                                        |              | (29,625
|                                                                        |              |        
|B.  Non-cash activities                                                 |              |        
|Acquisition of fixed                                                    |             
|assets on credit                                                        |              | 3,342  
|                                                                        |              |        

|(1) | See
Note 2A.
|--- | ------------

|(2) | Adjusted
 for  changes in the  exchange  rate of the U.S.  dollar as of          December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------

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

-6-



---

# MONDI BUSINESS PAPER
HADERA LTD.NOTES TO FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS
AND GENERAL

| | A. |  | Description
 of Business
| | -- |  | ------------------------

| | Mondi
 Business   Paper  Hadera  Ltd.   ("the   Company")  was                   incorporated
and commenced  operations on January 1, 2000. The                   Company and its
Subsidiaries are engaged in the production and                   marketing of paper,
mainly in Israel.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is presently  owned by Neusiedler AG ("NAG" or the                   "Parent
 Company")  (50.1%) and  American-Israeli  Paper Mills                   Ltd. ("AIPM")
(49.9%).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the framework of a change in the  organizational  structure                   of the
Group,  effective  January 1, 2003,  all  marketing and                   selling
 activities  of the Group,  which until such date were                   performed  by
 four  Subsidiaries,  were  centralized  to  one                   Subsidiary with three
logistic sites.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial  statements are prepared in accordance  with the                   Israeli
  Securities   Regulations   (Preparation   of  Annual                   Financial
Statements), 1993.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. |  | Definitions:
| | -- |  | ------------

| |                         |   |                                                                                                                                                                                  
| | ----------------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                         |   |                                                                                                                                                                                  
| | The Company             | - | Mondi Business Paper Hadera Ltd.                                                                                                                                                 
| |                         |   |                                                                                                                                                                                  
| | The Group               | - | the Company and its Subsidiaries, a list of which is presented in Note 7C.                                                                                                       
| |                         |   |                                                                                                                                                                                  
| | 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.                                                                                                                                                                 
| |                         |   |                                                                                                                                                                                  
| | Euro                    | - | the United European currency.                                                                                                                                                    
| |                         |   |                                                                                                                                                                                  
| | Adjusted Amount         | - | see Note 2A(1) below.                                                                                                                                                            
| |                         |   |                                                                                                                                                                                  
| | Reported Amount         | - | see Note 2A(1) below.                                                                                                                                                            

-7-

---

# MONDI BUSINESS
PAPER HADERA LTDNOTES TO FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS
AND GENERAL (cont.)

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 with the
exception of the  application of the provisions          of Standard No. 19 "Income
Taxex".
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. |  | Cessation
 of  Financial  Statement  Adjustment  and Change to                   Reporting in
Reported Amounts - Standard No. 12
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------

| | (1)            Definitions
| | --------------------------

| | Adjusted
Amount- historical  nominal amount adjusted                            for changes in
the exchange  rate of the U.S.  dollar                            as of December 31,
2003, in  accordance  with Opinion                            No.  36  of  the
  Institute  of   Certified   Public                            Accountants in Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reported
 Amount- Adjusted  Amount  plus  amounts in                            nominal terms
added  subsequent to December 31, 2003,                            and less amounts
subtracted after that date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) General
| | -----------

| | In
January 2004, Israeli  Accounting  Standard No. 12                            "Cessation
of Financial  Statements  Adjustment" came                            into effect.
 Following the initial implementation of                            Standard  No. 12,
 commencing  January  1, 2004,  the                            Group  ceased  the
  presentation  of  its  financial                            statements based on nominal
 historical cost adjusted                            for the  changes  in the  exchange
 rate of the  U.S.                            dollar in  relation  to the NIS.  Effective
 with the                            interim financial statements as of March 31, 2004
and                            for the reporting periods  thereafter,  including the
                           years ended  December 31, 2004 and 2005,  the Group's
                           financial  statements  are prepared and  presented in
                           Reported Amounts.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comparative
  figures  included  in  these  financial                            statements  relating
to the year ended  December  31,                            2003, are presented in
Adjusted Amounts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amounts at which non-monetary items are presented                            in  these
 financial  statements  do not  necessarily                            represent their
 realization value or economic value,                            but solely their
Reported Amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company's  condensed  financial   statements  in                            nominal
 values,  on the basis of which the Company's                            financial
statements in Reported amounts and Adjusted                            Amounts were
prepared, are presented in Note 24.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-8-



---

# MONDI BUSINESS PAPER
HADERA LTD.NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES (cont.)

| | A. |  | Cessation
 of  Financial  Statement  Adjustment  and Change to                   Reporting in
Reported Amounts - Standard No. 12 (cont.)
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Principles
 of  Adjustment  Applicable  for Financial                            Statements
 Relating to  Reporting  Periods  Ended in                            December 31, 2005
and 2004
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a. |  | Balance
sheet items
| |  |  | -- |  | -------------------

| | Non-monetary
items  (items  whose  balances                                     reflect  historical
 value at acquisition or                                     upon  establishment)  are
presented at their                                     Adjusted  Amounts as of  December
 31,  2003                                     plus  additions and  dispositions
 occurring                                     subsequent  to  such  date.  Additions
 made                                     subsequent   to   December   31,   2003  and
                                    dispositions  of items added  subsequent  to
                                    such date, are presented at their historical
                                    nominal value.  Dispositions  of items added
                                    on  or  prior  to  December   31,  2003  are
                                    presented at their Adjusted Amount.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Monetary
items (items whose  balance  sheet                                     amount   reflects
 their  current  value  or                                     realization value at the
balance sheet date)                                     are  presented at their  nominal
value as of                                     the balance sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in  Subsidiaries  are presented                                     based on the
 financial  statements of these                                     companies prepared
according to the guidance                                     of Standard No. 12.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b. |  | Statement
of Operations Items
| |  |  | -- |  | -----------------------------

| | Income
and expenses reflecting transactions,                                     and  financial
 income  and  expenses,   are                                     presented at their
nominal value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
and    expenses    deriving    from                                     non-monetary
 items  (mainly   depreciation,                                     amortization  and
changes in inventory) were                                     presented in a manner
 corresponding  to the                                     presentation  of  the  related
 non-monetary                                     balance sheet item, as illustrated
above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company's   share  in  the  results  of                                    Subsidiaries
 is  determined   based  on  the                                    financial
  statements  of  these   companies                                    prepared
  according   to  the   guidance  of                                    Standard No. 12.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Principles
 of  Adjustment  Applicable  for Financial                            Statements Relating
to Reporting Period Ended Through                            December 31, 2003
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
 through  December  31,                            2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
and expenses deriving from non-monetary  items                            (mainly
 depreciation,  amortization,  deferred taxes                            and changes in
inventory)  were presented in a manner                            corresponding   to  the
 adjustment  of  the  related                            balance sheet items.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financing
 expenses,  net reflect income and expenses                            in real terms and
include  exchange rate  differences                            derived from monetary
items.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company's share in the results of Subsidiaries is                            determined
based on the adjusted financial statements                            of these companies.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-9-



---

# MONDI BUSINESS PAPER
HADERA LTD.NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES (cont.)

| | B. |  | Principles
of Consolidation
| | -- |  | ---------------------------

| | The
consolidated financial statements include consolidation of                   the
 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
amortization policy of an unallocated  goodwill associated                   with the
acquisition of a Subsidiary, see H below.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | 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  computed  on  the                   specific
   identification    basis   for    accounts    whose                   collectibility,
on management's estimation, is uncertain.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | Inventories
| | -- |  | -----------

| | Inventories
 are stated at the lower of cost or market  value.                   Cost is determined
for raw materials,  auxiliary materials and                   finished products on the
basis of weighted moving average cost                   per unit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | Investments
in Subsidiaries
| | -- |  | ---------------------------

| | Investments
 in  Subsidiaries  are presented  using the equity                   method  based  on
 their  audited  financial  statements.  For                   amortization  the
 goodwill  included  in an  investment  in a                   Subsidiary, see H below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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:
| | 
| |  | Leasehold improvements                             
| |  | Machinery and equipment                            
| |  | Motor vehicles                                     
| |  | Office furniture and equipment                     

-10-



---

# MONDI BUSINESS PAPER
HADERA LTD.NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES (cont.)

| | G. |  | Fixed
Assets (cont.)
| | -- |  | --------------------

| | 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 charge is recorded at the amount in
                  which the carrying amount of the asset exceeds its recoverable
                  value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. |  | Other
Assets - Goodwill
| | -- |  | -----------------------

| | The
 unallocated  excess cost of an investment in a Subsidiary                   over  its
net  book  value at the  acquisition  date  reflects                   goodwill.   The
 goodwill  is  amortized   over  the  expected                   estimated  economic
 life of the  goodwill  (10 years) using a                   straight-line  method. The
amortization period and method were                   determined  following  the
 provisions of Standard No. 20 "The                   amortization   Period  of
  Goodwill"   which  calls  for  the                   amortization  of  goodwill  over
its useful  life,  based on a                   systematic  method that should reflect
the estimated  expected                   period  in  which  the  goodwill  is  to
 contribute  economic                   benefits.   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  income  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  differences  as well as in                   respect of carry-forward  tax
losses so long as it is probable                   that those assets will be realized.
 The deferred income taxes                   are  computed  by the tax  rates  expected
 to be in effect at                   realization, as they are known at the balance sheet
date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 computation  of deferred  income 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. |  | Revenue
Recognition
| | -- |  | -------------------

| | Revenues
are  recognized  upon  shipment,  when title has been                   transferred and
collectibility is reasonably assured. Revenues                   are  presented  net of
 discounts  granted.  The  accrual  for                   estimated  discounts  granted
 is  computed  according  to the                   provisions stipulated in the
agreements,  and is recorded when                   revenues are recognized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-11-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES (cont.)

| | K. |  | 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.  Management's 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. |  | Forward
Transactions
| | -- |  | --------------------

| | The
gain or loss of currency forward  transactions  designated                   to  hedge
  long-term   loans  from  banks  against   currency                   fluctuations, are
included in operations as incurred.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. |  | Earnings
(Loss) Per Share
| | -- |  | -------------------------

| | Earnings
 (loss) per share is computed  based on the  weighted                   average number of
paid up capital shares during the year.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | N. |  | 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 in the Israeli CPI:
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As of: | Representative
Exchange Rate
of the Dollar
(Nis Per $1) | CPI
"in respect of"
(in points)
| | ------ | ------------------------------------------------------- | -------------------------------
| |        | December 31, 2005                                       |                                
| |        | December 31, 2004                                       |                                
| |        | December 31, 2003                                       |                                
| |       
| |        | Increase (decrease)During the year ended:               |                                
| |        | December 31, 2005                                       |                                
| |        | December 31, 2004                                       |                                
| |        | December 31, 2003                                       |                                

| |  | (3) |  | Exchange-rate
 differences  are charged to operations                            as incurred.
| |  | --- |  | ---------------------------------------------------------------------------------------------

-12-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES (cont.)

| | O. |  | Recent
Accounting Standards
| | -- |  | ---------------------------

| |  | (1) |  | Accounting
Standard No. 21 "Earnings Per Share"
| |  | --- |  | -----------------------------------------------

| | In
February  2006, the Israeli  Accounting  Standards                            Board
approved for  publication  Accounting  Standard                            No. 21,
"Earnings Per Share" (the  "Standard").  With                            the initial
adoption of the Standard,  Opinion No. 55                            of the Institute of
Certified  Public  Accountants in                            Israel - Earnings  per share
will be  cancelled.  The                            Standard  prescribes  that an entity
shall  calculate                            basic  earnings per share  amounts for profit
or loss                            attributable to ordinary equity holders of the entity
                           and,  if  presented,  profit or loss from  continuing
                           operations  attributable to those equity holders. The
                           basic  earnings  per  share  shall be  calculated  by
                           dividing  profit  or loss  attributable  to  ordinary
                           equity  holders of the entity (the  numerator) by the
                           weighted    average   number   of   ordinary   shares
                           outstanding  (the  denominator)  during the  reported
                           period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the purpose of calculating  diluted  earnings per                            share,   an
 entity  shall  adjust   profit  or  loss                            attributable   to
 ordinary  equity  holders  of  the                            entity,  and the  weighted
 average  number of shares                            outstanding,   for  the   effects
 of  all   dilutive                            potential ordinary shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is effective  for  financial  statements                            for periods
commencing January 1, 2006 or thereafter.                            The  initial
  adoption  of  the  Standard   will  be                            accounted   for
  retrospectively   and   comparative                            Earnings  per share data
for prior  periods  shall be                            adjusted.  The  application  of
the  Standard  is not                            expected to materially affect the
Company's  Earnings                            per share data.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | Accounting
Standard No. 22                            "Financial Instruments: Disclosure and
Presentation"
| |  | --- |  | ----------------------------------------------------------------------------------------------------------

| | In
July 2005, the Israeli Accounting  Standards Board                            approved
for publication  Accounting Standard No. 22,                            "Financial
Instruments: Disclosure and Presentation".                            Financial
 instrument  under  this  Standard  is,  in                            general,  any
contract  that  establishes a financial                            asset  of an  entity,
 or a  financial  liability  or                            equity instrument of another
entity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
 Standard   establishes  the   requirements  for                            presentation
  of   financial   instruments   in  the                            financial  statements
 and indicates the  information                            that should be  disclosed  in
relation  thereto.  The                            presentation     requirements
    relate    to    the                            classification of financial
 instruments as financial                            assets,  financial liabilities or
equity instruments.                            It also  deals  with the  classification
 of  related                            interest,  dividends,  losses  and  gains  and to
the                            circumstances   under  which  financial   assets  and
                           liabilities derived from financial instruments are to
                           be  offset.  The  Standard  requires   disclosure  of
                           information relating to factors affecting the amount,
                           timing and  certainty  of the  entity's  future  cash
                           flows   relating   to   financial   instruments   and
                           accounting  policy  implemented  in  respect of these
                           instruments.    The   Standard    also    establishes
                           requirements for disclosure of information  about the
                           nature and the extent of an entity's use of financial
                           instruments,  the business  purposes they serve,  the
                           risks associated with them and management's  policies
                           for the oversight of those risks.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-13-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES (cont.)

| | O. |  | Recent
Accounting Standards (cont.)
| | -- |  | -----------------------------------

| |  | (2) |  | Accounting
Standard No. 22                            "Financial Instruments: Disclosure and
Presentation" (cont.)
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------

| | Standard
No. 22 is effective for financial statements                            for periods
commencing January 1, 2006 or thereafter.                            The  initial
  adoption  of  the  Standard   will  be                            accounted for
 prospectively.  Comparative  financial                            statements  for prior
 periods shall not be adjusted.                            The  Standard's   effect  on
 the  Group's  financial                            statements is not expected to be
significant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Accounting
Standard No. 24 "Share-Based Payment"
| |  | --- |  | ------------------------------------------------

| | In
September 2005, the Israeli  Accounting  Standards                            Board
  published    Accounting   Standard   No.   24                            "Share-Based
 Payment" (the "Standard"),  which calls                            for the  recognition
 in the financial  statements of                            share-based payment
 transactions.  Such transactions                            include   transactions  with
 employees  and  related                            parties to be settled by cash, by
other assets, or by                            equity  instruments.   Consequently,
  amongst  other                            matters,  costs  associated with grants of
shares and                            options  to  employees  will  be  expensed  over
 the                            vesting  period of each  grant.  These  costs will be
                           determined  based on the fair  value of the awards at
                           each grant date. The Standard establishes  guidelines
                           for  measuring  each  award  based on the  settlement
                           terms  (either  by cash or  equity  instrument).  The
                           Standard   also   establishes    certain   disclosure
                           requirements relating to share-based payment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is effective  for  financial  statements                            for periods
 commencing January 1, 2006 or thereafter                            (initial adoption is
recommended). The application of                            the Standard is not expected
to affect the  Company's                            financial position and results of
operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Accounting
Standard No. 25 "Revenues"
| |  | --- |  | -------------------------------------

| | In
February  2006, the Israeli  Accounting  Standards                            Board
approved for  publication  Accounting  Standard                            No. 25,
"Revenues" (the "Standard").
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
 Standard   establishes  the   requirements  for                            recognition
 criteria,  measurement,  disclosure  and                            presentation of
revenues  arising from sale of goods,                            rendering  of services
 and from the use by others of                            entity  assets  yielding
  interest,   royalties  and                            dividends.  This  Standard
 prescribes  that  revenue                            shall  be   measured   at  the
 fair   value  of  the                            consideration received or receivable.
The Standard is                            effective  for  financial   statements   for
 periods                            commencing January 1, 2006 or thereafter.  Assets and
                           liabilities  included in the financial  statements as
                           of December 31, 2005 in different  amounts from those
                           that  would  have been  presented  if the  standard's
                           requirements were applied will be adjusted on January
                           1, 2006 to the amounts to be recognized in accordance
                           with the  Standard's  guidelines.  The results of the
                           initial  adoption  of the  Standard  as at January 1,
                           2006 shall be accounted for by the cumulative  effect
                           of a change in accounting method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company is currently  evaluating  the impact,  if                            any, of the
adoption of the Standard on its financial                            position and results
of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-14-



---

# MONDI
BUSINESS PAPER HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 3 -  CASH AND CASH
EQUIVALENTS

| | Consolidated | Company                   
| | ------------ | --------------------------
|
|
|
|
| |              | In NIS                    
| |              | In foreign currencies     
| |              | (primarily in U.S. dollar)
| |              |                           
| |              |                           
| |              |                           

NOTE 4 -  TRADE RECEIVABLES

|                                         | Consolidated
|---------------------------------------- | ------------
|
|
|
|
|                                         |             
|Domestic                                 |             
|Open accounts                            |             
|Checks receivable                        |             
|                                         |             
|                                         |             
|                                         |             
|Foreign                                  |             
|Open accounts (primarily in u.s. dollar) |             
|Related parties                          |             
|                                         |             
|                                         |             
|                                         |             
|                                         |             
|Less - allowance for doubtful accounts   |             
|                                         |             
|                                         |             
|                                         |             

NOTE 5 -  OTHER RECEIVABLES

|                          | Consolidated | Company
|------------------------- | ------------ | -------
|
|
|
|
|
|Deferred taxes (Note 21D) |              | 6,899  
|Prepaid expenses          |              | 527    
|Advances to suppliers     |              | 2,642  
|Value Added Tax           |              | -      
|Income tax advances, net  |              | 207    
|Others                    |              | 597    
|                          |              |        
|                          |              | 10,872 
|                          |              |        

-15-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 6 -  INVENTORIES

|                                           | Consolidated |         | Company
|------------------------------------------ | ------------ | ------- | -------
|
|
|
|
|Raw and auxiliary materials                |              | 38,134  |        
|Finished products and goods in process (1) |             
|                                           |              | 78,725  |        
|                                           |              |         |        
|                                           |              | 116,859 |        
|                                           |              |         |        
|(1)   Includes products in transit         |              | 857     |        
|                                           |              |         |        
|The inventories are presented net of       |             
|provision for obsolescence                 |              | 715     |        
|                                           |              |         |        

| |  |  | (*) |  | Reclassified
| |  |  | --- |  | ------------

NOTE 7 -  INVESTMENTS IN
SUBSIDIARIES

|                                          | Company
|----------------------------------------- | -------
|
|
|
|
|Cost of shares                            |        
|Accumulated losses since acquisition, net |        
|                                          |        
|                                          |        
|                                          |        

|                                | Consolidated
|------------------------------- | ------------
|
|
|
|
|Cost                            |             
|Less - accumulated amortization |             
|                                |             
|                                |             
|                                |             

| | C. |  | Consolidated
Subsidiaries
| | -- |  | -------------------------

| | The
 consolidated  financial  statements  as of December 31,  2005,  include the financial
statements of the following Subsidiaries:
| | ------------------------------------------------------------------------------------------------------------------------------------

|                                           | Ownership and control
As of December 31,
2 0 0 5
|------------------------------------------ | ------------------------------------------------
|
|Mondi Business Paper Hadera Marketing Ltd. |                                                 
|Grafinir Paper Marketing Ltd.              |                                                 
|Yavnir (1999) Ltd.                         |                                                 
|Miterani Paper Marketing 2000 (1998) Ltd.  |                                                 

-16-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 8      -  FIXED ASSETS

|                            | Leasehold
Improvements | Machinery
and
Equipment | Motor
Vehicles | Office
Furniture,
Computers
And
Equipment | Total
|--------------------------- | ---------------------- | ----------------------- | -------------- | ----------------------------------------- | -----
|
|
|
|Consolidated                |                        |                         |                |                                           |      
|                            |                       
|Cost:                       |                       
|Balance - January 1, 2005   |                        | 3,724                   |                | 140,228                                   |      
|Changes during 2005:        |                       
|Additions                   |                        | -                       |                | 53,275                                    |      
|Dispositions                |                        | -                       |                | (370                                      | )    
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2005 |                        | 3,724                   |                | 193,133                                   |      
|                            |                        |                         |                |                                           |      
|Accumulated depreciation:   |                       
|Balance - January 1, 2005   |                        | 1,816                   |                | 28,755                                    |      
|Changes during 2005:        |                       
|Additions                   |                        | 388                     |                | 8,904                                     |      
|Dispositions                |                        | -                       |                | (187                                      | )    
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2005 |                        | 2,204                   |                | 37,472                                    |      
|                            |                        |                         |                |                                           |      
|Net book value:             |                       
|December 31, 2005           |                        | 1,520                   |                | 155,661                                   |      
|                            |                        |                         |                |                                           |      
|December 31, 2004           |                        | 1,908                   |                | 111,473                                   |      
|                            |                        |                         |                |                                           |      
|Company                     |                       
|                            |                       
|Cost:                       |                       
|Balance - January 1, 2005   |                        | 2,651                   |                | 138,904                                   |      
|Changes during 2005:        |                       
|Additions                   |                        | -                       |                | 53,275                                    |      
|Dispositions                |                        | -                       |                | (339                                      | )    
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2005 |                        | 2,651                   |                | 191,840                                   |      
|                            |                        |                         |                |                                           |      
|                            |                       
|Accumulated depreciation:   |                       
|Balance - January 1, 2005   |                        | 1,305                   |                | 27,928                                    |      
|Changes during 2005:        |                       
|Additions                   |                        | 265                     |                | 8,787                                     |      
|Dispositions                |                        | -                       |                | (157                                      | )    
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2005 |                        | 1,570                   |                | 36,558                                    |      
|                            |                        |                         |                |                                           |      
|Net book value:             |                       
|December 31, 2005           |                        | 1,081                   |                | 155,282                                   |      
|                            |                        |                         |                |                                           |      
|December 31, 2004           |                        | 1,346                   |                | 110,976                                   |      
|                            |                        |                         |                |                                           |      

-17-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 9     -  TRADE PAYABLES

|                                      | Consolidated |         | Company
|------------------------------------- | ------------ | ------- | -------
|
|
|
|
|In Israeli currency                   |              | 27,539  |        
|In foreign currency or linked thereto |             
|(primarily in u.s. dollar)            |              | 75,445  |        
|                                      |              |         |        
|                                      |              | 102,984 |        
|                                      |              |         |        

NOTE 10 -  OTHER PAYABLES AND
ACCRUED EXPENSES

|                        | Consolidated |        | Company |       
|----------------------- | ------------ | ------ | ------- | ------
|
|
|
|
|Accrued payroll and     |              |        |         |       
|related expenses        |              | 13,772 |         | 11,703
|Value Added Tax         |              | 1,030  |         | 3,366 
|Advances from customers |              | 448    |         | 862   
|NAG - Parent Company    |             
|(in u.s. dollar)        |              | 3,241  |         | 2,252 
|Interest payable        |              | 1,049  |         | 2,900 
|Forward transaction     |              | -      |         | 1,322 
|Other                   |              | 662    |         | 727   
|                        |              |        |         |       
|                        |              | 20,202 |         | 23,132
|                        |              |        |         |       

NOTE 11      - LONG-TERM BANK
LOANS

|                          |  | Consolidatedand Company |  |       
|------------------------- |  | ----------------------- |  | ------
|
|
|
|
|In U.S. dollar (**)       |  | 5.67                    |  | 21,221
|In NIS indexed to the CPI |  | 6.55                    |  | 16,828
|                          |  |                         |  |       
|                          |  |                         |  | 38,049
|Less - current maturities |  |                         |  | 16,242
|                          |  |                         |  |       
|                          |  |                         |  | 21,807
|                          |  |                         |  |       

| |  |  | (*) |  | Annual
average interest rate as of December 31, 2005.
| |  |  | --- |  | -----------------------------------------------------

| |  |  | (**) |  | As
of December 31, 2005, NIS 17,078 thousand bear                            interest based
on Libor plus + 0.5%-0.6%.
| |  |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------

-18-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 11      -LONG-TERM BANK
LOANS (cont.)

|                                 | Consolidated
and Company
|-------------------------------- | ------------------------
|
|
|
|                                 |                         
|Second year - 2007               |                         
|Third year - 2008                |                         
|Fourth year - 2009               |                         
|Fifth year (2010) and thereafter |                         
|                                 |                         
|+                                |                         
|                                 |                         

| | C. |  | According
to the loan agreements with the banks, as amended                      in the second
 half of 2005,  the  Company  is to  achieve,                      inter  alia,
 financial  ratio  at the end of each  audited                      fiscal year of total
 shareholders  equity (which  includes                      capital  notes to
 shareholders)  to total  assets to be no                      less than 23% (prior to
the  amendment,  the required ratio                      under the covenant was 30%).  In
case the Company  fails to                      fulfill these  covenants,  the banks are
entitled to demand                      early  repayment of the loans,  in whole or in
part.  As of                      December 31, 2005, the Company was in full  compliance
with                      the covenants  stipulated in the bank  agreements  and this
                     financial ratio amounted to 25.11%.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. |  | As
to a "negative pledge  agreement" signed by the Company,                      see Note
14B.
| | -- |  | ----------------------------------------------------------------------------------------------

| | E. |  | In
2004 and 2003, 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  122,000
 thousand.  Under  the  terms of the                      agreement, the credit facility
has no time limit. As of the                      balance sheet date, the Group utilized
NIS 85,887  thousand                      of the credit facility.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12 - CAPITAL NOTES TO
SHAREHOLDERS

| | The
capital  notes to  shareholders  are linked to the dollar and                bear no
interest.  According  to the terms of the capital  notes,                the  Company
 has the  ultimate  discretion  upon  the  dates  of                repayment  of  the
 capital  notes.  As  of  December  31,  2005,                management intends to repay
the capital note at their entirety by                the end of 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 13      -ACCRUED SEVERANCE
PAY, NET

| | Israeli
law and labor agreements  determine the obligations of the               Group to make
 severance  payments to dismissed  employees  and to               employees  leaving
 employment under certain other  circumstances.               The liability for severance
pay benefits, as determined by Israeli               Law,  is based upon  length of
 service  and the  employee's  most               recent  monthly  salary.  The liability
of the Group for severance               pay to its permanent  employees is covered by
current  deposits to               pension and severance funds. Accumulated amounts so
funded 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.  The amounts presented in the
balance               sheet as of December 31, 2005 reflects the severance pay liability
              in respect of temporary employees.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-19-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 14      -COMMITMENTS AND
CONTINGENT LIABILITIES

| | A. |  | Commitments:
| | -- |  | ------------

| |  | (1) |  | The
 Group  is  obligated  to pay  license  fees to a                            shareholder
- see Note 22B.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------

| |  | (2) |  | The
Company  and its  Subsidiaries  lease  certain of                            their
 facilities  under operating leases for varying                            periods with
 renewal  options  primarily  from AIPM.                            Future  minimum lease
rentals as of December 31, 2005                            are as follows:
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | Consolidated |        | Company |       
|---- | ------------ | ------ | ------- | ------
|
|
|2006 |              | 4,914  |         | 3,682 
|2007 |              | 4,914  |         | 3,682 
|2008 |              | 4,757  |         | 3,682 
|2009 |              | 3,682  |         | 3,682 
|     |              |        |         |       
|     |              | 18,267 |         | 14,728
|     |              |        |         |       

| | B. |  | Liens
| | -- |  | -----

| | To
secure  long-term bank loans and short-term bank credits                      (the
balance of which as of December, 31 2005 is NIS 38,049                      thousand),
 the Company  entered  into a "negative  pledge"                      agreement  under
 which the  Company  is  committed  not to                      pledge any of its assets,
 excluding fixed pledges relating                      to assets  financed by others,
 prior to the consent of the                      banks.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. |  | Guarantees
| | -- |  | ----------

| | The
Company  from time to time and in the  framework of its                      ongoing
operations provides guarantees, the amount of which                      as of December,
31 2005 was NIS 8,268 thousand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 15     - SHARE CAPITAL

| | A. |  | As
of December 31, 2005 and 2004, share capital is composed                      of ordinary
shares of NIS 1.00 par value each. Authorized -                      38,000 shares;
issued and paid up - 1,000 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.  See also                      Note 1A.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-20-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 16     -  NET SALES

|                      | Consolidated | Company
|--------------------- | ------------ | -------
|
|
|
|
|Industrial operations |              | 460,383
|Commercial operations |              | 202,955
|                      |              |        
|                      |              | 663,338
|                      |              |        

NOTE 17     -  COST OF SALES

|                                  | Consolidated | Company
|--------------------------------- | ------------ | -------
|
|
|
|
|Purchases (*)                     |              | 187,618
|Materials consumed                |              | 306,803
|Salaries and related expenses     |              | 36,391 
|Subcontracting                    |              | 5,898  
|Energy costs                      |              | 54,883 
|Depreciation                      |              | 9,607  
|Other manufacturing costs         |             
|and expenses (including rent)     |              | 29,939 
|                                  |              |        
|                                  |              | 631,139
|Change in finished goods ,        |             
|goods in process, and products in |             
|transit.(**)                      |              | (21,387
|                                  |              |        
|                                  |              | 609,752
|                                  |              |        

| |  |  | (*) |  | The
 purchases  of  the  Group  are  related  principally  to  commercial        operations.
| |  |  | --- |  | --------------------------------------------------------------------------------------------

| |  |  | (**) |  | Change
in raw and auxiliary materials are included in materials consumed.
| |  |  | ---- |  | -------------------------------------------------------------------------

-21-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 18     -  SELLING EXPENSES

|                                    | Consolidated | Company
|----------------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses       |              | 17,205 
|Packaging and shipping to customers |              | 16,719 
|Maintenance and rent                |              | 8,237  
|Transportation expenses             |              | 1,360  
|Advertising                         |              | 166    
|Commissions and license fees        |             
|to a shareholder                    |              | 1,164  
|Depreciation                        |              | 417    
|Other                               |              | -      
|                                    |              |        
|                                    |              | 45,268 
|                                    |              |        

NOTE 19     -  GENERAL AND
ADMINISTRATIVE EXPENSES

|                              | Consolidated | Company
|----------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses |              | 3,863  
|Office maintenance            |              | 169    
|Professional and              |             
|management fees               |              | 2,060  
|Depreciation                  |              | 74     
|Amortization of goodwill      |              | 623    
|Bad and doubtful debts        |              | (840   
|Other                         |              | 1,352  
|                              |              |        
|                              |              | 7,301  
|                              |              |        

NOTE 20     -  FINANCING INCOME
(EXPENSES), NET

|                                 | Consolidated | Company
|-------------------------------- | ------------ | -------
|
|
|
|
|Interest on long-term bank loans |              | 2,486  
|                                 |              |        
|Erosion of monetary assets and   |             
|liabilities, net                 |              | 5,630  
|                                 |              |        
|Forward transaction              |              | (1,497 
|                                 |              |        

-22-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 21    -  INCOME TAXES (TAXES
BENEFITS)

| | A. |  | The
Company and its  Subsidiaries are taxed according to the provisions          of The
 Income  Tax  Ordinance  and the  Income  Tax Law  (Inflationary          Adjustments),
 1985. The Company is an industrial company in conformity          with the Law for the
Encouragement of Industry (Taxes), 1969. The major          benefits  the  Company is
 entitled  to under  this law is  accelerated          depreciation rates.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Consolidated | Company
|------------------------------- | ------------ | -------
|
|
|
|
|                               
|Current taxes                   |              | 54     
|Taxes in respect of prior years |              | 36     
|Deferred taxes (E. below)       |              | (8,470 
|                                |              |        
|                                |              | (8,380 
|                                |              |        

| | C. |  | Reconciliation
of the Statutory Tax Rate to the Effective Tax Rate
| | -- |  | ------------------------------------------------------------------

|                                   | Consolidated | Company
|---------------------------------- | ------------ | -------
|
|
|
|
|Income (loss) before income taxes  |              | (11,786
|                                   |              |        
|                                   |             
|Statutory tax rate                 |              | 34     
|Tax computed by statutory tax      |             
|rate                               |              | (4,007 
|                                   |             
|Tax increments (savings)           |             
|due to:                            |             
|Non-deductible expenses            |              | 212    
|Non-taxable income                 |              | (22    
|Reduction in corporate tax rates - |             
|(E. below)                         |              | (3,888 
|Differences arising from           |             
|basis of measurement (*)           |              | (711   
|Prior years income taxes           |              | 36     
|                                   |              |        
|                                   |              | (8,380 
|                                   |              |        

| |  |  | (*) |  | For
2004 and  2005 -  Reported  Amounts  (NIS)  for  financial                   reporting
 purposes vis-a-vis the consumer price index for tax                   purposes;
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
 2003 -  U.S.  dollar  for  financial  reporting  purposes                   vis-a-vis
the Consumer Price Index for tax purposes.
| | -------------------------------------------------------------------------------------------------------------------------------------

-23-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 21     -  INCOME TAXES
(TAXES BENEFITS) (cont.)

| | D. |  | Deferred
Taxes
| | -- |  | --------------

|                                | Consolidated | Company
|------------------------------- | ------------ | -------
|
|
|
|
|Balance as of beginning of year |              | (21,470
|Changes during the year         |              | 4,582  
|Adjustment due to               |             
|change in income tax rates      |              | 3,888  
|                                |              |        
|Balance as of end of year       |              | (13,001
|                                |              |        

|                                            | Consolidated | Company
|------------------------------------------- | ------------ | -------
|
|
|
|
|Deferred taxes are presented in the         |              |        
|balance sheets as follows:                  |             
|                                            |             
|Other receivables and prepayments (Note 5): |             
|                                            |             
|Allowance for doubtful accounts             |              | 700    
|Vacation and recreation pay                 |              | 1,589  
|Carry forward tax losses                    |              | 4,609  
|                                            |              |        
|                                            |              | 6,899  
|                                            |              |        
|                                            |             
|Long-term liabilities:                      |             
|Depreciable fixed assets                    |              | (23,596
|Accrued severance pay, net                  |              | 13     
|Less- Carry forward tax losses              |              | 3,683  
|                                            |              |        
|                                            |              | (19,900
|                                            |              |        
|                                            |              | (13,001
|                                            |              |        

| | For
2005 -  Deferred  taxes were  computed  at rates  between  31%-25%,          primarily  -
25%.For 2004 -  Deferred  taxes were  computed  at rates  between  30%-34%,
         primarily - 30%.For 2003 - Deferred taxes were computed at 36%.
         Deferred taxes are recognized in respect of all carry forward losses of
         the Group, see F.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-24-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 21     -  INCOME TAXES
(TAXES BENEFITS) (cont.)

| | E. |  | Reduction
of Corporate Tax Rates
| | -- |  | --------------------------------

| | In
July 2005,  the  Israeli  Knesset  passed the Law for  Amending  the          Income Tax
Ordinance (No. 147), 2005,  according to which commencing in          2006 the  corporate
 income-tax  rate would be gradually  reduced,  for          which a 31% tax rate was
established, through 2010, in respect of which          a 25% tax rate was  established.
 The effect of this  amendment  on the          Group's  deferred  income tax provisions
is reflected by an increase of          NIS 3,888  thousand in income tax  benefit for
the year ended  December          31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | Carryforward
 tax  losses of the Group and the  Company  are NIS 26,814          thousand and NIS
27,250 thousand as of December 31, 2005, respectively.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. |  | The
 Company  and  its  Subsidiaries  have  tax  assessments  that  are          considered
final through the 2000 tax year.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------

NOTE 22     -  RELATED PARTIES
AND INTERESTED PARTIES

| | A. |  | Balances
with Related Parties and Subsidiaries
| | -- |  | ----------------------------------------------

|                                           | Consolidated | Company
|------------------------------------------ | ------------ | -------
|
|
|
|
|                                           |              |        
|Trade receivables - AIPM                   |              | -      
|                                           |              |        
|Trade receivables - related parties        |              | 12,135 
|                                           |              |        
|Trade payables - AIPM                      |              | 69,854 
|                                           |              |        
|Trade payables - related parties           |              | 4,032  
|                                           |              |        
|Other payables and accrued expenses - AIPM |              | 2,406  
|                                           |              |        
|Other payables and accrued expenses -      |             
|related parties                            |              | 3,241  
|                                           |              |        
|Capital notes to shareholders              |              | 18,412 
|                                           |              |        

-25-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 22     -  RELATED PARTIES
AND INTERESTED PARTIES (cont.)

| | B. |  | Transactions
With Related Parties and Subsidiaries
| | -- |  | --------------------------------------------------

|                                    | Consolidated | Company
|----------------------------------- | ------------ | -------
|
|
|
|
|                                    |              |        
|Sales to related parties            |              | 103,196
|                                    |              |        
|Sales to Subsidiaries               |              | -      
|                                    |              |        
|Cost of sales                       |              | 106,076
|                                    |              |        
|Selling expenses, net               |             
|(Participation in selling           |             
|expenses, net)                      |              | 5,969  
|                                    |              |        
|General and administrative expenses |              | 1,750  
|                                    |              |        
|Financing expenses (income), net    |              | 2,406  
|                                    |              |        

| | C. | (1) |  | The Company leases its premises from AIPM and render  services
                  (including  electricity,  water,  maintenance and professional
                  services) under agreements, which are renewed every year.
| | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | The
Group is obligated to pay  commissions and license fees to                   NAG.
| |  | --- |  | -------------------------------------------------------------------------------------

NOTE 23     -  DISCLOSURE AND
PRESENTATION OF FINANCIAL INSTRUMENTS

| | A. |  | Credit
Risk
| | -- |  | -----------

| | The
revenues of the Group's are derive from a large number of customers          mainly in
Israel  and in  Europe.  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  (including  amounts in foreign currency) are          deposited
with major commercial banks in Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | B. |  | Fair
Value of Financial Instruments
| | -- |  | -----------------------------------

| | The
 financial   instruments   of  the  Group   consist   primarily  of
         non-derivative  assets and liabilities.  Non-derivative  assets include
         cash  and cash  equivalents,  receivables,  other  current  assets  and
         long-term loans given.  Non-derivative  liabilities  include short-term
         bank credit, trade payables, other current liabilities, long-term loans
         from  banks and  capital  notes to  shareholders.  Due to the nature of
         these financial instruments,  their fair value, generally, is identical
         or close to the  value at which  they are  presented  in the  financial
         statements, unless stated otherwise.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair  value of the  long-term  loans  approximates  their  carrying          value, since
they bear interest at rates close to the prevailing market          rates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group  enters from time to time into  off-balance  sheet  financial          instruments
for hedging against currency and interest-rate risks.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

-26-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 24     -  COMPANY'S
FINANCIAL STATEMENTS IN NOMINAL VALUES                FOR TAX PURPOSES

| | A. |  | Balance
Sheets
| | -- |  | --------------

|                                           | Company
|------------------------------------------ | -------
|
|
|
|                                           |        
|Current Assets                             |        
|Cash and cash equivalents                  |        
|American Israeli Paper Mills Group, net    |        
|Other receivables                          |        
|Inventories                                |        
|                                           |        
|                                           |        
|                                           |        
|Long-Term Investments                      |        
|Investments in Subsidiaries                |        
|                                           |        
|Fixed Assets, net                          |        
|                                           |        
|Long -Term Assets                          |        
|Deferred Taxes                             |        
|                                           |        
|                                           |        
|                                           |        
|Current Liabilities                        |        
|Short  term bank credit                    |        
|Current maturities of long-term bank loans |        
|Capital notes to shareholders              |        
|Trade payables                             |        
|Subsidiaries                               |        
|Other payables and accrued expenses        |        
|                                           |        
|                                           |        
|                                           |        
|                                           |        
|Long term liabilities                      |        
|Long-term bank loans                       |        
|Capital notes to shareholders              |        
|Accrued severance pay, net                 |        
|                                           |        
|                                           |        
|                                           |        
|Shareholders' Equity                       |        
|                                           |        
|                                           |        
|                                           |        

-27-



---

# MONDI BUSINESS PAPER
HADERA LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 24     -  COMPANY'S
FINANCIAL STATEMENTS IN NOMINAL VALUES                FOR TAX PURPOSES (cont.)

| | B. |  | Statement
of Operations
| | -- |  | -----------------------

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|
|Net sales                                       |                        
|                                                |                        
|Cost of sales                                   |                        
|                                                |                        
|Gross profit                                    |                        
|                                                |                        
|Selling expenses                                |                        
|                                                |                        
|General and administrative expenses             |                        
|                                                |                        
|Operating profit (loss)                         |                        
|                                                |                        
|Financing (expenses) income, net                |                        
|                                                |                        
|Other income (expenses), net                    |                        
|                                                |                        
|Income (loss) before income tax benefits        |                        
|                                                |                        
|Income tax benefits                             |                        
|                                                |                        
|Income (loss) after income tax benefits         |                        
|                                                |                        
|Equity in net earnings (losses) of Subsidiaries |                        
|                                                |                        
|Net income (loss) for the year                  |                        
|                                                |                        

| | C. |  | STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
| | -- |  | ---------------------------------------------

|                            | Share
Capital | Premium | Retained
Earnings | Total 
|--------------------------- | ------------- | ------- | ----------------- | ------
|
|BALANCE - JANUARY 1, 2003   |               | 1       |                   | 41,125
|                            |              
|CHANGES DURING 2003:        |              
|Net income for the year     |               | -       |                   | -     
|                            |               |         |                   |       
|BALANCE - DECEMBER 31, 2003 |               | 1       |                   | 41,125
|                            |              
|CHANGES DURING 2004:        |              
|Net income for the year     |               | -       |                   | -     
|                            |               |         |                   |       
|BALANCE - DECEMBER 31, 2004 |               | 1       |                   | 41,125
|                            |              
|CHANGES DURING 2005:        |              
|Loss for the year           |               | -       |                   | -     
|                            |               |         |                   |       
|                            |              
|BALANCE - DECEMBER 31, 2005 |               | 1       |                   | 41,125
|                            |               |         |                   |       

-28-



---

Exhibit 19(a)(iii)

# HOGLA-KIMBERLY LTD.
                              FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2005

# HOGLA-KIMBERLY LTD.
                              FINANCIAL STATEMENTS                              AS OF
DECEMBER 31, 2005

# TABLE OF CONTENTS

|                                                        | 
|------------------------------------------------------- | 
|                                                        | 
|                                                        | 
|                                                        | 
|Report of Independent Registered Public Accounting Firm | 
|                                                        | 
|Financial Statements:                                   | 
|                                                        | 
|Balance Sheets                                          | 
|                                                        | 
|Statements of Operations                                | 
|                                                        | 
|Statements of Changes in Shareholders' Equity           | 
|                                                        | 
|Statements of Cash Flows                                | 
|                                                        | 
|Notes to the Financial Statements                       | 



---

| |                             
| | ----------------------------
| | Brightman Almagor           
| | 1 Azrieli Center            
| | Tel Aviv 67021              
| | P.O.B. 16593, Tel Aviv 61164
| | Israel                      
| | Tel: +972 (3) 608 5555      
| | Fax: +972 (3) 609 4022      
| | info@deloitte.co.il         
| | www.deloitte.com            

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders Of
Hogla-kimberly Ltd.

We have audited the  accompanying
 balance sheets of  HOGLA-KIMBERLY  LTD. ("the Company") as of December 31, 2005 and
2004, and the consolidated  balance sheets as of  such  dates,  and  the  related
 statements  of  operations,  changes  in shareholders' equity and cash flows - of the
Company and on a consolidated basis - for each of the three  years in the period  ended
 December  31,  2005.  These financial  statements are the responsibility of the
Company's Board of Directors and management.  Our  responsibility is to express an
opinion on these financial statements based on our audits.

We conducted  our audits in
 accordance  with  standards  of the Public  Company Accounting  Oversight Board (United
States) and with generally accepted auditing standards  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 consideration of internal  control  over  financial  reporting  as a basis  for
 designing  audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the  effectiveness  of the Company's  internal
 control over financial reporting. Accordingly, we express no such opinion. An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles used and
significant estimates made by the Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated
 financial statements referred to above present fairly, in all material respects, the
financial position - of the Company and on a  consolidated  basis - as of December  31,
 2005 and 2004,  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, 2005, 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.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position  of the Company and on a consolidated basis  as of December
31, 2005 and 2004, and the results of operations, changes in shareholders equity and
cash flows  of the Company and on a consolidated basis  for each of the three
years in the period ended December 31, 2005, in 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.

/s/ Brightman Almagor & Co. Brightman Almagor & Co. Certified
Public Accountants A Member Firm of Deloitte Touche Tohmatsu

Tel Aviv, Israel: March 2, 2006

-1-



---

HOGLA-KIMBERLY LTD.
                                                       BALANCE SHEETS
                                                     (NIS in thousands)

|                                           | Consolidated | Company
|------------------------------------------ | ------------ | -------
|
|
|
|                                           |              |        
|Current Assets                             |             
|Cash and cash equivalents                  |              | 3      
|Trade receivables                          |              | 4      
|Other receivables                          |              | 5      
|Inventories                                |              | 6      
|                                           |              |        
|                                           |              |        
|                                           |              |        
|Long-Term Investments                      |             
|Long-term bank deposit                     |              | 7      
|Capital note of shareholder                |              | 8      
|Investments in Subsidiaries                |              | 9      
|                                           |              |        
|                                           |              |        
|                                           |              |        
|Fixed Assets                               |              | 10     
|Cost                                       |              |        
|Less - accumulated depreciation            |              |        
|                                           |              |        
|                                           |              |        
|                                           |              |        
|Other Assets                               |             
|Goodwill                                   |              | 9B     
|Deferred taxes                             |              | 22     
|                                           |              |        
|                                           |              |        
|                                           |              |        
|                                           |              |        
|                                           |              |        
|Current Liabilities                        |             
|Short-term bank credit                     |              |        
|Current maturities of long-term bank loans |              | 13     
|Trade payables                             |              | 11     
|Other payables and accrued expenses        |              | 12     
|                                           |              |        
|                                           |              |        
|                                           |              |        
|Long-term Liabilities                      |             
|Long-term bank loans                       |              | 13     
|Deferred taxes                             |              | 22     
|                                           |              |        
|                                           |              |        
|Commitments and Contingent Liabilities     |              | 15     
|                                           |             
|Minority Interest                          |              |        
|                                           |              |        
|                                           |             
|Shareholders' Equity                       |             
|Share capital                              |              | 16     
|Capital reserves                           |              |        
|Translation adjustments relating to        |             
|foreign held autonomous Subsidiary (2)     |              |        
|Retained earnings                          |              |        
|                                           |              |        
|                                           |              |        
|                                           |              |        
|                                           |              |        
|                                           |              |        

(1)        
     See Note 2A(1).

(2)        
     See Note 2B.

|                                                        |                                                                       |                                             |                                            
|------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------- | -------------------------------------------
|/s/ T. Davis
T. DAVISChairman of the Board of Directors | /s/ Y. YerushalmiY. YERUSHALMIVice-Chairman of the Board of Directors | /s/ O. ArgovO. ARGOVChief Financial Officer | /s/ A. SchorA. SCHORChief Executive Officer
|                                                        |                                                                       |                                             |                                            
|                                                        |                                                                      

Approval date of the financial
statements: March 2, 2006.

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

-2-



---

HOGLA-KIMBERLY LTD.
                            STATEMENTS OF OPERATIONS                     (NIS in
thousands; except per share data)

|                                | Consolidated
Year Ended December 31, | Company
Year Ended December 31,
|------------------------------- | ------------------------------------ | -------------------------------
|
|
|Net sales                       |                                      | 17                             
|                                |                                     
|Cost of sales                   |                                      | 18                             
|                                |                                      |                                
|                                |                                     
|Gross profit                    |                                      |                                
|                                |                                     
|Selling and marketing           |                                     
|expenses                        |                                      | 19                             
|                                |                                     
|General and                     |                                     
|administrative expenses         |                                      | 20                             
|                                |                                      |                                
|                                |                                     
|Operating profit                |                                      |                                
|                                |                                     
|Financing income                |                                     
|(expenses), net                 |                                      | 21                             
|                                |                                     
|Other income, net               |                                      |                                
|                                |                                      |                                
|                                |                                     
|Income before income            |                                     
|taxes                           |                                      |                                
|                                |                                     
|Income taxes                    |                                      | 22                             
|                                |                                      |                                
|Income after income             |                                     
|taxes                           |                                      |                                
|                                |                                     
|Equity in net earnings (losses) |                                     
|of Subsidiaries                 |                                      |                                
|                                |                                     
|Minority interest in            |                                     
|earnings of Subsidiary          |                                      |                                
|                                |                                      |                                
|Net income for the year         |                                      |                                
|                                |                                      |                                
|                                |                                     
|Earnings per share (in NIS)     |                                      |                                
|                                |                                      |                                
|                                |                                     
|Number of shares used in        |                                     
|computation                     |                                      |                                
|                                |                                      |                                

| | (1) |  | See
Note 2A(1).
| | --- |  | ---------------

| | (2) |  | Adjusted
for changes in the exchange rate of the U.S dollar as                   of December 31,
2003.
| | --- |  | ------------------------------------------------------------------------------------------------------

-3-



---

HOGLA-KIMBERLY LTD.
                                        STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                                     (NIS in thousands)

|                             | Share
capital | Capital
reserves | Translation
adjustments
relating to
foreign held
autonomous
subsidiary | Retained
earnings | Dividend
declared
after
balance
sheet
date | Total 
|---------------------------- | ------------- | ---------------- | ---------------------------------------------------------------------- | ----------------- | ------------------------------------------ | ------
|Balance - January 1, 2003    |               |                  |                                                                        |                   |                                            |       
|(Adjusted Amounts (3))       |               | 28,788           |                                                                        | 156,799           |                                            | -     
|                             |              
|Changes During 2003:         |              
|                             |              
|Dividend paid                |               |                  |                                                                        |                   |                                            |       
|Net income for the year      |               |                  |                                                                        |                   |                                            |       
|                             |               |                  |                                                                        |                   |                                            |       
|Balance - December 31, 2003  |              
|(Adjusted Amounts (3))       |               | 28,788           |                                                                        | 156,799           |                                            | -     
|                             |              
|Changes During 2004:         |              
|                             |              
|Distribution of bonus shares |               | 250              |                                                                        | 23,615            |                                            |       
|Translation adjustments      |              
|relating to foreign held     |              
|autonomous Subsidiary(2)     |               |                  |                                                                        |                   |                                            | (3,377
|Net income for the year      |               |                  |                                                                        |                   |                                            |       
|                             |               |                  |                                                                        |                   |                                            |       
|Balance - December 31, 2004  |              
|(Reported Amounts (1))       |               | 29,038           |                                                                        | 180,414           |                                            | (3,377
|                             |              
|Changes during 2005:         |              
|Translation adjustments      |              
|relating to foreign held     |              
|autonomous Subsidiary (2)    |               |                  |                                                                        |                   |                                            | 3,995 
|Dividend paid                |               |                  |                                                                        |                   |                                            |       
|Net income for the year      |               |                  |                                                                        |                   |                                            |       
|                             |               |                  |                                                                        |                   |                                            |       
|                             |              
|Balance - December 31, 2005  |              
|(Reported Amounts (1))       |               | 29,038           |                                                                        | 180,414           |                                            | 618   
|                             |               |                  |                                                                        |                   |                                            |       

| | (1) |  | See
Note 2A(1).
| | --- |  | ---------------

| | (2) |  | See
Note 2B.
| | --- |  | ------------

| | (3) |  | Adjusted
for changes in the exchange rate of the U.S dollar as                   of December 31,
2003.
| | --- |  | ------------------------------------------------------------------------------------------------------

-4-



---

HOGLA-KIMBERLY LTD.
                                                  STATEMENTS OF CASH FLOWS
                                                     (NIS in thousands)

|                                       | Consolidated | Company 
|-------------------------------------- | ------------ | --------
|
|
|
|Cash flows - operating activities      |              |         
|Net income                             |              | 43,276  
|Adjustments to reconcile net income to |             
|net cash provided by operating         |             
|activities (Appendix A)                |              | (37,622 
|                                       |              |         
|Net cash provided by                   |             
|operating activities                   |              | 5,654   
|                                       |              |         
|Cash flows - investing activities      |             
|Withdrawal of long-term bank deposit   |              | 73,648  
|Capital notes and loans to Subsidiary  |              | -       
|Acquisition of fixed assets            |              | (44,634 
|Proceeds from sale of fixed assets     |              | 293     
|                                       |              |         
|Net cash provided by (used in)         |             
|investing activities                   |              | 29,307  
|                                       |              |         
|Cash flows - financing activities      |             
|Dividend paid                          |              | (43,619 
|Long-term loans received               |              | -       
|Repayment of long-term loans           |              | (94,437 
|Short-term bank credit                 |              | 21,475  
|                                       |              |         
|Net cash provided by                   |             
|(used in) financing activities         |              | (116,581
|                                       |              |         
|Translation adjustments of cash        |             
|and cash equivalents of foreign        |             
|held autonomous subsidiary (2)         |              | (193    
|                                       |              |         
|Increase (decrease) in cash and        |             
|cash equivalents                       |              | (81,813 
|Cash and cash equivalents -            |             
|beginning of year                      |              | 117,364 
|                                       |              |         
|Cash and cash equivalents -            |             
|end of year                            |              | 35,551  
|                                       |              |         

| | (1) |  | See
Note 2A(1).
| | --- |  | ---------------

| | (2) |  | See
Note 2B.
| | --- |  | ------------

| | (3) |  | Adjusted
for changes in the exchange rate of the U.S dollar as                   of December 31,
2003.
| | --- |  | ------------------------------------------------------------------------------------------------------

-5-

---

HOGLA-KIMBERLY LTD.
                                           APPENDICES TO STATEMENTS OF CASH FLOWS
                                                     (NIS in thousands)

|                                       | Consolidated | Company
|-------------------------------------- | ------------ | -------
|
|
|
|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                             |              | 4,424  
|Equity in net losses (earnings) of     |             
|Subsidiaries                           |              | -      
|Depreciation and amortization          |              | 25,162 
|Deferred taxes, net                    |              | (12,740
|Gain from sale of fixed assets         |              | (293   
|Effect of exchange rate                |             
|differences, net                       |              | 20     
|                                       |             
|Changes in assets and liabilities:     |             
|Decrease (increase) in trade           |             
|receivables                            |              | (41,401
|Increase in other receivables          |              | (18,974
|Increase in inventories                |              | (2,357 
|Increase in trade payables             |              | 6,167  
|Net change in balances with            |             
|related parties                        |              | (10,515
|Increase (decrease) in other           |             
|payables and accrued expenses          |              | 12,885 
|                                       |              |        
|                                       |              | (37,622
|                                       |              |        
|B. Non-cash activities                 |              |        
|                                       |             
|Acquisition of fixed assets on credit  |              | 37,617 
|                                       |              |        

| | (1) |  | See
Note 2A(1).
| | --- |  | ---------------

| | (2) |  | Adjusted
for changes in the exchange rate of the U.S dollar as                   of December 31,
2003.
| | --- |  | ------------------------------------------------------------------------------------------------------

-6-



---

# 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 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 which is
presented 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   by  the   Israeli
Securities Regulations (Preparation of Financial Statements), 1993.                                                                                      
| | Controlling Shareholder | - | as   defined   by  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                                                                                                                                                                           
| | Adjusted Amount         | - | see Note 2A(1) below.                                                                                                                                                                     
| | Reported Amount         |   | see Note 2A(1) below.                                                                                                                                                                     

| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. |  | The
financial statements of the Company are prepared in accordance with          the Israeli
 Securities  Regulations  (Preparation of Annual  Financial          Statements), 1993.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-7-



---

# 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 with
the exception of the  application of the provisions          of Standard No. 19 "Income
Taxes".
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. |  | Cessation
of Financial Statements Adjustment and Change to Reporting in          Reported Amounts -
Standard No. 12
| | -- |  | -------------------------------------------------------------------------------------------------------------------

| |  | (1) |  | Definitions
| |  | --- |  | -----------

| | Adjusted
 Amount-  historical  nominal  amount  adjusted  for                   changes in the
exchange rate of the U.S. dollar as of December                   31, 2003, in
 accordance  with Opinion No. 36 of the Institute                   of Certified Public
Accountants in Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reported
 Amount-  Adjusted  Amount  plus  amounts in nominal                   terms added
 subsequent to December 31, 2003, and less amounts                   subtracted after
that date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | General
| |  | --- |  | -------

| | In
January 2004, Israeli Accounting Standard No. 12 "Cessation                   of
 Financial   Statements   Adjustment"   came  into  effect.                   Following
 the  initial  implementation  of  Standard  No. 12,                   commencing
 January 1, 2004, the Group ceased the presentation                   of its financial
 statements based on nominal  historical cost                   adjusted  for the
 changes  in the  exchange  rate of the U.S.                   Dollar in  relation  to
the NIS.  Effective  with the  interim                   financial  statements  as  of
 March  31,  2004  and  for  the                   reporting  periods  thereafter,
 including  each of the  years                   ended  December  31,  2004,  and  2005
the  Group's  financial                   statements are prepared and presented in
Reported Amounts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comparative
 figures  included in these  financial  statements                   relating to the year
ended  December 31, 2003 are presented in                   Adjusted Amounts.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amounts at which non-monetary items are presented in these                   financial
 statements  do  not  necessarily   represent  their                   realization value
or economic value, but solely their Reported                   Amount.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company's  condensed  financial  information  in  nominal                   values,  on
 the  basis  of  which  the  Company's   financial                   statements  in
Reported  Amounts  and  Adjusted  Amounts  were                   prepared, are presented
in Note 25.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Principles
of Adjustment  Applicable for Financial  Statements                   Relating to
Reporting  Periods  Ended in December 31, 2005 and                   2004
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a. |  | Balance
Sheet Items
| |  |  | -- |  | -------------------

| | Non-monetary
 items (items whose balances  reflect  historical                   value at acquisition
or upon  establishment)  are presented at                   their  Adjusted   Amounts
 plus  additions  and   dispositions                   occurring   during  the  reporting
  period.   Additions  made                   subsequent  to  December  31, 2003 and
 dispositions  of items                   added   subsequent  to  such  date,  are
 presented  at  their                   historical  nominal value.  Dispositions  of
items added on or                   prior to December  31, 2003 are  presented  at their
 Adjusted                   Amount.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-8-

---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | A. |  | Cessation
of Financial Statements Adjustment and Change to Reporting in          Reported Amounts -
Standard No. 12 (cont.)
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Principles
of Adjustment  Applicable for Financial  Statements                   Relating to
Reporting  Periods  Ended in December 31, 2005 and                   2004 (Cont.)
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a. |  | Balance
Sheet Items (cont.)
| |  |  | -- |  | ---------------------------

| | Monetary
 items  (items  whose  balance  sheet amount                            reflects their
current value or realization  value at                            the  balance  sheet
 date)  are  presented  at  their                            nominal value as of the
balance sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in Subsidiaries and minority interest are                            presented based on
the financial  statements of these                            companies  prepared
 according  to  the  guidance  of                            Standard No. 12.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b. |  | Statement
of Operations Items
| |  |  | -- |  | -----------------------------

| | Income
 and  expenses  reflecting  transactions,  and                            financial
income and expenses, are presented at their                            nominal value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
and expenses deriving from non-monetary  items                            (mainly
depreciation and amortization) were presented                            in a manner
 corresponding to the presentation of the                            related
  non-monetary   balance   sheet   item,   as                            illustrated
above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company's  share and  minority  interest  in the                            results of
Subsidiaries  are determined  based on the                            financial
 statements  of  these  companies  prepared                            according to the
guidance of Standard No. 12.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Principles
of Adjustment  Applicable for Financial  Statements                   Relating to
Reporting  Periods Ended Through December 31, 2003
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 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
December 31,2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 item.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-9-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | B. |  | Translation
of Foreign Operations'  Financial Statements - Standard          No. 13
| | -- |  | -----------------------------------------------------------------------------------

| | In
January 2004, Israeli Accounting  Standard No. 13 "Effect of Changes          in Foreign
 Exchange Rates" came into effect.  This Standard  addresses          the translation of
 transactions  denominated in foreign  currency,  as          well as the  translation of
financial  statements of a foreign  entity,          for  inclusion in the financial
 statements  of the reporting  company.          Standard No. 13 supersedes
Clarifications No. 8 and 9 to Opinion No. 36          of the Institute of Certified
Public Accountants in Israel,  which were          nullified  on the date on which
 Accounting  Standard  No. 12 came into          effect, as described in A above.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (1) |  | Principles
of Translation  of Financial  Statements of Foreign                   Held Autonomous
Subsidiary Applicable for Financial Statements                   Relating to Reporting
 Periods  Ended in December 31, 2005 and                   2004
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  | Monetary
and  non-monetary  assets and liabilities of                            the  foreign
 entity are  translated  at the  closing                            rate.
| |  |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  | Statement
of operations  items and cash flow items of                            the foreign entity
are translated, in general, by the                            average  exchange  rate
 for  the  reporting  period,                            rather  than by the  closing
 rate as was  previously                            required under the applicable
 accounting  literature                            prior to the date in which  Standard
No. 13 came into                            effect (January 1, 2004).
| |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  | All
differences resulting from the translation of the                            foreign
entity's  financial  statements by the method                            described above,
are included in a separate component                            of shareholders'  equity
as "Translation  adjustments                            relating to foreign held
autonomous Subsidiary".
| |  |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  | Following
 the  implementation  of  Standard  No. 13,                            commencing
 January  2004  goodwill  derived  from an                            investment made in
another entity is to be treated as                            one  of  that  entity's
 assets.   Accordingly,   the                            goodwill  associated  with the
Group's  investment in                            Ovisan (a Subsidiary located in Turkey)
is translated                            to  NIS at  the  closing  rate,  rather  than
 at the                            exchange  rate at the date in which  said  investment
                           was  made,  as  was  previously  required  under  the
                           applicable  accounting  literature in effect  through
                           December 31, 2003.
| |  |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | Principles
of Translation  of Financial  Statements of Foreign                   Held Autonomous
Subsidiary Applicable for Financial Statements                   Relating to Reporting
Periods Ended in December 31, 2003
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of Subsidiaries operating abroad were                   prepared in
U.S.  dollars and translated into NIS based on the                   exchange rate of the
U.S. dollar as of the balance sheet date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-11-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | C. |  | Principles
of Consolidation
| | -- |  | ---------------------------

| | The
 consolidated  financial  statements  include  consolidation of the          financial
statements of the Company and all its Subsidiaries.  Material          inter-company
balances and transactions of and between Subsidiaries and          the Company 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
 consolidated  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. See also I below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. |  | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | Inventories
| | -- |  | -----------

| | Inventories
 are presented at the lower of cost or market  value,  with          cost determined as
follows:
| | ------------------------------------------------------------------------------------------------------------

| |  |                     | 
| |  | ------------------- | 
| |  | Finished products   | 
| |  | Raw, auxiliary      | 
| |  | materials and other | 

| | G. |  | 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 C above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-12-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | H. |  | 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                                           | 
|Leasehold improvements                              | 
|Machinery and equipment                             | 
|Motor vehicles                                      | 
|Office furniture and equipment                      | 

| | 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          Standard No. 15 of the Israeli Accounting
Standards Board,  "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  charge is  recorded  at the  amount  in which the
 carrying          amount of the asset exceeds its recoverable value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. |  | 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 C          above).  The amortization
 period and method were determined  following          the provisions of Standard No. 20
"The amortization Period of Goodwill"          which  calls for the  amortization  of
goodwill  over its useful  life,          based on a systematic method that should
reflect the estimated expected          period  in which  the  goodwill  is to
 contribute  economic  benefits.          Impairment  examinations  and  recognition are
performed and determined          based on the accounting policy outlined in H above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. |  | 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 the
 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-13-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | K. |  | Deferred
Income Taxes
| | -- |  | ---------------------

| | The
 Group  records  deferred  income  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          those that result from
depreciation  differences on leased property and          fixed  assets.  The Group
 records  deferred-tax  assets in  respect of          temporary differences 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  income
taxes are computed using the          tax rates expected to be in effect at realization
according to tax laws          that have been substantively enacted by the balance sheet
date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 computation  of deferred  income  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 dividend distributions within the          Group for cases in which such
dividend distributions are expected to be          tax-exempt.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. |  | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. |  | Revenue
Recognition
| | -- |  | -------------------

| | Revenues
are recognized upon shipment,  when title has been transferred          and
collectibility is reasonably assured.
| | --------------------------------------------------------------------------------------------------------------------------

| | Revenues
are  presented  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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. |  | Earnings
Per Share
| | -- |  | ------------------

| | Earnings
per share are computed based on the weighted average number of          shares
outstanding during the year.
| | --------------------------------------------------------------------------------------------------------------------

| | O. |  | 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) |  | Exchange-rate
  differences   are  charged  to  operations  as                   incurred.
| |  | --- |  | ------------------------------------------------------------------------------------------

-14-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | O. |  | Exchange
Rates and Linkage Basis (Cont.)
| | -- |  | ----------------------------------------

| |  | (3) |  | 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:
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|As of                  | Representative
Exchange
Rate of the Dollar
(Nis Per $1) | Turkish Lira Exchange
Rate Vis-a-vis the
U.s. Dollar
(Tl'000 Per $1) | CPI
"In Respect
Of"
(In Points)
|---------------------- | ------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------
|December 31, 2005      |                                                         | 4.603                                                                |                                
|December 31, 2004      |                                                         | 4.308                                                                |                                
|December 31, 2003      |                                                         | 4.379                                                                |                                
|                       |                                                        
|Increase (Decrease)    |                                                        
|during the year ended: |                                                         | %                                                                    |                                
|                       |                                                         |                                                                      |                                
|December 31, 2005      |                                                         | 6.8                                                                  |                                
|December 31, 2004      |                                                         | (1.6                                                                 | )                              
|December 31, 2003      |                                                        
|                       |                                                         | (7.6                                                                 | )                              

| | P. |  | Recent
Accounting Standards
| | -- |  | ---------------------------

| |  | (1) |  | Accounting
Standard No.22 "Financial  Instruments:  Disclosure                   and Presentation"
| |  | --- |  | --------------------------------------------------------------------------------------------------

| | In
July 2005, the Israeli Accounting  Standards Board approved                   for
 publication   Accounting   Standard  No.  22,  "Financial                   Instruments:
   Disclosure   and   Presentation".    Financial                   instrument  under
this  Standard is, in general,  any contract                   that  establishes  a
 financial  asset  of  an  entity,  or  a                   financial liability or equity
instrument of another entity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
Standard establishes the requirements for presentation of                   financial
  instruments   in  the  financial   statements  and                   indicates the
information that should be disclosed in relation                   thereto.   The
  presentation   requirements   relate  to  the                   classification  of
financial  instruments as financial assets,                   financial  liabilities  or
equity  instruments.  It also deals                   with the classification of related
interest, dividends, losses                   and  gains  and to the  circumstances
 under  which  financial                   assets and liabilities derived from financial
 instruments are                   to be offset. The Standard requires  disclosure of
information                   relating to factors affecting the amount, timing and
certainty                   of the  entity's  future  cash  flows  relating  to
 financial                   instruments  and accounting  policy  implemented in respect
of                   these instruments.  The Standard also establishes requirements
                  for disclosure of information  about the nature and the extent
                  of an entity's  use of  financial  instruments,  the  business
                  purposes  they  serve,  the  risks  associated  with  them and
                  management's policies for the oversight of those risks.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Standard
 No. 22 is effective  for  financial  statements  for                   periods
commencing January 1, 2006 or thereafter.  The initial                   adoption of the
Standard will be accounted for  prospectively.                   Comparative  financial
 statements for prior periods shall not                   be adjusted.  The Standard's
 effect on the Group's  financial                   position  and  results of  operations
 is not  expected  to be                   significant.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-15-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | P. |  | Recent
Accounting Standards (cont.)
| | -- |  | -----------------------------------

| |  | (2) |  | Accounting
Standard No.24 "Stock-based Compensation"
| |  | --- |  | ----------------------------------------------------

| | In
September  2005,  the Israeli  Accounting  Standards  Board                   published
 Accounting  Standard No. 24  "Share-Based  Payment"                   (the  "Standard"),
 which  calls  for the  recognition  in the                   financial statements of
share-based payment transactions. Such                   transactions  include
 transactions with employees and related                   parties to be settled by cash,
by other  assets,  or by equity                   instruments.   Consequently,   amongst
 other  matters,  costs                   associated with grants of shares and options to
employees will                   be expensed over the vesting period of each grant. These
costs                   will be  determined  based on the fair  value of the awards at
                  each grant  date.  The  Standard  establishes  guidelines  for
                  measuring each award based on the settlement  terms (either by
                  cash or equity  instrument).  The  Standard  also  establishes
                  certain  disclosure   requirements   relating  to  share-based
                  payment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is effective for financial statements for periods                   commencing
January 1, 2006 or thereafter  (initial adoption is                   recommended).  The
application of the Standard is not expected                   to affect the  Company's
 financial  position  and  results of                   operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Accounting
Standard No. 21 "Earnings Per Share"
| |  | --- |  | -----------------------------------------------

| | In
February  2006,  the  Israeli  Accounting  Standards  Board                   approved
for publication Accounting Standard No. 21, "Earnings                   Per Share" (the
"Standard").  With the initial adoption of the                   Standard,  Opinion No.
55 of the Institute of Certified Public                   Accountants  in Israel -
Earnings per share will be cancelled.                   The Standard  prescribes  that an
entity shall calculate basic                   earnings per share amounts for profit or
loss  attributable to                   ordinary   equity   holders  of  the  parent
 entity  and,  if                   presented,   profit   or  loss  from   continuing
  operations                   attributable to those equity  holders.  The basic earnings
per                   share  shall  be  calculated   by  dividing   profit  or  loss
                  attributable  to ordinary  equity holders of the parent entity
                  (the  numerator)  by the weighted  average  number of ordinary
                  shares  outstanding  (the  denominator)  during  the  reported
                  period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the purpose of calculating  diluted earnings per share, an                   entity shall
adjust  profit or loss  attributable  to ordinary                   equity holders of the
parent entity,  and the weighted average                   number of shares outstanding,
 for the effects of all dilutive                   potential ordinary shares.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is effective for financial statements for periods                   commencing
January 1, 2006 or thereafter. The initial adoption                   of the Standard
 will be  accounted  for  retrospectively  and                   comparative Earnings per
share data for prior periods shall be                   adjusted.  The  application of
the Standard is not expected to                   materially affect the Company's
Earnings per share data.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-16-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2      -  SIGNIFICANT
ACCOUNTING POLICIES (cont.)

| | P. |  | Recent
Accounting Standards (cont.)
| | -- |  | -----------------------------------

| |  | (4) |  | Accounting
Standard No. 25 "Revenues"
| |  | --- |  | -------------------------------------

| | In
February  2006,  the  Israeli  Accounting  Standards  Board                   approved
  for   publication   Accounting   Standard  No.  25,                   "Revenues" (the
"Standard").
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
Standard  establishes  the  requirements  for recognition                   criteria,
measurement, disclosure and presentation of revenues                   arising from sale
of goods, rendering of services and from the                   use by others of entity
assets  yielding  interest,  royalties                   and dividends.  This Standard
prescribes that revenue shall be                   measured  at the fair value of the
 consideration  received or                   receivable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is effective for financial statements for periods                   commencing
  January  1,  2006  or   thereafter.   Assets  and                   liabilities
  included  in  the  financial  statements  as  of                   December 31, 2005 in
 different  amounts from those that would                   have  been  presented  if
 the  standard's  requirements  were                   applied  will be adjusted on
January 1, 2006 to the amounts to                   be recognized in accordance  with the
 Standard's  guidelines.                   The  results of the  initial  adoption  of the
 Standard as at                   January  1,  2006  shall be  accounted  for by the
 cumulative                   effect of a change in accounting method.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company is currently evaluating the impact, if any, of the                   adoption of
the Standard on its financial position and results                   of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 3      -  CASH AND CASH
EQUIVALENTS

|                            | Consolidated | Company
|--------------------------- | ------------ | -------
|
|
|
|
|In NIS                      |              | 1,086  
|In foreign currencies       |             
|(Primarily the U.S. dollar) |              | 34,465 
|                            |              |        
|                            |              | 35,551 
|                            |              |        

-17-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 4      -  TRADE RECEIVABLES

|                                        | Consolidated | Company
|--------------------------------------- | ------------ | -------
|
|
|
|
|Domestic  - Open accounts               |              | 184,952
|- Checks receivable                     |              | 36,077 
|- Related parties (*)                   |              | 782    
|                                        |              |        
|                                        |              | 221,811
|                                        |              |        
|Foreign    - Open accounts              |              | 54,364 
|- Related parties                       |              | 668    
|                                        |              |        
|                                        |              | 55,032 
|                                        |              |        
|Less -  allowance for doubtful accounts |              | 276,843
|                                        |              | 18,944 
|                                        |              |        
|                                        |              | 257,899
|                                        |              |        

| |  |  | (*) |  | Balances
 with Israeli  related  parties are linked to the CPI                   and bear 4%
annual interest
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------

| | The
Company's products are marketed principally by its Subsidiaries.
| | --------------------------------------------------------------------

NOTE 5      -  OTHER RECEIVABLES

|                          | Consolidated | Company
|------------------------- | ------------ | -------
|
|
|
|
|Deferred taxes (Note 22D) |              | 8,207  
|Prepaid expenses          |              | 1,775  
|Advances to suppliers     |              | 7,549  
|Value Added Taxes         |              | 24,345 
|Income tax advances, net  |              | 16,230 
|Loans to employees        |              | 509    
|Other                     |              | 1,190  
|                          |              |        
|                          |              | 59,805 
|                          |              |        

-18-



---

# HOGLA-KIMBERLY
LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 6      -  INVENTORIES

|                            | Consolidated | Company
|--------------------------- | ------------ | -------
|
|
|
|
|
|Raw and auxiliary materials |              | 71,426 
|Finished goods              |              | 57,741 
|Spare parts and other       |              | 18,910 
|                            |              |        
|                            |              | 148,077
|                            |              |        

NOTE 7     -  LONG-TERM BANK
DEPOSIT

| | The
US dollar linked  deposit was held as collateral for long-term loan          received by
Subsidiary (see Note 15C) that was fully repaid on December          30,  2005.
 Consequently,  the Group  withdrew  the deposit at the same          time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 9     -  INVESTMENTS IN
SUBSIDIARIES

|                                                   | Company
|-------------------------------------------------- | -------
|
|
|
|A.   Composition                                   |        
|                                                  
|Cost of shares                                     |        
|Equity in post-acquisition earnings, net           |        
|Translation adjustments relating to                |        
|foreign held autonomous Subsidiary                 |        
|                                                   |        
|                                                   |        
|                                                   |        
|Long-term loans (1)                                |        
|Capital notes (2)                                  |        
|Translation adjustments on loans and capital notes |        
|                                                   |        
|                                                   |        
|                                                   |        
|                                                   |        
|                                                   |        

| |  |  | (1) |  | Non-interest
 bearing  loans,  denominated in Turkish                            Lira,  with all
 principle to be repaid in 2025.  See                            also C below.
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (2) |  | Non-interest
 bearing  capital notes,  denominated in                            U.S.  dollar.
 Repayment  dates  have  not  yet  been                            determined. See also C
below.
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Consolidated
|------------------------------- | ------------
|
|
|
|
|Cost                            |             
|Translation adjustments         |             
|                                |             
|                                |             
|Less - accumulated amortization |             
|                                |             
|                                |             
|                                |             

| | C. |  | Investment
in Kimberli Clark Tuketim Mallari Sanayi Ve Ticaret A.(S).          ("KCTR") (Formerly:
Ovisan)
| | -- |  | ----------------------------------------------------------------------------------------------------------

| | As
of December  31,  2005,  the Group's  investment  in KCTR (a Turkish          Subsidiary)
 amounted to NIS 4,358 thousand  (including  goodwill - see          above).  In the
recent  years KCTR  incurred  significant  losses  from          operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-19-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 9     -  INVESTMENTS IN
SUBSIDIARIES (cont.)

| | C. |  | Investment
in Kimberli Clark Tuketim Mallari Sanayi Ve Ticaret A.(S).          ("KCTR") (Formerly:
Ovisan) (cont.)
| | -- |  | ------------------------------------------------------------------------------------------------------------------

| | In
addition to the NIS 116.5 million the Company  provided KCTR in 2005          for the
 continuation  of its on  going  operations,  the  Company  has          committed to
financially support KCTR in 2006. Such finance support may          be  granted  to KCTR
 either by cash  injection,  long-term  loans,  or          guaranteed if required so by
banks  according to the financing needs of          KCTR.  The ability of KCTR to
continue as a  stand-alone  business unit          depends  significantly on the
occurrence of its  multiple-year  working          plan and on said financial support by
the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. |  | Consolidated
Subsidiaries
| | -- |  | -------------------------

| | The
consolidated  financial statements as of December 31, 2005, include          the
financial statements of the following Subsidiaries:
| | ----------------------------------------------------------------------------------------------------------------------------------------

|                                                      | Ownership And
Control as Of
December 31,
2005
|----------------------------------------------------- | ---------------------------------------------
|
|Rakefet Marketing and Trade Services Ltd. ("Rakefet") | (*)    79.7                                  
|Subsidiaries of Rakefet:                             
|Hogla-Kimberly Marketing Ltd. ("Marketing")           | (**)    99.5                                 
|Shikma Ltd. ("Shikma")                                | (**)    99.0                                 
|Subsidiary of Shikma                                 
|Kimberli Clark Tuketim Mallari Sanayi                 | 100.0                                        
|Ve Ticaret A.(S). ("KCTR")                           
|Mollet Marketing Ltd. ("Mollet")                      | 100.0                                        
|H-K Overseas (Holland) B.V                            | 100.0                                        
|Subsidiary of H-K Overseas (Holland) B.V.:           
|Hogla-Kimberly Holding Anonim Sirketi (***)           | 100.0                                        

| |  |  | (*) |  | 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.
| |  |  | ---- |  | ---------------------------------------------------------------------------------------------------------

| |  |  | (***) |  | During
 the year  ended  December  31,  2005 the  company  was                   dormant.
| |  |  | ----- |  | -----------------------------------------------------------------------------------------

| | E. |  | Supplemental
Data
| | -- |  | -----------------

| | On
December 30, 2005,  H-K Overseas  (Holland) B.V sold the entirety of          its
 holdings in KCTR to Shikma Ltd. in  consideration  for NIS 70,826.          The
 consideration  amount  was  determined  based  on  an  independent          appraisal,
and reflects a fair value of the transaction.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
 December  2005,  the Company  filed a request  with the Israeli Tax          Authority
 for the  merger of  Rakefet  and  Shikma  into the  Company.          According to the
merger  request,  the assets and liabilities of Shikma          and Rakefet will be
merged into those of the  Company,  and the Company          will issue shares to its
shareholders, KC and AIPM, in respect of their          holdings  in  Rakefet.  As  of
 the  approval  date  of  the  financial          statements,  the  Company's  request
 has not yet been  approved by the          Israeli Tax Authority.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-20-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 10 -  FIXED ASSETS

|CONSOLIDATED                | Buildings (1) | Leasehold
Improvements | Machinery
and
Equipment | Motor
Vehicles | Office
Furniture
And
Equipment | Total (2)
|--------------------------- | ------------- | ---------------------- | ----------------------- | -------------- | ------------------------------ | ---------
|
|Balance - January 1, 2005   |               | 56,884                 |                         | 9,713          |                                | 412,663  
|Changes during 2005:        |              
|Additions                   |               | 815                    |                         | 1,189          |                                | 37,090   
|Dispositions                |               | -                      |                         | -              |                                | (10,066  
|Foreign currency            |              
|translation adjustments     |               | 2,139                  |                         | 22             |                                | 2,002    
|                            |               |                        |                         |                |                                |          
|Balance - December 31, 2005 |               | 59,838                 |                         | 10,924         |                                | 441,711  
|                            |               |                        |                         |                |                                |          
|Accumulated Depreciation:   |              
|Balance - January 1, 2005   |               | 17,821                 |                         | 4,809          |                                | 178,265  
|Changes during 2005:        |              
|Additions                   |               | 1,074                  |                         | 573            |                                | 17,792   
|Dispositions                |               | -                      |                         | -              |                                | (10,066  
|Foreign currency            |              
|translation adjustments     |               | 299                    |                         | -              |                                | 879      
|                            |               |                        |                         |                |                                |          
|Balance - December 31, 2005 |               | 19,194                 |                         | 5,383          |                                | 186,848  
|                            |               |                        |                         |                |                                |          
|Net Book Value:             |              
|December 31, 2005           |               | 40,644                 |                         | 5,541          |                                | 254,863  
|                            |               |                        |                         |                |                                |          
|December 31, 2004           |               | 40,247                 |                         | 3,441          |                                | 235,674  
|                            |               |                        |                         |                |                                |          
|COMPANY                     |              
|Cost:                       |              
|Balance - January 1, 2005   |               | 25,291                 |                         | 7,611          |                                | 367,247  
|Changes during 2005:        |              
|Additions                   |               | -                      |                         | 59             |                                | 22,672   
|Dispositions                |               | -                      |                         | -              |                                | (10,066  
|                            |               |                        |                         |                |                                |          
|Balance - December 31, 2005 |               | 25,291                 |                         | 7,670          |                                | 379,853  
|                            |               |                        |                         |                |                                |          
|Accumulated Depreciation:   |              
|Balance - January 1, 2005   |               | 12,763                 |                         | 4,074          |                                | 152,372  
|Changes during 2005:        |              
|Additions                   |               | 473                    |                         | 274            |                                | 14,569   
|Dispositions                |               | -                      |                         | -              |                                | (10,066  
|                            |               |                        |                         |                |                                |          
|Balance - December 31, 2005 |               | 13,236                 |                         | 4,348          |                                | 156,875  
|                            |               |                        |                         |                |                                |          
|Net Book Value:             |              
|December 31, 2005           |               | 12,055                 |                         | 3,322          |                                | 222,978  
|                            |               |                        |                         |                |                                |          
|December 31, 2004           |               | 12,528                 |                         | 3,537          |                                | 214,875  
|                            |               |                        |                         |                |                                |          

| | (1) |  | Company
- leasehold  improvements  of industrial  buildings on                   lands leased by
the Company from AIPM (until 2005).  The lease                   agreements are renewed
annually.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | The
majority of the Group's fixed assets are located in Israel                   with the
remaining located in Turkey.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------

-21-



---

# HOGLA-KIMBERLY
LTD.                           NOTES TO FINANCIAL STATEMENTS

NOTE 11     -  TRADE PAYABLES

|                     | Consolidated | Company
|-------------------- | ------------ | -------
|
|
|
|
|In Israeli currency: |              |        
|Open accounts        |              | 114,140
|Related parties      |              | 19,690 
|In foreign currency: |             
|Open accounts        |              | 71,935 
|Related parties      |              | 10,007 
|                     |              |        
|                     |              | 215,772
|                     |              |        

NOTE 12     -  OTHER PAYABLES AND
ACCRUED EXPENSES

|                            | Consolidated | Company
|--------------------------- | ------------ | -------
|
|
|
|
|Accrued income taxes,       |              |        
|net of advances             |              | 12,621 
|Accrued payroll and related |             
|expenses                    |              | 24,101 
|Value Added Tax             |              | 5,462  
|Advances from customers     |              | 1,099  
|Other                       |              | 8,367  
|                            |              |        
|                            |              | 51,920 
|                            |              |        

NOTE 13     -  LONG-TERM BANK
LOANS

|                          |  | Consolidated     
|------------------------- |  | -----------------
|
|
|
|
|In U.S. dollar            |  | Libor + 1.22-1.63
|Less - current maturities |  |                  
|                          |  |                  
|                          |  |                  
|                          |  |                  

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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-22-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 15     -  COMMITMENTS AND
CONTINGENT LIABILITIES

| | A. |  | Commitments
| | -- |  | -----------

| |  | (1) |  | The
Group is obligated to pay royalties to a shareholder - see                   also 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, 2005 are as follows:
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | Consolidated | Company
|------------------- | ------------ | -------
|
|2006                |              | 14,695 
|2007                |              | 8,399  
|2008                |              | 7,548  
|2009                |              | 7,548  
|2010 and thereafter |              | 87,074 
|                    |              |        
|                    |              | 125,263
|                    |              |        

| | 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, 2005 amounted to NIS 87,273 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,  2005                   amounted to NIS 2,636
thousand.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. |  | Legal
Proceedings
| | -- |  | -----------------

| |  | (1) |  | The
 Company  received  on  December  7,  2003 a  claim  and a                   petition
that was filed in the Tel-Aviv district court for the                   approval of a
class action  against the Company.  According to                   the  petition  the
 Company has reduced the number of units of                   diapers in a package and
thus misled the public  according  to                   the Israeli Consumer  Protection
Act. The plaintiffs  estimate                   the  scope  of the  class  action  to be
NIS 18  million.  The                   Company rejects the claim and intends to defend
itself against                   the  action.  Based  on the  opinion  of the  Company's
 legal                   counsel for this matter,  the Company's  management is unable,
                  at  this  stage,  to  estimate  the  possible  outcome  of the
                  lawsuit.  However,  based on the legal counsels' opinion,  the
                  Company's  management  estimates  that the  Company  has valid
                  arguments  to oppose  the  lawsuit  and  reasonable  basis for
                  denying it from being recognized as a class action. Therefore,
                  no  provision  was  recorded in the  financial  statements  in
                  respect of this claim.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-23-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 15     -  COMMITMENTS AND
CONTINGENT LIABILITIES (cont.)

| | C. |  | Legal
Proceedings (cont.)
| | -- |  | -------------------------

| |  | (2) |  | In
February 2004, a former  customer  filed a lawsuit  against                   the
 Company.  This  lawsuit  is a part  from  multi-suppliers                   lawsuit,
 filed by the  customer  claiming for one billion NIS                   from the Company
and each other supplier for alleged  damages.                   The  customer  asked  for
 discharge  from  legal  fee and the                   request  was  denied.  Due to  the
 preliminary  stage  of the                   proceedings,  management  is unable to
estimate  the  possible                   outcome of the lawsuit.  However, based on the
Company's legal                   counsels,  management  estimates  that the  Company
 has valid                   arguments to oppose the lawsuit.  Therefore,  no provision
was                   recorded in the financial statements relating to this lawsuit.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | In
July 2005, Clubmarket Marketing Chains Ltd. ("Clubmarket"),                   a customer
of the Company and one of the largest retail groups                   in  Israel,
  applied  for  the  regional  court  in  Tel-Aviv                   ("Court") for a
staying of procedures by creditors.  The court                   protection was granted
until August 17, 2005. As a result,  in                   the second quarter of 2005 a
provision of NIS 10.6 million for                   doubtful  accounts  was  recorded,
 which is  included  in the                   general and  administrative  expenses  line
item. In the third                   quarter of 2005, Shufersal, Israel's biggest retail
chain, won                   a bid  supervised by the Court for the purchase of the
stores,                   operations and  inventories  of Clubmarket.  In December 2005,
                  the Court  approved a creditors  settlement  submitted  by the
                  trustees,  according  to which,  amongst  other  matters,  the
                  Company is to receive 51% of Clubmarket's debt to the Company.
                  The  settlement  is subject to various  conditions,  including
                  reaching an understanding between the trustees and the Company
                  about the exact amount  Clubmarket is to pay the Company,  and
                  crystallizing certain material issues between the trustees and
                  the  Israeli  Tax  Authorities.   Due  to  said  uncertainties
                  relating  to the exact  amounts  to be paid,  and based on the
                  opinions of the  Company's  legal  advisors  for this  matter,
                  management cannot estimate, at this stage, the exact payout of
                  Clubmarket's   debt  to  the  Company  as  a  result  of  said
                  settlement.  The  remaining  net balance of  Clubmarket  as of
                  December 31, 2005, that is in excess of the doubtful  accounts
                  provision   recorded   in   the   financial   statements,   is
                  approximately   NIS  5.3  million   (excluding   VAT),   which
                  represents approximately 25% of the balance as of such date.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 16     -  SHARE CAPITAL

| | A. |  | Composition
of Share Capital in Nominal NIS as of December 31, 2005 And          2004:
| | -- |  | --------------------------------------------------------------------------------------

|                                      | Number of Shares
|------------------------------------- | ----------------
|
|Ordinary Shares of NIS 1.00 par value |                 
|                                      |                 

| | B. |  | In
connection with the Company's approved enterprise program, following          the
 Company's  Board of  Directors  decision in  September  2004,  the          Company's
issued its shareholders in 2004,  250,000 bonus shares with a          premium of NIS
94.46 for each share.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-24-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 16     -  SHARE CAPITAL (cont)

| | C. |  | 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.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-25-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 17     -  NET SALES

|   | Consolidated
|-- | ------------
|
|
|
|
|A. |             
|   |             
|B. |             
|   |             
|C. |             
|   |             
|   |             
|   |             
|   |             

NOTE 18 -  COST OF SALES

|                              | Consolidated | Company
|----------------------------- | ------------ | -------
|
|
|
|
|Purchases (*)                 |              | 614,281
|Salaries and related expenses |              | 88,175 
|Manufacturing expenses        |              | 100,371
|Depreciation                  |              | 18,757 
|                              |              |        
|                              |              | 821,298
|Change in finished            |             
|goods inventory               |              | (583   
|                              |              |        
|                              |              | 820,715
|                              |              |        

| | (*) |  | The
 purchases of the Company are related to  manufacturing  operations.         Consolidated
purchases in excess of Company purchases relate principally         to commercial
operations.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-26-



---

# HOGLA-KIMBERLY LTD.NOTES
TO FINANCIAL STATEMENTS

NOTE 19     -  SELLING EXPENSES

|                                | Consolidated | Company
|------------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses   |              | 61,574 
|Maintenance and                 |             
|transportation expenses         |              | 40,153 
|Advertising and sales promotion |              | 49,375 
|Commissions to distributors     |              | 19,067 
|Royalties to a shareholder      |              | 22,703 
|Depreciation                    |              | 3,022  
|Other                           |              | 5,789  
|                                |              |        
|                                |              | 202,683
|                                |              |        

NOTE 20     -  GENERAL AND
ADMINISTRATIVE EXPENSES

|                                | Consolidated | Company
|------------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses   |              | 19,927 
|Administrative and computer     |             
|services                        |              | 9,189  
|Services provided by            |             
|Shareholder                     |              | 1,194  
|Office maintenance              |              | 4,804  
|Depreciation                    |              | 560    
|Goodwill amortization           |              | 3,030  
|Provision for doubtful accounts |             
|(see Note 15C(3))               |              | 10,327 
|Other                           |              | 7,252  
|                                |              |        
|                                |              | 56,283 
|                                |              |        

-27-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 21     -  FINANCING INCOME
(EXPENSES), NET

|                                 | Consolidated | Company
|-------------------------------- | ------------ | -------
|
|
|
|
|Interest on long-term bank loans |              | (6,330 
|                                 |              |        
|Exchange rate differences        |              | 3,092  
|                                 |              |        
|Interest from long-term and      |             
|short-term bank deposits         |              | 3,929  
|                                 |              |        

The majority of the  remaining
 balances of the  consolidated  financial  income (expenses)  for each of the periods
 presented  are  comprised of exchange  rate differences.

NOTE 22     -  INCOME TAXES

|                    | Consolidated | Company
|------------------- | ------------ | -------
|
|
|
|
|Current taxes       |              | 32,267 
|Taxes in respect of |             
|prior years         |              | -      
|Deferred taxes - D  |             
|below               |              | (12,740
|                    |              |        
|                    |              | 19,527 
|                    |              |        

| | B. |  | The
Company and its Israeli  Subsidiaries are subject to the Income Tax          Ordinance
 and 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),  1969. 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 was 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-28-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 22     -  INCOME TAXES
(cont.)

| | C. |  | Reconciliation
of the Statutory Tax Rate to the Effective Tax Rate:
| | -- |  | -------------------------------------------------------------------

|                                 | Consolidated | Company
|-------------------------------- | ------------ | -------
|
|
|
|
|Income before income taxes       |              | 67,228 
|                                 |              |        
|Statutory tax rate (see          |             
|E below)                         |              | 34     
|Tax computed by statutory tax    |             
|rate-                            |              | 22,858 
|Tax increments (savings) due to: |             
|Income in reduced tax rate       |              | 1,112  
|Non-deductible expenses          |              | 4,352  
|Non-taxable income               |              | (1,144 
|Unrecorded deferred taxes in     |             
|connection with tax loss carry   |             
|forward                          |              | 450    
|Utilization of prior years       |             
|unrecorded deferred taxes in     |             
|connection with tax loss carry   |             
|forward                          |              | -      
|Unrecorded deferred taxes in     |             
|connection with submitting       |             
|consolidated tax returns         |              | -      
|Reduction in corporate tax rates |             
|(E. below)                       |              | (5,361 
|Differences arising from         |             
|basis of measurement (*)         |              | (1,664 
|Income taxes for prior years     |              | -      
|Other differences, net           |              | (1,076 
|                                 |              |        
|                                 |              | 19,527 
|                                 |              |        

|(*) |  | For
2005 and 2004 - In  Israel,  Reported  Amounts  (NIS)  for                   financial
 reporting  purposes  vis-a-vis  the consumer  price                   index for tax
purposes;  In Turkey - U.S. dollar for financial                   reporting   purposes
  vis-a-vis  the  Turkish  Lira  for  tax                   purposes.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
 2003 -  U.S.  dollar  for  financial  reporting  purposes                   vis-a-vis
 the Consumer  Price Index in Israel and the Turkish                   Lira in Turkey for
tax purposes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-29-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 22     -  INCOME TAXES
(cont.)

| | D. |  | Deferred
Taxes
| | -- |  | --------------

|                          | Consolidated | Company
|------------------------- | ------------ | -------
|
|
|
|
|Balance as of             |              |        
|beginning of year         |              | 17,669 
|Changes during the year   |              | (7,473 
|Adjustment due to         |             
|change in income          |             
|tax rates                 |              | (5,361 
|Foreign currency          |             
|translation adjustments   |              | (1,035 
|                          |              |        
|Balance as of end of year |              | 3,800  
|                          |              |        

|                                     | Consolidated | Company
|------------------------------------ | ------------ | -------
|
|
|
|
|Deferred taxes are presented in the  |              |        
|balance sheets as follows:           |             
|Long-term liabilities (in respect of |             
|depreciable assets)                  |              | 38,566 
|Other receivables (in respect of     |             
|temporary differences) - Note 5      |              | (8,207 
|Other assets                         |              | (26,559
|                                     |              |        
|                                     |              | 3,800  
|                                     |              |        

| | For
2005 - Deferred  taxes were  computed at rates  between  26.5%-33%,          primarily  -
26.5%.          For 2004 -  Deferred  taxes were  computed  at rates  between  30%-34%,
         primarily - 30%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | Reduction
of Corporate Tax Rates
| | -- |  | --------------------------------

| | In
July 2005,  the Israeli  Knesset  passed the Law for  Amending the Income Tax Ordinance
(No. 147),  2005,  according to which commencing in 2006 the corporate income-tax  rate
 would  be  gradually  reduced,  for  which a 31% tax  rate was established,  through
2010, in respect of which a 25% tax rate was  established. For the effect of the
reduction in tax rates, see D. above.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | 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.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. |  | The
Company and its Israeli  Subsidiaries possess final tax assessments          through 2001.
| | -- |  | ----------------------------------------------------------------------------------------------

-30-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 23     -  RELATED PARTIES
AND INTERESTED PARTIES

| | A. |  | Balances
With Related Parties
| | -- |  | -----------------------------

|                             | Consolidated | Company
|---------------------------- | ------------ | -------
|
|
|
|
|Trade receivables (*)        |              | 1,450  
|                             |              |        
|Capital note - shareholder   |              | 32,770 
|                             |              |        
|Loans - Subsidiaries         |              | -      
|                             |              |        
|Capital notes - Subsidiaries |              | -      
|                             |              |        
|Trade payables (*)           |              | 29,536 
|                             |              |        

| | (*) |  | Company
- excludes  Subsidiaries  in Israel.  See also Notes 4                   and 11.
| | --- |  | ----------------------------------------------------------------------------------------

| | B. |  | Transactions
With Related Parties and Subsidiaries
| | -- |  | --------------------------------------------------

|                           | Consolidated | Company
|-------------------------- | ------------ | -------
|
|
|
|
|Sales to related parties   |              | 13,793 
|                           |              |        
|Sales to Subsidiaries      |              | -      
|                           |              |        
|Cost of sales              |              | 157,073
|                           |              |        
|Royalties                  |              | 23,703 
|                           |              |        
|General and administrative |             
|expenses (*)               |              | 9,381  
|                           |              |        
|Financing income, net (*)  |              | -      
|                           |              |        

| | (*) |  | Company
- excludes Subsidiaries in Israel.
| | --- |  | ------------------------------------------

-31-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

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 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
 financial   instruments   of  the  Group   consist   primarily  of
         non-derivative  assets and liabilities.  Non-derivative  assets include
         cash  and cash  equivalents,  receivables  and  other  current  assets.
         Non-derivative  liabilities  include  trade  payables and other current
         liabilities.  Due to the nature of these financial  instruments,  their
         fair value, generally, is identical or close to the value at which they
         are presented in the financial statements, unless stated otherwise.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the fact that as of December 31, 2005,  the terms of the capital          note of
shareholder do not include determined payment dates, fair value          based on present
values cannot be  established.  Accordingly,  the fair          value of the capital note
is not disclosed in the financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-32-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 25    -  COMPANY'S FINANCIAL
INFORMATION IN NOMINAL VALUES FOR TAX PURPOSES

| | A. |  | Balance
Sheets
| | -- |  | --------------

|                                    | Company
|----------------------------------- | -------
|
|
|
|Current Assets                      |        
|Cash and cash equivalents           |        
|Trade receivables                   |        
|Other receivables                   |        
|Inventories                         |        
|                                    |        
|                                    |        
|                                    |        
|Long-term Investments               |        
|Capital note of shareholder         |        
|Investments in Subsidiaries         |        
|                                    |        
|                                    |        
|                                    |        
|Fixed Assets, Net                   |        
|                                    |        
|                                    |        
|                                    |        
|Current Liabilities                 |        
|Short-term bank credit              |        
|Trade payables                      |        
|Other payables and accrued expenses |        
|                                    |        
|                                    |        
|                                    |        
|Shareholders' Equity                |        
|                                    |        
|                                    |        
|                                    |        

-33-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 25     -  COMPANY'S
FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX                PURPOSES (cont.)

| | B. |  | Statement
of Operations
| | -- |  | -----------------------

|                                    | Year Ended December 31,
|----------------------------------- | -----------------------
|
|
|Net sales                           |                        
|Cost of sales                       |                        
|                                    |                        
|Gross profit                        |                        
|Selling expenses                    |                        
|General and administrative expenses |                        
|                                    |                        
|Operating Profit                    |                        
|Financing income (expenses), net    |                        
|Other income, net                   |                        
|                                    |                        
|Income before income taxes          |                        
|Income taxes                        |                        
|                                    |                        
|Income After Income Taxes           |                        
|Equity in net earnings              |                        
|of Subsidiaries                     |                        
|                                    |                        
|Net income for the year             |                        
|                                    |                        

-34-



---

# HOGLA-KIMBERLY LTD.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 25     -  COMPANY'S
FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX                PURPOSES (cont.)

| | C. |  | Statements
of Changes in Shareholders' Equity
| | -- |  | ---------------------------------------------

|                             | Share
Capital | Capital
Reserves | Translation
Adjustments
Relating to
Foreign Held
Autonomous
Subsidiary | Retained
Earnings | Dividend
Declared
After
Balance
Sheet
Date | Total 
|---------------------------- | ------------- | ---------------- | ---------------------------------------------------------------------- | ----------------- | ------------------------------------------ | ------
|
|Balance - December 31, 2002  |               | 8,263            |                                                                        | 132,127           |                                            | -     
|Changes during 2003:         |              
|Dividend paid                |               |                  |                                                                        |                   |                                            |       
|Exchange rate differences of |              
|prior year declared dividend |              
|                             |               |                  |                                                                        |                   |                                            |       
|Net income for the year      |               |                  |                                                                        |                   |                                            |       
|                             |               |                  |                                                                        |                   |                                            |       
|Balance - December 31, 2003  |               | 8,263            |                                                                        | 132,127           |                                            | -     
|Changes during 2004:         |              
|Dividend paid                |              
|Distribution of bonus shares |               | 250              |                                                                        | 23,615            |                                            |       
|Translation adjustments      |              
|relating to foreign held     |              
|autonomous Subsidiary        |               |                  |                                                                        |                   |                                            | (3,377
|Net income for the year      |               |                  |                                                                        |                   |                                            |       
|                             |               |                  |                                                                        |                   |                                            |       
|Balance - December 31, 2004  |               | 8,513            |                                                                        | 155,742           |                                            | (3,377
|Changes during 2005:         |              
|Dividend paid                |               |                  |                                                                        |                   |                                            |       
|Translation adjustments      |              
|relating to foreign held     |              
|autonomous Subsidiary        |               |                  |                                                                        |                   |                                            | 3,995 
|Net income for the year      |               |                  |                                                                        |                   |                                            |       
|                             |               |                  |                                                                        |                   |                                            |       
|Balance - December 31, 2005  |               | 8,513            |                                                                        | 155,742           |                                            | 618   
|                             |               |                  |                                                                        |                   |                                            |       

-35-



---



# AUDITORS REPORT

# To the Shareholders of TMM INTEGRATED
RECYCLING INDUSTRIES LTD.

We
have audited the accompanying balance sheets of TMM Integrated Recycling Industries Ltd.
(the Company) as of December 31, 2005 and 2004 and the consolidated balance
sheets as of such dates and the related statements of operations, changes in
shareholders equity and cash flows  of the Company and consolidated  for
each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Companys board of directors and management.
Our responsibility is to express an opinion on these financial statements based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and in accordance with generally accepted auditing
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. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
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, 2005 and 2004, and the results of operations,
changes in shareholders equity and cash flows  of the Company and consolidated
 for each of the three years in the period ended December 31, 2005, in
conformity with 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
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in
conformity with Accounting Standards of the Israel Accounting Standards Board. The
financial statements for the year ended December 31, 2003, are presented in values that
were adjusted until that date according to the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of Certified
Public Accountants in Israel.





---



# AUDITORS REPORT

# To the Shareholders of BARTHELEMI HOLDINGS
LTD.

We
have audited the accompanying balance sheets of Barthelemi Holdings Ltd. (the
Company) as of December 31, 2005 and 2004 and the consolidated balance sheets as of
such dates and the related statements of operations, changes in shareholders equity
and cash flows  of the Company and consolidated  for each of the three years
in the period ended December 31, 2005. These financial statements are the
responsibility of the Companys board of directors and management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and in accordance with generally accepted auditing
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. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
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, 2005 and 2004, and the results of operations,
changes in shareholders equity and cash flows  of the Company and consolidated
 for each of the three years in the period ended December 31, 2005, in
conformity with generally accepted accounting principles in Israel.

As
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in
conformity with Accounting Standards of the Israel Accounting Standards Board. The
financial statements for the year ended December 31, 2003, are presented in values that
were adjusted until that date according to the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of Certified
Public Accountants in Israel.





---



# REPORT OF INDEPENDENT
PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# CARMEL CONTAINER
SYSTEMS LTD.

We
have audited the accompanying balance sheets of Carmel Container Systems Ltd. (the
Company) as of December 31, 2005 and 2004, and the consolidated balance sheets as of
such dates and the related statements of operations, changes in shareholders equity
and cash flows  Company and consolidated  for each of the three years in the
period ended December 31, 2005. These financial statements are the responsibility of the
Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
did not audit the financial statements of certain subsidiaries, whose assets constitute
approximately 10% and 8% of total consolidated assets as of December 31, 2005 and 2004,
respectively, and whose revenues constitute approximately 10%, 9% and 8% of total
consolidated revenues for the years ended December 31, 2005, 2004 and 2003,
respectively. The financial statements of those companies were audited by other auditors,
whose reports have been furnished to us, and our opinion, insofar as it relates to amounts
included for those companies, is based on the reports of the other auditors.

We
conducted our audits in accordance with generally accepted auditing 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 board of directors and
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, 2005 and 2004,
and the results of operations, changes in shareholders equity and cash flows 
of the Company and consolidated  for each of the three years in the period ended
December 31, 2005, in conformity with generally accepted accounting principles in Israel.

As
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in
conformity with Accounting Standards of the Israel Accounting Standards Board. The
financial statements for the year ended December 31, 2003, are presented in values that
were adjusted until that date according to the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of Certified
Public Accountants in Israel.

In
our opinion, based on our audits and the reports of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2005 and 2004, and the consolidated results of their operations and cash flows for each of
the three years in the period ended of December 31, 2005, in conformity with Israel
generally accepted accounting principles, which differ in certain respects from those
followed in the United States, as described in Note 22 to the consolidated financial
statements.





---

# Report of Independent
Registered Public Accounting Firm

To the shareholders of

# C.D. PACKGING SYSTEMS
LTD.

We have audited the balance sheets of
C.D. Packaging Systems ltd. (hereafter - the Company) and the consolidated financial
statements of the Company and its consolidated subsidiary: balance sheets as of
December 31, 2005 and 2004 and statements of income (loss), changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the responsibility of the
Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the aforementioned
financial statements present fairly, in all material respects, the financial position
 of the Company and consolidated  as of December 31, 2005 and 2004 and
the results of operations, changes in shareholders equity and cash flows  of
the Company and consolidated  for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
(GAAP) in Israel.

As applicable to these financial
statements Israeli GAAP and U.S. GAAP are practically identical in all material respects,
except for differences which are explained in note 12.

As explained in note 1b the financial
statements, as of dates and for reporting periods subsequent to December 31, 2003, are
presented in New Israeli Shekels, in conformity with accounting standards issued by the
Israel Accounting Standards Board. The financial statements as of dates and for reporting
periods ended prior to, or on the above date, are presented in values that have been
adjusted for the changes in general purchasing power of the Israeli currency, through that
date, in accordance with pronouncements of the Institute of Certified Public Accountants
in Israel.

/s/ Kesselman & Kesselman

Haifa    March
6 , 2006



---

Exhibit 19(a)(iv)

# 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 16, 2006, appearing in the 2005
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 17 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.

|                  |                                               
|----------------- | ----------------------------------------------
|Tel-Aviv,  Israel | /s/ Kesselman & KesselmanKesselman & Kesselman
|March 16, 2006    | Certified Public Accountants (Isr.)           



---

# Report of Independent
Registered Public Accounting Firm onthe U.S. GAAP Reconciliation (Information)

To the Board of Directorsof
American Israeli Paper Mills Ltd.

Our audits of the consolidated
financial statements referred to in our report dated March 16, 2006 appearing in the
Annual Report to Shareholders of American Israeli Paper Mills Ltd. included on page 69 of
this Form 20-F also included an audit of the U.S. GAAP reconciliation (information)
presented on pages 53-62 of this Form 20-F. In our opinion, based on our audits and the
reports of other auditors referred to in our opinion on the financial statements above,
this U.S. GAAP reconciliation (information) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated
financial statements.

PricewaterhouseCoopers

/s/ Kesselman & Kesselman

Tel Aviv, IsraelJune 28, 2006

---

Exhibit 19(a)(v)



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# RECONCILIATION OF
ISRAELI GAAP TO U.S. GAAP

T.M.M. Integrated
Recycling Industries Ltd. Tel Aviv

In
connection with our audits of the balance sheets of T.M.M. Integrated Recycling Industries
Ltd. (the Company) as of December 31, 2005 and 2004, and the related
statements of operations, changes in shareholders equity and cash flows for each of
the three years in the period ended December 31, 2005 (not presented separately herein),
we have also audited the information in the Reconciliation of Israeli GAAP to U.S. GAAP
(the Reconciliation). The Reconciliation is the responsibility of the
Companys management. Our responsibility is to express an opinion on the
Reconciliation based on our audits.

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 Reconciliation is free of material
misstatement. We were not engaged to perform an audit of the Companys internal
control over financial reporting. Our audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Reconciliation. An audit also includes
assessing the accounting principles used and significant estimates made by the management,
as well as evaluating the overall Reconciliation presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the information set forth in the Reconciliation presents fairly, in all
material respects, in relation to the financial statements of the Company taken as a
whole, the material differences between Israeli GAAP and U.S GAAP.



---

T.M.M. INTEGRATED
RECYCLING INDUSTRIES LTD.

# RECONCILIATION OF
ISRAELI GAAP TO U.S. GAAP (In thousands of NIS)

|                                                                                  |         |         
|--------------------------------------------------------------------------------- | ------- | --------
|A.        Shareholders' equity as of December 31, 2005 as reported in the         |         |         
|financial statements of the Company prepared in accordance with                  
|accounting principles generally accepted in Israel                                |         | 73,450  
|Adjustments to conform with accounting principles generally accepted in          
|the United States:                                                               
|Inflation adjustments                                                             | (713)   |         
|Capitalized start-up costs, net                                                   | (1,120) |         
|Amortization of goodwill                                                          | 8,135   |         
|                                                                                  |        
|                                                                                  |         | 6,302   
|                                                                                  |         |         
|Adjusted Shareholders' Equity in accordance with accounting principles            |         | 79,752  
|generally accepted in the United States                                          
|                                                                                  |         |         
|B.        Loss for the year ended December 31, 2005 as reported in the financial 
|statements of the Company prepared in accordance with accounting                 
|principles generally accepted in Israel                                           |         | (10,611)
|Adjustments to conform with accounting principles generally accepted in          
|the United States:                                                               
|Inflation adjustments                                                             | 537     |         
|Reversal of capitalized start-up costs, net                                       | 48      |         
|Amortization of goodwill                                                          | 1,896   |         
|                                                                                  |         | 2,481   
|                                                                                  |         |         
|Adjusted Loss for the year ended December 31, 2005 in accordance with            
|accounting principles generally accepted in the United States                     |         | (8,130) 
|                                                                                  |         |         
|C.        Changes in shareholders' equity for the year ended December 31, 2005 in
|accordance with accounting principles generally accepted in the                  
|United States                                                                    
|Balance as of January 1, 2005                                                     |         | 87,882  
|Net loss                                                                          |         | (8,130) 
|                                                                                  |         |         
|Balance as of December 31, 2005                                                   |         | 79,752  
|                                                                                  |         |         
|D.        Subsequent events (Unaudited)                                          

On March 7, 2006, the Company
announced that the Securities  Authority  (Israel) is conducting an  investigation,  the
       matter of which was not  divulged  to the  Company.  To the best of the  Company's
 knowledge,  the  president  of the        Company had been arrested and released under
 restricting  conditions.  The details related to the  investigation  are        unknown
to the Company.  The  Company's  management  is unable to assess the effect to the
 aforesaid,  if any, on the        Company.

|                 |                       |                    |                        
|---------------- | --------------------- | ------------------ | -----------------------
|June 22, 2006    | /s/ Henry Starkman    | /s/ Shalom Elkayam | /s/ Meir Sabag         
|                 |                       |                    |                        
|Date of approval | Henry Starkman        | Shalom Elkayam     | Meir Sabag             
|                 | Chairman of the Board | General Manager    | Chief Financial Officer



---

T.M.M. INTEGRATED
RECYCLING INDUSTRIES LTD.

# RECONCILIATION OF
ISRAELI GAAP TO U.S. GAAP (In thousands of NIS)

|                                                                     |         |       
|-------------------------------------------------------------------- | ------- | ------
|A.       Shareholders' equity as of December 31, 2004 as reported    |         |       
|in the financial statements of the Company prepared in              
|accordance with accounting principles generally accepted            
|in Israel                                                            |         | 84,061
|Adjustments to conform with accounting principles generally         
|accepted in the United States:                                      
|Inflation adjustments                                                | (1,250) |       
|Capitalized start-up costs, net of tax effect                        | (1,168) |       
|Amortization of goodwill                                             | 6,239   |       
|                                                                     |        
|                                                                     |         | 3,821 
|                                                                     |         |       
|Adjusted Shareholders' Equity in accordance with accounting         
|principles generally accepted in the United States                   |         | 87,882
|                                                                     |         |       
|B.       Net income for the year ended December 31, 2004 as reported
|in the financial statements of the Company prepared in              
|accordance with accounting principles generally accepted            
|in Israel                                                            |         | 603   
|Adjustments to conform with accounting principles                   
|generally accepted in the United States:                            
|Inflation adjustments                                                | 791     |       
|Reversal of capitalized start-up costs, net of tax effect            | (323)   |       
|Amortization of goodwill                                             | 2,080   |       
|                                                                     |        
|                                                                     |         | 2,548 
|                                                                     |         |       
|Adjusted net income for the year ended December 31, 2004            
|in accordance with accounting principles generally                  
|accepted in the United States                                        |         | 3,151 
|                                                                     |         |       
|C.        Changes in shareholders' equity for the year ended        
|December 31, 2004 in accordance with accounting                     
|principles generally accepted in the United States                  
|Balance as of January 1, 2004                                        |         | 84,731
|Net income                                                           |         | 3,151 
|Balance as of December 31, 2004                                      |         | 87,882
|                                                                     |         |       
|                                                                    



---

T.M.M. INTEGRATED
RECYCLING INDUSTRIES LTD.

# RECONCILIATION OF
ISRAELI GAAP TO U.S. GAAP (In thousands of NIS)

|                                                                   |         |        
|------------------------------------------------------------------ | ------- | -------
|A.       Shareholders' equity as of December 31, 2003 as reported  |         |        
|in the financial statements of the Company prepared in            
|accordance with accounting principles generally accepted          
|in Israel                                                          |         | 83,458 
|Adjustments to conform with accounting principles generally       
|accepted in the United States:                                    
|Inflation adjustments                                              | (2,041)
|Capitalized start-up costs, net of tax effect                      | (845)  
|Amortization of goodwill                                           | 4,159  
|                                                                   |         | 1,273  
|                                                                   |         |        
|Adjusted Shareholders' Equity in accordance with accounting       
|principles generally accepted in the United States                 |         | 84,731 
|                                                                   |         |        
|B.       Net loss for the year ended December 31, 2003 as reported
|in the financial statements of the Company prepared in            
|accordance with accounting principles generally accepted          
|in Israel                                                          |         | (3,098)
|Adjustments to conform with accounting principles                 
|generally accepted in the United States:                          
|Inflation adjustments                                              | 2,629  
|Reversal of capitalized start-up costs, net of tax effect          | (116)  
|Amortization of goodwill                                           | 2,080  
|                                                                   |         | 4,593  
|                                                                   |         |        
|Adjusted net income for the year ended December 31, 2003          
|in accordance with accounting principles generally                
|accepted in the United States                                      |         | 1,495  
|                                                                   |         |        
|C.       Changes in shareholders' equity for the year ended       
|December 31, 2003 in accordance with accounting                   
|principles generally accepted in the United States                
|Balance as of January 1, 2003                                      |         | 83,236 
|Net income                                                         |         | 1,495  
|                                                                   |         |        
|Balance as of December 31, 2003                                    |         | 84,731 
|                                                                   |         |        



---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# RECONCILIATION OF
ISRAELI GAAP TO U.S. GAAP

Barthelemi Holdings Ltd.Tel Aviv

In connection with our audits of the
balance sheets of Barthelemi Holdings Ltd. (the Company) as of December 31,
2005 and 2004, and the related statements of operations, changes in shareholders
equity and cash flows for each of the three years in the period ended December 31, 2005
(not presented separately herein), we have also audited the information in the
Reconciliation of Israeli GAAP to U.S. GAAP (the Reconciliation). The
Reconciliation is the responsibility of the Companys management. Our responsibility
is to express an opinion on the Reconciliation based on our audits.

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 Reconciliation is free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting. Our
audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the Reconciliation. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
Reconciliation presentation. We believe that our audits provide a reasonable basis for our
opinion.

In
our opinion, the information set forth in the Reconciliation presents fairly, in all
material respects, in relation to the financial statements of the Company taken as a
whole, the material differences between Israeli GAAP and U.S GAAP.



---

BARTHELEMI HOLDINGS LTD.

RECONCILIATION OF ISRAELI
GAAP TO U.S. GAAP(In thousands of NIS)

The financial statements of the
Company have been prepared in accordance with generally accepted accounting principles
applicable in Israel (Israeli GAAP). The Company presents the following information which
describes the material effects on the Companys results of operations and
shareholders equity had the Company prepared its financial statements in accordance
with accounting principles generally accepted in the U.S. (U.S. GAAP).

|                                                                                                                             |          |         
|---------------------------------------------------------------------------------------------------------------------------- | -------- | --------
|A.(1) Shareholders' equity as of December 31, 2005 as reported in the financial                                              |          |         
|statements of the Company prepared in accordance with accounting                                                            
|principles generally accepted  in Israel                                                                                     |          | 50,698  
|Adjustments to conform with accounting principles generally accepted in the                                                 
|United States:                                                                                                              
|Inflation adjustments                                                                                                        | (995)   
|Amortization of goodwill                                                                                                     | 20,230  
|Impairment of goodwill                                                                                                       | (12,300)
|Contingent consideration                                                                                                     | 1,378   
|Adjustment in respect of additional acquisition of T.M.M                                                                     | (166)   
|Capitalized start-up costs, net (T.M.M.)                                                                                     | (786)   
|Amortization of goodwill (T.M.M.)                                                                                            | 5,708   
|                                                                                                                             |          |         
|                                                                                                                             |          | 13,069  
|                                                                                                                             |          |         
|Adjusted shareholders' equity in accordance with accounting principles
              generally accepted in the United States |          | 63,767  
|                                                                                                                             |          |         
|(2) Loss for the year ended December 31, 2005 as reported in the financial                                                   |          |         
|statements of the Company prepared in accordance with accounting principles                                                 
|generally accepted in Israel                                                                                                 |          | (12,647)
|Adjustments to conform with accounting principles generally accepted in the                                                 
|United States:                                                                                                              
|Inflation adjustments                                                                                                        | (56)    
|Amortization of goodwill                                                                                                     | 5,261   
|Impairment of goodwill                                                                                                       | (7,300) 
|Reversal of capitalized start-up costs, net (T.M.M.)                                                                         | 34      
|Amortization of goodwill (T.M.M.)                                                                                            | 1,330   
|                                                                                                                             |         
|                                                                                                                             |          | (731)   
|                                                                                                                             |          |         
|Adjusted loss for the year ended December 31, 2005 in accordance with                                                       
|accounting principles generally accepted in the United States                                                                |          | (13,378)
|                                                                                                                             |          |         

---

BARTHELEMI HOLDINGS LTD.

RECONCILIATION OF ISRAELI
GAAP TO U.S. GAAP(In thousands of NIS)

|                                                                               |  |         
|------------------------------------------------------------------------------ |  | --------
|                                                                               |  |         
|(3)   Changes in shareholders' equity for the year ended December 31,          |  |         
|accordance with accounting principles generally accepted in the United States:
|Balance as of January 1, 2005                                                  |  | 77,145  
|Net loss                                                                       |  | (13,378)
|                                                                               |  |         
|Balance as of December 31, 2005                                                |  | 63,767  

(4)
     Subsequent event (Unaudited)

| | On
March 7, 2006, Tamam announced that the Securities Authority is conducting an
investigation, the matter of which was not divulged to Tamam. To the best of Tamams
knowledge, the president of Tamam had been arrested and released under restricting
conditions. The details related to the investigation are unknown to Tamam. Tamams
management is unable to assess the effect to the aforesaid, if any.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                 |                |                 
|---------------- | -------------- | ----------------
|June 22 , 2006   | /s/ Shaul Maoz | /s/ Israel Eldar
|                 |                |                 
|Date of approval | Shaul Maoz     | Israel Eldar    
|                 | Director       | Director        

 2 

---

BARTHELEMI HOLDINGS LTD.

RECONCILIATION OF ISRAELI
GAAP TO U.S. GAAP(In thousands of NIS)

|                                                                                                                                                 |         |        
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------- | -------
|B.(1) Shareholders' equity as of December 31, 2004 as reported in the financial                                                                  |         |        
|statements of the Company prepared in accordance with accounting                                                                                
|principles generally accepted in Israel                                                                                                          |         | 63,344 
|Adjustments to conform with accounting principles generally accepted in the                                                                     
|United States:                                                                                                                                  
|Inflation adjustments                                                                                                                            | (938)  
|Amortization of goodwill                                                                                                                         | 14,970 
|                                                                                                                                                 |        
|Impairment of goodwill                                                                                                                           | (5,000)
|Contingent consideration                                                                                                                         | 1,378  
|Adjustment in respect of additional acquisition of T.M.M                                                                                         | (166)  
|Capitalized start-up costs, net of tax effect (T.M.M.)                                                                                           | (820)  
|Amortization of goodwill (T.M.M.)                                                                                                                | 4,377  
|                                                                                                                                                 |        
|                                                                                                                                                 |         | 13,801 
|                                                                                                                                                 |         |        
|Adjusted shareholders' equity in accordance with accounting principles
             generally accepted in the United States                      |         | 77,145 
|                                                                                                                                                 |         |        
|(2) Loss for the year ended December 31, 2005 as reported in the financial                                                                       |         |        
|statements of the Company prepared in accordance with accounting principles                                                                     
|generally accepted in Israel                                                                                                                     |         | (4,713)
|Adjustments to conform with accounting principles generally accepted in the                                                                     
|United States:                                                                                                                                  
|Inflation adjustments                                                                                                                            | 457    
|Amortization of goodwill                                                                                                                         | 5,239  
|                                                                                                                                                 |        
|Impairment of goodwill                                                                                                                           | (5,000)
|Reversal of capitalized start-up costs, net of tax effect (T.M.M.)                                                                               | (227)  
|Amortization of goodwill (T.M.M.)                                                                                                                | 1,459  
|                                                                                                                                                 |        
|                                                                                                                                                 |         | 1,928  
|                                                                                                                                                 |         |        
|Adjusted loss for the year ended December 31, 2004 in accordance with
             accounting principles generally accepted in the United States |         | (2,785)
|                                                                                                                                                 |         |        
|(3)   Changes in shareholders' equity for the year ended  December 31, 2004 in                                                                  
|accordance with accounting principles generally accepted in the United States:                                                                   |         |        
|Balance as of January 1, 2004                                                                                                                    |         | 79,930 
|Net loss                                                                                                                                         |         | (2,785)
|                                                                                                                                                 |         |        
|Balance as of December 31, 2004                                                                                                                  |         | 77,145 
|                                                                                                                                                 |         |        

 3 

---

BARTHELEMI HOLDINGS LTD.

RECONCILIATION OF ISRAELI
GAAP TO U.S. GAAP(In thousands of NIS)

|                                                                                                                                                               |         |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------
|C.(1) Shareholders' equity as of December 31, 2003 as reported in the financial                                                                                |         | 68,057 
|statements of the Company prepared in accordance with accounting                                                                                              
|principles generally accepted  in Israel                                                                                                                      
|Adjustments to conform with accounting principles generally accepted in                                                                                       
|the United States:                                                                                                                                            
|Inflation adjustments                                                                                                                                          | (1,395)
|Amortization of goodwill                                                                                                                                       | 9,731  
|                                                                                                                                                               |        
|Contingent consideration                                                                                                                                       | 1,378  
|Adjustment in respect of additional acquisition of T.M.M                                                                                                       | (166)  
|Capitalized start-up costs, net of tax effect (T.M.M.)                                                                                                         | (593)  
|Amortization of goodwill (T.M.M.)                                                                                                                              | 2,918  
|                                                                                                                                                               |        
|                                                                                                                                                               |         | 11,873 
|                                                                                                                                                               |         |        
|Adjusted shareholders' equity in accordance with accounting principles                                                                                         |         | 79,930 
|                                                                                                                                                               |         |        
|generally accepted in the United States                                                                                                                       
|(2)    Loss for the year ended December 31, 2003 as reported in the financial
             statements of the Company prepared in accordance with accounting   
|principles generally accepted in Israel                                                                                                                        |         | (7,012)
|Adjustments to conform with accounting principles generally accepted in the                                                                                   
|United States:                                                                                                                                                
|Inflation adjustments                                                                                                                                          | 1,994  
|Amortization of goodwill                                                                                                                                       | 4,902  
|                                                                                                                                                               |        
|Reversal of capitalized start-up costs, net of tax effect (T.M.M.)                                                                                             | (76)   
|Amortization of goodwill (T.M.M.)                                                                                                                              | 1,385  
|                                                                                                                                                               |        
|                                                                                                                                                               |         | 8,205  
|                                                                                                                                                               |         |        
|Adjusted net income for the year ended December 31, 2003 in accordance with
             accounting principles generally accepted in the United States         |         | 1,193  
|                                                                                                                                                               |         |        
|(3)   Changes in shareholders' equity for the year ended December 31, 2003
             accordance with accounting principles generally accepted in the United
|States:                                                                                                                                                       
|Balance as of January 1, 2003                                                                                                                                  |         | 78,737 
|Net income                                                                                                                                                     |         | 1,193  
|                                                                                                                                                               |         |        
|Balance as of December 31, 2003                                                                                                                                |         | 79,930 
|                                                                                                                                                               |         |        

 4 



---

|Date: |  | March
5, 2006
|----- |  | -------------

|Our ref: |  | 802921
|-------- |  | ------

|To: |  | Mondi
Business Paper Hadera Ltd.Hadera
|--- |  | --------------------------------------

Gentlemen,

| | Re: |  | US
GAAP Adjustments Report as of December 31, 2005 and for
the year then ended
| | --- |  | ------------------------------------------------------------------------------



Pursuant to your request and as the
independent accountants of Mondi Business Paper Hadera Ltd. (the Company), we
have audited the Companys US GAAP Adjustments Report as of December 31, 2005 and
2004 and for each of the two years then ended (the Report). The Report, which
is enclosed herewith, marked by our Firms identification seal, is the responsibility
of the Companys board of directors and management.

The Companys US GAAP
adjustments Report as of December 31, 2003 and for the year then ended was audited by
other auditors whose report, dated March 10, 2004, expressed an unqualified opinion on the
US GAAP adjustments contained in the Report .

We conducted our audit in accordance
with standards of the Public Company Accounting Oversight Board (United States) and with
generally accepted auditing standards 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 Report is free
of material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the Report, assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as evaluating
the overall Report presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the Report referred
to above present fairly, in all material respects, the adjustments required to present the
financial position of the Company as of December 31, 2005 and 2004, and the results of
operations and changes in shareholders equity for each of the two years then ended,
in accordance with generally accepted accounting principles in the United States of
America.

Sincerely,

/s/ Brightman Almagor
& Co.Brightman Almagor & Co.Certified Public Accountants



---

# Report of Independent
Registered Public Accounting Firm on Reconciliationof Israeli GAAP to U.S. GAAP

To the Shareholders ofMondi Business Paper Hadera Ltd.
(formerly: Neusiedler Hadera Paper Ltd.)

In connection with our audits of the
consolidated statements of income, changes in shareholders equity and cash flows for
the year ended December 31, 2003 of Mondi Business Paper Hadera Ltd. (the
Company), included in the 2005 financial statements of the Company which are
incorporated in this Form 20-F and regarding which, we have expressed an unqualified
opinion, dated March 10, 2004, we have also audited the information included in the
Reconciliation of Israeli GAAP to U.S. GAAP listed under U.S. GAAP Adjustment Report
(hereafter  Reconciliation). The Reconciliation is the responsibility of the
Companys Board of directors and management. Our responsibility is to express an
opinion on the Reconciliation based on our audits.

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, the reconciliation
present fairly, in all material respects, the adjustments required to present the
Companys net income for the year December 31, 2003, in order for them to be
presented in accordance with accounting principles generally accepted in the United
States.

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



---



# Mondi Business Paper
Hadera Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

The consolidated financial statements
of Mondi Business Paper Hadera Ltd. (the Company) as of December 31, 2005 and
2004 and for each of the three years in the period ended December 31, 2005, have been
prepared in accordance with generally accepted accounting principles (GAAP)
applicable in Israel. The following describes major effects on the Companys
consolidated financial statements, had the Company prepared its financial statements in
accordance with GAAP applicable in the United States of America.

|1. |  | Significant
accounting policies
|-- |  | -------------------------------

| | A. |  | Goodwill
| | -- |  | --------

| | According
to Israeli GAAP, goodwill is to be amortized over its useful life that reflects the
period in which the goodwill is to contribute economic benefits. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2006, the Israeli Accounting Standards Board published standard No. 20, Goodwill
and Intangible Assets Arising from Investments in Investee Company (Revised) that
calls for ceasation of the goodwill amortization, commencing January 1, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. |  | Basis
of Measurement  Adjusted NIS vis-a-vis Nominal NIS
| | -- |  | ---------------------------------------------------------

| | According
to Israeli GAAP, the financial statements of the Group through December 31, 2003 were
presented based on nominal historical cost adjusted for the changes in the exchange rate
of the U.S. Dollar in relation to the NIS based on the principles presented in Note 2A(4)
to the Companys financial statements as of December 31, 2005, while according to US
GAAP, the financial statements are to be presented in nominal historical terms.
Accordingly, the effect of the difference in the basis of measurement on the Groups
financial position and results of operations is excluded for the U.S. GAAP presentation.
As presented in Note 2A to the Companys financial statements as of December 31,
2005, commencing January 1, 2004, the Group ceased the presentation of its financial
statements based adjusted NIS, and effective with the financial statements as of December
31, 2004 and 2005, the Groups financial statements are prepared and presented in
Reported Amounts, as defined in Note 2A(1) to the Companys financial statements as
of December 31, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

# Mondi Business Paper
Hadera Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

|1. |  | Significant
accounting policies (cont.)
|-- |  | ---------------------------------------

| | C. |  | Relevant
recent accounting pronouncements by the FASB
| | -- |  | -----------------------------------------------------

| |  | (1) |  | SFAS
No. 151  Inventory Costs, an Amendment of ARB No. 43, Chapter                4
 In November 2004 the FASB issued SFAS No. 151,                Inventory
Costs, an Amendment of ARB No. 43, Chapter 4". SFAS                No. 151 amends
the guidance in ARB 43, Chapter 4, Inventory Pricing,                which
provides guidance on the allocation of certain costs to inventory. SFAS
               151 clarifies that abnormal amounts of idle facility expense, freight,
handling                costs, and wasted material (spoilage) should be recognized as
current-period                charges. In addition, SFAS 151 requires that allocation of
fixed production                overheads to the costs of conversion be based on the
normal capacity of the                production facilities. The provisions of this
statement are effective for                inventory costs incurred during fiscal years
beginning after June 2005. The                provisions of this statement shall be
applied prospectively. This application of                this Standard did not have a
material effect on the Companys financial                position or results of
operations.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | SFAS
153, Exchange of Non-Monetary Assets In                December 2004, the FASB
issued SFAS No. 153, Exchanges of Nonmonetary                Assets an amendment of
APB No. 29". This Statement amends Opinion 29 to                eliminate the
exception for nonmonetary exchanges of similar productive assets                and
replaces it with a general exception for exchanges of nonmonetary assets
               that do not have commercial substance. The Statement specifies that a
               nonmonetary exchange has commercial substance if the future cash flows of
the                entity are expected to change significantly as a result of the
exchange. This                Statement is effective for nonmonetary asset exchanges
occurring in fiscal                periods beginning after June 15, 2005. Earlier
application is permitted for                nonmonetary asset exchanges occurring in
fiscal periods beginning after the date                this Statement is issued.
Retroactive application is not permitted. The adoption                of this Standard
did not affected the Companys financial position or                results of
operations.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | SFAS
No. 154, Accounting Changes and Error Corrections This                Statement,
published in May 2005, replaces APB Opinion No. 20, Accounting                Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim
               Financial Statements, and changes the requirements for the accounting for
and                reporting of a change in accounting principles. This Statement applies
to all                voluntary changes in accounting principles, and to changes required
by an                accounting pronouncement in the unusual instance that the
pronouncement does not                include specific transition provisions.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Opinion
 20 previously required that most voluntary changes in accounting principles be
recognized by including the cumulative effect of changing to the new accounting
principles in the net income of the period of the change. This Statement requires
retrospective application to prior periods financial statements of changes in
accounting principles, unless it is impracticable to determine the specific effects or
the cumulative effect of the change. The Statement also provides guidance for cases in
which it is impracticable to determine the period-specific effects of an accounting
change on one or more individual prior periods presented, and/or for cases in which it is
impracticable to determine the cumulative effect of applying a change in accounting
principles to all prior periods.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Mondi Business Paper
Hadera Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

|1. |  | Significant
accounting policies (cont.)
|-- |  | ---------------------------------------

| | C. |  | Relevant
recent accounting pronouncements by the FASB (Cont.)
| | -- |  | -------------------------------------------------------------

| |  | (3) |  | SFAS
No. 154, Accounting Changes and Error Corrections  (cont.)
| |  | --- |  | ----------------------------------------------------------------

| | This
Statement defines retrospective application as (i) the application of a different
accounting principle to prior accounting periods as if that principle had always been
used, or (ii) as the adjustment of previously issued financial statements to reflect a
change in the reporting entity. This Statement also redefines restatement as the
revisiting of previously issued financial statements to reflect the correction of an
error.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
Statement also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets, be accounted for as a change in accounting estimate
effected by a change in accounting principles. This Statement carries forward without
change the guidance in Opinion 20 for reporting the correction of an error in previously
issued financial statements and a change in accounting estimate. This Statement also
carries forward the guidance in Opinion 20 requiring justification of a change in
accounting principles on the basis of preferability.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provisions of this Statement are effective for accounting changes and corrections of
errors made during fiscal years beginning after December 15, 2005. The adoption of this
Standard is not expected to have a material effect on the Companys financial
position or results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Following
are the selected balance-sheet items and selected statement of           operations items
as presented in accordance with GAAP applicable in Israel and           the corresponding
adjustments required in order for them to be presented           according to US GAAP.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. |  | Selected
Balance-Sheet Items
| | -- |  | ----------------------------

|                        | As of December 31, 2005 | As of December 31, 2004
|----------------------- | ----------------------- | -----------------------
|
|
|
|Other assets - Goodwill |                         | 3,177                  
|                        |                         |                        
|Shareholders' equity    |                         | 95,781                 
|                        |                         |                        
|                        |                        



---

# Mondi Business Paper
Hadera Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

|2. |  | Cont.
|-- |  | -----

| | B. |  | Selected
Statement of Operations Items
| | -- |  | --------------------------------------

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|
|
|Net income (loss) under Israeli GAAP (*)    |                        
|Effect of material differences between      |                        
|Israeli GAAP and US GAAP:                   |                        
|Change in basis of measurement              |                        
|from reported / adjusted NIS to nominal NIS |                        
|Amortization of goodwill                    |                        
|Deferred taxes                              |                        
|                                            |                        
|Net income (loss) under US GAAP             |                        
|                                            |                        

|(*) |  | For each of the two years ended in December 31, 2005  reported amounts.
          For the year ended in December 31, 2003  adjusted amounts.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Changes
in Shareholders Equity in Accordance with US GAAP
|-- |  | ----------------------------------------------------------

|                                                      | NIS in thousands
|----------------------------------------------------- | ----------------
|
|Shareholders' equity under US GAAP as of January 1,   |                 
|Net income (loss) for the year under US GAAP          |                 
|                                                      |                 
|Shareholders' equity under US GAAP as of December 31, |                 
|                                                      |                 
|                                                      |                 

|                            |                         |                                                    
|--------------------------- | ----------------------- | ---------------------------------------------------
|/s/ Avi Magid               | /s/ A. Solel            | /s/ Y. Yerushalmi                                  
|                            |                         |                                                    
|Avi MagidFinancial Director | A. SolelGeneral Manager | Y. YerushalmiVice Chairmanof the Board of Directors
|                            |                         |                                                    
|                           
|                           

Date: March 5, 2006

---

|Date: |  | June
27, 2006
|----- |  | -------------

|Our  ref: |  | 802811
|--------- |  | ------

To:     Hogla-Kimberly
Ltd.           Ramla

Gentlemen,

Re:      
US GAAP Adjustments Report as of December 31, 2005

Pursuant to your request and as the
independent accountants of Hogla-Kimberly Ltd. (the Company), we have audited
the Companys US GAAP Adjustments Report as of December 31, 2005 and 2004 and for
each of the three years ended December 31, 2005 (the Report). The Report,
which is enclosed herewith, marked by our Firms identification seal, is
Companys management responsibility.

We conducted our audits in accordance
with standards of the Public Company Accounting Oversight Board (United States) and with
generally accepted auditing standards 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 Report is free
of material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the Report, assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as evaluating
the overall Report presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the Report referred
to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and 2004, and the results of its operations and changes in
shareholders equity for each of the three years ended December 31, 2005, in
accordance with generally accepted accounting principles in the United States of America.

Sincerely,

/s/ Brightman Almagor &
Co.Brightman Almagor &
Co. Certified Public Accountants A Member Firm of Deloitte Touche Tohmatsu



---

# Hogla-Kimberly Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

| | The
consolidated financial statements of the Company have been prepared in accordance with
generally accepted accounting principles (GAAP) applicable in Israel. The
following describes the effects on the Companys consolidated financial statements
had the Company prepared its financial statements in accordance with GAAP applicable in
the United States of America.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. |  | Recent
accounting pronouncements by the FASB
| | -- |  | --------------------------------------------

| |  | (1) |  | SFAS
No. 151  Inventory Costs, an Amendment of ARB No. 43, Chapter           4 In
November 2004 the FASB issued SFAS No. 151,           Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". SFAS           No. 151 amends the guidance
in ARB 43, Chapter 4, Inventory Pricing,           which provides guidance on
the allocation of certain costs to inventory. SFAS           151 clarifies that abnormal
amounts of idle facility expense, freight, handling           costs, and wasted material
(spoilage) should be recognized as current-period           charges. In addition, SFAS
151 requires that allocation of fixed production           overheads to the costs of
conversion be based on the normal capacity of the           production facilities. The
provisions of this statement are effective for           inventory costs incurred during
fiscal years beginning after June 2005. The           provisions of this statement shall
be applied prospectively. The Standards           application is not expected to
have a material effect on the Companys           financial position or results of
operations under U.S. GAAP.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | SFAS
153, Exchange of Non-Monetary Assets  In           December 2004, the FASB
issued SFAS No. 153, Exchanges of Nonmonetary           Assets an amendment of APB
No. 29". This Statement amends Opinion 29 to           eliminate the exception for
nonmonetary exchanges of similar productive assets           and replaces it with a
general exception for exchanges of nonmonetary assets           that do not have
commercial substance. The Statement specifies that a           nonmonetary exchange has
commercial substance if the future cash flows of the           entity are expected to
change significantly as a result of the exchange. This           Statement is effective
for nonmonetary asset exchanges occurring in fiscal           periods beginning after
June 15, 2005. Earlier application is permitted for           nonmonetary asset exchanges
occurring in fiscal periods beginning after the date           this Statement is issued.
Retroactive application is not permitted. The adoption           of this Standard does
not affect the Companys financial position or           results of operations.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

# Hogla-Kimberly Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

| |  | A. |  | Recent
accounting pronouncements by the FASB (Cont.)
| |  | -- |  | ----------------------------------------------------

| |  | (3) |  | SFAS
No. 154, Accounting Changes and Error Corrections This Statement,
published in May 2005, replaces APB Opinion No.           20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes           in Interim Financial
Statements, and changes the requirements for the accounting           for and reporting
of a change in accounting principles. This Statement applies           to all voluntary
changes in accounting principles, and to changes required by an           accounting
pronouncement in the unusual instance that the pronouncement does not           include
specific transition provisions.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Opinion
20 previously required that most voluntary changes in accounting principles be recognized
by including the cumulative effect of changing to the new accounting principles in the
net income of the period of the change. This Statement requires retrospective application
to prior periods financial statements of changes in accounting principles, unless
it is impracticable to determine the specific effects or the cumulative effect of the
change. The Statement also provides guidance for cases in which it is impracticable to
determine the period-specific effects of an accounting change on one or more individual
prior periods presented, and/or for cases in which it is impracticable to determine the
cumulative effect of applying a change in accounting principles to all prior periods.
This Statement defines retrospective application as (i) the application of a different
accounting principle to prior accounting periods as if that principle had always been
used, or (ii) as the adjustment of previously issued financial statements to reflect a
change in the reporting entity. This Statement also redefines restatement as the
revisiting of previously issued financial statements to reflect the correction of an
error. This Statement also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets, be accounted for as a change in
accounting estimate affected by a change in accounting principles. This Statement carries
forward without change the guidance in Opinion 20 for reporting the correction of an
error in previously issued financial statements and a change in accounting estimate. This
Statement also carries forward the guidance in Opinion 20 requiring justification of a
change in accounting principles on the basis of preferability.The
provisions of this Statement are effective for accounting changes and corrections of
errors made during fiscal years beginning after December 15, 2005. The adoption of this
Standard is not expected to have a material effect on the Companys financial
position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | B. |  | Goodwill
| |  | -- |  | --------

| | According
to Israeli GAAP, until December 31, 2005, goodwill is amortized over the expected
estimated economic life of the asset acquired. Commencing January 1, 2006 goodwill shall
not be amortized but rather will be examined for impairment annually or more frequently
if events or changes in circumstances indicate that it might be impaired.According
to US GAAP (SFAS 142), commencing January 2002 goodwill is not amortized but rather is
reviewed annually (or more frequently if impairment indicators arise) for impairment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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# Hogla-Kimberly Ltd.

# US GAAP Adjustments
Report As of December 31, 2005

| |  | C. |  | Basis
of Measurement  Adjusted NIS vis-a-vis Nominal NIS
| |  | -- |  | ---------------------------------------------------------

| | According
to Israeli GAAP, the financial statements of the Group through December 31, 2003 were
presented based on nominal historical cost adjusted for the changes in the exchange rate
of the U.S. Dollar in relation to the NIS.Commencing
January 1, 2004, the Group ceased the presentation of its financial statements based
adjusted NIS, and effective with the interim financial statements as of March 31, 2004
and for the reporting periods thereafter, including the year ended December 31, 2004, the
Groups financial statements are prepared and presented in Reported Amounts, as
defined in Note 2A to the Companys financial statements as of December 31, 2005.
See also Note 2A to the Companys financial statements as of December 31, 2005.According
to US GAAP, the financial statements are to be presented in nominal historical terms.
Accordingly, the effect of the difference in the basis of measurement on the Groups
financial position and results of operations is excluded for the U.S. GAAP presentation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | D. |  | Selected
Balance Sheet Items
| |  | -- |  | ----------------------------

|                        | As of December 31, 2005
|----------------------- | -----------------------
|
|
|Other assets - Goodwill |                        
|                        |                        
|Shareholders' equity    |                        
|                        |                        

|                        | As of December 31, 2004
|----------------------- | -----------------------
|
|
|Other assets - Goodwill |                        
|                        |                        
|Shareholders' equity    |                        
|                        |                        



---

| |  | E. |  | Selected
Statements of Operation Items
| |  | -- |  | --------------------------------------

|                                        | Consolidated and Company
|--------------------------------------- | ------------------------
|
|
|
|Net income under Israeli GAAP           |                         
|Effect of material  differences between |                         
|Israeli GAAP and US GAAP:               |                         
|Change  in  basis of  measurement  from |                         
|adjusted NIS to nominal NIS             |                         
|Amortization of goodwill                |                         
|Deferred taxes                          |                         
|                                        |                         
|Net income under US GAAP                |                         
|                                        |                         

| |  | F. |  | Changes
in Shareholders Equity in Accordance with US GAAP
| |  | -- |  | ----------------------------------------------------------

|                                                           | NIS in thousands
|---------------------------------------------------------- | ----------------
|Shareholders' equity under US GAAP as of January 1, 2005   | 436,113         
|Dividend paid                                              | (43,619)        
|Translation adjustments                                    | 4,398           
|Net income for the year under US GAAP                      | 43,219          
|Shareholders' equity under US GAAP as of December 31, 2005 | 440,111         

|                                |                                       
|------------------------------- | --------------------------------------
|/s/ A. Schor                    | /s/ O. Argov                          
|                                |                                       
|A. SchorChief Executive Officer | O. ArgovActing Chief Financial Officer

---