|As filed with the Securities and Exchange Commission on June 23, 2008
|---------------------------------------------------------------------
|                                                                     

# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

# OR

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

# For the fiscal year
ended on December 31, 2007

# OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

# For the transition
period from ____________ to

|o | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Commission File Number
1-04212

AMERICAN ISRAELI PAPER
MILLS LTD. (Exact name of
registrant as specified in its charter)

|                             |                               
|---------------------------- | ------------------------------
|
|
|
|
|N/A                          | Israel                        
|(Translation of registrant's | (Jurisdiction of incorporation
|name into English)           | or organization)              

P.O. Box 142, Hadera
38101, Israel(Address of principal
executive offices)

Lea Katz. Adv., Corporate Secretary, TL: 972-4-6349408, FAX: 972-4-6339740. Industrial Zone, Hadera, Israel

|
|

|(Name,
Telephone, E-Mail and/or Facsimile and Address of Company Contact Person)
|--------------------------------------------------------------------------------

|                                                                                |                                          
|------------------------------------------------------------------------------- | -----------------------------------------
|
|
|
|
|Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of each class                                                             | Name of each exchange on which registered
|                                                                                |                                          
|Ordinary Shares par value NIS .01 per share                                     | American Stock Exchange                  

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

# None

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

# None

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: 5,060,774 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.

# o Yes     x No

If this report is an annual or
transition report, indicate by checkmark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

# o Yes     x 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 x No o



---

---

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 o     Accelerated filer x    Non- accelerated filer o

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
|
|
|
|
| | U.S. GAAP o                                                                                            
| | International Financing Reporting Standards as issued by the International Accounting Standards Board o
| | Other x                                                                                                

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow:

Item 17 x Item 18 o

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

o Yes     x No



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# TABLE OF CONTENTS

CERTAIN DEFINED TERMSFORWARD-LOOKING STATEMENTS

PART I

|          |                                                                              | PAGE
|--------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 5   
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 5   
|ITEM 3.   | KEY INFORMATION                                                              | 5   
|ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 12  
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 22  
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 22  
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 38  
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 43  
|ITEM 8.   | FINANCIAL INFORMATION                                                        | 44  
|ITEM 9.   | THE OFFER AND LISTING                                                        | 45  
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 47  
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 54  
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 57  
|PART II  
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 58  
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 58  
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 58  
|ITEM 16.  | [RESERVED]                                                                   | 59  
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 59  
|ITEM 16B. | CODE OF ETHICS                                                               | 59  
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 59  
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 60  
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 60  
|PART III 
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 61  
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 69  
|ITEM 19.  | EXHIBITS                                                                     | 70  

3

---

---

# CERTAIN DEFINED TERMS

In
this annual report, unless otherwise provided, references to American Israeli Paper
Mills, AIPM, Company, we, us. and
our refer to American Israel Paper Mills Ltd. and its subsidiaries and
references to the Group refers to American Israel Paper Mills Ltd., its
subsidiaries and associated companies. The terms Euro, EUR or
 refer to the common currency of twelve member states of the European
Union, NIS refers to New Israeli Shekel, and dollar,
USD or $ refers to U.S. dollars.

# 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 Exchange 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 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.

4

---

---

# PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

# ITEM 2. OFFER STATISTICS
AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

|A. | Selected
Financial Data
|-- | -----------------------

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 it relates to the Company, as described in Item 17.

The
following selected financial data is derived from the audited consolidated financial
statements of the Company, which have been audited by Brightman Almagor & Co., an
independent public accounting firm and a member firm of Deloitte Touche Tohmastu.
Brightman Almagor & Co replaced Kesselman & Kesselman & Co. who served as the
Companys external auditors since 1954 until 2006. Our audited consolidated balance
sheets as of December 31, 2006 and 2007, and the related audited consolidated statements
of income and of cash flows for each of the three years ended December 31, 2005, 2006 and
2007, together with the notes thereto, appear elsewhere in this annual report.

You
should read the following selected consolidated financial data in conjunction with the
section of this annual report entitled Item 5. Operating and Financial Review and
Prospects and our consolidated financial statements and the notes thereto included
elsewhere in this annual report.

The
financial data is presented in New Israeli Shekel (NIS) as follows:AIPM made a
transition to reporting in nominal NIS in 2004, pursuant to the directives of Standard 12
of the Financial Accounting Standards Board in Israel. Prior to 2004, 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 year 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.

5

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Five Fiscal Year Financial Summary
According to Israeli GAAP

|                                        | Year Ended December 31
|--------------------------------------- | ----------------------
|
|
|
|
|Sales                                   |                       
|Income from ordinary operations         |                       
|Share in profits (losses) 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 declared per share             |                       

---

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

|** | Amount
does not include the cumulative affect of a change in accounting policy of associated
company of NIS (461).
|-- | ------------------------------------------------------------------------------------------------------------------

|1 | The
net income includes gains for the years 2005, 2004 and 2003 (in the sum of
          8,000 thousands, NIS 14,440 thousands and NIS 2,700 thousands respectively,
          which relate to certain tax benefits  for a further discussion of these
          items, see discussion in Item 5  Operating Financial Review and
Prospects,           in this annual report on Form 20-F.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Dividend
for 2006 in the sum of NIS 24.85 per share ($ 5.64 per share) was declared in June 2006
and paid in July 2006.
| | -----------------------------------------------------------------------------------------------------------------------

6

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# According to U.S. GAAP

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

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

---

|** | Consists
of two dividends declared in 2005 (see footnote 2 below)
|-- | -----------------------------------------------------------------

|1 | The
net income includes losses 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)).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
income in the years 2005, 2004 and 2003, includes gains of NIS 8,000 thousands, NIS
14,440 thousands and NIS 2,700 thousands respectively, originated from certain tax
benefits for a further discussion of these items, see Item 5  Operating and
Financial Review and Prospects.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | An
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.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | Dividend
for 2006 in the sum of NIS 24.85 per share ($ 5.64 per share) was declared in June 2006
and paid in July 2006.
| | -----------------------------------------------------------------------------------------------------------------------

7

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# Exchange Rates

The
exchange rate between the NIS and U.S. dollar published by the Bank of Israel was NIS
3.233 to the dollar on May 31, 2008. The high and low exchange rates between the NIS and
the U.S. dollar during the six months from December 2007 through May 2008, as published by
the Bank of Israel, were as follows:

|Month         | High      | Low      
|------------- | --------- | ---------
|
|
|
|
|December 2007 | 4.008 NIS | 3.841 NIS
|January 2008  | 3.861 NIS | 3.625 NIS
|February 2008 | 3.655 NIS | 3.578 NIS
|March 2008    | 3.656 NIS | 3.377 NIS
|April 2008    | 3.640 NIS | 3.425 NIS
|May 2008      | 3.461 NIS | 3.233 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, 2003 - December 31, 2003 | 4.512 NIS/$1 
|January 1, 2004 - December 31, 2004 | 4.483 NIS/$1 
|January 1, 2005 - December 31, 2005 | 4.878 NIS/$1 
|January 1, 2006 - December 31, 2006 | 4.456 NIS/$1 
|January 1, 2007 - December 31, 2007 | 4.085 NIS/$1 

|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 confined by legal constraints (such as government policy on various subjects,
different requirements made by the authorities supervising environmental regulations and
governmental decisions to raise minimum wages). These restrictions may affect the results
of operations of the Group.

---

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

8

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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 occasionally
enter into hedging transactions to cover the exposure due to the liabilities. A high
inflation rate may also affect payroll expenses, which, at the long run, tends to be
adjusted to the changes in the CPI.

Exposure to Exchange Rate
Fluctuation

The
Company, its consolidated 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. Changes in the foreign
exchange rates of the different currencies compared to the New Israeli Shekel may cause
erosion in profitability and cash flow.

In
September 2007 the company entered into dollar/Euro hedging transactions for periods of up
to four months, in the amount of NIS 13.4 million, terminated at the end of 2007. In
December 2007, the company entered into buy and sale transactions of Euro  NIS
options for up to one year period for 20 million Euro.

Interest Risks

The
company is exposed to changes in interest rates, primarily in respect of bonds it has
issued in the amount of NIS 196 million, as of December 31, 2007.

# 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. For further information see the
section titled  Competition in Item 4B below.

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 the collection of paper waste and seek
wider range of collection sources. The lack of enforcement of the Israeli recycling laws,
which require waste recycling, makes it difficult to find alternative resources at a
competitive cost, but the enactment of the Clean Environment Act in January 2007, which
charges a landfill levy on waste may, if effectively enforced, significantly improve the
ability to collect paper waste.

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 tariffs or entrance
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.

Account Receivable 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.

9

---

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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 and exchange rate fluctuations, which have characterized the Turkish economy during
the past years, and may be repeated and adversely affect KCTRs activities.

Risks Associated with
credit from banks

The Company forms part of the I.D.B.
Group and is influenced by the Israel Banking Supervisors Correct Banking
Management Regulations, which includes amongst other things, limits to the volume of
loans an Israeli bank can issue to a single borrower; a single borrowing group
(as this term is defined in the said regulations), and to the six largest borrowers and
borrowing groups at a bank corporation. I.D.B. Development, its controlling
shareholders and some of the companies held thereby, are considered to be a single
borrowing group. Under certain circumstances, this can influence the AIPM
Groups ability to borrow additional sums from Israeli banks and to carry out certain
business transactions in partnership with entities that drew on the aforesaid credit.For
further information, see Item 11  Quantitative and Qualitative Disclosure
about Market Risk.

# Risk related to our
paper and recycling business

We are dependent on the
transporter of natural gas to our plant in Hadera.

In
October 2007, we converted our energy-generation systems, currently based on heavy fuel
oil, to natural gas (see Item 4 Section D below). The termination by the natural gas
transporter of its agreement with us to transport the natural gas that we use at our
facility in Hadera could have a material adverse effect on our operations.

We are dependent on a
single source supplier of natural gas.

In
our paper and recycling operations, we are dependent on our current supplier of natural
gas Yam Tethys, which as of the date of this annual report is the sole supplier of natural
gas in Israel, for the supply of natural gas to our facility in Hadera. If our agreement
with Yam Tethys is terminated, we would be required to contract with natural gas suppliers
outside of Israel, or to convert back to fuel oil, which, as of the date of this annual
report, is significantly more expensive than natural gas. If we are required to contract
with alternative natural gas suppliers outside of Israel, such a transition would involve
a substantial expense.

Unforeseen or recurring
operational problems and maintenance outages at any of our paper and recycling facilities may
cause significant lost production.

Our
paper and recycling operations are concentrated in a small number of facilities in a
limited number of locations. Our manufacturing process could be affected by operational
problems that could impair our production capability. Each of our facilities contains
complex and sophisticated machines that are used in our manufacturing process. Disruptions
or shutdowns at any of our facilities could be caused by many factors, many of which are
outside our control. If our facilities are shut down, they may experience prolonged
startup periods, regardless of the reason for the shutdown. Any prolonged disruption in
operations of any of our facilities could cause significant lost production, which would
have a material adverse effect on our business, financial condition and operating results.

Our profitability may be
affected by new environmental and safety laws and regulations and compliance expenditures.

Certain
aspects of our manufacturing operations are subject to a wide range of general and
industry-specific environmental, and safety laws and regulations, which impose a
substantial financial burden on our resources. Such financial expense is likely to
increase as the publics environmental awareness increases and laws and regulations
impose additional obligations on us.

In
addition, as our operations involve the use of hazardous and poisonous materials, we may
be exposed to litigation in connection with third-party damages, including tort liability
and natural resource damages, relating to past or present releases of hazardous substances
on or from our properties. We may be involved in administrative or judicial proceedings
and inquiries in the future relating to such environmental matters which could have a
material adverse effect on our business, financial condition and operating results.

10

---

---

Under Israeli law, we are
considered a monopoly and therefore subject to certain restrictions that may
negatively impact our ability to grow our business in Israel.

We
have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, in
the market for the manufacture and marketing of packaging paper. Under Israeli law, a
monopoly is prohibited from taking certain actions, and the Commissioner of the Israeli
Antitrust Authority has the right to intervene in matters that may adversely affect the
public, including imposing business restrictions on a company declared a monopoly,
including supervision of prices charged. The Israeli antitrust authority may further
declare that we have abused our position in the market. Any such declaration in any suit
in which it is claimed that we engage in anti-competitive conduct would serve as prima
facie evidence that we are a monopoly or that we have engaged in anti-competitive
behavior. Furthermore, we may be ordered to take or refrain from taking certain actions,
such as set maximum prices, in order to protect against unfair competition. Despite all
the above-mentioned, the Israeli antitrust authority had not intervened and/or imposed
any restrictions upon us with regard to our declaration as a monopoly. Restraints on our
operations as a result of being considered a monopoly in Israel could
adversely affect our financial outcomes in the manufacture and marketing of packaging
paper activity.

# Risk related to our
office supplies business

We are dependent on
continued success in securing large tenders.

The
office supplies activity is conducted through securing large-scale tenders for defined and
fixed periods of time. We cannot assure that in the future we and/or our subsidiaries will
continue to be successful at securing these tenders. If we and/or our subsidiaries are
unsuccessful in continually securing certain large-scale tenders, this may negatively
impact our sales volume which, in turn, may adversely affect our profitability in the
office supplies sector of our business.

We are dependent on the
ability of a wholly-owned subsidiary to maintain its current status as an exclusive distributor
of certain international brands of office supplies.

Graffiti
Office Supplies & Paper Marketing Ltd., or Graffiti, our wholly owned subsidiary,
through Atar Marketing Office Supplies Ltd., or Atar, also our wholly owned subsidiary, is
the exclusive distributor of a number of international brands in the office supplies
industry. If we were to lose exclusivity regarding one or more of these brands, this could
adversely affect our profitability in this field. However, due to the fact that Graffiti
is an exclusive agent for a number of providers, according to the assessment of Graffiti
the effect of the aforementioned cancelation of exclusivity would not be material.

# Risks relating to our
location in Israel

Political, economic, and
security conditions in Israel affect our operations and may limit our ability to produce and
sell our products or provide our services

We
are incorporated under the laws of the State of Israel, where we also maintain our
headquarters and our principal manufacturing facilities. Specifically, we could be
materially and adversely affected by:

| |  | any
major hostilities involving Israel;
| | - | ---------------------------------------

| |  | a
full or partial mobilization of the reserve forces of the Israeli army;
| | - | -------------------------------------------------------------------------

| |  | the
interruption or curtailment of trade between Israel and its present trading partners; or
| | - | --------------------------------------------------------------------------------------------

| |  | a
significant downturn in the economic or financial condition of Israel.
| | - | ------------------------------------------------------------------------

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, and a state of hostility, varying from time
to time in intensity and degree, has led to security and economic problems for Israel.
Most recently, in the summer of 2006, for approximately one month, battles took place
between the Israeli military and Lebanese guerilla units. Further, the establishment of a
Hamas government in Gaza has created additional unrest and uncertainty in the region.
There is no indication as to how long the current hostilities will last or whether there
will be any further escalation. Any continuation of or further escalation in these
hostilities or any future armed conflict, political instability or violence in the region
may have a negative effect on our business condition, harm our results of operations and
adversely affect our share price. Furthermore, there are a number of countries, primarily
in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel
or Israeli companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies directed toward Israel or Israeli businesses may have an
adverse impact on our operations, our financial results or the expansion of our business.

Generally,
all nonexempt male adult citizens and permanent residents of Israel, including some of our
officers and employees, are obligated to perform military reserve duty annually, and are
subject to being called to active duty at any time under emergency circumstances. While we
have operated effectively under these requirements since our incorporation, we cannot
predict the full impact of such conditions on U.S. in the future, particularly if
emergency circumstances occur. If many of our employees are called for active duty, our
business may be adversely affected.

Furthermore,
an economic slowdown in Israel or globally and/or a deterioration of the political and
security situation in Israel and outside Israel could have an adverse effect on the
financial situation of the Company and the Groups companies. In addition, these
circumstances could reduce the demand for the Companys products, and as a result
hurt sales, financial results and profitability.

11

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# Risks relating to our
ordinary shares

Our shares are listed for
trade on more than one stock exchange, and this may result in price variations.

Our
ordinary shares are listed for trading AMEX and on TASE. This may result in price
variations. Our ordinary shares are traded on these markets in different currencies, U.S.
dollars on AMEX and New Israeli Shekels on TASE. These markets have different opening
times and close on different days. Different trading times and differences in exchange
rates, among other factors, may result in our shares being traded at a price differential
on these two markets. In addition, market influences in one market may influence the price
at which our shares are traded on the other.

Any shareholder with a
cause of action against us as a result of buying, selling or holding our ordinary shares
may have difficulty asserting a claim under U.S. securities laws or enforcing a U.S.
judgment against us or our officers, directors or Israeli auditors.

We
are organized under the laws of the State of Israel, and we maintain most of our
operations in Israel. Most of our officers and directors as well as our Israeli auditors
reside outside of the United States and a substantial portion of our assets and the assets
of these persons are located outside the United States. Therefore, if you wish to enforce
a judgment obtained in the United States against us, or our officers, directors and
auditors, you will probably have to file a claim in an Israeli court. Additionally, you
might not be able to bring civil actions under U.S. securities laws if you file a lawsuit
in Israel. We have been advised by our Israeli counsel that Israeli courts generally
enforce a final executory judgment of a U.S. court for liquidated amounts in civil matters
after a hearing in Israel. If a foreign judgment is enforced by an Israeli court, it will
be payable in Israeli currency. However, payment in the local currency of the country
where the foreign judgment was given shall be acceptable, subject to applicable foreign
currency restrictions.

ITEM 4. INFORMATION ON THE COMPANY

|A. | History
and Development of the Company
|-- | --------------------------------------

American
Israeli Paper Mills Ltd. 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, and also the Companys registered
offices, are located at 1 Meizer St., Industrial Zone, P.O. Box 142, Hadera, Israel. The
Companys telephone number is (972-4) 634-9349, and its facsimile number is (972-4)
633-9740.

Over
the last few years, the Group has participated in several 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. On June 1, 2007 Carmel
          preformed a self-acquisition of its own shares, and as a result, the
          Groups holding in Carmel increased. As of December 31, 2007, the Group
          held 36.2% of the shares of Carmel. Another major shareholder in Carmel is the
          Kraft Group LLC, an American shareholder holding49.6% of Carmels shares.
          Carmel shares were traded on the AMEX before it was delisted and deregistrated
          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 (the
          Agreement) with Neusiedler AG, which later changed its name to Mondi
          Business Paper (MBP), pursuant to which MBP 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, of which MBP acquired 50.1%. NHP was renamed in 2004 to Mondi Business  Hadera Paper, and was again renamed in February 2008 and is now called Mondi
          Hadera Paper (Mondi Hadera).

In
accordance with the Agreement, MBP was granted the option, unlimited by time and
realizable at any time, by which MBP is allowed to sell its holdings in Mondi Hadera to
the Company at a price 20% lower than Mondi Haderas value. According to the
Agreement, Mondi Haderas value will be set according to a valuation that will not be
less than the sum stated in the Agreement. According to oral understandings between senior
officers of the Company and MBP that was resulted in proximity to the agreement between
the parties, MBP agreed to actualize the option only in exceptional circumstances, such as
those that paralyze production in Israel for long periods of time. Since the long period
that passed from the date of those oral understandings, and due to changes in MBPs
management, recently accrued, the Company has taken a conservative accounting approach to
the Agreement by reflecting the financial value of the option in the note regarding the
transition to IFRS, which will occur in fiscal year 2008. See also Note 16(E)(7) to the
financial statements of the Company for December 31, 2007.

12

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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 business, acquired 20% of
          Cycle-Tec Recycling Technologies Ltd. (Cycle-Tec) in 1997 and an
          additional 10% in 1998. Cycle-Tec is a research and development company
          developing a process for manufacturing high-strength, low-cost composite
          materials based on recycled post-consumer plastic and paper treated with special
          chemical additives. As of May 31, 2008, Amnir owned 30.18% of Cycle-Tec.

5.       
          In July 1998, the Company signed an agreement with a strategic partner,
          Compagnie Generale dEntreprises Automobiles (CGEA), for the
          sale of 51% of the operations of Amnir Industries and Environmental Services
          Ltd. (Amnir Environment) in the field of solid waste management. The
          agreement did not apply to Amnirs operations in collecting and recycling
          paper and plastic. (As of February 13, 2007, the Company is no longer a
          shareholder in Amnir Environment  see Item 6 below.)

6.       
          In March 2000, AIPM and CGEA entered into an agreement with Tamam Integrated
          Recycling Industries Ltd. (TMM) and its controlling shareholders.
          Through a jointly held company, called Barthelemi Holdings Ltd
          (Barthelemi), AIPM and CGEA acquired from TMMs controlling
          shareholders 62.5% of the share capital of TMM, an Israeli company in the solid
          waste management field. Simultaneously, 100% of Amnir Environments shares
          were transferred to TMM in return for an allocation of 35.3% of the shares of
          TMM to the shareholders of Amnir Environment. Following the transaction, AIPM
          and CGEA together owned 75.74% of the shares of TMM. In August and September
          2000, TMM acquired approximately 3% of its own share capital. In December 2001
          and in August 2003 AIPM and CGEA acquired additional shares of TMMs
          through the jointly held company Barthelemi, resulting in an increase in the
          ownership of shares of TMM by AIPM and CGEA to 88%. As of December 31, 2006,
          AIPM held directly and indirectly 43.08% of TMMs shares and CGEA held
          44.92%. On January 4, 2007, an agreement was signed between the Company and
          CGEA, according to which the Company sold to CGEA its holdings in Barthelemi and
          the remainder of its holdings in TMM. The $27 million transaction was completed
          on February 13, 2007. Since then, the Company has no longer been a shareholder
          in TMM.

7.       
          In June 2005, C.D. Packaging Systems Ld. (C.D., a company held
          jointly by AIPM and Carmel) acquired the business activity of Frenkel and Sons
          Ltd., in exchange for an allocation of shares in C.D. Both companies were
          engaged in the field of folding boxes. C.D. was renamed to Frenkel-CD Ltd. in
          the merger, which was effective as of January 1, 2006. As of May 31, 2008, the
          Group held 37.93% of C.D.s shares (directly and indirectly through Carmel,
          which holds 27.85% of C.D.s shares). In addition, Frenkel and Sons Ltd.
          held 44.3% of C.D.s shares.

Other
important events in the development of the Company include:

During
the first half of 2008, critical agreements were signed for acquiring the equipment
required for a new production system for packaging paper produced from paper and board
waste. The new production system at the Companys Hadera site, which will have an
output capacity of approximately 230 thousand tons per annum, will cost an estimated NIS
690 million (approximately $170 million). The principal equipment for the production
system was acquired from the leading companies in the world in the manufacture and sale of
paper machines, with the central equipment purchased from the Italian company Voith, while
additional complementary items were ordered from Finnish company METSO. For further
details, see Item 10.C Material Contracts.

On January 1, 2007, an agreement was
signed with Arledan Investments Ltd., according to which the Company sold its leasing
rights over a plot of land of approximately three acres in Ramat Hahayal, for
a sale price of approximately NIS 57 million. The property is rented until January 2013.
For further details, see Item 10.C Material Contracts.

In
November 2007, the Company allocated via private placement 1,012,585 ordinary shares NIS
0.01 par value each which on the allocation date comprised 20% of the Companys
issued share capital in exchange for a total investment of NIS 213 million. About 60% of
these shares (607,551 shares) were allotted to shareholders in the Company, Clal
Industries Ltd. and Discount Investments Corporation Ltd. (hereinafter in this paragraph:
the Special Offerees), in accordance with their pro-rata holdings in the
Company, and 40% of these shares (405,034 shares) were offered by way of a tender to
institutional and/or private investors (whose number did not exceed 35) (hereinafter in
this paragarph: the Ordinary Offerees). The share price for Ordinary Offerees,
determined by auction, was NIS 210. Accordingly, the share price for Special Offerees,
considering the number of shares offered to Special Offerees, was set at NIS 211.05 (the
auction share price plus 0.5%). The Company paid the distributors a rate of 1.2% of the
total consideration received from institutional and/or private investors, that is, a sum
of NIS 1,020,686. The consideration received in respect of the allotment of these shares,
shall be used for the partial financing of the acquisition of the new machine for the
manufacture of packaging paper, as set forth in Item 4.D Property, Plants and Equipment.

On
May 11, 2008, the Board of Directors approved the change of the name of the Company from
American Israeli Paper Mills Ltd. to Hadera Paper Ltd. or to a similar name approved by
the Israeli Registrar of Companies and to amend the Companys articles of association
accordingly. The change shall be effective subordinate to the approval by shareholders at
the Annual General Meeting that will be held in June 2008, and after approval of the
Israeli Registrar of Companies.

13

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On
May 26, 2008, the Company publicly filed with the Israeli Securities Authority and the Tel
Aviv Stock Exchange (TASE) a shelf prospectus pursuant to which the Company
may issue from time to time: (1) Up to 1,000,000 ordinary shares of the Company, par value
NIS 0.01 each; (2) Up to five series of debentures (series 3 to 7) each of a total
principal amount of up to NIS 1,000,000,000, payable in a number of payments, as described
in the shelf prospectus; (3) Up to five series of convertible debentures (series 8 to 12)
each of a total principal amount of up to NIS 1,000,000,000, payable in a number of
payments, as described in the shelf prospectus; (4) Up to four series of warrants (series
A to D), each series including no more than 10,000,000 warrants, each warrant is
exercisable into one ordinary share of the Company, par value NIS 0.01 each, subject to
adjustments, in return for cash payment, as described in the shelf prospectus; and (5) Up
to four series of warrants (series E to H), each series including no more than 1,000,000
warrants, each warrant is exercisable to debentures with principal amount of NIS 100 from
Series 2, 3 to 7 and 8 to 12 of the Company, subject to adjustments, in return for cash
payment, as described in the shelf prospectus. The offering of the ordinary shares,
debentures and warrants in accordance with the shelf prospectus shall be made in
accordance with Article 23A(F) to the Israeli Securities Law of 1968, pursuant to shelf
offering reports, in which all the details specific to that offering shall be disclosed.
The securities covered by the shelf prospectus have not been registered under the U.S.
Securities Act of 1933, as amended, and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.

# Capital Expenditures and
Divestitures

# 2007

The Companys investments in
fixed assets totaled about NIS 82.0 million (about $ 21.3 million) in 2007. These
investments included:

| | Investments
of approximately NIS 1.8 million ($ 0.5 million) in environmental expenditures.
|- | -------------------------------------------------------------------------------------------

| | An
investment of approximately NIS 12.5 million ($ 3.3 million) in a conversion to gas
system.
|- | ----------------------------------------------------------------------------------------------

| | Investments
of approximately NIS 19.4 million ($ 5.0 million) in conversion and improvement of steam
tanks.
|- | -----------------------------------------------------------------------------------------------------------

| | Investments
of approximately NIS 2.8 million ($ 0.7 million) in real estate in Naharia as a reserve
for the          Company's future development.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
of approximately NIS 5.6 million (about $1.4 million) in new packaging paper production
system (Machine 8).
| | -------------------------------------------------------------------------------------------------------------------------

| | Investments
totaling NIS 39.9 million ($ 10.4 million) in buildings, equipment, transportation and
information technology.
|- | --------------------------------------------------------------------------------------------------------------------------

# 2006

The Companys investments in
fixed assets totaled about NIS 53.1 million (about $ 12.5 million) in 2006. These
investments included:

| | Investments
of approximately NIS 3.0 million ($ 0.7 million) in environmental expenditures.
|- | -------------------------------------------------------------------------------------------

| | An
investment of approximately NIS 2.5 million ($ 0.6 million) in a conversion to gas
system.
|- | ---------------------------------------------------------------------------------------------

| | Investments
of approximately NIS 13.9 million ($ 3.3 million) in conversion and improvement of steam
tanks.
|- | -----------------------------------------------------------------------------------------------------------

| | Investments
of approximately NIS 1.7 million ($ 0.4 million) in real estate in Hadera as a reserve
for the          Company's future development.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
totaling NIS 32.0 million ($ 7.5 million) in buildings, equipment, transportation and
information technology.
|- | -------------------------------------------------------------------------------------------------------------------------

# 2005

The Companys investments in
fixed assets totaled about NIS 71.1 million (about $15.4 million) in 2005. These
investments included:

| | Investments
of approximately NIS 4.6 million ($1.0 million) in environmental expenditures.
|- | ------------------------------------------------------------------------------------------

| | An
investment of approximately NIS 1.8 million ($0.4 million) in a conversion to gas system
|- | -------------------------------------------------------------------------------------------

| | 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.
|- | ----------------------------------------------------------------------------------------------------------------------

14

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

In
1995, the Company formed a wholly-owned subsidiary, AIPM Paper Industry Ltd. to engage in
production and sale of packaging paper.

In
order to serve its paper production activities, the Company, through a wholly-owned
subsidiary, supplies various services, including engineering services, maintenance, steam
and energy, water supply, and sewage treatment, to a variety of paper machines located at
the Companys main production site in Hadera in return for cost sharing (the cost of
the above-mentioned services are divided among the Group companies, according to the
actual use and consumption of their paper machines located in Hadera). In December 2007,
the Company applied to the Israeli Income Tax Authority requesting approval to spin-off
operations of this subsidiary to a new company named Hadera Paper  Development and
Infrastructure Ltd. The objectives of this spin-off are to improve efficiency and to allow
the Company in the future to consider forming strategic partnerships with AIPM Paper
Industry operations. To date, Income Tax Authority approval of the spin-off has not yet
been received, and the spin-off has not yet been completed.

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 manufactured and/or marketed by the Group are as follows:

| |  | Grades
of Paper and Board
| | - | -------------------------

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

| |  | Packaging
Products
| | - | ------------------

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

| |  | Household
Products
| | - | ------------------

Bathroom
tissue, toilet paper, kitchen towels, facial tissue, napkins, disposable tablecloths,
sanitary towels, panty shields, tampons, disposable baby diapers, training pants, baby
wipes, disposable adult diapers, and 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 complementary products,
cups and plates, and examination gloves.

| |  | Other
Products
| | - | --------------

Aluminum
food wraps, cling-film wraps, garbage bags, oven baking and cooking trays, office
supplies, recycled ground and palletized plastics used by the plastic products industry.

# Sales and Marketing

The
Groups packaging products are sold mostly to five main customers in Israel (one of
them is an associated company) which operate in the corrugated board sector with whom the
Group has long-standing business relationships.

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, health maintenance
organizations and banks. About 21% of the sales are made through tenders.

The
Groups paper grade 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
customers.

15

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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., to the agriculture, and food and beverage industries), including direct marketing
to ultimate customers through subcontractors and agents.

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

| | (a) | Maintaining
its existing dominant share in the Israeli market for paper grade                and
household products produced by the Group and imported by it, through short
               delivery times 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 its production capacity.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

In
March 2007, KCTR signed an agreement in principle with Unilever, according to which
Unilever shall distribute and sell KCTRs products in Turkey, excluding distribution
and sales to food chains, which will be done directly by KCTR. The agreement was signed to
help KCTR increase its market penetration and volume of sales following the approval of a
strategic plan by KCTR to expand its activities in Turkey in the coming decade. The
complete strategic plan is designed to expand the activities of KCTR from the current
yearly sales volume of $50 million to a volume of $300 million in the year 2015.

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

|Packaging PaperManufacturingand Recycling 1 | Marketing OfficeSupplies 2 | Total
|------------------------------------------- | -------------------------- | -----
|
|
|
|
|                                            | 464.7                      |      
|                                            |                            |      

|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 suppliers in Scandinavia, the United States, Portugal, Austria, Chile and
Spain. The bulk of the pulp tonnage purchased by the Company 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 Paper (the Austrian
parent company), which purchases pulp for its subsidiaries around the world. This ensures
fluent supply and better prices.

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

About
65% of the fibers required in paper production by the Group (including printing and
writing paper and household products for the operation of its associated companies) come
from waste paper, which in some paper grades is used in lieu of relatively more expensive
pulp. The production of packaging and brown wrapping paper is based mostly on recycled
fibers. Therefore, the main raw material used for the production of packaging and brown
wrapping paper is paper waste, most of which is collected from various sources by Amnir, a
wholly owned subsidiary of the Company. Approximately 210,000 tons per year of waste paper
are collected and handled by Amnir, most of which are used by the Group for the production
of fluting and tissue paper, and some of which is sold to other tissue paper
manufacturers. Apart from the waste paper collected by Amnir, American Israeli Paper Mills
Industries (1995) Ltd, Companys subsidiary, purchase residue which is created during
the production of packages and purchased from the manufacturers of corrugated board.

The
relative absence of supporting enforcement of Israels Recycling Act, which mandates
waste recycling, detracts from the Companys ability to expand waste collection. On
January 16, 2007, however, the Clean Environment Act (9th amendment) 
2007 was enacted, imposing a landfill levy on waste. Pursuant to the provisions of this
act, a landfill charge will be levied against waste, at the rate of NIS 10 per ton in
2007, rising up to NIS 50 per ton from 2011 and thereafter. The enforcement of this act
may lead to improved capacity in paper waste collection.

16

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Also,
Amnir is preparing to increase paper waste collection over the coming years following
approval by the Companys Board of Directors of an investment in a new machine for
packaging paper, at a cost of approximately $170 million (see also Item 4.D. Property,
Plants and Equipment). The construction of the new packaging machine will require twice
the volume of paper waste collection to serve as raw material in the production of
packaging paper over the coming years. Amnir is gearing up to increase collection volumes
in anticipation of the installation of the new packaging paper machine.

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, Mondi Hadera, an associated company, has been using precipitated calcium carbonate
(PCC), a special pigment used for filling and coating paper, in order to
improve paper quality. In 2005, an agreement was signed between Mondi Hadera and the
Swedish company Omya International AG (Omya) for the supply of PCC. The
original agreement was signed for a period of 10 years and, in 2007, the parties signed an
agreement extending it for another four years. The supplier is contesting the aforesaid
extension period. Omya constructed and operates a PCC plant in Israel. In September 2005,
the Agreement was converted to an Israeli fully-owned subsidiary of Omya. The PCC
purchased from Omya replaced a former PCC purchase from another PCC supplier, and led to a
significant PCC cost saving.

The
cost of paper production is affected by fluctuating raw material prices and the cost of
water and energy (during 2007, the cost of paper production was affected also by prices of
fuel oil. However, since October 2007, the Company converted its energy-generation
systems, which had been based on fuel oil, to natural gas). The associated companies are
exposed to fluctuations in raw material prices, as well as the prices of products
purchased for import that arrive in Israel with no tariffs and no entrance barriers.
Unusual increases in the cost of raw materials or in the quantity of imported finished
products could impair profitability.

# Competition

Most
of the Groups products that are sold in the Israeli market are exposed to
competition with local and imported products. The imported products arrive in Israel
exempt from import tariffs, especially from the European Economic Community
(EEC), the European Free Trade Association (EFTA) and the U.S.
Tariffs on imports of fine paper from other countries range up to 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 main competitor of H-K is Proctor & Gamble Co.)

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
sector of office supplies with direct delivery to organizations and businesses includes
two dominant competitors, Office Depot and Kravitz, which together with Grafiti primarily
dominate the tender and strategic business customer segment. In addition, there a large
number of small competitors, which mostly operate within a limited geographical area. In
late 2006 and early 2007, several tenders of the Accountant General of the Ministry of
Finance were issued for office supplies and consumables office supplies. The tenders were
secured by Office Depot, whose market share in this sector is therefore expected to grow
to about 11%. Graffiti and Kravitz will each possess an estimated 10% market share after
implementation of the new General Accountant tenders.

The
Groups collection and paper recycling operation competes with local companies which
operate in every region of Israel.

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.

Competition
in packaging paper is against imports. Imports into Israel include all paper types
produced in Israel at different paper qualities. To the best of the Companys
knowledge, the primary overseas competitors include Varel  Germany, Emin
Leidlier France, Saica  Spain, Hamburger  Austria, SCA  Italy,
Otor  France and Nine Dragons  China.

Regarding
Mondi Hadera, entry barriers to manufacturing writing and print papers are high due to
heavy investments required in paper machinery. On the other hand, Mondi Hadera is exposed
to competition from paper importers who do not face entrance barriers to the Israeli
market. As there are no restrictions, obstacles or customs duties imposed on paper
imported into Israel, Mondi Hadera must constantly maintain other advantages it has as a
local manufacturer, such as availability, flexibility, service and quality, in order to
deal with paper importers. Mondi Haderas main competitors are the following paper
importers: Niris Ltd., Ronaimer Ltd., Allenper Trade Ltd., Mei Hanahal Ltd. and BVR Ahvat
Havered Ltd.

17

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Hogla-Kimberly
operates in a very competitive environment with the local market as well as against
imported products. Nevertheless, the operations of Hogla-Kimberly in the manufacture of
paper products and diapers is characterized by few competitors, especially in view of the
elevated entrance barriers that exist therein, include inter alia, significant investments
in production facilities, investments in distribution infrastructure and frequent
investments in technological improvements. It should further be noted that although there
exists no limit on the import of paper products and diapers, other than tariffs on imports
from the Far East, due to the bulky nature of some of the products, local production
enjoys a significant economic advantage.

Regarding
feminine hygiene products and disposable diapers, Hogla-Kimberlys main competitor is
Procter and Gamble (P&G). Regarding household paper products, Hogla-Kimberlys
main competitors include Sano  Brunos Plants Ltd. (hereinafter:
Sano), Shaniv Paper Industries Ltd. (hereinafter:
Shaniv) and Kalir Chemicals  Production and Marketing Ltd.
(hereinafter: Kalir). It should be noted that as part of the
competition in the household paper products market to the Ultra-Orthodox activity, one of
the companys competitors (Shaniv), shuts down its production on Saturdays (the
sabbath). This fact may constitute a certain advantage for this competitor in
that particular market. In the activity of paper products to the institutional market,
Hogla-Kimberlys main competitors include Kalir and Sano. In the home cleaning aids
activity there are many competitors and a large market share is held by private labels.

The
Companys operations depend  to a great degree  on energy consumption,
and are therefore strongly impacted by fuel prices. Profit margins may be eroded if fuel
and electricity prices surge.

In
December 1989, the Company was declared a monopoly in the manufacture and marketing of
packaging paper by the Israel Antitrust Authority- there are no special provisions for the
packaging paper.

Regarding
seasonality, H-Ks products are generally sold year-round, with some increase in
sales during the Jewish holiday seasons (Rosh Hashanah and Passover).

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

As
of May 20, 2008, Clal Industries and Investment Ltd. beneficially owned 37.98% of the
ordinary shares of the Company and Discount Investment Corporation Ltd. beneficially owned
21.45% of the ordinary shares of the Company. Clal and DIC agreed in 1980 to coordinate
and pool their voting power in the Company. To the best of our knowledge, IDB Development
Corporation Ltd. owns 73.88% of DIC and 60.52% of Clal. See Item 7. Major
Shareholders and Related Party Transactions.

18

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# Significant
subsidiaries and associated companies

|Name of the Company                                                 | Ownership and
Voting | Country of
Incorporation
|------------------------------------------------------------------- | -------------------- | ------------------------
|
|
|
|
|Subsidiaries                                                        |                      |                         
|Amnir Recycling Industries Ltd.                                     | 100.00%              | Israel                  
|                                                                   
|Graffiti Office Supplies & Paper Marketing Ltd.                     | 100.00%              | Israel                  
|                                                                   
|Attar Marketing Office Supplies Ltd.                                | 100.00%              | Israel                  
|                                                                   
|American Israeli Paper Mills Paper Industry (1995) Ltd.             | 100.00%              | Israel                  
|                                                                   
|Associated Companies                                               
|Hogla-Kimberly Ltd.                                                 | 49.90%               | Israel                  
|                                                                   
|Kimberly -Clark Tuketim  Mallari Sanayi Ve Ticaret A.S.            
|("KCTR") (held through H-K)                                         | 49.90%               | Turkey                  
|                                                                   
|Mondi 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.                                      | 36.21%               | Israel                  
|                                                                   
|Frenkel- CD Ltd. (direct and indirect through Carmel)               | 37.93*               | Israel                  
|                                                                   
|Cycle-Tec Recycling Technology Ltd.                                 | 30.18%               | Israel                  

---

* The holding in voting
shares is 35.11%

** As of February 2007, the Company
no longer has any holding in these entities.

|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. Hadera is a major seaport located 28 miles north of Tel Aviv. The Company owns 68.5
acres of the land on which it operates, of which 19.27 acres were purchased in 2005 for
the amount of $4.4 million. An additional 17 acres are leased from the Israel Land
Administration, an agency of the State of Israel, under several leases. The lease periods
terminate from 2012 until 2056. 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. In addition, AIPM leases from the Israel Land
Administration approximately 6.25 acres in Nahariya, in northern Israel, under a lease
agreement until 2018, which are rented to an associated company.
Recently, the Company acquired the contractual rights via a development agreement in
another area of approximately 0.9 acres in Nahariya, which will also be rented to the
associated company. In September 2002, the Company signed an agreement with the Tel Aviv
Municipality for the extension of the lease period until 2059 of a real estate lease for a
plant in Tel Aviv that had been shut down at the end of 2002, 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.

19

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The
Group also owns a two-acre parcel in the industrial zone of Bnei Brak, which is near
Tel-Aviv and used for waste paper collection.

The
Group owned a warehouse containing 50,000 square feet of space situated on approximately
3.1 acres of land in the Tel Aviv area, leased from the Israel Land Authority and rented
to third party under a long term lease agreement. On December 31, 2006, the Company sold
its lease rights to this land to Erledan Investments Accountant Ltd. in consideration of
NIS 57 million. For further information, see Note 10 (i) to the financial statements of
the Company.

H-Ks
headquarters and logistics center, which are leased under a long-term lease agreement, are
located in a new, modern site in Zrifin, near Tel-Aviv. The headquarters and logistics
center, covers an area of 430,550 square feet, with 188,370 square feet of buildings. An
additional production plant owned by H-K is located in a 10-acre plot in Afula, a city in
northern Israel.

Associated
companies rent plants and office facilities in 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 five 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 the Company operates four of the five machines with a combined
production capacity of over 320,000 tons per year. The fifth machine is located in
Nahariya, which produces tissue paper with a production capacity of 20,000 tons per year.

In
November 2006 and October 2007, the Companys Board of Directors approved an
investment of approximately $170 million to construct a new packaging paper machine in
Hadera for the manufacture of packaging paper from cardboard and paper waste. The machine
will have an output capacity of 230,000 tons per annum. Subsequent to the construction of
the new machine, planned for 2009, and along with the parallel decommissioning of one of
two packaging paper machines currently operating, the Companys annual production
capacity for packaging paper will increase from 160,000 tons at the present time, to
approximately 330,000 tons per year. The new packing paper machine is intended to address
growing demand in the local market for packaging paper at prices and of a quality that are
competitive with prices and quality of imported packaging paper. As at the date of this
annual report, the Company has signed the principal agreements necessary for the purchase
of the main equipment for the new paper machine, and the Company is in the process of
negotiating agreements with additional suppliers and contractors required for the new
paper machine. The Company intends to finance the construction of the new machine
partially with proceeds received from the private placement in November 2007, as described
in Item 4 Section A. In addition, the company is analyzing various other alternatives for
raising the additional funds required to complete the acquisition of the new machine,
including by way of a public offering of the Companys securities. The Company has
yet to decide how it will finance the project, and is currently analyzing various
alternatives.

The
Group also operates converting lines for the production 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. 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.

In
2000, the Company established a new co-generation power plant in Hadera, based on
high-pressure steam available from steam drying employed in paper production, for a total
investment of about $14 million. With the operation of the power plant, the Group now
enjoys an independent power generation capacity of 18 megawatt, with generation costs
considerably lower than the cost of electricity previously 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. In
October 2007, a malfunction was discovered during routine maintenance testing of the steam
turbine in the new power plant,. Due to this malfunction, from October 2007 up to the
beginning of June 2008 , only up to 7 megawatt was generated by an alternative turbine,
that was temporarily being used by the Company, due to this malfunction. The malfunction
had been repaired at the beginning of June 2008. The Company estimates this malfunction
will not have a material impact on the Company, since the Company estimates, based on a
letter received by the Company from its insurance company in March 2008, that the
insurance company will cover the major portion of the loss associated with the
malfunction.

20

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During
October 2007 the Company converted its energy-generation system that had been using heavy
fuel oil to natural gas, and completed the transition of the energy system at its Hadera
facility from fuel oil to natural gas. The use of natural gas is expected to significantly
lower the cost of energy to the Company, while concurrently significantly reducing the
amount of emissions released into the atmosphere. The Company has invested a total of NIS
30 million in infrastructure installation and conversion of existing equipment for the use
of natural gas instead of fuel oil. The Company estimates that the transition to the use
of natural gas, based on the current natural gas and fuel oil prices, will yield annual
savings which would, in turn, improve net profit by NIS 25 million per full year of
operation. In 2007, the Group reduced its energy costs by NIS 12 million, primarily due to
the transition from the use of fuel oil to the use of natural gas during the fourth
quarter of 2007. Pursuant to the Companys agreement with Yam Tethys, as described in
Item 10 Material Contracts Section 10.C below, natural gas will be supplied by the Yam
Tethys partnership through mid-2011. As part of the process of the Companys
transition to the use of natural gas instead of fuel oil, the Company has had to adapt its
work environment accordingly, including by implementing changes according to its hazardous
materials permit as well as its policies regarding work procedures.

In
addition, the Company is examining and promoting a project for establishing a combined
cycle co-generation plant based on natural gas in Hadera, to be supplied by East
Mediterranean Gas Company (EMG) pursuant to the principles agreement signed by
the parties on May 2007, as described in Item 10 Material Contracts. The new plant is
expected to enable the Company to sell electricity to external users, including the Israel
Electric Company (IEC) and/or private customers. The project for the new power plant is in
the final stages of configuration and feasibility studies.

As
part of the progress of examining and promoting the project, the Israeli Minister of
National Infrastructure granted the Company 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 by the Israeli Minister of
National Infrastructure.

The
permit authorizes the Company to build a power station with a total output of 230
megawatts, with integrated cycle co-generation, operating on natural gas, at the AIPM site
in the Hadera Industrial Zone. This authorization is contingent upon several conditions
that have yet to be met, including, among other things, meeting the production license
requirements, meeting the requirements of the Electricity Economy Law, and achieving
certain milestones outlined in the authorization.

In
October 2006, the National Infrastructure Committee approved the change in designation of
40,000 m(2) of land, adjacent to the Companys premises in Hadera, to be
used as a power station and for other uses. The approval was empowered by the Israeli
government on February 6, 2007.

Environmental
Regulation Matters

The
business license for 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 Company is required to operate the site in accordance with the
conditions specified by the Israeli water commission regarding effluent disposal. To the
best knowledge of the Company, the Company operates the site in compliance with such
requirements, and in the event of non-compliance, the Company acts in conjunction with
such governmental authorities to rectify any violations.

In
November 2006, the Environmental Protection Ministry announced that, even though the
Company plant at Hadera has made considerable investments in sewage treatment and
environmental protection issues, an investigation may be launched against it to review
deviations from certain emission standards. The Company expects that the investigation
will not have a material impact on its operations.

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

During
the years 2000-2007 the Group invested approximately $15.9 million in Hadera site on
projects intended to enable the Company to comply with the strict environmental
regulations applicable to it, approximately $4.4 million of which was invested in 2007,
including a $3.6 million investment in the conversion of the energy system to consume
natural gas instead of fuel oil as described below, $250 thousand for noise reduction
projects at the Hadera facility, as well as an investment in reuse of treated waste water
at the facility and improved reliability of the water and sewage treatment system.

In
October 2007, the Company converted its energy-generation system that had been using heavy
fuel oil to natural gas, and completed the transition of the energy system at its Hadera
facility from fuel oil to natural gas. The Company invested approximately $8 million in
converting its energy-generation systems, currently based on heavy fuel oil, to natural
gas. This process was completed with the completion of the installation of the natural gas
pipeline to Hadera. This project is expected to significantly reduce the cost of energy to
the Company, which, in turn, would improve net profits by approximately $6.5 million per
full year of operation, as well as improve the Companys compliance with
environmental requirements by using natural gas instead of fuel oil. In 2007 the Group
reduced its cost of energy by approximately NIS 12 million, or $3 million, primarily due
to the transition from the use of fuel oil to the use of natural gas for steam generation
during the fourth quarter of 2007.

21

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---

Furthermore,
over the past two years the Company has been implementing a gradual plan to further reduce
noise at the Companys facility in Hadera. In 2007, the Company invested a total of
NIS 1 million in implementation of this plan.

The
Company estimates that its total environmental expenses in 2008, arising in the normal
course of business, will amount to NIS 3.6 million. This amount includes investments in
environmental compliance that have been approved by the Companys Board of Directors,
as well as on-going Company activities related to environmental protection. According to
Company estimates, these expenses are not expected to decline in coming years.

In
2007 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.

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
critical accounting policies:

Inventories

Commencing
January 1, 2007, the Company has been implementing the provisions of Accounting Standard
No. 26, "Inventories".

Inventories
are measured at the lower of cost or net realizable value. The cost of inventories
includes acquisition costs, fixed and varied overhead costs, as well as others costs
incurred in bringing the inventory to the current location and condition.

The
net realization value represents the selling price estimate during the ordinary course of
business, net of the estimate of completion costs and the estimate of costs required to
perform the sale.

Until
December 31, 2006, inventory was presented at the lower of cost or market value.

In
accordance with the Standard, when inventories are purchased under credit terms whereby
the arrangement involves a financing element, the inventories should be presented at cost
reflecting the purchase price under ordinary credit terms. The difference between the
actual purchase amount and the cost reflecting the purchase price under ordinary credit
terms, is recognized as an interest expense during the credit period.

The
cost of inventory is determined on a moving average basis.

The spare
parts that are in continuous use, are not associated with the specific fixed assets. Some
of these spare parts are even sold to the Groups affiliated companies, as needed,
and are part of the inventory. Based on the experience accumulated by the Company, these
spare parts are held for no longer than 12 months. In light of the above, the spare parts
that are in continuous use are presented in inventory clause, and recognized in the profit
and loss report when used.

The
first-time application of the standard did not have any effect on the Companys
financial statements.

22

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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 current
collection trends that are expected to continue. These estimated allowances are
periodically reviewed, and customers payment histories analyzed. 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

The
Company and the companies in the Group allocate taxes in respect of temporary differences
between the value of assets and liabilities in the financial statements and their tax base
and in respect of losses for tax purposes, whose realization is predictable. Deferred
taxes are computed at the tax rates expected to be in effect at the time of realization
thereof, as they are known at the balance sheet date.

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.

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.

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.

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.

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 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 to the Financial Statements.

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.

23

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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.

Discontinuance of
Adjusting Financial Statements for Inflation

The
Company draws up and presents its financial statements in Israeli currency
(hereafter - shekels or NIS), in accordance with the provisions of Israel Accounting
Standard No. 12  Discontinuance of Adjusting Financial Statements for
Inflation  of the IASB, which establishes principles for transition to nominal
reporting, commencing January 1, 2004 (hereafter - the transition date).
Accordingly, amounts that relate to non-monetary assets (including depreciation and
amortization thereon), investments in associated companies (see also below)
permanent investments, 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 (based on the exchange rate of the dollar 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.

The
financial statements of group companies which are drawn up in foreign currency, are
translated into shekels or are remeasured in shekels for the purpose of inclusion in these
financial statements, as explained in e. below.

The
sums of non-monetary assets do not necessarily reflect the realization value or an updated
economic value, but rather only the reported sums of the said assets, as stated in (1),
above. The term cost in these financial statements shall mean the cost in
reported sums.

Offset of financial
instruments

Financial
assets and financial liabilities are presented on the balance sheet at their net amount,
only when the Company has a legally enforceable right to effect such set off, and subject
to the existence of intent to settle the asset and the liability on a net basis, or to
realize the asset and settle the liability simultaneously.

Deferred charges

Until
December 31, 2005, the deferred charges in respect of issue of debentures were displayed
in Other Assets at their cost, deduction of accumulated amortization. The above expenses
that were attributed to the debenture issuance were amortized at the straight
line method on the basis of the weighted average of the debentures in turnover,
till their redemption date.

The
balance of deferred issuance costs, which at December 31, 2005 amounted to
NIS 946 thousands, has been reclassified and presented as a deduction from the amount
of the liabilities to which such expenses relate. Through December 31, 2005, deferred
issuance costs were included under other assets and amortized according to the
straight-line method.

Revenue Recognition

Commencing
January 1, 2006, the company applies Israel Accounting Standard No. 25 of the
IASB  Revenue, which prescribes recognition, measurement, presentation
and disclosure criteria for revenues originating from the sale of goods purchased or
manufactured by the company.

Revenue
is measured, as detailed below, at the fair value of the consideration received or the
consideration that the company is entitled to receive, taking into account trade discounts
and/or bulk discounts granted by the entity:

Revenue
from sale of goods is 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.

The
Company implements Clarification No. 8 of the Israeli Institute of Accounting Standard
regarding the reporting of revenues on a gross basis or a net basis. Accordingly, the
Companys revenues as an agency or intermediary, without bearing the risks and
returns that derive from the transaction, are presented on a net basis.

24

---

---

Interest
income is accrued on a cumulative basis, taking into consideration the principal to be
repaid and by using the effective interest rate.

Dividend
income in respect of investments is recognized on the date in which the entitlement for
said income was created for the shareholders.

Upon
the application of the standard, an associated company separates the financing component
embedded in revenue from sales made on credit for periods exceeding the customary credit
period in its industry (mainly 90 days), that does not bear interest at the appropriate
rate; the financing component is determined according to the amount by which the nominal
amount of consideration for the transaction exceeds the present value of future cash
payments in respect thereof, based on the customary market interest rate applicable to
credit extended under similar terms. Revenue from the financing component is recognized
over the credit period. Through December 31, 2005, the company did not separate the
financing component in respect of sales made on credit, as above, and included within
revenue from the sale on the date of recognition of such revenue.

In
accordance with the transitional provisions of the standard, on January 1, 2006 the
affiliated company recognized an expense of NIS 1.1 million as a result of
presentation in present value, resulting from the adjustment of trade receivables in
respect of such credit transactions to their present value on the effective date of the
standard, the share of the company at the adjustment effect as above was approximately NIS
0.5 million which is presented in these financial statements under Cumulative
effect, at beginning of year, of an accounting change in an associated company.

Share  Based Payment

Commencing
January 1, 2006, the company applies Israel Accounting Standard No. 24 of the
IASB, Share-Based Payment, which prescribes the recognition and measurement
principles, as well as the disclosure requirements, relating to share-based payment
transactions.

Since
the company has not granted any equity-settled awards, nor made modifications to existing
grants, subsequent to March 15, 2005, the measurement criteria of the standard do not
apply to past grants made by the company, and its application has not had any effect on
the financial statements of the Company.

Net Income per Share

In
January 2006, Accounting Standard No. 21 of the IASB, Earnings per Share
became effective. The computation of basic net income per share is generally based on
earnings available for distribution to holders of ordinary shares, divided by the weighted
average number of ordinary shares outstanding during the period.

In
computing diluted net incomeper share, the weighted average number of shares to be
issued, assuming that all dilutive potential shares are converted into shares, is to be
added to the average number of ordinary shares used in the computation of the basic income
(loss) per share. Potential shares are taken into account, as above, only when their
effect is dilutive (reducing net income per share from continuing activities).

Comparative
net income per share figures included in these financial statements reflect a
retrospective application of the new standards computation directives.

As to the data used in the
computation of net income per share, as above  see Note 11 to the Financial
Statements.

Effects of Prior Year
Misstatements

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Financial
Statements  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 requires
companies to quantify the impact of all correcting misstatements, including both the
carryover and reversing effects of prior year misstatements, on the current year financial
statements. SAB 108 is effective for fiscal years ending after November 15, 2006. We
initially applied the provisions of SAB 108 using the cumulative effect transition method
in our annual financial statements for the year ending December 31, 2006 in connection
with our accounting treatment for various misstatements the cumulative effect of which on
our retained earnings as at December 31, 2005 totaled NIS 2,665 thousand net of tax.

25

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General

1.    
          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. On January 4, 2007, the Company sold all
          its holdings in T.M.M. (See Item 4A  History and Development of the
          Company above). Regarding T.M.M., true to publishing date of this report, the
          Company does not have any new information.

2.    
          On April 15, 2007, at a General Meeting the shareholders approved the
          appointment of Brightman Almagor & Co as the Companys external
          auditors for the year 2007. Brightman Almagor & Co replaced Kesselman &
          Kesselman & Co who served as the Companys external auditors since
          1954.

3.    
          In January 2008, the Board of Directors of the Company approved a program for
          the allotment, for no consideration, of non marketable options to the CEO of the
          company, to employees and officers of the company and investees. In the context
          of the program, an allotment of 287,750 options was approved, of which 40,250
          options were to the CEO of the company, 135,500 to management of the
          subsidiaries and 74,750 to management of the affiliates.

On
May 11, 2008, the board of directors of the company approved the allotment to a
trustee of the balance of the options that had not been allotted through that date, in the
amount of 32,250 options as a pool for the future grant to officers and employees of
investees, subject to the approval of the board of directors.

The
date of grant of the options was set for the months of January- March 2008, subject to
restrictions of Section 102 (capital route) of the Income Tax Ordinance. As of the date of
approval of the financial statements, 250,500 options had been allotted. Each option is
exercisable into one ordinary share of the company with NIS 0.01 par value against the
payment of an exercise increment in the amount of NIS 223.965 (subject to adjustments).
The options will vest in installments as follows: 25% of the total options will be
exercisable from January 14, 2009; 25% of the total options will be exercisable from
January 14, 2010; 25% of the total options will be exercisable from January 14, 2011; and
25% of the total options will be exercisable from January 14, 2012. The vested options are
exercisable through January 14, 2012, 2013, 2014 for the first and second, third and
fourth portions, respectively.

The
cost of the benefit embedded in the allotted options as above, on the basis of the fair
value as of the date they are granted, was approximated to be the amount of approximately
NIS 13.5 million. This amount will be charged to the statement of operations over the
vesting period. The debt for the grant to officers of the affiliates will be paid in cash.

The
fair value of the options granted as aforementioned was estimated by applying the Black
and Scholes model. In this context, the effect of the terms of vesting will not taken into
account by the company, other than the market condition of fair value of the capital
instruments granted.

The parameters which were used for
implementation of the model are as follows:

|                                      |              
|------------------------------------- | -------------
|
|
|
|
|Share price (NIS)                     | 217.10-245.20
|Exercise price (NIS)                  | 223.965      
|Anticipated volatility (*)            | 27.04%       
|Length of life of the options (years) | 3-5          
|Non risk interest rate                | 5.25%        

(*)
          The anticipated volatility is determined on the basis of historical fluctuations
          of the share price of the company. The average length of life of the option was
          determined in accordance with managements forecast as to the holding
          period by the employees of options granted to them, in consideration of their
          functions in the company and past experience of the company with employees
          leaving.

26

---

---

|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 12/31/07v.year ended 12/31/06 | Year ended 12/31/06v.year ended 12/31/05
|------------------------------------------------- | ---------------------------------------- | ----------------------------------------
|
|
|
|
|Net sales                                         |                                          |                                         
|Cost of sales                                     |                                          |                                         
|                                                  |                                          |                                         
|Gross profit                                      |                                          |                                         
|Selling, administrative and general expenses      |                                          |                                         
|                                                  |                                          |                                         
|Income from ordinary operations                   |                                          |                                         
|Financial expenses (income) - net                 |                                          |                                         
|Other income                                      |                                          |                                         
|                                                  |                                          |                                         
|Income before taxes on income                     |                                          |                                         
|Taxes on income                                   |                                          |                                         
|                                                  |                                          |                                         
|Income from operation of the Company and the      |                                          |                                         
|consolidated subsidiaries                         |                                          |                                         
|Share in profits (losses) of associated companies |                                          |                                         
|Cumulative effect, at beginning of year of an     |                                          |                                         
|accounting change in an associated company        |                                          |                                         
|                                                  |                                          |                                         
|Net income                                        |                                          |                                         
|                                                  |                                          |                                         

|* | The
statements of income for the years ended December 31, 2007, 2006 and 2005 are presented
in New Israeli Shekels as explained in note 1 to the Financial Statements.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
number of New Israeli Shekels which were exchangeable for 1 U.S. dollar increased
(decreased) over the prior year by 6.8%, (-8.2%) and (-9.0%) in 2005, 2006 and 2007,
respectively. See Note 1 to the Financial Statements attached and Item 17 Financial
Statements for the anticipated effect of adopting of accounting pronouncements that have
been issued but are not yet adopted.

# 2007 Compared to 2006

|I. | Overview
of Results of Operations
|-- | ---------------------------------

|1. | Consolidated
Data
|-- | -----------------

Consolidated
sales in 2007 amounted to NIS 583.6 million, as compared with NIS 530.1 million in 2006,
representing growth of approximately 10%.

The
consolidated operating profit amounted to NIS 75.4 million in 2007, as compared with NIS
50.5 million in 2006, representing growth of approximately 49.3%.

Profit
after taxes and before AIPMs share in earnings of associated companies for 2007,
amounted to NIS 34.3 million, as compared with NIS 40.0 million in 2006.

|2. | Net
Profit and Earnings Per Share
|-- | ---------------------------------

Net
profit in 2007 amounted to NIS 31.4 million, as compared with NIS 13.3 million in 2006.

---

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 U.S. dollar against the NIS.

27

---

---

Net
profit this year was affected by the growth in the Companys share in the losses of
the operations in Turkey (KCTR), amounting to NIS 11.8 million (see Section C7 in this
Item 5, below).

In
2007, the net profit included earnings from the realization of surplus cost at an
associated company in the amount of NIS 2.5 million, a loss from the amortization of a tax
asset at an associated company in the sum of NIS 13.4 million and a capital loss from the
sale of cardboard machines (machine 6) and hub machines in the sum of NIS 2.4 million.

Net
profit in 2006 included a net capital gain from the sale of real estate at Atidim in the
sum of NIS 28.5 million, and non-recurring expenses (net of taxes) of NIS 18 million,
primarily on account of a provision for impairment at an associated company (in the third
quarter of the year) and the impact of the devaluation and modified tax rates in Turkey
(in the second quarter of the year- approximately NIS 8 million included in the loss of
the operations in Turkey).

Basic
earnings per share amounted to NIS 7.61 per share in 2007 ($ 1.98 per share), as compared
with NIS 3.31 per share in 2006 ($0.81 per share) .

The
diluted earnings per share amounted to NIS 7.60 per share in 2007 ($ 1.98 per share), as
compared with NIS 3.28 per share in 2006 ($0.77 per share).

|II. | The
Business Environment
|--- | ------------------------

2007
was characterized by continued growth in the Israeli economy of 4.7% , while the high
demand in consumer spending persisted. Moreover, 2007 was characterized by the continued
revaluation of the NIS against the U.S. dollar, which amounted to 9%, in addition to a
revaluation of 8.2% in 2006.

The
positive global trends in the paper industry, primarily in Europe, due to the decline in
the gap between paper supply and demand, have affected the group companies active in
Israel. Moreover, the growth trend in developing markets, primarily in Asia, as reflected
by relatively high growth rates, is creating high demand for pulp and paper waste, as well
as for paper products.

These
demands are causing a continuing rise in input prices  primarily fibers and
chemicals  in parallel to a rise in global paper prices since the end of the
previous year  both in fine paper and in packaging paper.

These
trends enable the Group companies to realize price hikes in most paper and paper products
areas, thereby compensating for the high input prices, while improving profitability.

The
above information pertaining to trends in the paper market constitutes forward-looking
information as defined in the securities law, based on the companys estimates at the
date of this report. These estimates may not materialize  in whole or in part 
or may materialize in a different manner, inter alia on account of factors that lie
outside the control of the company, such as changes in global raw material prices, changes
in supply and demand of global paper products.

Energy
prices (primarily fuel oil) that were at their lowest point in two years during the first
quarter this year, have reversed their trend in the second quarter of 2007 and have
started climbing back toward the high prices that prevailed in 2006. The trend of rising
fuel prices that began in the second quarter of the year, accelerated in the second half
of the year and amounted to 40%, as compared with the level of prices at the beginning of
the year. Due to the gradual transition to the use of natural gas in the course of the
fourth quarter of the year, the Group saved NIS 12 million in energy operation costs.
These savings are mostly attributed to the transition to natural gas and to the fuel oil
price level during 2007.

Electricity prices rose by an average
of 13% at the end of 2007.

The inflation rate in 2007 amounted
to 3.4%, as compared with an inflation rate of 0% in 2006.

|III. | Analysis
of Operations and Profitability
|---- | ----------------------------------------

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

28

---

---

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

The
consolidated sales amounted to NIS 583.6 million in 2007, as compared with NIS 530.1
million in 2006 and NIS 482.5 million in 2005.

The
increase in the turnover in 2007 originated primarily from the growth in sales of
packaging paper and recycling as a result of the possibility of realizing price hikes in
accordance with prevailing global conditions in the paper market.

Sales
of the packaging paper and recycling activity amounted to NIS 464.7 million in 2007, as
compared with NIS 408.0 million in the corresponding period last year.

The
growth in the sales turnover of the packaging paper and recycling activity originated
primarily from the raising of the selling prices.

Sales
of the marketing of office supplies marketing activity amounted to NIS 119.0 million in
the reported period, as compared with NIS 122.1 million last year. Most of the decrease in
sales is attributed to the impact of not winning the Accountant General tender in early
2007, a fact that was somewhat compensated for by an increase in sales to other customers,
at better margins.

The
change in the turnover in 2006 in relation to 2005 originated primarily from a certain
increase in sales of packaging paper and recycling and a marginal decrease in sales of the
office supplies sector in light of a change in the customer mix toward a more profitable
one.

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

The
cost of sales amounted to NIS 440.9 million in 2007, representing 75.5% of sales, as
compared with NIS 418.7 million, or 79.0% of sales in 2006 and as compared with NIS 383.2
million, or 79.4% of sales in 2005.

The
gross profit as a percentage of sales grew in 2007 to reach 24.5%, as compared with 21.0%
in 2006 and 20.6% in 2005.

The
increase in the gross profit originated primarily from the improved selling prices and the
quantitative growth in the local market, coupled with the savings in energy costs,
primarily on account of the transition to natural gas in the last quarter. On the other
hand, an increase was recorded in other manufacturing costs as a result of the increase of
the volume of operations, including growth in collection by Amnir and the rise in diesel
prices.

Labor
Wages

The
labor wages in the cost of sales, in selling expenses and in General and Administrative
expenses, amounted to approximately NIS 174.8 million in 2007, as compared with NIS 160.6
million in 2006 and NIS 149.7 million in 2005.

The
change in payroll costs in relation to the corresponding period last year reflects a 5%
increase in personnel  especially at Amnir, as part of preparations for increasing
paper waste collection in anticipation of the future operation of the new packaging paper
machine  along with a nominal increase of 3.5% in the wages. The wage expenses (in
General and Administrative) also included non-recurring expenditures, primarily on account
of the employment agreement with the Companys CEO. See Note 9D to the financial
statements.

|3. | Selling,
General and Administrative Expenses
|-- | --------------------------------------------

The
selling, general and administrative expenses (including wages) amounted to NIS 67.4
million in 2007 (11.6% of sales), as compared with NIS 60.9 million (11.5% of sales), in
2006 and NIS 55.9 million in 2005 (11.6% of sales).

The
increase in selling, general and administrative expenses originated primarily from growth
in labor expenses, including non-recurring influences, as stated above in the Labor Wages
section.

|4. | Operating
Profit
|-- | ----------------

The
operating profit amounted to NIS 75.4 million in 2007, representing 49% growth in
relation to 2006, 13.0% of sales, as compared with NIS 50.5 million, or 9.5% of sales in
2006 and as compared with NIS 43.3 million, or 9.0% of sales in 2005.

The
increase in operating profit in 2007, by 49% in relation to 2006, originated from the
increase in sales of packaging paper and recycling, primarily on account of the
improvement in selling prices and the efficiency measures, that were partially offset by
rising energy prices, coupled with the improvement in the operating profit of the
marketing of office supplies activity as a result of efficiency measures and the
reorganization that the company initiated in the past several years.

29

---

---

In
the marketing of office supplies activity, the trend of maintaining the operating profit
of NIS 0.4 million in 2007, was attributed to the reorganization in the sector,
accompanied by far-reaching efficiency measures and steps to increase sales, following
the transition to an operating profit in 2006 as compared with a loss in 2005 (NIS 0.2
million in 2006, as compared with NIS -0.9 million in 2005).

|5. | Financial
Expenses
|-- | ------------------

Financial
expenses amounted to NIS 19.6 million in 2007, as compared with NIS 31.1 million in 2006.

The
total average of the Companys net, interest-bearing liabilities grew by an average
of approximately NIS 10 million between the years 2007 and 2006. The increase is primarily
attributed to investments in fixed assets, net of positive cash flows from operating
activities.

Despite
the said increase in the obligo, the financial expenses in 2007 were cut back in relation
to the preceding year by NIS 11.5 million.

The
said decrease in financial expenses originated from the decrease in the average interest
rate on short-term credit (by approximately 1.2%), the lower expenses on account of
CPI-linked notes, despite the sharp rise in the inflation rate in relation to 2006, on
account of the lowering of the cost of hedging the CPI-linked notes against a rise in the
CPI that fell from 1.8% in 2006, to 1.3% in 2007 and resulted in a approximately NIS 1.1
million decrease in note-related costs.

As
a result of currency hedging transactions made by the company on the dollar/euro ratio,
the company recorded financial revenues of NIS 4.6 million in the last quarter of the
year. (These revenues, on account of hedging the expected cash flows for the new packaging
paper Machine were allocated to the statement of income pursuant to accounting principles
since the agreement with the machines supplier VOITH was only signed in late
December 2007).

Due
to the decrease in the dollar exposure this year in relation to the preceding year, the
financial expenses decreased this year by NIS 4.7 million in relation to last year on
account of currency rate differential revenues on account of the assets in foreign
currency.

|6. | Taxes
on Income
|-- | ---------------

Expenses
for taxes on income from current operations totaled NIS 18.4 million in 2007, as compared
with NIS 5.5 million in 2006 and NIS 10.2 million in 2005.

The
principal factors responsible for the increase in tax expenses from operating activities
in 2007 as compared with 2006, included the increase in operating profit before taxes this
year, despite the impact of the lower tax rate on current and deferred taxes this year, in
relation to last year. In addition, the tax expenses this year grew by NIS 2 million as a
result of the sharp rise in the CPI this year by 3.4% in relation to last year.

Moreover,
the tax expenses in 2007 included an additional tax expense of NIS 0.9 million in 2007
from taxes on previous years as a result of the completion of tax assessments for the
years 2002-2005. An additional tax expense of NIS 11.2 million was recorded in 2006,
primarily on account of betterment tax on the sale of real estate. 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 2005 (gradually lowering the corporate tax rate to 25% by
2010) on the companys deferred taxes.

Total
tax expenses amounted to NIS 19.3 million in 2007, as compared with NIS 5.5 million in
2006 and NIS 6.0 million in 2005.

|7. | 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 (losses) of associated companies amounted to NIS
(2.9) million in 2007, as compared with losses of NIS (26.7) million in 2006 and earnings
of NIS 16.4 million in 2005.

The
following principal changes were recorded in the Companys share in the earnings of
associated companies, in relation to 2006:

30

---

---

| |  | The
Companys share in the net profit of Mondi Hadera (49.9%) increased by NIS 12.9
million this year. Most of the change in profit originated from the companys highly
improved profitability, the transition from an operating loss of NIS 2.1 million last
year to an operating profit of NIS 33.6 million this year  primarily as a result of
the improved trading conditions that allowed for higher selling prices that led to an
improved gross margin, coupled with a decrease in certain raw material costs as a result
of the lower dollar exchange rate, primarily in the course of the second half of the
year, coupled with a significant improvement in the efficiency of the companys
operational array. This said improvement was rendered possible as a result of the said
recovery in the European paper industry, coupled with the quantitative increase in sales
to the local market. This improvement began in the second quarter of the year,
accelerated in the second quarter and preserved the same trend in the second half of the
year. The sharp improvement in profit was somewhat offset as a result of the rise in the
net financial expenses, which originated primarily from working capital requirements due
to the rise in the volumes of operation and the impact of changes in the exchange rate.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Companys share in the net profit of Hogla-Kimberly Israel (49.9%) increased by NIS
5.4 million in 2007, as compared with 2006. The operating profit of Hogla grew from NIS
127.0 million to NIS 135.4 million this year. The improved operating profit originated
from a quantitative increase in sales, improved selling prices and the continuing trend
of raising the proportion of some of the premium products out of the products basket.
This improvement was partially offset by the continuing rise in raw material prices. The
net profit was also affected by the increase in financial expenses of NIS -1.7 million,
as compared with financial revenues of NIS 1 million last year, as a result of the
financing needs of the operations in Turkey. The net profit of Hogla-Kimberly Israel last
year was influenced by non-recurring tax expenses of NIS 4.5 million (our share was
approximately NIS 2.2 million).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Companys
share in the losses of KCTR (formerly: Ovisan) (49.9%) grew by approximately
NIS 11.8 million in 2007, as compared with 2006. The operating loss decreased by
approximately NIS 9.4 million in 2007 in relation to last year, due to the continuing
growth in the penetration rate of brands and their strengthened position in the market.
The launch process of premium KC products in the Turkish market (Kotex® and Huggies®),
that began in the second quarter last year and was accompanied by fierce competition over
shelf space, primarily against P&G coupled with the erosion of selling prices  to
the lowest levels in the world  for same-quality disposable diapers. In the course
of 2007, a non-recurring loss of approximately NIS 6 million ($1.5 million) was included
on account of the termination of trade agreements with distributors due to the transition
to distribution by Unilever, of which our share was approximately NIS 3 million.
Moreover, the tax asset that was recorded in previous years in Turkey, in the sum of
approximately approximately NIS 26 million ($6.4 million) was reduced, of which our share
is NIS approximately 13.3 million. Last year, the loss included a non-recurring
expenditure of approximately NIS 16 million, of which our share was approximately NIS 8
million, primarily as a result of the devaluation of the Turkish lira and the
amortization of a tax asset in the sum of approximately NIS 6.7 million, of which our
share was approximately NIS 3.3 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Companys share in the net profit of Carmel (36.21%) increased by NIS 2.1 million in
2007 as compared with 2006. The factors that affected the growth in the companys
share in the net profit of Carmel, originated inter alia from the improvement in the
operating profitability at Carmel  primarily in the second half of the year. This
improvement originated primarily from higher prices and was partially offset by the sharp
rise in raw material prices. In the course of the second quarter, the companys
holding rate in Carmel rose from 26.25% to 36.21% due to Carmels self purchase of
some of the minority shareholders holdings. As a result of the acquisition, a
negative surplus cost of NIS 4.9 million was created at the company, of which a sum of
NIS 2.4 million was allocated to the statement of income this year and served to increase
the companys share in the Carmel profits in 2007. In 2006, Carmels net profit
included capital gains from the sale of a real-estate asset in Netanya in the amount of
NIS 3.9 million, of which the Companys share was approximately NIS 1 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2006, the Companys share in the earnings of associated companies included the
Companys share in the losses of TMM, in the amount of NIS 14.8 million. As mentioned
above, the Company sold its holdings in TMM in early 2007 and this item is therefore not
included in the Companys share in the earnings of associated companies this year.

The
Companys share in the earnings of associated companies from current operations in
Israel (excluding Turkey and TMM) grew by NIS 20.7 million this year and amounted to NIS
60.9 million.

# 2006 Compared to 2005

|I. | Overview
of Results of Operations
|-- | ---------------------------------

|1. | Consolidated
Data
|-- | -----------------

Consolidated
sales in 2006 amounted to NIS 530.1 million, as compared with NIS 482.5 million in 2005,
representing growth of approximately 10%.

31

---

---

The
consolidated operating profit amounted to NIS 50.5 million in 2006, as compared with NIS
43.3 million in 2005, representing growth of approximately 17%.

Profit
after taxes and before AIPMs share in earnings of associated companies for 2006,
amounted to NIS 40.0 million, as compared with NIS 29.3 million in 2005.

2.        Net
Profit and Earnings Per Share

Net
profit in 2006 amounted to NIS 13.3 million, as compared with NIS 45.7 million in 2005.

Net
profit this year was affected by the growth in the Companys share in the losses of
the operations in Turkey (KCTR), amounting to NIS 41.9 million (see Section C7 in this
Item 5, below).

Net
profit in 2006 included a net capital gain from the sale of real estate at Atidim in the
sum of NIS 28.5 million, and non-recurring expenses (net of taxes) of NIS 18 million,
primarily on account of a provision for impairment at an associated company (in the third
quarter of the year) and the impact of the devaluation and modified tax rates in Turkey
(in the second quarter of the year- approximately NIS 8 million included in the loss of
the operations in Turkey).

Basic
earnings per share amounted to NIS 3.31 per share in 2006 ($0.81 per share), as compared
with NIS 11.43 per share in 2005 ($2.48 per share) .

The
diluted earnings per share amounted to NIS 3.28 per share in 2006 ($0.77 per share), as
compared with NIS 11.35 per share in 2005 ($2.46 per share).

|II. | The
Business Environment
|--- | ------------------------

In
2006, the accelerated growth in the Israeli economy continued (5%), along with growing
demand in the public sector and growth in private consumption.

Although
the Second Lebanon War in the summer of 2006 led to a slowdown in economic activity
during the war. The economy, however, rapidly recovered and for the rest of 2006 returned
to the accelerated growth rate that existed before the war.

The
Companys results continued to be effected by high energy prices  primarily
fuel oil, whose prices rose by an aggregate 70% in 2005 and 2006 as compared to 2004 (38%
in 2005 and 22% in 2006), while diesel prices rose by an average of 29% during the same
period.

The
impact of rising energy prices on the aggregate operating profit of the Company amounted
to approximately NIS 22 million in 2006.

At
the same time, the prices of the main raw materials utilized by the Group in their
various activities also continued to rise during 2006.

The
impact of rising raw material prices on the aggregate operating profit of the Company
amounted to approximately NIS 46 million in 2006.

The
recovery that began in Europes paper industry, which closed the gap between paper
supply and demand, was slow during 2006 and did not yet fully translate into a decrease
in competing imports into Israel. As a result it was difficult to raise selling prices
primarily those of fine paper, as warranted by the said rise in input prices.

# General

During
2006 the Group dealt with the increased input prices by implementing a range of
activities. These activities included raising prices vis-à-vis the competition to
the extent possible and intensifying the efficiency measures implemented with respect to
all its expense components. The efficiency measures implemented by the Group in 2006 led
to cost savings in the amount of approximately NIS 27 million.

As
part of the said operations, the Company initiated measures to achieve synergies between
the Groups companies, so as to allow for efficiency and cost-cutting, including
energy and raw material costs. Among other measures, this was reflected in a fuel
purchase agreement that allowed for significant savings, while capitalizing on the Groups
economies of scale. The said measures also included the anticipated savings from the
completion of the conversion to the use of natural gas at the Hadera plant, as described
below.

32

---

---

At
the same time, the Group continues to implement a number of cross organization plans
including the following: the talent management program for the development of the Groups
managers and the creation of a managerial reserve; the WOW Program, for enhancing the
customers perceived added value of the Companys products and improving the
loyalty premium and the price based on a differentiation of products and service; and
Kimberly Clarks global center lining program, aimed at improving production-line
efficiency (applying a methodology that creates a common basis for all factors
influencing operation of the machines, such as engineering, maintenance, technology and
operations, while continuously measuring the variance of the selected parameters,
creating a process of constant improvement in both quality and costs). These programs
began to show results in 2006 .

The
Group also continued 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
rise in input prices.

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

As
part of the Companys efforts to cut production costs and achieve further
improvements in environmental quality, the Company is continuing to promote the project
for the establishment of a co-generation plant in Hadera, using natural gas.

The
Company took the initial steps to convert its energy generation facilities from the use
of fuel oil to natural gas. This process was completed with the completion of the natural
gas pipeline to Hadera , pduring the third quarter of 2007.

In
connection therewith, the Company signed an agreement in London on July 29, 2005, with the
Tethys Sea Group, for the purchase of natural gas to supply the Companys
requirements in the coming years, for the operation of the existing energy co-generation
plant at the Hadera plant that has been converted for the use of natural gas, instead of
the current use of fuel oil. The overall financial volume of the transaction totals about
$35 million over the term of the agreement from the initial supply of gas and until the
earlier of (1) the point at which the Company will have purchased an aggregate of 0.43 BCM
of natural gas, or (2) , July 1, 2011.

The
conversion from fuel oil to gas was to enable significant savings in fuel costs,
estimated at approximately $8.5 million per annum, due to the significant differences
between the current prices of fuel oil and gas, and will enhance the Groups
competitiveness and profitability.

The
exchange rate between the NIS and the U.S. dollar was revalued by a further 8.2% in 2006,
as compared to a 6.8% devaluation in 2005.

The inflation rate in 2006 amounted
to 0%, as compared with an inflation rate of 2.4% in 2005.

|III. | Analysis
of Operations and Profitability
|---- | ----------------------------------------

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

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

Consolidated
sales amounted to NIS 530.1 million in 2006, as compared with NIS 482.5 million in 2005
and NIS 482.9 million in 2004.

The
growth in sales in 2006 included increases in sales in both the packaging paper and
recycling sector, as well as the office supplies sector.

The
change in sales in 2005 in comparison to 2004, originated primarily from a certain growth
in the sales of packaging paper and recycling, along with an immaterial decrease in the
office supplies sector, following the implementation of a reorganization in this sector.

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

Cost
of sales amounted to NIS 418.7 million in 2006, representing 79.0% of sales, as compared
with NIS 383.2 million, or 79.4% of sales in 2005 and as compared with NIS 375.9 million,
or 77.9% of sales in 2004.

The
gross margin grew to 21.0% of sales in 2006, as compared with 20.6% in 2005 and 22.1% in
2004.

The
principal factors that affected the material changes in gross profitability in 2006, as
compared with 2005 consisted of a certain increase in raw material prices and an unusual
rise in energy prices (fuel oil by 22%).

The
rising prices in packaging paper and recycling and the quantitative increase in sales
 primarily in office supplies sector  together with the continuing efficiency,
resulted in an improvement in the consolidated gross margin in 2006.

The
gross margin eroded in 2005 as compared to 2004 as a result of the unusual increase in
energy prices (approximately 38%), raw material prices and other inputs. These price hikes
were not fully compensated for by an increase in selling prices, due to prevailing market
conditions.

33

---

---

Labor
Wages

The
labor wages in the cost of sales, in selling, general and administrative expenses ,
amounted to approximately NIS 162.2 million in 2006, as compared with NIS 149.7 million in
2005 and NIS 137.0 million in 2004.

The
increase in wages in 2006 originated mostly from an increase in personnel  primarily
at Amnir as part of the preparations for an expansion in collection volumes, in
anticipation of the establishment of the new paper manufacturing array.

|3. | Selling,
General and Administrative Expenses
|-- | --------------------------------------------

The
selling, general and administrative expenses (including wages) amounted to NIS 60.9
million in 2006 (11.5% of sales), as compared with NIS 55.9 million (11.6% of sales) in
2005 and NIS 52.5 million in 2004 (10.8% of sales).

The
increase in selling, general and administrative expenses originated partially from a
certain increase in labor expenses, coupled with non-recurring expenses (approximately NIS
2 million), included in the expenses this year.

|4. | Operating
Profit
|-- | ----------------

The
operating profit amounted to NIS 50.5 million in 2006, representing growth of 17% as
compared with 2005, and comprised 9.5% , 9.0% and 11.3% of sales in 2006, 2005 and 2004
respectively.

The
increase in operating profit in 2006, in a rate of 17% as compared with 2005 originated
from the increase in sales of packaging paper and recycling, primarily on account of the
improvement in selling prices and the efficiency measures, that were partially offset by
rising energy prices, coupled with the improvement in the operating profit of the office
supplies sector as a result of efficiency measures and the reorganization that the Company
initiated in the past several years.

In
the office supplies sector, the transition to operating profit in 2006, as compared with
an operating loss in 2005, was attributed to the reorganization in the sector, accompanied
by far-reaching efficiency measures and steps to increase sales, following the decrease of
the operating loss in 2005 as compared with 2004 (NIS -0.9 million in 2005, as compared
with NIS -4.6 million in 2004).

|5. | Financial
Expenses
|-- | ------------------

Financial
expenses amounted to NIS 31.1 million in 2006, as compared with NIS 12.5 million in 2005
and NIS 13.1 million in 2004.

The
total average of the Companys net, interest-bearing liabilities grew by an average
of approximately NIS 160 million in 2006, compared to 2006 and 2005. The increase resulted
primarily from investments in fixed assets and dividends distributed in 2006, net of
dividends received from associated companies and the positive cash flows from operating
activities.

Moreover,
the costs of hedging the Series 2 notes against a rise in the CPI has risen to 1.8% per
annum in 2006, as compared with 1.3% per annum in 2005 and resulted in an increase in
costs related to the notes.

During
2006 hedging transaction was made at a cost equal to 1.8%, and a 0.1% decrease in the CPI
led during 2006 to additional financing costs of NIS 4 million being incurred on account
of the CPI-linked notes.

In
addition to the above, the sharp revaluation in 2006 of the New Israeli Shekel against the
U.S. dollar served to increase the financial expenses on account of the surplus of
dollar-denominated assets over dollar-denominated liabilities held by the Company, as
compared with the devaluation recorded in 2005 (revaluation of 8.2% in 2006, as compared
with a devaluation of 6.8% in 2005), also resulted in an increase in financial expenses in
2006.

|6. | Taxes
on Income
|-- | ---------------

Expenses
for taxes on income from current operations totaled approximately NIS 5.5 million in 2006,
as compared with NIS 10.2 million in 2005 and NIS 13.2 million in 2004.

The
principal factors responsible for the decrease in tax expenses from current operations in
2006 as compared with 2005, are both the decrease in the profit from current operations
before taxes this year, and the impact of the lower tax rate on current and deferred taxes
this year, in relation to last year.

34

---

---

Moreover,
the tax expenses in 2006 included an additional tax expense of NIS 11.2 million, primarily
on account of the betterment tax realized on the sale of real estate. 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 2005 (gradually lowering the corporate tax rate to 25% by
2010) on the Companys deferred taxes.

In
2004, the financial statements included a tax benefit of NIS 10 million, on account of the
impact of the change in the corporate tax rate and a benefit on account of the exercise of
options by employees.

Total
tax expenses amounted to NIS 16.7 million in 2006, as compared with NIS 6.0 million in
2005 and NIS 3.2 million in 2004.

|7. | Companys
Share in Earnings (Losses) of Associated Companies
|-- | ------------------------------------------------------------

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

The
Companys share in the earnings (losses) of associated companies amounted to NIS
(26.7) million in 2006, as compared with NIS 16.4 million in 2005 and NIS 25.1 million in
2004.

The
following principal changes were recorded as the Companys share in the earnings of
the associated companies:

| | The
Companys share in the losses of Mondi Hadera (49.9%) in 2006, grew by NIS 2 million
in relation to last year. Last year, Mondi recorded a tax benefit of NIS 4 million (our
share consists of NIS 2 million on account of the change in the corporate tax rate;
without this benefit, no change would have been recorded in the Companys share as
compared with last year). Mondis quantitative sales increased in 2006 as a result
of greater output capacity due to the improvements to the paper machine in 2005. The
sharp rise in pulp prices in the course of the year (16%), rising energy prices (22%) and
the continuing imports from Europe at low prices, served to erode the gross margin and
harmed the operating profitability. The revaluation of the dollar and the lowering of
interest rates served to lower the financial expenses and offset the erosion in the
operating profit.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys share in the net earnings of Hogla-Kimberly Israel (49.9%) increased by
NIS 9.8 million in 2006, as compared with 2005. The operating profit of Hogla-Kimberly
Israel grew from NIS 94 million to NIS 128 million. This increase is primarily attributed
to the improvement in selling prices. In the course of the year, Hogla-Kimberly continued
to improve selling prices and to expand the market share of premium products, where the
profit margins are higher. In 2006, Hogla-Kimberly also continued its far-reaching
efficiency measures, that further contributed to its profitability. This profitability
was partially offset by the continuing increase in input prices in 2006 (primarily raw
materials and energy).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys share in the losses of KCTR, a wholly-owned consolidated subsidiary of
Hogla-Kimberly (49.9%) grew by NIS 41.9 million in 2006, as compared with 2005. Over the
past two years KCTR has been establishing the organizational infrastructure in Turkey,
developing its sales and distribution network, and is continuing to upgrade the diaper
production plant producing Huggies® premium disposable diapers. In 2006, KCTR began
launching Kimberly Clarks international brands  Huggies® and Kotex® on
the Turkish market. The launch of the brands involves significant investments in
advertising, sales promotion and listing fees for the organized retail chains. These
investments led to continued growth and an increase of 30% in quantitative sales to the
local market. However, the rising prices of raw materials on account of the sharp
devaluation in local currency in 2006, the escalating competition against local
manufacturers and the investments in launching the international brands  all led to
a significant increase in the operating loss. Furthermore, KCTR recorded an extraordinary
expenditure of approximately NIS 16 million (the Companys 49.9% share approximately
NIS 8 million) on account of the effect of the reduction in the corporate tax rate from
30% to 20% on the tax asset created in the past several years at KCTR and due to the
sharp 20% devaluation of the exchange rate of the Turkish lira relative to the U.S.
dollar.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys share in the net earnings of the Carmel Group (26.25%) increased by NIS
2.0 million in 2006, as compared with 2005. The change in profit is attributed to the
higher operating profit that increased from NIS 8.1 million to NIS 11.7 million. The
improvement in the operating profit originated primarily from an increase in quantities,
the rise in selling prices and the continuing efficiency measures. This improvement was
partially eroded in the course of the year as a result of the continuing rise in energy
and raw material prices. At the same time, financial expenses have decreased as a result
of the revaluation of the dollar in 2006.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys share in the losses of TMM (43.08%) increased by NIS 10.1 million in 2006,
as compared with 2005. The factors that led to this increase in losses included primarily
non-recurring expenses that were incurred during the year. These expenses included a loss
on account of the cumulative impact at the beginning of the year, on account of the
implementation of Standard 25, in the sum of NIS 1.1 million, a provision for impairment
on account of a long-term loan granted to a third party in the amount of NIS 1.6 million,
the cancellation of a tax asset created on account of carryover losses in the amount of
NIS 2.2 million and the impairment of two transfer stations by NIS 12.5 million. The
Companys total share in these expenses amounted to approximately NIS 7.5 million
(incorporated above).
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As mentioned above, the Company sold
its direct and indirect holdings in TMM in early 2007.

35

---

---

|B. | Liquidity
and capital resources
|-- | -------------------------------

|1. | Cash
Flows
|-- | ----------

The
cash flows from operating activities in 2007 amounted to NIS 69.5 million, as compared
with NIS 53.1 million in 2006. The change in the cash flows from operating activities in
2007 is primarily attributed to the increase in current operations and in profit.

The
cash flows from operating activities in 2005 amounted to NIS 88.6 million.

The dividend
that was declared in December 2005, in the amount of NIS 50 million, was paid in January
2006. Additional dividend of NIS 100 million was paid in July 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.

The
long-term liabilities (including current maturities) of the Companies amounted to NIS
261.7 million as at December 31, 2007 as compared with NIS 297.9 million as at December
31, 2006.

The
Company uses loans from local financial institutions, mostly banks, to finance its
activities. As of December 31, 2007, these loans consisted of the following:

| | 1. | Short-term
credit from banks  AIPM has a bank credit facility of some NIS                360
Million. Of this, as of December 31, 2007, some NIS 143 Million were
               utilized. The Company does not have any credit limitations (i.e.                financial
covenants) other than this. see Note 10c to the Financial Statements
               attached.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Notes
 see Note 4a to the Financial Statements attached.
| | -- | ---------------------------------------------------------

| | 3. | Long
Term Loans  See Note 4b to the Financial Statements
| | -- | ---------------------------------------------------------

| | 4. | Other
liabilities  see Note 4c 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
distributions from investee companies is in the amount of up to approximately NIS 97
million (of which the Companys share of the additional tax is NIS 16 million, if
this dividend is distributed). No account was taken of the additional tax, since AIPM has
the ability and the intention that such earnings are to be reinvested and that no dividend
would be declared which would involve additional tax liability to the Group in the
foreseeable future.

36

---

---

|3. | Material
commitments for Capital Expenditures
|-- | ---------------------------------------------

| |  | The
Company converted during October 2007 its energy-generation plant in Hadera to using
natural gas, instead of fuel oil.
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | 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 $ 35 million over the term of the agreement from the initial
supply of gas and until the earlier of (1) the point at which the Company will have
purchased an aggregate of 0.43 BCM of natural gas, or (2) , 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
 1.74 million, for the purchase of the systems needed for the conversion and
assistance with their installation at the plant in Hadera. Up to December 31, 2007 the
remainder of the agreement was worth approximately  0.6 million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the beginning of 2008, the Company has engaged in a contract with the main equipment
suppliers for the new manufacturing facility of packaging papers, for the total sum of
48.4 million. Some of the equipment will be supplied during 2008 and the rest will
be supplied in the beginning of 2009.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the last quarter of 2007, the Company signed an agreement with a gas company for the
transmission of gas for a period of 6 years with a two-year extension option. The total
financial value of the transaction is NIS 13.8
million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

There
were no significant investments in research and development activities during the last
three years.

|D. | Trend
information
|-- | -----------------

For
trend information see The Business Environment section included in Item 5 above.

|E. | Off
Balance sheet Arrangements
|-- | ------------------------------

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

|F. | Contractual
Obligations
|-- | -----------------------

|In NIS in million           | Total | Less than 1year | 1-3 years | 4-5 years
|--------------------------- | ----- | --------------- | --------- | ---------
|
|
|
|
|Long term debt obligations* |       |                 |           | 232.3    
|Purchase obligations**      |       |                 |           | 132.0    

* Including interest** From natural gas agreement

37

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# ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

|6.A | Directors
and Senior Management
|--- | -------------------------------

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

|Name                                      | Age | Position/Principal Occupation                                                      
|----------------------------------------- | --- | -----------------------------------------------------------------------------------
|
|
|
|
|Senior Management in Company and in       |     |                                                                                    
|Subsidiaries (as of June 10, 2008)       
|Avi Brener                                | 55  | Chief Executive Officer                                                            
|Israel Eldar                              | 63  | Controller and responsible for risks and business interruption management.         
|Shaul Gliksberg                           | 46  | Chief Financial Officer and Business Development Manager                           
|Lea Katz                                  | 57  | Legal counsel and Corporate Secretary.                                             
|Gabi Kenan                                | 64  | Senior Manager for projects                                                        
|Gur Ben David                             | 56  | General manager of Packaging Paper and Recycling Division.                         
|Pinhas Rimon                              | 68  | Senior manager                                                                     
|Gideon Liberman                           | 58  | General Manager of Development and Infrastructure Division, Chief Operating Officer
|Amir Moshe                                | 42  | General Manager, Graffiti Office Supplies & Paper Marketing Ltd.                   
|Uzi  Carmi                                | 52  | General Manager, Amnir Recycling Industries Ltd.                                   
|Simcha Kenigsbuch                         | 50  | Chief Information Officer                                                          
|                                         
|Senior Management in Affiliated Companies
|(as of June 10, 2008)                    
|Arik Schor                                | 52  | General Manager, Hogla-Kimberly Ltd.                                               
|Avner Solel                               | 54  | General Manager, Mondi Business Paper Hadera Ltd.                                  
|Doron Kempler                             | 58  | General Manager, Carmel Container Systems Ltd.                                     
|                                         
|Directors of the Company                 
|Zvi Livnat(1)                             | 55  | Chairman of the Board                                                              
|Ari Bronshtein(2)                         | 39  | Director                                                                           
|Nochi Dankner(3)                          | 53  | Director (Until August 8, 2007)                                                    
|Roni Milo(4)                              | 58  | Director                                                                           
|Avi Fischer(5)                            | 52  | Director                                                                           
|Isaac Manor(6)                            | 67  | Director                                                                           
|Amos Mar-Haim(7)                          | 70  | Director                                                                           
|Adi Rozenfeld(8)                          | 53  | Director                                                                           
|Avi Yehezkel(9)                           | 49  | Director                                                                           
|Amir Makov(10)                            | 74  | External Director                                                                  
|Ronit Blum(11)                            | 56  | External Director (Until May 22, 2008)                                             

(1) Mr. Livnat has been a
member of our Board of Directors since 2003 and was appointed Chairman of our
Board since April 2, 2006. (2) Mr. Bronsthein has
been a member of our Board of Directors since 2006. (3) Mr. Dankner has been a
member of our Board of Directors since 2003 and resigned on August 8, 2007. (4) Mr. Milo has been a
member of our Board of Directors since August 8, 2007. (5) Mr. Fischer has been a
member of our Board of Directors since 2004. (6) Mr. Manor has been a
member of our Board of Directors since 2003. (7) Mr. Mar-Haim has been
a member of our Board of Directors since 1984. (8) Mr. Rozenfeld has been
a member of our Board of Directors since 2004. (9) Mr. Yehezkel has been
a member of our Board of Directors since 2003. (10) Mr. Makov has been a
member of our Board of Directors since 2005. (11) Ms. Blum has been a
member of our Board of Directors since 2005. On May 22, 2008 the Company
received a resignation letter from Ms. Blum, an external director.
Ms. Blum pointed out that due to other offices she holds, there is a potential
for an affiliation between her and the controlling shareholder of the Company
(the IDB Group). The Israeli Companies Law of 1999 prohibits certain
affiliations between an external director and the controlling shareholder of
the company in which the said external director serves. Because of the possible
affiliation, Ms. Blum decided to resign. On June 3, 2008, the Companys
Board of Directors resolved to call for a Special General Meeting to elect Mrs.
Atalya Arad as an external director of the Company.

38

---

---

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

Mr.
          Zvi Livnat. Mr. Livnat has been Chairman of the Board of Directors of the
          Company since April 2006. In addition he serves as Co-CEO of Clal Industries
and           Investments Ltd., Executive Vice President and director of IDB Holding
          Corporation Ltd., Deputy Chairman of IDB Development Corporation Ltd., and
          a director of Discount Investments Corporation Ltd. Mr. Livnat also serves
          in prominent positions in other public and private companies.Mr. Livnat
          is a graduate of HND Business Studies &Transport (CIT)  Dorset
          Institute of Higher Education, Bournemouth, United Kingdom.

Mr.
          Ari Bronshtein. Mr. Bronshtein is Vice President of Discount Investments
          Corporation Ltd. He also serves as director at various companies. He formerly
          served as Deputy CEO of Economics and Business Development of Bezeq, the
Israeli           Telecom Company Ltd. Mr. Bronshtein is a graduate of Tel Aviv
University where           he studied Management and Economics. He also received a masters
degree in           Management Science of Accounting and Finance from Tel-Aviv
University.

Mr.
          Roni Milo. Mr. Milo served as Chairman of Azorim from 2003-2006, as well as
          Chairman of the Israeli Cinema Council during the same period. He also serves
as           a director of Bank Yahav. Mr. Milo is a lecturer of social science at Bar
Ilan           University. Mr. Milo is a graduate of Tel-Aviv University, where he
received           L.L.B..

Mr.
          Avi Fischer.Mr. Fischer is Director and Co-CEO of Clal Industries and
          Investments Ltd., Deputy Chairman of IDB Development Ltd., Deputy CEO of IDB
          Holdings Corporation Ltd., and Chairman and director of several public and
          private companies in the Ganden Group and the IDB Group. He is a senior partner
          in Fischer, Behar, Chen & Co. Law Office. Mr. Fischer is a graduate of
          Tel-Aviv University, where he received L.L.B..

Mr.
          Isaac Manor. Mr. Manor is a director of IDB Holdings Corporation Ltd., IDB
          Development Ltd., Discount Investments Corporation Ltd., Clal Industries and
          Investments Ltd. and is a director of various publicly-traded and
privately-held           companies within the IDB Group, the Israel Union Bank Ltd. and
others. . He also           serves as Chairman and as a director of companies in the
David Lubinsky Group           Ltd. Mr. Manor is a master in Business Management from the
Hebrew University of           Jerusalem.

Mr.
          Amos Mar-Haim. Mr. Mar-Haim is a member of the Israel Accounting Standards
          Board and a director of various companies. He is the Deputy Chairman of Phoenix
          Investments & Finances Ltd., Chairman of Migdal Underwriting & Promotion
          of Investments Ltd. and is a member of the Active Committee of the Public
          Companies Union. Mr. Mar-Haim received a B.A. in Economics and M.A. in Business
          Management with specialization in Finance from the Hebrew University of
          Jerusalem.

Mr.
          Adi Rozenfeld. Mr. Rozenfeld is a businessman, an Honorary Consul of
          Slovenia in Israel and a director of Clal Industries and Investments Ltd.,
          Discount Investments Corporation Ltd. and Property & Building Corp. He is
          also Chairman of the Association of Friends, Haifa University. Mr. Rozenfeld is
          a graduate of Haifa University,where he studied General History.

Mr.
          Avi Yehezkel.Mr. Yehezkel is an external director at Bank Yahav. He served
          as a Knesset member from 1992-2003, during which he also 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 as a member of the Finance Committee.
Mr.           Yehezkel is a graduate of Tel-Aviv University where he studied Economics,
and           has an M.A. in Law from Bar- Ilan University.

Mr.
          Amir Makov.Mr. Makov is 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),           and
Pigmentan Ltd.. He is also an external director in Wolfman Industries and in
          Leumi Card Ltd. Mr. Makov served as an external director of the Company from
          1996-2001. Mr. Makov is a graduate of the Technion where he received a B.Sc in
          Chemical Engineering and has M.A. in Law from the Hebrew University of
          Jerusalem.

|6.B | Compensation
|--- | ------------

The
aggregate amount of remuneration paid to all directors and senior officers of the Company,
and its subsidiaries (24 officers and directors) as a group for services provided by them
during 2007 was approximately NIS 15,732,701 (approximately $4,090,666). The aggregate
amount set aside for pension, retirement or similar benefits for all directors and senior
officers of the Company and its subsidiaries as a group for services provided by them
during 2007 was approximately NIS 1,882,204 (approximately $489,393).

39

---

---

The
aggregate remuneration above includes payments to the Companys five most-highly
compensated officers, as follows1:

|Name  | Position      | NIS (in thousands)
|----- | ------------- | ------------------
|
|
|
|
|No. 1 | CEO(a)        | 2,643             
|     
|No. 2 | Senior Manger | 1,612             
|     
|No. 3 | Deputy CEO    | 1,406             
|     
|No. 4 | Senior Manger | 1,268             
|     
|No. 5 | Senior Manger | 1,195             

(a) On May 13, 2007, the Board of
Directors  approved the  Employment  Agreement and  remuneration  of Mr. Avi Brener, the
CEO of the Company.  The main elements of the Agreement are:  monthly salary linked to
the Israeli  Consumer Price Index and a yearly  bonus in the  amount  of  between  6-9
 salaries,  subject  to the  discretion  of the  Board.  In addition,  upon termination
of employment,  Mr. Brener will receive, in addition to provisions for severance
payments, a retirement grant payment in an aggregate  amount equal to one-month's  salary
for each year in which he was employed by the Group (from August 1988).

In
 addition,  the senior  officers of the Company and of certain  other  companies  in the
Group were  granted options  pursuant  to a stock  option  plan  adopted in January
 2008.  For details  regarding  the stock  option plan granted  to senior  officers,  see
Item 6.E.  Share  ownership,  below,  and Note 6b of the Notes to the  Consolidated
Financial Statements.

Remuneration of Directors

The
 remuneration  of the  directors  (including  the  external  directors)  for 2007 was
 approved at the 2007 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 29,010  and NIS 47,135,  plus an
additional fee for each meeting  attended which must be between  NIS 1,021 and NIS 1,813.
 The Board  determined  that for 2007 the  remuneration of each director,  including the
external  directors,  would be fixed at NIS 40,000 plus an additional NIS 1,550 for each
meeting attended.

On
June 3, 2008,  the Board of Directors  resolved to adjust the annual  compensation  and
the  compensation for  participation  in Board of  Directors  and  committee  meetings
 granted  to all the  directors  in the  Company, including  external  directors and
directors who are, or their family  members are,  controlling  shareholders  of the
Company,  for the year 2008 up to a sum equal to the "Fixed Amount",  according to the
second and third supplements to the Israeli  Companies  Regulations  (Rules Regarding the
Compensation and Expenses of an External  Director) 2000, as amended in March 2008,
 effective  commencing from, and is subject to, the election of Mrs. Atalya Arad as an
external director in the Company at the forthcoming Special General Meeting.

|6.C | Board
Practices
|--- | ---------------

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

Notwithstanding
 the foregoing,  if no directors were  appointed at any Annual General  Meeting,  the
directors appointed  at the  previous  Annual  General  Meeting  would  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 Board of 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  contracts  which give the current  directors  of the Company any  benefits  upon
 termination  of office.

---

1
          The chart details remuneration paid by the Company to five most-highly
          compensated officers of the Company, as reported by the Company in accordance
          with Israeli law in its Annual Report for 2007 filed with the Israel Securities
          Agency in March 2008.

40

---

---

In reliance upon Section 110 of the
AMEX Company Guide, as a foreign  private  issuer,  the Company has elected not to follow
the requirement  that a majority of the members of our Board of Directors be independent,
 pursuant to Sections 121 and 802 of the AMEX Company Guide.  In addition,  the Company
is considered a "controlled  company" under the AMEX Company  Guide as over  50% of the
 voting  power in the  Company  is held by Clal  and DIC as a group.  According  to
Section  801(a) of the AMEX  Company  Guide,  a controlled  company is not required to
comply with board  independence requirements  under  Section  802.  Accordingly,  the
 Company's  Board of  Directors  is  currently  composed of nine members, of whom four
are independent directors,  namely, Amir Markov, Avi Yehezkel,  Roni Milo and Amos
Mar-Haim, and five are non-independent  directors,  namely Zvi Livnat, Ari Bronshtein,
 Avi Fischer,  Isaac Manor and Adi Rozenfeld. Due to the  resignation of Ms. Ronit Blum,
an external  director and an independent  member of the Company's  Board of Directors,
 the  Company's  Board of Directors  has  resolved to convene a special  general  meeting
of the  Company's shareholders,  to be held on July 10, 2008, to elect Ms.  Atalya Arad
as an external  director of the Company in place of Ms.  Blum.  If  elected,  the
 Company  will have ten  members  on the Board of  Directors,  of which five would be
independent,  including  Ms.  Arad,  and  five  non-independent  directors.  For  further
 information  regarding  the resignation of Ronit Blum 6.A. Directors and Senior
Management.

External Directors

Under
the Israeli  Companies  Law, 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.  Due to the  resignation of Ms. Ronit Blum, Mr. Makov is currently
the only external  director of the Company.  For details of Ms. Blum's resignation,  and
for the period of time each director served in his or her respective  position,  see Item
6.A.  Directors  and Senior  Management.  The Company's  Board of Directors has resolved
to convene a special  general meeting of the Company's  shareholders,  to be held on July
10, 2008, to elect Ms. Atalya Arad as an external director of the Company in place of Ms.
Blum.

None
of the Group's directors are entitled to benefits upon termination of their employment.

Audit Committee

Under
the Israeli  Companies  Law,  members of the Audit  Committee  are elected from members
of the Board of Directors  of the  Company  by the Board of  Directors.  The  Audit
 Committee  must 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.
 In addition,  according to the rules of the AMEX the audit committee must have at least
three members,  each of whom satisfies the independence  standards of Section 803A of the
AMEX  Company  Guide and Rule 10A-3 under the  Securities  Exchange  Act of 1933,  must
not have  participated  in the preparation  of the financial  statements  of the Company
or any current  subsidiary of the Company at any time during the past three years and is
able to read and understand  fundamental  financial  statements.  Additionally,  the
Audit Committee  must have at least one  member who is  financially  sophisticated.  The
Audit  Committee  operates  under a charter adopted by the board of directors.

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 to rectify such flaws and (ii) to decide whether to
approve actions or transactions  which under the Israeli  Companies Law require the
approval of the Audit Committee (such as transactions with a related party).

The
Company's Audit Committee  members are currently:  Amos Mar-Haim,  Chairman,  and Amir
Makov.  Both of whom are "independent"  directors,  as that term is defined in the
American Stock Exchange listing standards. If elected to the Board of Directors, Ms.
Atalya Arad will replace Ms. Blum as the third member of the Company's Audit Committee.

The
Company's Audit Committee also serves as a Balance Sheet Committee to supervise the
completeness of the financial statements and the work of the CPAs and to offer
recommendations regarding the approval of the financial statements and the discussion
thereof prior to said approval.

Nominating Committee

In
reliance upon Section 801(a) of the AMEX Company Guide, as a controlled company in which
over 50% of the voting power is held by Clal and DIC as a group, the Company has elected
not to follow the requirement that a listed company have a nominating committee of the
board of directors that is responsible for recommending nominations to the company's
board of directors, pursuant to Section 804 of the AMEX Company Guide.

41

---

---

Compensation Committee

Section 805 of the AMEX Company Guide
requires that compensation of the chief executive officer and other officers of a listed
company be determined, or recommended to the board for determination, either by a
compensation committee comprised of independent directors or by a majority of the
independent directors on its board. According to Section 801(a) of the AMEX Company Guide,
a controlled company is not required to comply with Section 805. In reliance upon Section
801(a), as a controlled company, the Company has elected not to follow the requirements of
Section 805. The Company has a Compensation Committee, but it is comprised of two
independent directors, namely, Amos Mar-Haim and Amir Makov, and one non-independent
director, namely, Zvi Livnat.

|6.D | Employees
|--- | ---------

As
of April 30, 2008, the Group had 3,050 employees in Israel,  of which the Company and its
 subsidiaries  had 816  employees in Israel.  Of the Company  employees in Israel,  142
were engaged in the office  supplies  activities, 654 in the packaging  paper and
recycling  division,  and 20 were  management and clerical  personnel at the Company's
headquarters  in Hadera.  The associated  companies had 2,234  employees in Israel,  of
whom 1,080 were engaged in the household paper activities (in addition,  KCTR had 287
employees in Turkey engaged in household paper activities,  317 in the printing and
writing paper activities and 837 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  agreements are the Company and
the employees,  through the union.  The Company believes that the relationship between
the Company and the union are good.

|6.E | Share
Ownership
|--- | ---------------

In
2001 the Board of Directors of the Company approved two option plans.

In
April 2001,  the Board of Directors  adopted a 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  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
2007,  35,425  options  were  exercised  under the 2001 plan and 14,466  shares  were
issued  following  the exercise of options.  As of the  reporting  date of this 20-F,
 the full  amount of options  allotted  under said plan were exercised or have expired.

In
August  2001,  the Board of  Directors  approved a stock  option plan for  employees  of
the Company and its subsidiaries  that  expired on  November  3,  2006.  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 vesting
period of the options is two years from the data of grant.  Each option is  exercisable
 within  three  years from the end of the  vesting  period. For further  information
 regarding  the 2001 employee  plan,  see Note 6 of the Notes to the  Consolidated
 Financial Statements.  As of the reporting  date,  the full amount of options  allotted
 under said plan were  exercised or have expired.

On
January 14, 2008,  following the approval of the Audit  Committee,  the Board of
Directors  approved a bonus plan for senior  employees in the Company and/or in
 subsidiaries  and/or in associated  companies,  under which up to 285,750 options (,
each exercisable  into one ordinary share of the Company,  will be allotted to senior
employees and officers in the Group,  including  the CEO of the  Company.  On the date of
approval of the bonus plan,  the number of shares to be  allotted  accounted  for 5.65%
of the issued  share  capital of the  Company.  The  offerees in the said bonus plan are
not interested  parties in the Company,  except for the CEO who is an interested party by
virtue of his position.  Pursuant to the  conditions  of the said  options,  the offerees
 who will  exercise the option will not be allocated all of the shares  derived
 therefrom,  but only a quantity of shares that reflects the sum of the financial benefit
 that is inherent to the option at the  exercise  date only.  The  options  vest in four
yearly  installments. The  vesting  period of the  first  installment  is one year,
 commencing  on the date of  grant,  and the next  three installments  vest  on the
 fourth,  fifth  and  sixth  anniversary  of the  grant  date.  The  first  installment
 is exercisable  for four years from the vesting date.  Each  installment  of the next
three  installments  is exercisable for two years from the vesting date of such
 installment.  For further  information  regarding the 2008 plan, see Note 6 of the Notes
to the Consolidated Financial Statements.

Of
the 287,750  options under the bonus plan,  40,250 options were allotted to the CEO of
the Company,  135,500 were to management of the  subsidiaries  and 74,750 were to
 management  of the  affiliates.  The date of grant of the options was set for the months
of  January-March  2008,  subject to the restrictions of Section 102 (Capital Route) of
the Israeli Income Tax Ordinance.  As of December 31, 2007,  250,500  options had been
allotted.  On May 11, 2008, the Board of  Directors  approved  the  allotment  to a
trustee of the balance of the options  that had not been  allotted through that date, in
the amount of 32,250  options,  as a pool for a future grant to officers and employees,
 subject to the approval of the Board.

42

---

---

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

|7.A | Major
shareholders
|--- | ------------------

The
 following  table  sets  forth,  as of June  10,  2008,  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:                                                                                   | Amount Beneficially OwnedDirectly or Indirectly* | Percent of ClassOutstanding
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------
|
|
|
|
|Clal Industries Ltd. ("Clal")                                                                       |                                                  |                            
|3 Azrieli Center, the Triangle Tower,  Tel Aviv,                                                    |                                                  |                            
|Israel                                                                                              |                                                  |                            
|                                                                                                    |                                                  |                            
|Discount Investments Corporation Ltd. ("DIC")3 Azrieli Center, the Triangle Tower, Tel Aviv, Israel |                                                  |                            
|                                                                                                    |                                                  |                            
|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, Isaac Manor and Zvi Livnat whose ownership is
set forth in footnote (1) below.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | IDB
Holding Corporation Ltd. (IDBH) holds 75.78% of the           equity
of and 76.04% of the voting power in IDB Development Corporation Ltd.           (IDBD),
which, in turn, holds 73.88% of the equity of and           voting power in DIC and
60.52% of the equity of and voting power in Clal. IDBH,           IDBD, Clal and DIC are
public companies traded on the Tel Aviv Stock Exchange.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IDBH
is controlled as follows: (i) Ganden Holdings Ltd. (Ganden), which is
a private Israeli company controlled by Nochi Dankner and his sister, Shelly Bergman,
holds approximately 54.72% of the outstanding shares of IDBH (of which, approximately 17%
of the outstanding shares of IDBH are held directly and approximately 37.73% of the
outstanding shares of IDBH are held through Ganden Investments I.D.B. Ltd, a private
Israeli company, which is an indirect wholly owned subsidiary of Ganden); (ii) Shelly
Bergman, through a wholly-owned company, holds approximately 4.23% of the outstanding
shares of IDBH and approximately 0.68% of the equity and 0.69% of the voting power in
IDBD,; (iii) Avraham Livnat Ltd. (Livnat), which is a private company
controlled by Avraham Livnat holds, directly and through a wholly-owned subsidiary
(Avraham Livnat Investments (2002) Ltd.), approximately 13.26% of the outstanding shares
of IDBH); (iv) Manor Holdings BA Ltd. (Manor), a private company
controlled by Isaac and Ruth Manor holds, directly and through a majority-owned
subsidiary (Manor Investments-IDB Ltd.), approximately 13.24% of the outstanding shares
of IDBH. Subsidiaries of Ganden, Livnat and Manor have entered into a shareholders
agreement with respect to shares of IDBH constituting 31.02%, 10.34% and 10.34%,
respectively, of the outstanding shares of IDBH for the purpose of maintaining and
exercising control of IDBH as a group. The holdings of said entities in IDBH in excess of
said 51.7% of the issued share capital and voting rights of IDBH (as well as the holdings
of Ganden, Manor and Livnat and Shelly Bergman in IDBH) are not subject to the
shareholders agreement. The term of the shareholders agreement expires in May 2023.
Certain of the foregoing shares of IDBH have been pledged in favor of certain financial
institutions as collateral for loans taken to finance part of the purchase price of such
shares. Upon certain events of default, these financial institutions may foreclose
on the loans and assume ownership of or sell the shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 a director of Clal.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

---

---

| | Avi
Fischer holds, directly and through a private company controlled by Avi Fischer and his
wife, directly and indirectly, 9.02% of the equity and the voting power of Ganden.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 as a bloc in General Meetings of the Company on the subject of dividend
distributions. This agreement has been extended up to the year 2010.

Since
May 23, 2005, beneficial ownership percentages for Clal and DIC increased by 5.14% and
2.9%, respectively, as compared to the percentages as indicated in the chart above.

The
Company estimates that as of May 30, 2008, 8.46 % of its outstanding ordinary shares were
held in the United States by 827 record holders.

All
ordinary shares of the Company have equal voting rights. The Companys major
shareholders who beneficially own 5% or more of the Companys ordinary shares
outstanding do not have voting rights different from other holders of ordinary shares.

|7.B | Related
Party Transactions
|--- | --------------------------

The
information is included in the Companys attached Consolidated Financial Statements.
For loans to associated companies, see Note 2 to the attached financial statements. For a
capital note to an associated company, see Note 4c to the attached financial statements.
For transactions and balances with related parties, see Note 13 to the attached financial
statements.

For
further information see also Note 9b, 9c and 9d to the financial statements attached.

|7.C | Interests
of Experts and Counsel
|--- | --------------------------------

Not
applicable.

# ITEM 8. FINANCIAL
INFORMATION

|8.A | Consolidated
Statements and Other Financial Information
|--- | -------------------------------------------------------

See
the financial statements included in Item 17.

# Export Sales

In
2007, the Company had NIS 48.7 million of export sales, which represents approximately
8.3% of the NIS 583.6 million total sales volume of the Company.

Legal
Proceedings

From
time to time, we and our subsidiaries and affiliated companies may be involved in
lawsuits, claims, investigations or other legal or arbitral proceedings that arise in the
ordinary course of our business. These proceedings may include general commercial disputes
and claims regarding intellectual property.

In
December 2003, a petition was filed against H-K, an affiliated company (of which the
Company owns 49.9% of the outstanding shares), for approval of a class action lawsuit.
According to the petition, H-K had reduced the number of units of diapers in a package of
its Huggies® Freedom brand and thus misled the public according to the
Israeli Consumer Protection Act. The plaintiff estimated the damages in the class action
lawsuit to be NIS 18 million. On October 9, 2007, the court dismissedthe action
and thepetition for the approval of a class action, and ordered the plaintiffs to
pay legal fees and expenses to H-K in the amount of NIS 30,000.

In
September 2006, a petition was filed against H-K, an affiliated company (of which the
Company owns 49.9% of the outstanding shares), for approval of a class action lawsuit.
According to the petition, H-K had reduced the number of units of diapers in a package of
its Titulim® brand and thus misled the public according to the Israeli
Consumer Protection Act. The plaintiff estimated the damages inthe class action lawsuit to
be NIS 47 million. On June 18, 2007, the court approved the plaintiffs abandonment
of the petition for approval of a class action lawsuitwith no order that legal expenses be
paid.

In
December 2006, a petition was filed against H-K for the approval of a class action
lawsuit. According to the petition, H-K has reduced the quantity of paper in its
Kleenex® Premium brand toilet paper several years earlier, and thus misled
the public according to the Israeli Consumer Protection Act. The plaintiff estimated the
damages in the class action lawsuit to be approximately NIS 43 million. On June 26, 2007,
the court approved plaintiffs abandonment of the petition for the approval of a
class action lawsuit, and ordered payment of the legal expenses of H-K in the amount of
NIS 10,000.

44

---

---

In
January 2007, a petition was filed against H-K for the approval of a class action lawsuit.
According to the petition, H-K reduced the quantity of wipes in its Titulim®
Premium brand baby wipes several years earlier, and thus misled the public according
to the Israeli Consumer Protection Act. The plaintiff estimated the scope of the damages
in the class action lawsuit to be approximately NIS 28 million. H-K rejects these claims
in their entirety and intends to defend itself vigorously against the lawsuit. On July 4,
2007, the court approved the plaintiffs abandonment of the petition for approval of
a class action lawsuitwith no order that legal expenses be paid.

In
November 2006, the Environmental Protection Ministry announced an investigation of the
Company in connection with alleged deviations from certain air emission standards at its
production plant in Hadera. The Company anticipates that the investigation will not
materially impact its operations.

On
March 7, 2006, TMM, an affiliated company, announced that the Israeli Securities Authority
contacted TMM with regard to an investigation the authority is conducting. At this stage,
TMM is unable to predict the outcome of this investigation or estimate the impact it may
have on the company. On February 04, 2007, the Company sold all its holdings in TMM. See
Item 4. Information on the Company  A. History and Development of the
Company for information on the sale by the Company of its holdings in TMM.

# Dividend Policy

During
2007, the Company did not have a defined policy for distributing dividends.

|8.B | Significant
Changes
|--- | -------------------

The
following significant changes occurred since December 31, 2007, the date of the most
recent annual financial statements included in this document:

In
January 2008, the Board of Directors of the Company approved a program for the allotment,
for no consideration, of non marketable options to the CEO of the company, to employees
and officers of the company and investees. For further details, see Item 5 (General)
above.

# ITEM 9. THE OFFER AND
LISTING

|9.A | Listing
Details
|--- | ---------------

The
following table sets forth the high and low market prices of the Companys ordinary
shares on the American Stock Exchange (AMEX) and TASE for the five most recent
full fiscal years:

|              | American Stock Exchange | Tel Aviv Stock Exchange
|------------- | ----------------------- | -----------------------
|
|
|
|Calendar Year
|2007          |                         |                        
|2006          |                         |                        
|2005          |                         |                        
|2004          |                         |                        
|2003          |                         |                        

* Share prices have been converted
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.

45

---

---

The
following table sets forth the high and low market prices of the Companys ordinary
shares on AMEX and TASE for each fiscal quarter for the two most recent fiscal years and
the first quarter of 2008:

|                           | American Stock Exchange | Tel Aviv Stock Exchange
|-------------------------- | ----------------------- | -----------------------
|
|
|
|
|March 31                   |                         |                        
|June 30 (through June- 15) |                         |                        

|2007 Quarter Ended | High | Low | High | Low   | High | Low
|------------------ | ---- | --- | ---- | ----- | ---- | ---
|
|
|
|
|March 31           |      |     |      | 49.84 |      |    
|June 30            |      |     |      | 67.50 |      |    
|September 30       |      |     |      | 60.88 |      |    
|December 31        |      |     |      | 66.00 |      |    

|2006 Quarter Ended | High | Low | High | Low   | High | Low
|------------------ | ---- | --- | ---- | ----- | ---- | ---
|
|
|
|
|March 31           |      |     |      | 49.23 |      |    
|June 30            |      |     |      | 52.12 |      |    
|September 30       |      |     |      | 46.67 |      |    
|December 31        |      |     |      | 48.55 |      |    

The
following table sets forth the high and low market prices of the Companys ordinary
shares on AMEX and TASE for each month of the most recent six months:

|              | American Stock Exchange | Tel Aviv Stock Exchange
|------------- | ----------------------- | -----------------------
|
|
|
|
|
|May 2008      |                         |                        
|April 2008    |                         |                        
|March 2008    |                         |                        
|February 2008 |                         |                        
|January 2008  |                         |                        
|December 2007 |                         |                        

* 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.

|9.B | Plan
of Distribution
|--- | --------------------

Not
applicable.

|9.C | Markets
|--- | -------

The
Companys ordinary shares have been listed on AMEX since 1959. The ordinary shares
have also been listed on TASE since 1961. The trading symbol for the ordinary shares on
AMEX is AIP.

|9.D | Selling
Shareholders
|--- | --------------------

Not applicable.

|9.E | Dilution
|--- | --------

Not applicable.

46

---

---

|9.F | Expenses
of the Issue
|--- | ---------------------

Not applicable.

# ITEM 10. ADDITIONAL
INFORMATION

|10.A | Share
Capital
|---- | -------------

Not
applicable.

|10.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
Companys Memorandum of Association (the Memorandum of Association) and
Articles of Association (the Articles) are attached as Exhibits 1.1 and 1.2,
respectively, of this annual report.

# Objects and purposes of
the company

As
indicated in Article 5 of the Articles, the Company may, at any time, engage in any kind
of business in which it is, expressly or by implication, authorized to engage in
accordance with the objects of the Company as specified in the Memorandum of Association.
According to the Companys Memorandum of Association, the Companys objectives
are paper manufacturing and any other legal objective.

# Directors personal
interest

The
Israeli Companies Law requires that a director and an officer in 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 the meeting of the
board of directors in which the transaction is first discussed. The Companies Law defines
a personal interest as a personal interest of a person in an action or
transaction by the company, including a personal interest of a relative and of a
corporation in which he or his relative are interested parties, excluding a personal
interest stemming solely from ownership of shares in the company.

If
the transaction is an extraordinary transaction, the approval procedures are as described
below. Under the Israeli Companies Law, an extraordinary transaction is a transaction that
is not in the ordinary course of business, a transaction not on market terms or a
transaction 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 transaction must be approved by the audit
committee, board of directors and by shareholders at a general shareholders meeting byt
the affirmative vote of the holders of a majority of the voting power represented at the
meeting in person or by proxy, provided that either (i) such a majority includes at least
one third of the total votes of shareholders who are not controlling shareholders or on
their behalf, present at the meeting in person or by proxy (votes abstaining shall not be
taken into account in counting the above-referenced shareholder votes); or (ii) the total
number of shares of the shareholders mentioned in clause (i) above that are voted against
does not exceed one percent (1%) of the total voting rights in the Company.

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 of Directors. The management of the Company is guided
by the Board of Directors.

# Powers and function of
directors

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

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According
to the Companies Law, compensation to directors is subject to approval of the audit
committee, the Board of Directors and the General Meeting of Shareholders. There are no
provisions in the Companys Articles regarding an age limit for the retirement of
directors.

Pursuant to regulation promulgated
under the Companies Law, the remuneration of directors does not require the approval of
the general meeting according to the Companies law if it does not exceed the maximum
amount permissible by applicable law. Nevertheless, if a shareholder (one or more) who
holds at least 1% of the share capital or the voting rights in the Company objects, not
later than 14 days from the filing of a report by the Company with the Israeli Authority
then, a resolution of the audit committee and the Board of Directors regarding the
remuneration of the directors would require approval of the General Meeting by a simple
majority and the resolution regarding the remuneration of the directors who are deemed to
be controlling shareholders of the Company would require the approval of the General
Meeting by a simple majority provided that the majority of the votes cast approving such
resolution includes (a) at least 1/3 of the votes of shareholders (or any one on their
behalf) voting at the General Meeting who do not have a personal interest in the approval
of the transaction (the votes of abstaining shareholders will not be taken into account as
part of the majority votes); or (b) the votes of the shareholders mentioned in section (a)
above, who object to such resolution constituted no more than 1% of all voting rights in
the Company.

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

As
described in Item 6.C Board Practices, all directors, except external
directors, stand for election annually at the General Meeting. 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 has equal rights to that of 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 is 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.

Subject
to the provisions of the Israeli Companies Law, the Board of Directors may decide whether
or not to distribute a dividend. When deciding on the distribution of a dividend, the
Board of Directors 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 of Directors.

Dividends
on the Companys ordinary shares may only be paid 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 or any reserve fund from redemption of capital.

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 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.

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

Furthermore,
any controlling shareholder who knows that he 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 regarding the Company, is under a duty to act in fairness
toward the Company. The Israeli Companies Law does not describe the substance of this duty
of fairness. These various shareholder duties may restrict the ability of a shareholder to
act in what the shareholder perceives to be its own best interests.

48

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# 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 of 60% of the votes of shareholders (in present
or by proxies) voting at the General Meeting (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 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 Israel in Hebrew. The notice shall be published at least
twenty-one days prior to the meeting date. 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 described above, the Company is not required by
the Articles and the Israeli Companies Law to give any additional notice as to the General
Meeting, either to the registered shareholders or to shareholders who are not registered.
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, to include the agenda as well as a summary of the
proposed resolutions, and to include any other details required by law.

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

In
the resolution of the Board to convene a meeting, the Board of Directors 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 the manner in which notice will be given to the
shareholders entitled to participate at the meeting.

Each
shareholder holding at least ten percent (10%) of the issued capital and one percent (1%)
of the voting rights, or each shareholder holding at least ten percent (10%) of the voting
rights, is entitled to request that the Board 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 begins consideration of 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 provided in
the meeting notice, unless otherwise determined in the Articles.

If
a quorum is not present within half an hour, the meeting shall be 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 determine.

If
a quorum is not present at the adjourned meeting, the meeting shall be canceled.

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# 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 in the manner required by the Companies Law. The Board of
Directors 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.

Any
person entitled to shares of the Company may vote at a General Meeting in the same manner
as if he were the registered holder of such shares, provided that at least forty eight
hours before the time of the meeting or of the adjourned meeting, as the case may be, at
which he proposes to vote, he shall satisfy the Board of Directors 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 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 of Directors 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 of Directors. The Board of Directors may also establish
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 of Directors, either generally or in respect
to 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
basis 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 a form
customary in Israel or any other form which may be approved by the Board.

According
to an amendment to 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 on each item that comes before the General Meeting.

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

For
purposes of shareholders approval, unless a court rules otherwise, in the vote by
the shareholder meeting of a merging company whose shares are held by the other merging
company, 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 or 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 merger obligations. . In addition, a merger may not be completed unless at
least 30 days have passed from the date that the merger was approved at the general
meetings of any of the merging companies and at least 50 days have passed from the date
that a proposal of merger was 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 at the time. If there is no existing shareholder of the Company who holds
more than 45% of the voting rights 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 shareholder of more than 45% of
the voting rights in 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.

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Under
the Israeli Securities Act 1968, any major shareholder who is the beneficial owner of more
than 5% of the Companys equity capital or voting securities is required to report
this fact, and any change in his holdings, to the Israeli Securities Authority.

# Transfer Agent and
Registrar

We
have  appointed  American  Stock  Transfer & Trust Co. as the transfer  agent and
registrar for our ordinary shares.

# Listing

Our
ordinary shares are listed on both the AMEX and on the TASE under the symbol
AIP.

|10.C | Material
Contracts
|---- | ------------------

For
a description of material contracts other than those described below, see Item 7
Major Shareholders and Related Party TransactionsRelated Party Transactions.

On
January 1, 2007, an agreement was signed with Arledan Investments Ltd., according to which
the Company sold its leasing rights over a plot of land stretching over approximately
three acres in Ramat Hahayal, for a sale price of approximately NIS 57
million. The property is rented until January 2013. As a result of the sale, it
recognized, capital profits of approximately NIS 21 million in the fourth quarter of 2006.

In
February 2007, AIPM finalized the sale of all its direct and indirect holdings in TMM, as
well as its holdings in Barthelemi, to CGEA (in an agreement signed January 4, 2007). The
sale price was approximately $27 million. Following the sale, AIPM ceased to be a
shareholder in TMM. For further details, see Item 4.A History and Development of the
Company.

In
March 2007, KCTR signed an agreement in principle with Unilever, according to which
Unilever shall distribute and sell KCTRs products in Turkey, excluding distribution
and sales to food chains, which will be done directly by KCTR. The agreement was signed to
help KCTR increase its market penetration and volume of sales following the approval of a
strategic plan by KCTR to expand its activities in Turkey in the coming decade. The
complete strategic plan is designed to expand the activities of KCTR from the current
yearly sales volume of $50 million to a volume of $300 million in the year 2015.

In
May 2007, the Company entered into an agreement with East Mediterranean Gas Company
(EMG) for the purchase of natural gas from Egypt. The agreement describes
principles for use in concluding a detailed agreement for the purchase of natural gas. It
is expected that this will generate significant fuel cost savings and lead to further
improvement in air quality. In July 2005, AIPM signed an agreement for the purchase of
natural gas with Thetys Sea Group to meet the Companys requirements for natural gas
at the Hadera production facility until the middle of 2011. The agreement with EMG
provides for the continued availability of natural gas for an additional 15 years. In
addition, the agreement allows AIPM, within a limited period of time, to increase the
quantities of natural gas purchased to serve the needs of the new power plant which is
being planned. The estimated annual purchase of natural gas from EMG will range from $10
million to $50 million, depending on the quantities purchased and the prevailing prices.
Bank and corporate guarantees, of an order of one year purchase, will be provided by AIPM,
when signing the detailed agreement. According to the May 2007 agreement, the parties must
sign a detailed agreement by the end of 2007. As of the report date of this annual report,
the parties are in negotiations to formulate the final version of the said detailed
agreement.

On
July 29, 2005 the Company signed an agreement in London, with the Thetys Sea Group (Noble
Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Avner Oil Exploration
Limited Partnership and Delek Investment and Assets Ltd.), 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 was converted for the use of natural gas, instead of fuel oil. The overall
financial volume of the transaction totals $35 million over the term of the agreement from
the initial supply of gas and until the earlier of (1) the point at which the Company will
have purchased an aggregate of 0.43 BCM of natural gas, or (2) , July 1, 2011.

On
July 11, 2007, the Company entered into an agreement with Israel Natural Gas Routes Ltd.
(Gas Routes) for transportation of natural gas to its facility in Hadera for a
six-year term, with an optional extension for another two-years. Consideration, pursuant
to the agreement includes payment of a non-recurring connection fee upon connection based
on the actual cost of connection to the Companys facility, as well as monthly
payments based on two components: (a) a fixed amount for the gas volume ordered by the
Company; and (b) an additional amount based on the actual gas volume delivered to the
facility. As of the report date of this annual report, the Company is dependent on Gas
Routes, since in the agreement the Company undertook to pay a set annual payment of NIS 2
million even if it does not actually make use of Gas Routes transportation services.

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During
the first half of 2008, critical agreements were signed for acquiring the equipment
required for a new production system for packaging paper produced from paper and board
waste. The new production system at the Companys Hadera site, which will have
an output capacity of approximately 230 thousand tons per annum, will cost an estimated
NIS 690 million (approximately $170 million). The principal equipment for the production
system was acquired from the leading companies in the world in the manufacture and sale of
paper machines, with the central equipment purchased from the Italian company Voith, while
additional complementary items were ordered from Finnish company METSO. According to the
signed agreements, the Company will pay a total sum of  48.4 million for the
equipment detailed above. Some of the equipment will be supplied in the coming months,
whereas the rest of the equipment will be supplied by the beginning of 2009. Pursuant to
the signed agreements, the Company is expected to sign agreements with additional
suppliers and contractors for the acquisition of additional equipment necessary for the
production system.

|10.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 ordinary shares or on the conduct of the Groups
operations, except as otherwise set forth in the paragraph below regarding taxation.

|10.E | Taxation
|---- | --------

The following information is
regarding Israeli law 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 TASE).

After
the 2003 Tax Reform, the Israeli Parliament approved on July 25, 2005 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. The 2006 Tax Reform includes, inter alia, a
gradual reduction of income tax rates for both individuals and corporations over the years
through 2010, and outlines 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 effective date of the 2003 Tax Reform and the 2006 Tax Reform remain
unclear in view of ambiguous legislative language and the lack of authoritative
interpretations at this time. The analysis below is therefore based on our current
understanding of the new legislation.

# 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 a withholding tax of 20%. If the shareholder is considered a principal
shareholder at any time during the 12-month period preceding such distribution,
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 shareholder (non-Approved
Enterprise income) will be 25%. The withholding tax by the Company on such dividend would
remain 20% In the event that tax exempt Approved Enterprise profits are distributed as a
dividend, the Company is subject to the corporate tax from which it was exempt (25%) and
to withholding tax at source in respect of the distributed dividend (usually 15%).

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 (U.S.
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 U.S. Treaty) will be 25%. 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:

| | 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
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.

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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.
In the event that tax exempt Approved Enterprise profits are distributed as a dividend,
the Company is subject to the corporate tax from which it was exempt (25%) and to
withholding tax at source in respect of the distributed dividend (usually 15%). 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%.

# 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 (except for principal shareholder which then the tax rate
is 25%) and 25% for corporations. Inflationary Surplus, that accrued after December 31,
1993, is exempt from tax.

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

Pursuant
to the 2006 Tax Reform, the current applicable corporate tax rate in 2007 is to be
gradually reduced from 29% to 25%, in the following manner: the tax rate for 2007 was
 29% , in 2008  27%, in 2009  26%, in 2010 and afterwards  25%.
The maximum tax rate for individuals is 48% in 2007 and shall also be gradually reduced to
44% in 2010 and afterwards. 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.

An
individual shareholder will generally be subject to tax at a 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%.

Israeli corporations
shareholders will generally be subject to tax at a 25% rate on realized real capital gain
accrued from January 1, 2003 and thereafter.

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 that different taxation rules may apply to shareholders who purchased
their shares prior to the listing on the TASE. 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.

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# 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 TASE provided, however, that such capital gains are not
derived from his permanent establishment in Israel 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 that different taxation rules may apply to shareholders who purchased
their shares prior to the listing on the TASE. 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 directly or indirectly an interest
of less than 10% of the Israeli company, and who held an interest of less than 10% during
all 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.

Uncertainty in income taxes

As of January 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
specifies how tax benefits for uncertain tax positions are to be recognized, measured, and
derecognized in financial statements; requires certain disclosures of uncertain tax
positions; specifies how reserves for uncertain tax positions should be classified on the
balance sheet; and provides transition and interim-period guidance, among other
provisions. As a result of the implementation of the standard there isnt any
influence on the financial statements of the Group.

|10.F | Dividends
and Paying Agents
|---- | ---------------------------

Not
applicable.

|10.G | Statement
by Expert
|---- | -------------------

Not
applicable.

|10.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. We are subject to the information
requirements of the Exchange Act. In accordance with these requirements, we file reports
and other information with the Securities and Exchange Commission (the SEC).

Copies
of this annual report and the exhibits hereto may be inspected and copied at the
SECs Public Reference Room at 100 F Street, NE, 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.

# 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 in interest rates affect the
Companys financial results.

The
Companys Board of Directors determines the policy to address these risks, 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 its exposure every month and examines the compliance with the
policy determined by the Board of Directors.

54

---

---

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

As
of December 31, 2007 AIPM owned CPI-linked long-term loans (notes) in the total amount of
approximately NIS 195.5 million. The interest on such loans is not higher than the market
interest rate. In the event that the inflation rate rises 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 entered into forward transactions, in early 2008 for
hedging NIS 190 million against a rise in the CPI until December 2008. These transactions
replaced hedging transactions of NIS 220 million that terminated in December 2006 and
January 2007.

Through
our normal operations, we are exposed principally to the market risks associated with
changes in the Consumer Price Index, which our notes are linked to. We manage our exposure
to these market risks through our regular financing activities and, when deemed
appropriate, we hedge these risks through the use of derivative financial instruments. We
use the term hedge to mean a strategy designed to manage risks of volatility movements on
certain liabilities. The gains or losses on derivative instruments are expected to offset
the losses or gains on these liabilities. We use derivative financial instruments as risk
hedging tools and not for trading or speculative purposes. Our risk management objective
is to minimize the effect of volatility on our financial results exposed to these risks
and appropriately hedging them with forward contracts.

|                    | Maturity
|------------------- | --------
|
|
|
|
|Series 1debentures  |         
|Series 2 debentures |         

# Credit Risks

The
Companys and its subsidiaries cash and cash equivalents and the short-term
deposits as of December 31, 2007 are deposited mainly with major Israeli banks. The
Company and its subsidiaries consider the credit risks in respect of these balances to be
immaterial.

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.

55

---

---

# Sensitivity Analysis
Tables for Sensitive Instruments, According to Changes in Market Elements

All
other Companys market risk sensitive instruments are instruments entered into for
purposes other than trading proposes.

|Sensitivity to Interest Rates
|-----------------------------
|
|
|
|
|Series 1 Debentures          
|Series 2 Debentures          
|Other liabilities            
|Long-term loans and capital  
|notes - granted              

The fair value of the loans is based
on a calculation of the present value of the cash flows, according to the
generally-accepted interest rate on loans with similar characteristics (4% in 2007).

Regarding the terms of the debentures
and other liability  See Note 4 to the Financial Statements

Regarding the terms of the long-term
loans and capital notes granted  See Note 2 to the Financial Statements

|Sensitivity of  linked instruments to changes in the(euro)exchange rate
|------------------------------------------------------------------------
|
|
|
|
|NIS- forward transaction                                               

See
Note 12a to the financial statements.

|Sensitivity to the U.S. Dollar Exchange Rate
|--------------------------------------------
|
|
|
|
|Other Accounts Receivable                   
|Capital note                                
|Accounts Payable                            

Other accounts receivable reflect
primarily short-term customer debts.

Capital note  See Note 2b to
the financial statements.

Accounts payable reflect primarily short-term
liabilities to suppliers.

56

---

---

Quantitative Information
Regarding Market Risk

The
following are the balance-sheet components by linkage bases at December 31, 2007:

|In NIS Millions                                  | Unlinked | CPI-linked | Inforeigncurrency, orlinkedthereto(primarilyU.S.$) | Non-MonetaryItems | Total
|------------------------------------------------ | -------- | ---------- | -------------------------------------------------- | ----------------- | -----
|
|
|
|
|Assets                                           |          |            |                                                    |                   |      
|Cash and cash equivalents                        |          |            |                                                    | 2.5               |      
|Other Accounts Receivable                        |          |            |                                                    | 259.0             |      
|Inventories                                      |          |            |                                                    |                   |      
|Investments in Associated Companies              |          |            |                                                    | 52.2              |      
|Deferred taxes on income                         |          |            |                                                    |                   |      
|Fixed assets, net                                |          |            |                                                    |                   |      
|Deferred expenses, net of accrued amortization   |          |           
|                                                 |          |            |                                                    |                   |      
|Total Assets                                     |          |            |                                                    | 313.7             |      
|                                                 |          |            |                                                    |                   |      
|Liabilities                                      |          |           
|Credit from Banks                                |          |            |                                                    | 143.0             |      
|Other Accounts Payable                           |          |            |                                                    | 185.3             |      
|Deferred taxes on income                         |          |            |                                                    |                   |      
|Long-Term Loans                                  |          |            |                                                    | 33.5              |      
|Notes (bonds)                                    |          |            |                                                    |                   |      
|Other liabilities - including current maturities |          |            |                                                    | 32.8              |      
|Equity, funds and reserves                       |          |            |                                                    |                   |      
|                                                 |          |            |                                                    |                   |      
|Total liabilities and equity                     |          |            |                                                    | 394.6             |      
|                                                 |          |            |                                                    |                   |      
|Surplus financial assets                         |          |           
|(liabilities) as at December 31, 2007            |          |            |                                                    | (80.9             | )    

# ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

57

---

---

# PART II

# ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

None.

# ITEM 15. CONTROLS AND
PROCEDURES

# (a) Disclosure Controls
and Procedures

Our
Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15 (f)) have concluded that, as of the end of the period covered by this Form 20-F,
our disclosure controls and procedures were effective to ensure that material information
required to be disclosed in the reports that we file and furnish under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms.

# (b) Managements
Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes policies and procedures
that:

| |  | pertain
to the  maintenance  of records  that in  reasonable  detail  accurately  and fairly
 reflect  our             transactions and asset dispositions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance regarding the prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on our
financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect material misstatements. Also, projection of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and procedures
may deteriorate.

Under
the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31,
2007 based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

As
permitted, we have excluded from our evaluation the affiliated companies: Mondi Hadera
Paper Ltd., Frenkel C.D. Ltd., Carmel Container Systems Ltd., Cycle-Tec Recycling
Technology Ltd., and Hogla-Kimberly Ltd. (H-K) (which together, not including
H-K, are referred to as the excluded companies), which are included in our
2007 Consolidated Financial Statements. In the aggregate, the Companys investments
in the excluded companies represented 10.8% of consolidated total assets and, in the
aggregate, the Companys share in net income of the excluded companies represented
42% of consolidated net income (loss) for the year ended December 31, 2007. H-K has a
significant influence on the 2007 Consolidated Financial Statements; however, H-K had its
evaluation performed separately, as part of the 2007 evaluation by Kimberly-Clark Ltd.,
H-Ks parent company.

Our
managements assessment of the effectiveness of the Companys internal control
over financial reporting concluded that, as of December 31, 2007, the Companys
internal control over financial reporting was effective. Our independent registered public
accounting firm, Brightman Almagor, an affiliate of Deloitte Touche Tohmastu, has audited
the consolidated financial statements in this annual report on Form 20-F, and, as part of
their audit, has issued their report, included herein, on the effectiveness of our
internal control over financial reporting as of December 31, 2007.

(c)
          There were no changes in our internal controls over financial reporting that
          occurred during the year end December 31, 2007 that have materially affected, or
          are reasonably likely to materially affect, our internal control over financial
          reporting.

58

---

---

# ITEM 16. [RESERVED]

# ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT

Amos
Mar-Haim, a member of the Companys Audit Committee, meets the criteria of an Audit
Committee Financial Expert under the applicable rules and regulations of the SEC and his
designation as the Audit Committees Financial Expert has been ratified by the Board
of Directors. Amos Mar-Haim is independent, as that term is defined in the
AMEXs 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 officer, principal financial
officer, and principal accounting officer or controller 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 actual or apparent conflicts of interest; support
full, fair, accurate, timely and understandable disclosure in reports and documents the
Company files with, or submits to, the SEC and other governmental authorities, and in its
other public communications; deter wrongdoing; encourage compliance with applicable laws
and governmental rules and regulations; and ensure the protection of the Companys
legitimate business interests. The Company encourages all of its officers and employees
promptly to report any violations of the Code of Ethics, and has provided mechanisms by
which they may do so. The Company will provide a copy of the Code of Ethics to any person,
without charge, upon written request addressed to the Corporate Secretary of the Company
at the Companys corporate headquarters in Hadera, Israel.

# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The
Audit Committee maintains a policy of approving and recommending only those services to be
performed by the Companys external auditors which are permitted under the
Sarbanes-Oxley Act and the applicable rules of the SEC relating to auditor independence,
and which are otherwise consistent with and will encourage, and are remunerated at levels
that accord with, the basic principles of auditor independence. The practice of the Audit
Committee is to receive from the Companys management a list of all services,
including audit, audit-related, tax and other services, proposed to be provided during the
current fiscal year to the Company and its subsidiaries by Brightman Almagor & Co., a
member firm of Deloitte Touche Tohmastu (on April 15, 2007, at a General Meeting the
shareholders approved the appointment of Brightman Almagor & Co. as the Companys
external auditors for the year 2007. Brightman Almagor & Co replaced Kesselman &
Kesselman & Co. who served as the Companys external auditors since 1954 until
2006.). 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 approves prior to the accountant
being engaged such of the proposed services, with a specific pre-approved budget, as it
considers appropriate in accordance with the above principles. Additional services from
Brightman Almagor and any increase in budgeted amounts will similarly be approved during
the year by the Audit Committee prior to the accountant being engaged on a case-by-case
basis.

All
audit-related and non-audit-related services performed by Brightman Almagor during 2007
were proposed to and approved by the Audit Committee prior to the accountant being
engaged, in accordance with the procedures outlined above.

The
following table provides information regarding fees we paid to Brightman Almagor for all
services, including audit services, for the years ended December 31, 2007 and 2006,
respectively.

|                              | U.S. $ in thousands
|----------------------------- | -------------------
|
|
|
|
|Audit fees                    |                    
|Audit of financial statements |                    
|Auditing IFRS reconciliation  |                    
|Audit-related Fees            |                    
|ICFR audit                    |                    
|Tax Fees                      |                    
|All Other Fees                |                    
|Differentials                 |                    
|                              |                    
|Total                         |                    

Audit Fees are the
aggregate fees billed for the audit of our annual financial statements. This category also
includes services that the independent accountant generally provides, such as statutory
audits, consents and assistance with and review of documents filed with the SEC.

Audit-Related Fees are
the aggregate fees billed for assurance and related services that are reasonably related
to the performance of the audit and are not reported under Audit Fees. These fees include
mainly accounting consultations regarding the accounting treatment of matters that occur
in the regular course of business, implications of new accounting pronouncements and other
accounting issues that occur from time to time.

59

---

---

Tax Fees are the
aggregate fees billed for professional services rendered for tax compliance, tax advice,
other than in connection with the audit of the financial statements. Tax compliance
involves preparation of original and amended tax returns, tax planning and tax advice.

All Other Fees are the
aggregate fees billed for products and services provided other than those included in
Audit Fees, Audit-Related Fees, or Tax Fees.

# 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 2007.

60

---

---

# PART III

# ITEM 17. FINANCIAL
STATEMENTS

See
Item 19 below for Consolidated Financial Statements filed as a part of this Annual Report.

The Company
prepares its financial statements in accordance with Israeli GAAP. The effect of the
material 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 for
reporting purposes, commencing in 1994, it would implement the rules relating to economies
no longer considered hyper-inflationary 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 note 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.

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.

61

---

---

|c. | Stock
based compensation
|-- | ------------------------

Under
Israeli GAAP, until December 31, 2005 no compensation expenses were recorded in respect of
employee stock options. Commencing January 1, 2006, the Company applied Israel
Accounting Standard No. 24 of the IASB, Share-Based Payment
(hereafter - Standard 24), which prescribes the recognition and measurement
principles, as well as the disclosure requirements, relating to share-based payment
transactions.

However,
since the Company has not granted any equity-settled awards, nor made modifications to
existing grants, subsequent to March 15, 2005, the transition date as prescribed in
the Israeli standard, the measurement criteria of the standard do not apply to past grants
made by the company, and its application has not had any effect on the measurements of the
stock based compensation expenses.

Under
Israeli GAAP, prior to the adoption of Standard 24, there were no compensation expenses
recorded in respect of share based payments. However, upon exercise, the tax benefit is
credited to shareholders equity. The U.S. GAAP adjustment of NIS (3,397) in 2007, NIS
(2,414) in 2006 and NIS (401) in 2005 to shareholders equity is required to reverse
the credit to equity upon exercise.

For
U.S. GAAP purposes, prior to January 1, 2006 the Company accounted for employee stock
based compensation under the intrinsic value model in accordance with 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
disclosed pro forma data assuming the Company had accounted for employee stock option
grants using the fair value-based method defined in FAS 123.

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

FAS
123R eliminates the ability to account for employee share-based payment transactions using
APB 25 -, and requires instead that such transactions be accounted for using the
grant-date fair value based method. 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.

Compensation
expense for outstanding awards for which the requisite service had not been rendered as of
the effective date will be recognized over the remaining service period using the
compensation cost calculated for pro-forma disclosure purposes under FAS 123, taking into
account the forecasted forfeiture rate.

The
Company adopted FAS 123R, as of January 1, 2006, using the modified prospective
application transition method, as permitted by FAS 123R. Under such transition method, the
Companys financial statements for periods prior to the effective date of FAS 123R
(January 1, 2006) have not been restated. The adoption of FAS 123R resulted in a net
gain representing the cumulative effect of a change in accounting principle in an amount
of approximately NIS 0.2 million net of tax, which reflects the net cumulative impact
of estimating future forfeiture in the determination of period expense, rather that
recording forfeitures when they occur as was previously required.

The
fair value of stock options granted with service conditions, was determined using the
Black Scholes option pricing model, which is consistent with the Companys valuation
techniques previously utilized for options in footnote disclosures required under FAS 123
and FAS 148. Such value is recognized as an expense over the service period, net of
estimated forfeitures, using the accelerated method of amortization under FAS 123R.

The
estimation of stock awards that will ultimately vest requires significant judgment, and to
the extent actual results or updated estimates differ from the Companys current
estimates, such amounts will be recorded as a cumulative adjustment in the period those
estimates are revised. The Company considers many factors when estimating expected
forfeitures, including types of awards, employee class, and historical experience. Actual
results, and future changes in estimates, may differ substantially from the Companys
current estimates.

At
December 31, 2006 all options are fully vested.

62

---

---

The
following table illustrates the effect on net income and EPS assuming the Company had
applied the fair value recognition provisions of FAS 123 to its stock based employee
compensation for the years presented prior to the adoption of FAS 123R:

|                                                                               | 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 effect                                      |                       
|                                                                               |                       
|                                                                               |                       
|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                                                            |                       

A
summary of the status of the Companys option plans as of December 31, 2007, 2006 and
2005 ,respectively, and changes during the years ended on those dates, is presented below:

|                         | 2007 | 2006 | 2005
|------------------------ | ---- | ---- | ----
|
|
|
|
|Options outstanding at   |      |      |     
|beginning of year        |      |      |     
|Changes during the year: |      |     
|                         |      |     
|Exercised                |      |      |     
|Forfeited                |      |      |     
|                         |      |      |     
|Options outstanding at   |      |     
|end of year              |      |      |     
|                         |      |      |     
|Options exercisable at   |      |     
|year-end                 |      |      |     
|                         |      |      |     

* The options plan expired during
July 2007.

|d. | Earnings
per share (EPS)
|-- | --------------------------

Israeli
GAAP relating to computation of EPS was changed as of January 1, 2006 with retroactive
effect. As to the provisions of the new standard see note 1v 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, after the implementation of the new Israeli standard No. 21,
there are no material GAAP differences with regard to the computation of the basic EPS,
however there is a difference in the computation of the diluted EPS as follows:

The computation of the diluted EPS
under U.S. GAAP requires that the unamortized compensation expenses related to employee
stock options will be included in the total amount of the assumed proceeds used in
applying the treasury stock method, while under Israeli GAAP this amounts is not taken
into account.

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

63

---

---

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:

| |                                                    | 2007 | 2006 | 2005
| | -------------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Weighted average number of shares used in the      |      |      |     
| | computation of basic earnings per share            |      |      |     
| | Net additional shares from the assumed exercise of |      |     
| | employee stock options                             |      |      |     
| |                                                    |      |      |     
| | Weighted average number of shares used in the      |      |     
| | computation of diluted earnings per share          |      |      |     
| |                                                    |      |      |     

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

# Carmel

Under
Israeli GAAP, an investment in an associated company is tested for impairment under the
provisions of Israeli Standard No. 15 of the Israeli Accountant Standard Board 
Impairment of Assets (see note 1i 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 things, 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), SEC Staff
Accounting Bulletin (SAB) No. 59 (Accounting for Non current Marketable Equity
Securities) and EITF 03-1 (The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments), 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 things, 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 that the
decline was other than a 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 to NIS 16,986,000.

Under
U.S. GAAP, since there was no goodwill and non amortizable assets, the impairment was
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 the years 2007, 2006 and 2005.

Carmel
was held to the extent of 26.25% by the Company. During the second quarter of 2007 Carmel
acquired its own shares which were held by part of its minority shareholders. As a result
of this acquisition the share of holding in Carmel increased from 26.25% to 36.21%. The
increase in the share of holding yielded to the Company negative excess of cost in the
amount of NIS 4,923 thousands which according to standard 20 (adjusted) was related to non
financial assets, which will be realized according to the rate of realization of these
assets.

Under
Israeli GAAP during the period the Company included in the profits from affiliated
companies, a profit amount of NIS 2,439 thousands from the realization of these assets.

Under
U.S. GAAP (FAS 141  Business Combination) since there is no realization
attributed to inventory the Company included in the profit from affiliated companies, a
profit amount of NIS 733 thousands from the realization of fixed assets.

64

---

---

# 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). Until December
31, 2005 based on the provisions of this Standard, a the Company determined that the
recoverable value of the investment in TMM based on an outside appraiser exceeded its
carrying value (based, among other things, on its Discounted Cash Flows), and accordingly,
the investment was not written down.

As
a result of the implementation of Accounting Standard No. 15, T.M.M recorded a loss of NIS
12.5 million from the impairment of fixed assets in the third quarter of 2006, based on
the estimate of an external assessor.The Companys share of this loss
(43.08%) amounted to NIS 5.4 million.This sum appeared as part of the
Companys share in the earnings (losses) of associated companies for that year.

At
the beginning of 2007 the Company sold its holdings in TMM for a sum approximately equal
to its book value, after taking into account the impairment, which was done during 2006.

Under
U.S. GAAP (APB 18  The Equity Method of Accounting for Investments in Common
Stock), SEC Staff Accounting Bulletin (SAB) No. 59 (Accounting for Non-current
Marketable Equity Securities) and EITF 03-1 (The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments), 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 exceeded
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 that the
decline was other than a 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.

The
losses of TMM and Barthelemi for the year 2006 under U.S. GAAP including impairment in
value of fixed assets and goodwill, amounted to NIS 21.6 million. The Companys share
in this impairment was approximately NIS 8.7 million. Due to the impairment recorded in
the Companys books in 2005 the Companys share in the operating results of
those investment for 2006 was determined, based on their actual results, net of the
impairment, to have been already reflected in 2005. As a result under U.S. GAAP the book
value of TMM was as of 31, December 2006 similar to the value under Israeli GAAP, as
mentioned above.

On
January 4, 2007, the Company entered into an agreement with Veolia Israel CGEA Ltd.
(CGEA), whereby it agreed to sell to CGEA its holdings in Barthelemi, along
with its remaining holdings in T.M.M. Pursuant to the agreement, CGEA has acquired all of
the Companys holdings in Barthelemi.CGEA also acquired all of the
Companys holdings in T.M.M, as part of a complete tender offer, and, beginning in
February 2007, the Company was no longer a shareholder in T.M.M.

The
sale of the Companys holdings in T.M.M was made for consideration approximately
equal to its book value, after taking into account, the impairment as mention above.

|f. | Reclassification
of deferred charges
|-- | ------------------------------------



Under
Israeli GAAP, in accordance with a new Israeli Standard No 22, commencing January 1,
2006 see also note 1j to the financial statements:        The
balance of deferred debt issuance costs, which at December 31, 2005 amounted to
NIS 946 thousands, is reclassified and presented as a deduction from the amount of
the liabilities to which such expenses relate. Under U.S. GAAP deferred charges should be
classified as other assets, see h.3. below. The reclassifications have not impacted net
income as both costs are amortized to the income statement over the term of the debt.

|g. | Leasehold
rights from the Israel Land Administration Authority (ILAA)
|-- | -----------------------------------------------------------------------

Under
Israeli GAAP, land lease rights from the ILAA are accounted for as fixed assets, and not
depreciated.

Under U.S. GAAP, in accordance with SFAS 13 Accounting for Leases,
leases involving real estate can be
accounted for as capital lease only when (a) the lease transfers ownership of the
property to the lessee by the end of the lease term or (b) the lease contains a bargain
purchase option. Since none of the above-mentioned terms is met, leasehold rights are
accounted for as an operating lease. The leasehold rights are amortized over the period
of the initial option and if applicable the renewal option period (see j below).

65

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|h. | Put
option for investee
|-- | -----------------------

As
part of an agreement dated November 21, 1999 with Mondi Business Paper (hereafter MBP,
formerly Neusiedler AG), Mondi Hadera purchased the operations of the Group in the area of
writing and typing paper and issued 50.1% of its shares to MBP.

As
part of this agreement, MBP was granted an option to sell its holdings in Mondi Hadera to
the company, at a price 20% lower than its value (as defined in the agreement) or $ 20
million less 20%, whichever is higher. According to oral understandings between persons in
the company and persons in MBP, which were formulated in proximity to signing the
agreement, MBP will exercise the option only in extremely extraordinary circumstances,
such as those which obstruct manufacturing activities in Israel over a long period.

In
view of the extended period which has passed since the date of such understandings and due
to changes in the management of MBP, occurring recently, the company has chosen to take a
conservative approach, and, accordingly, to reflect the economic value of the option in
the context of the transition to reporting according to international standards.

Under
Israeli GAAP, it was not required to give a value to the PUT option.

Under U.S.
GAAP, the value of the option was computed and recognized as a liability, measured
according to fair value, with changes in fair value being recorded to operations in
accordance with U.S. GAAP.

As
of December 31, 2007, a liability with respect to the option for sale of the shares of the
subsidiary in the amount of approximately NIS 3,901 thousands was 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                             |                       
|Effect of treatment of the following items in accordance with U.S. GAAP:       |                       
|Functional currency , see a above                                              |                       
|Deferred income taxes - net, see a above                                       |                       
|Reconciliation resulting from the Company's share in the adjustments of the    |                       
|associated companies.                                                          |                       
|Other then temporary impairment of an investment in associated companies, see  |                       
|e above                                                                        |                       
|Amortization of other then temporary impairment of an investment in            |                       
|an associated company,  see e above                                            |                       
|Amortization of leasehold rights from the ILAA, see g above                    |                       
|Reconciliation resulting from Put option for investee                          |                       
|Applying FAS 123R in respect of employee stock options, see c above:           |                       
|Gross amount                                                                   |                       
|Deferred taxes                                                                 |                       
|Applying APB 25 in respect of employee stock options, see c above:             |                       
|Gross amount                                                                   |                       
|Deferred taxes                                                                 |                       
|Cumulative effect at beginning of period, net of tax of NIS 127 *, see c above |                       
|                                                                               |                       
|                                                                               |                       
|Net income under U.S. GAAP                                                     |                       
|                                                                               |                       
|                                                                               |                       
|Earnings per share, see d above:                                               |                       
|Basic                                                                          |                       
|                                                                               |                       
|Diluted                                                                        |                       
|                                                                               |                       

*As a result of the adoption of FAS
123R, see c above.

66

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

|                                                                         | December 31
|------------------------------------------------------------------------ | -----------
|
|
|
|
|Shareholders' equity according to Israeli GAAP                           |            
|Effect of treatment of the following items in accordance with U.S. GAAP: |            
|Functional currency                                                      |            
|Amortization of leasehold rights                                         |            
|Investments in associated companies                                      |            
|Other then temporary impairment of an investment in -                    |            
|associated  companies, net of amortization                               |            
|Elimination of exercise of employee options into shares                  |            
|Cumulative effect, at beginning of 2006 of SAB 108, net of tax           |            
|Put Option                                                               |            
|Deferred income taxes                                                    |            
|                                                                         |            
|Shareholders' equity under U.S. GAAP                                     |            
|                                                                         |            

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

|                                      | D  e  c  e  m  b  e  r   3  1
|------------------------------------- | -----------------------------
|
|
|
|
|
|
|Assets                                |                              
|                                      |                              
|Inventories                           |                              
|                                      |                              
|                                      |                              
|Investment in associated companies    |                              
|                                      |                              
|                                      |                              
|Fixed assets - net                    |                              
|                                      |                              
|                                      |                              
|Deferred charges                      |                              
|                                      |                              
|                                      |                              
|Liabilities and shareholders' equity  |                              
|                                      |                              
|Accounts payable and accruals - Other |                              
|                                      |                              
|                                      |                              
|Deferred taxes - net                  |                              
|                                      |                              
|                                      |                              
|Notes                                 |                              
|                                      |                              
|                                      |                              
|Shareholders' equity**                |                              
|                                      |                              

|** | 2006
retained earnings are net of an adjustment of NIS (2,665) thousands, net of tax related
to the adoption of SAB 108 (see k below).
|-- | --------------------------------------------------------------------------------------------------------------------------------------

67

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|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
U.S. GAAP for the years ended December 31, 2005, 2006 and 2007, respectively, is presented
below:

| |                                           | 2007 | 2006 | 2005
| | ----------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Net cash provided by operating activities |      |      |     
| | Net cash used in investing activities     |      |      |     
| | Net cash used in financing activities     |      |      |     
| |                                           |      |      |     
| | Increase (decrease) in cash and cash      |      |     
| | Equivalents                               |      |      |     
| | Balance of cash and cash equivalents      |      |     
| | at beginning of year                      |      |      |     
| |                                           |      |      |     
| | Balance of cash and cash equivalents      |      |     
| | at end of year                            |      |      |     
| |                                           |      |      |     

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 are classified as operating activities.

|k. | Adoption
of SAB 108 Accounting for the Effects of Prior year           Misstatements when
Quantifying Misstatementsin current year financial           statements
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 addresses the diversity in practice of quantifying financial statement
misstatements resulting in the potential build up of improper amounts on the balance
sheet. SAB 108 provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors using both a
balance sheet and an income statement approach and evaluate whether either approach
results in quantifying a misstatement that, when all relevant quantitative and qualitative
factors are considered, is material. SAB 108 is effective for companies with fiscal years
ending after November 15, 2006 and SAB 108 allows a one-time transitional cumulative
effect adjustment to beginning retained earnings, in the first year of adoption, for
errors that were not previously deemed material, but are material under the guidance in
SAB 108.

Additionally,
the use of the cumulative effect transition method requires detailed disclosure of the
nature and amount of each individual error being corrected through the cumulative
adjustment and how and when it arose. The Company has adopted SAB No. 108. The
adoption of SAB No. 108 had an effect of NIS 2,665 thousand , net of tax, on the
consolidated retained earnings due to the GAAP differences related to the leases from the
Israeli Land Administration Authority, see note g above.

|l. | Recently
issued accounting pronouncements in the Untied States:
|-- | ---------------------------------------------------------------

|1. | SFAS
No. 157 Fair Value Measurements
|-- | -------------------------------------

In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157). This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. The provisions of
SFAS No. 157 are effective for the Company beginning January 1, 2008. The
FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for
one year for all nonfinancial assets and nonfinancial liabilities, except for those items
that are recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company does not expect the adoption will have material impact on its
consolidated financial statements.

68

---

---

|2. | SFAS
No. 159  The Fair Value Option for Financial Assets and Financial Liabilities
|-- | -----------------------------------------------------------------------------------

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159). SFAS No. 159 permits companies to
choose to measure certain financial instruments and certain other items at fair value. The
standard requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings. The provisions of SFAS No. 159
are effective for the Company beginning January 1, 2008. The Company does not expect
the adoption of SFAS No. 159 will have an impact on its consolidated financial
statements.

|3. | SFAS
No. 141 (revised 2007)  Business Combinations
|-- | ---------------------------------------------------

In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141R). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the acquiree and
the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable
the evaluation of the nature and financial effects of the business combination.
SFAS 141R is effective for fiscal years beginning after December 15, 2008.
Earlier adoption is prohibited. The Company is currently evaluating the potential impact,
if any, of the adoption of SFAS 141R on its consolidated results of operations and
financial condition.

|4. | SFAS
No. 160  Non-controlling Interests in Consolidated Financial
          Statements, an amendment of ARB No. 51.
|-- | --------------------------------------------------------------------------------------------------------------------

In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51". SFAS No. 160 establishes accounting and reporting
standards that require that the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parents equity;
the amount of consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated statement of
income; and changes in a parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently. SFAS
No. 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not expect the adoption of
SFAS No. 160 will have significant impact on its consolidated financial statement

# Schedule 
Valuation and Qualifying Accounts

Three Years Ended December 31, 2007

(NIS in thousands)

|Column A                         | Column B | Column C | Column D | Column E
|-------------------------------- | -------- | -------- | -------- | --------
|
|
|
|
|
|Allowance for doubtful accounts: |          |          |          |         
|Year ended December 31, 2007     |          |          |          | 16,791  
|                                 |          |          |          |         
|Year ended December 31, 2006     |          |          |          | 16,914  
|                                 |          |          |          |         
|Year ended December 31, 2005     |          |          |          | 16,148  
|                                 |          |          |          |         

# ITEM 18. FINANCIAL
STATEMENTS

# Not applicable.

69

---

---

# 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,
2007 (including Reports of Independent Registered Public Accounting           Firms).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Financial
statements of Mondi Paper Hadera Ltd. for the year ended December 31,           2007.
| | ---- | -----------------------------------------------------------------------------------------------

| | (iii) | Financial
statements of Hogla-Kimberly Ltd. for the year ended December 31,           2007.
| | ----- | -------------------------------------------------------------------------------------------

| | (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)
          For additional documents filed with this report see Exhibit Index.

70

---

---

# SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on
its behalf.

| |  | AMERICAN ISRAELI PAPER MILLS LIMITEDBy: /s/ Shaul Gliksberg
Shaul GliksbergChief Financial Office
| |  | ---------------------------------------------------------------------------------------------------------------

Dated: June 22, 2008

71

---

---

# EXHIBIT INDEX

|ExhibitNumber |  | Description
|------------- |  | -----------

|1.1 |  | Memorandum
of Association of AIPM (incorporated by reference to the Company's Annual Report on Form
20-F for               the year ended December 31, 1987).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Articles
of Association of AIPM (incorporated by reference to exhibit 1 to the Company's Annual
Report on Form               20-F for the year ended December 31, 2005, filed with the
SEC on June 30, 2006).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Voting
Agreement dated February 5, 1980 by and among Clal Industries Ltd., PEC Israel Economic
Corporation and               Discount Bank Investment Corporation Ltd. (incorporated by
reference to exhibit 3.1 to the Company's Annual               Report on Form 20-F for
the year ended December 31, 1987).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | Table
of subsidiaries of AIPM.*
|--- |  | -------------------------------

|12.1 |  | Certification
of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.302
of the               Sarbanes-Oxley Act.*
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.302
of the               Sarbanes-Oxley Act.*
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
of Chief Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of
the               Sarbanes-Oxley Act.*
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of Chief Financial Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of
the               Sarbanes-Oxley Act.*
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

* Field herein.

72

---

---

AMERICAN ISRAELI PAPER
MILLS LIMITED2007 CONSOLIDATED
FINANCIAL STATEMENTS



---

---

AMERICAN ISRAELI PAPER
MILLS LIMITED2007 CONSOLIDATED
FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                            | Page     
|----------------------------------------------------------- | ---------
|
|
|
|
|REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    | F-2-F-3  
|CONSOLIDATED FINANCIAL STATEMENTS:                         
|Balance sheets                                              | F-4-F-5  
|Statements of income                                        | F-6      
|Statements of changes in shareholders' equity               | F-7      
|Statements of cash flows                                    | F-8-F-10 
|Notes to financial statements                               | F-11-F-58
|SCHEDULE - DETAILS OF SUBSIDIARIES AND ASSOCIATED COMPANIES | F-59     



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders ofAmerican Israeli Paper
Mills Ltd.

We have audited the accompanying
consolidated balance sheets of American Israeli Paper Mills Ltd.
(the Company) and its subsidiaries as ofDecember 31, 2007
and the related statements of operations, changes in shareholders equity and
comprehensive income, and cash flows for the year ended December 31, 2007. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

The financial statements of the
company for the years ended December 31,2006 and 2005 have been audited by other
independent auditors who expressed their unqualified opinion as of March 7, 2007.

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, 2007 is NIS 66.5 million, and
the Companys share in excess of profits over losses of which is a net amount of NIS
2.9 million, for the year ended December 31, 2007. The financial statements of those
companies were audited by other Independent registered Public Accounting Firms whose
reports have been furnished to us, and our opinion, insofar as it relates to amounts
included for those companies, is based solely on the reports of the other independent
auditors.

We conducted our audits in accordance
with 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 also
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the reports of the other independent auditors, the consolidated financial statements
present fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2007 and the consolidated results of their
operations and their consolidated cash flows for year ended December 31, 2007, 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.

In addition we have audited the
Companys US GAAP reconciliation report presented at item 17 of this form 20-F as of
December 31, 2007 and for the year then ended (the Report). The Report is the
responsibility of the Companys management.

In our opinion, the Report present
fairly, in all material respects, the information set forth there in, in accordance with
generally accepted accounting principles in the United States of America

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of December 31, 2007,
based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 22, 2008 expressed an unqualified opinion on the Companys
internal control over financial reporting.

/s/ Brightman Almagor & Co. Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
June 22, 2008

F - 2

---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of American Israeli Paper Mills Ltd.

We have audited the internal control over
financial reporting of American Israeli Paper Mills Ltd. and subsidiaries (the
Company) as of December 31, 2007, based on criteria established in
Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Managements Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed by, or under the supervision of, the
companys principal executive and principal financial officers, or persons performing
similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of the inherent limitations
of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2007, based on the criteria established in Internal Control
 Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company and its subsidiaries as
of December 31, 2007 and the related statements of operations, changes in
shareholders equity and comprehensive income, and cash flows for year ended December
31, 2007 and our report dated June 22, 2008 expressed an unqualified opinion thereon.

/s/ Brightman Almagor & Co.Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
June 22, 2008

F - 3

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---

AMERICAN ISRAELI PAPER
MILLS LIMITEDCONSOLIDATED BALANCE
SHEETS

|                                    |  | December 31
|----------------------------------- |  | -----------
|
|
|
|
|Assets                              |  |            
|CURRENT ASSETS:                     |  |            
|Cash and cash equivalents           |  |            
|                                    |  |            
|Accounts receivable:                |  |            
|Trade                               |  |            
|Other                               |  |            
|Inventories                         |  |            
|                                    |  |            
|Total  current assets               |  |            
|                                    |  |            
|INVESTMENTS AND LONG-TERM           |  |            
|RECEIVABLES:                        |  |            
|Investments in associated companies |  |            
|Deferred income taxes               |  |            
|                                    |  |            
|                                    |  |            
|                                    |  |            
|FIXED ASSETS:                       |  |            
|Cost                                |  |            
|Less - accumulated depreciation     |  |            
|                                    |  |            
|                                    |  |            
|                                    |  |            
|DEFERRED CHARGES,                   |  |            
|net of accumulated amortization     |  |            
|                                    |  |            
|Total  assets                       |  |            
|                                    |  |            

| |                     |                                
| | ------------------- | -------------------------------
|
|
|
|
| |                     | )  Chairman of the             
| | /s/ Zvi Livnat      |                                
| | Zvi Livnat          | )  Board of Directors          
| |                    
| |                     | )                              
| | /s/ Avi Brener      |                                
| | Avi Brener          | )  Chief Executive Officer     
| |                    
| |                     | )                              
| | /s/ Shaul Gliksberg |                                
| | Shaul Gliksberg     | )  Chief Financial and Business
| |                     | Development Officer            

Date of approval of the financial
statements: 22 June 2008

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

F - 4

---

---

|                                                          |  | December 31
|--------------------------------------------------------- |  | -----------
|
|
|
|
|Liabilities and shareholders' equity                      |  |            
|CURRENT LIABILITIES:                                      |  |            
|Credit from banks and others                              |  |            
|Current maturities of long-term notes and long term loans |  |            
|Accounts payable and accruals:                            |  |            
|Trade                                                     |  |            
|Other                                                     |  |            
|                                                          |  |            
|Total current liabilities                                 |  |            
|                                                          |  |            
|LONG-TERM LIABILITIES:                                    |  |            
|Deferred income taxes                                     |  |            
|Loans and other liabilities                               |  |            
|(net of current maturities):                              |  |            
|Loans from banks                                          |  |            
|Notes                                                     |  |            
|Other liabilities                                         |  |            
|                                                          |  |            
|Total long-term liabilities                               |  |            
|                                                          |  |            
|COMMITMENTS AND CONTINGENT LIABILITIES                    |  |            
|                                                          |  |            
|Total liabilities                                         |  |            
|                                                          |  |            
|SHAREHOLDERS' EQUITY:                                     |  |            
|Share capital (ordinary shares of NIS 0.01 par value:     |  |            
|authorized - 20,000,000 shares; issued and paid:          |  |            
|December 31, 2007 and 2006 - 5,060,774 and                |  |            
|4,032,723 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 shareholders equity                                 |  |            
|                                                          |  |            
|Total  liabilities and shareholders' equity               |  |            
|                                                          |  |            

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

F - 5

---

---

AMERICAN ISRAELI PAPER
MILLS LTD. CONSOLIDATED STATEMENTS
OF INCOME

|                                                                      | Note | 2007 | 2006 | 2005  
|--------------------------------------------------------------------- | ---- | ---- | ---- | ------
|
|
|
|
|SALES                                                                 |      |      |      | 10e;14
|COST OF SALES                                                         |      |      |      | 10f   
|                                                                      |      |      |      |       
|GROSS PROFIT                                                          |      |      |      |       
|                                                                      |      |      |      |       
|SELLING, MARKETING, ADMINISTRATIVE                                    |      |     
|AND GENERAL EXPENSES:                                                 |      |      |      | 10g   
|Selling and marketing                                                 |      |      |      |       
|Administrative and general                                            |      |      |      |       
|                                                                      |      |      |      |       
|                                                                      |      |      |      |       
|                                                                      |      |      |      |       
|INCOME FROM ORDINARY OPERATIONS                                       |      |      |      |       
|FINANCIAL EXPENSES - net                                              |      |      |      | 10h   
|OTHER INCOME (EXPENSES) - net                                         |      |      |      | 10i   
|                                                                      |      |      |      |       
|INCOME BEFORE TAXES ON INCOME                                         |      |      |      |       
|TAXES ON INCOME                                                       |      |      |      | 7     
|                                                                      |      |      |      |       
|INCOME FROM OPERATIONS OF THE                                         |      |     
|COMPANY AND ITS SUBSIDIARIES                                          |      |      |      |       
|SHARE IN PROFITS (LOSSES) OF ASSOCIATED                               |      |     
|COMPANIES - net                                                       |      |      |      | 2     
|                                                                      |      |     
|INCOME BEFORE CUMULATIVE EFFECT,                                      |      |     
|AT BEGINNING OF YEAR, OF AN ACCOUNTING                                |      |      |      |       
|                                                                      |      |      |      |       
|CHANGE IN ASSOCIATED COMPANIES                                        |      |      |      |       
|                                                                      |      |     
|CUMULATIVE EFFECT, AT BEGINNING OF                                    |      |     
|YEAR, OF AN ACCOUNTING CHANGE IN AN ASSOCIATED COMPANY                |      |      |      | 1m    
|                                                                      |      |      |      |       
|NET INCOME FOR THE YEAR                                               |      |      |      |       
|                                                                      |      |      |      |       
|                                                                      |      |     
|
|                                                                      |      |     
|EARNINGS PER SHARE:                                                   |      |      |      | 1v;11 
|Primary:                                                              |      |     
|Before cumulative effect of a change in accounting policy             |      |      |      |       
|Cumulative effect, at beginning of year, of a change in accounting    |      |     
|policy of an associated company                                       |      |      |      |       
|                                                                      |      |      |      |       
|Net income per share                                                  |      |      |      |       
|                                                                      |      |      |      |       
|Fully diluted:                                                        |      |     
|Before cumulative effect of a change in accounting policy             |      |      |      |       
|Cumulative effect, at beginning of year, of a change in accounting    |      |     
|policy of an associated company                                       |      |      |      |       
|                                                                      |      |      |      |       
|Net income per share                                                  |      |      |      |       
|                                                                      |      |      |      |       
|Number of shares used to compute the primary earnings per share       |      |      |      |       
|                                                                      |      |      |      |       
|Number of shares used to compute the fully diluted earnings per share |      |      |      |       
|                                                                      |      |      |      |       

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

F - 6

---

---

AMERICAN ISRAELI PAPER
MILLS LIMITEDSTATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

|                                                                                                   | Share capital | Capital
surpluses | Capital surplusresulting from
tax benefit onexerciseof employee options | Differences fromcurrency translation
resulting fromfinancialstatements ofassociated companies | Retainedearnings | Total
|-------------------------------------------------------------------------------------------------- | ------------- | ----------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------- | -----
|
|
|
|
|BALANCE AT JANUARY 1, 2005                                                                         |               |                   |                                                                         | 125,257                                                                                       |                  |      
|CHANGES IN 2005:                                                                                   |               |                  
|Net income                                                                                         |               |                   |                                                                         | -                                                                                             |                  |      
|Dividend paid***                                                                                   |               |                   |                                                                         | -                                                                                             |                  |      
|Exercise of employee options into shares                                                           |               |                   |                                                                         | *                                                                                             |                  |      
|Differences from currency translation resulting from                                               |               |                  
|financial statements of associated companies                                                       |               |                   |                                                                         | -                                                                                             |                  |      
|                                                                                                   |               |                   |                                                                         |                                                                                               |                  |      
|BALANCE AT DECEMBER 31, 2005                                                                       |               |                   |                                                                         | 125,257                                                                                       |                  |      
|CHANGES IN 2006:                                                                                   |               |                  
|Net income                                                                                         |               |                   |                                                                         | -                                                                                             |                  |      
|Dividend paid                                                                                      |               |                   |                                                                         | -                                                                                             |                  |      
|Exercise of employee options into shares                                                           |               |                   |                                                                         | *                                                                                             |                  |      
|Differences from currency translation resulting from                                               |               |                  
|financial statements of associated companies                                                       |               |                   |                                                                         | -                                                                                             |                  |      
|                                                                                                   |               |                   |                                                                         |                                                                                               |                  |      
|BALANCE AT DECEMBER 31, 2006                                                                       |               |                   |                                                                         | 125,257                                                                                       |                  |      
|CHANGES IN 2007:                                                                                   |               |                  
|Net income                                                                                         |               |                   |                                                                         | -                                                                                             |                  |      
|Costs Shares issuance (deduction of costs issuance in        the amount of  NIS 1,581 thousands)** |               |                   |                                                                         | 10                                                                                            |                  |      
|Exercise of employee options into shares                                                           |               |                   |                                                                         | *                                                                                             |                  |      
|Differences from currency translation resulting from                                               |               |                  
|financial statements of associated companies                                                       |               |                   |                                                                         | -                                                                                             |                  |      
|                                                                                                   |               |                   |                                                                         |                                                                                               |                  |      
|BALANCE AT DECEMBER 31, 2007                                                                       |               |                   |                                                                         | 125,267                                                                                       |                  |      
|                                                                                                   |               |                   |                                                                         |                                                                                               |                  |      

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

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

|** | See
note 6a.
|-- | ------------

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

F - 7

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---

AMERICAN ISRAELI PAPER
MILLS LIMITEDCONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                              | 2007 | 2006 | 2005
|------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |      |      |     
|Net income for the year                                       |      |      |     
|Adjustments to reconcile net income to                        |      |     
|net cash provided by operating activities (A)                 |      |      |     
|                                                              |      |      |     
|Net cash provided by operating activities                     |      |      |     
|                                                              |      |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |      |     
|Purchase of fixed assets                                      |      |      |     
|Deposit and Marketable securities                             |      |      |     
|Associated companies:                                         |      |     
|Granting of loans                                             |      |      |     
|Collection of loans                                           |      |      |     
|Proceeds from sale of investment of associated company        |      |      |     
|Proceeds from sale of subsidiary consolidated in the past (B) |      |      |     
|Proceeds from sale of fixed assets                            |      |      |     
|                                                              |      |      |     
|Net cash used in investing activities                         |      |      |     
|                                                              |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |      |     
|Proceeds gain from private shares allocating                  |      |      |     
|Receipt of long-term loans from banks                         |      |      |     
|Repayment of long-term loans from banks                       |      |      |     
|Redemption of notes                                           |      |      |     
|Dividend paid                                                 |      |      |     
|Short-term credit from banks - net                            |      |      |     
|                                                              |      |      |     
|Net cash used in financing activities                         |      |      |     
|                                                              |      |      |     
|INCREASE IN CASH AND                                          |      |     
|CASH EQUIVALENTS                                              |      |      |     
|BALANCE OF CASH AND CASH EQUIVALENTS AT                       |      |     
|BEGINNING OF YEAR                                             |      |      |     
|                                                              |      |      |     
|BALANCE OF CASH AND CASH EQUIVALENTS AT                       |      |     
|END OF YEAR                                                   |      |      |     
|                                                              |      |      |     

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

F - 8

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---

AMERICAN ISRAELI PAPER
MILLS LIMITEDCONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                | 2007 | 2006 | 2005
|--------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|(A)    Adjustments to reconcile net income to net cash provided |      |      |     
|by operating activities:                                        |      |     
|Income and expenses not involving cash flows:                   |      |     
|Share in losses (profits) of associated companies - net         |      |      |     
|Capital loss from sale of investment of an associated company   |      |      |     
|Dividend received from associated company                       |      |      |     
|Depreciation and amortization                                   |      |      |     
|Deferred income taxes - net                                     |      |      |     
|Capital losses (gains) on:                                      |      |     
|Sale of fixed assets - net                                      |      |      |     
|Sale of subsidiary consolidated in the past (B)                 |      |      |     
|Losses (gains) on short-term deposits and securities            |      |      |     
|Linkage and exchange differences (erosion) on principal of      |      |     
|long-term loans from banks - net                                |      |      |     
|Linkage differences (erosion) on principal of notes             |      |      |     
|Linkage differences (erosion) on principal of long-term loans   |      |     
|granted  to associated companies                                |      |      |     
|                                                                |      |      |     
|                                                                |      |      |     
|                                                                |      |      |     
|Changes in operating asset and liability items:                 |      |     
|Increase in trade receivables                                   |      |      |     
|Decrease (increase) in other receivables                        |      |     
|(excluding deferred income taxes)                               |      |      |     
|Decrease (increase) in inventories                              |      |      |     
|Increase in trade payables                                      |      |      |     
|Increase (decrease) in other payables and accruals              |      |      |     
|                                                                |      |      |     
|                                                                |      |      |     
|                                                                |      |      |     
|                                                                |      |      |     
|                                                                |      |      |     
|Supplementary disclosure of cash flow information -             |      |     
|Payments in cash during the year:                               |      |     
|Income taxes paid                                               |      |      |     
|                                                                |      |      |     
|Interest paid                                                   |      |      |     
|                                                                |      |      |     

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

F - 9

---

---

AMERICAN ISRAELI PAPER
MILLS LIMITEDCONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                  | 2005
NIS in thousands
(see note 1b)
|----------------------------------------------------------------- | -----------------------------------
|
|
|
|
|(B)   Proceeds from sale of subsidiary consolidated in the past - |                                    
|                                                                  |                                    
|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 that the                Companys
share in this dividend amounts to NIS 2,650,000 was paid during                2006.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | In
December 2006 a land was sold in consideration of approximately NIS 40
               million, net of tax, betterment levy and other accompanying selling cost.
This                amount was transferred to a trustee at the date of the transaction
execution and                received during January 2007 see note 10i.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | For
December 31, 2007 the acquisition of fixed assets on credit amounts to NIS
               6,634 thousands and for December 31, 2006 amounts to NIS 10,599 thousands.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 10

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---

AMERICAN ISRAELI PAPER
MILLS LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES

| | The
consolidated 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 in the accounting policy
resulting from the first-time application, in 2007, of new accounting standards of the
Israel Accounting Standards Board (hereafter - the IASB) were applied on a
consistent basis, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the adoption of International Financial Reporting Standards (IFRS), which is to be
carried out in reporting periods commencing on January 1, 2008 and thereafter, see
note 16 below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Related
parties  as defined by opinion No. 29 of the Institute of Certified Public
Accountants in Israel.
| | ----------------------------------------------------------------------------------------------------------

F - 11

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---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | Controlling
shareholders  Until December 31, 2006, transactions between the Company and a
controlling shareholder therein were treated in accordance with the provisions of
Securities Regulations (Presentation of Transactions between a Company and a Controlling
Shareholder Therein in the Financial Statements), 1996 (hereinafter  the
Regulations).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, the Company has been implementing Accounting Standard No. 23: The
Accounting Treatment of Transactions between an Entity and the Controlling Shareholder
Therein.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Basis
of presentation of the financial statements
| | -- | -------------------------------------------------

| | 1) | The
Company draws up and presents its financial statements in Israeli currency
               (hereafter - shekels or NIS). in accordance with the provisions of
Israel                Accounting Standard No. 12  Discontinuance of Adjusting
Financial                Statements for Inflation  of the IASB, which
establishes principles                for transition to nominal reporting, commencing
January 1, 2004                (hereafter - the transition date). Accordingly,
amounts that relate to                non-monetary assets (including depreciation and
amortization thereon),                investments in associated companies (see also e
below) permanent               investments, 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 (based on the
exchange rate of the dollar 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. The
financial statements of group companies which are drawn up in                foreign
currency, are translated into shekels or are remeasured in shekels for                the
purpose of inclusion in these financial statements, as explained in e.
               below.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
sums of non-monetary assets do not necessarily reflect the realization value
               or an updated economic value, but rather only the reported sums of the
said                assets, as stated in (1), above. The term cost in these
financial                statements shall mean the cost in reported sums.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | -- | -----------

| | Commencing
January 1, 2007, the Company has been implementing the provisions of Accounting Standard
No. 26, Inventories.
| | --------------------------------------------------------------------------------------------------------------------------

| | Inventories
are measured at the lower of cost or net realizable value. The cost of inventories
includes acquisition costs, fixed and varied overhead costs, as well as others costs
incurred in bringing the inventory to the current location and condition. The net
realization value represents the selling price estimate during the ordinary course of
business, net of the estimate of completion costs and the estimate of costs required to
perform the sale.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Until
December 31, 2006, inventory was presented at the lower of cost or market value.
| | --------------------------------------------------------------------------------------

F - 12

---

---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | In
accordance with the Standard, when inventories are purchased under credit terms whereby
the arrangement involves a financing element, the inventories should be presented at cost
reflecting the purchase price under ordinary credit terms. The difference between the
actual purchase amount and the cost reflecting the purchase price under ordinary credit
terms, is recognized as an interest expense during the credit period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of inventory is determined on a moving average basis.
| | --------------------------------------------------------------

| | The
spare parts of machinery and equipment, which are not intended for current use, are
presented under fixed assets.
| | -----------------------------------------------------------------------------------------------------------------------

| | The
first-time application of the standard did not have any effect on the Companys
financial statements.
| | ---------------------------------------------------------------------------------------------------------

| | 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 i. 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%.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | In
accordance with the provisions of Standard No. 20 (As Amended), which           is
applied by the group companies since January 1, 2006, as of that date,
          amortization of goodwill at associated company, which until then was included
          under share in profits (losses) of associated companies, was
          discontinued. The amounts of amortization of goodwill, included under
          share in profits (losses) of associated companies, as above, for
the           year ended December 31, 2005 are NIS 4 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 13

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | g. | Real
estate for investment
| | -- | --------------------------

| | Commencing
January 1, 2007, when the standard became effective, the Company has been implementing
Accounting Standard No. 16, Real Estate For Investment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Real
estate for investment is defined as real estate (land or a building or part of a building
or both), which is held (by the owners or under a financing lease), for the purpose of
producing rental income or realizing a capital appreciation or both, and not for the
purpose of:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
use of manufacture or supply of goods or services or for administrative purposes, or
| | - | ----------------------------------------------------------------------------------------

| |  | Sale
during the ordinary course of business
| | - | -------------------------------------------

| | The Company does not own any buildings that fall under the definition of Real Estate for Investment. The Company has
several leasing rights in real estate which, in accordance with IFRS, are classified as
operating leases. Upon initial adoption of IFRS, the Company does not intend to classify
these leasehold rights as real estate held for investment. The Company has consequently
decided not to classify these leasehold rights as real estate held for investment
according to Standard 16, but rather to continue to present them at cost, as part of fixed
assets, pursuant to generally accepted accounting principles in Israel. The initial
adoption of the provisions of the Standard did not consequently have a material impact on
the Companys financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Fixed
assets:
| | -- | -------------

| | Commencing
January 1, 2007, The Company has been implementing Accounting Standard No. 27 Fixed
Assets and Accounting Standard No. 28 Amendment of Transition Provisions in
Accounting Standard No. 27, Fixed Assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
fixed asset is a tangible item, which is held for use in the manufacture or supply of
goods or services, or leased to others, which is predicted to be used for more than one
period. The Company presents its fixed assets items according to the cost model.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the cost method  a fixed asset item is presented at the balance sheet at cost (net
of any investment grants), less any accumulated depreciation and any accumulated
impairment losses. The cost includes the cost of the assets acquisition as well as
costs that can be directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by
management. The cost of qualifying assets also includes credit costs which have to be
discounted as stated in note k. below.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
depreciation is carried out systematically by the straight line method over the expected
useful life of the items components from the date in which the asset is prepared
for its intended use.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
useful life that was used in the calculation of the assets depreciation is as
follows:
| | -------------------------------------------------------------------------------------------

| |                                                    | Years   
| | -------------------------------------------------- | --------
|
|
|
|
| | Buildings                                          | 10 to 50
| | Machinery and equipment                            | 7 to 20 
| | Vehicles                                           | 5 to 7  
| | Office furniture & equipment (including computers) | 3 to 17 

F - 14

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | In
accordance with the implementation of the transitional provisions of Accounting Standard
No. 28 Amendment of Transition Provisions in Accounting Standard No. 27, Fixed
Assets, as of January 1, 2007, the Company has been adopting the cost model.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. In accordance
with the transitional provisions of Standard 22, commencing January 1, 2006, in
addition to the aforesaid, the financial statements include the following changes:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of deferred issuance costs, which at December 31, 2005 amounted to NIS 946
thousands, has been reclassified and presented as a deduction from the amount of the
liabilities to which such expenses relate. Through December 31, 2005, deferred
issuance costs were included under other assets and amortized according to the
straight-line method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
change in the amortization method of deferred issuance costs, as above, do not have a
material effect on the operating results in the reported years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Deferred
charges
| | -- | ----------------

| | Until
December 31, 2005, the deferred charges in respect of issue of debentures were displayed
in Other Assets at their cost, deduction of accumulated amortization. The above expenses
that were attributed to the debenture issuance were amortized at the straight line method
on the basis of the weighted average of the debentures in turnover, till their
redemption date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of deferred issuance costs, which at December 31, 2005 amounted to NIS 946
thousands, has been reclassified and presented as a deduction from the amount of the
liabilities to which such expenses relate. Through December 31, 2005, deferred
issuance costs were included under other assets and amortized according to the
straight-line method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Credit
costs
| | -- | ------------

| | The
Company has been discounting credit costs in accordance with Standard No. 3 Discounting
of Credit Costs of the Israeli Institute of Accounting Standards.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to Standard No. 3, specific and non-specific financing costs are to be capitalized to
qualifying assets (assets under preparation or establishment, which still do not serve
their purpose and the preparation of which for their intended use or sale require
considerable time, all in accordance with the rule established in Standard No. 3).
Non-specific financing costs are capitalized to such qualifying assets, or portion
thereof, which was not financed with specific credit, by means of a rate which is the
weighted-average cost of the financing sources which were not specifically capitalized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

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---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | l. | Deferred
income taxes:
| | -- | ----------------------

| | The
Company and the companies in the Group allocate taxes in respect of temporary differences
between the value of assets and liabilities in the financial statements and their tax
base and in respect of losses for tax purposes, whose realization is predictable.
Deferred taxes are computed at the tax rates expected to be in effect at the time of
realization thereof, as they are known at the balance sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | m. | Revenue
recognition
| | -- | -------------------

| | Commencing
January 1, 2006, the company applies Israel Accounting Standard No. 25 of the
IASB  Revenue, which prescribes recognition, measurement, presentation
and disclosure criteria for revenues originating from the sale of goods purchased or
manufactured by the company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
is measured, as detailed below, at the fair value of the consideration received or the
consideration that the company is entitled to receive, taking into account trade
discounts and/or bulk discounts granted by the entity:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from sale of goods is 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

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---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | The Company implements Clarification
No. 8 of the Israeli Institute of Accounting Standard regarding the reporting of revenues
on a gross basis or a net basis. Accordingly, the Companys revenues as an agency or
intermediary from sales of electricity, water, steam and logistic services to the group
company, without bearing the risks and returns that derive from the transaction, are
presented on a net basis.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
income is accrued on a cumulative basis, taking into consideration the principal to be
repaid and by using the effective interest rate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Dividend
income in respect of investments is recognized on the date in which the entitlement for
said income was created for the shareholders.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
the application of the standard, an associated company separates the financing component
embedded in revenue from sales made on credit for periods exceeding the customary credit
period in its industry (mainly 90 days), that does not bear interest at the appropriate
rate; the financing component is determined according to the amount by which the nominal
amount of consideration for the transaction exceeds the present value of future cash
payments in respect thereof, based on the customary market interest rate applicable to
credit extended under similar terms. Revenue from the financing component is recognized
over the credit period. Through December 31, 2005, the company did not separate the
financing component in respect of sales made on credit, as above, and included within
revenue from the sale on the date of recognition of such revenue.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the transitional provisions of the standard, on January 1, 2006 the
company recognized an expense of NIS 1.1 million as a result of presentation in
present value, resulting from the adjustment of trade receivables in respect of such
credit transactions to their present value on the effective date of the standard, the
share of the company at the adjustment effect as above was approximately NIS 0.5 million
which is presented in these financial statements under Cumulative effect, at
beginning of year, of an accounting change in an associated company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Shipping
and handling costs
| | -- | ---------------------------

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

| | o. | Allowance
for doubtful accounts
| | -- | -------------------------------

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

| | p. | Derivate
financial instruments
| | -- | ------------------------------

| | Gains
and losses from forward transactions on existing assets or liabilities are included in the
Income Statements and Statements of Cash Flows when created.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

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---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | q. | Fair
Value of Financial Instruments
| | -- | -----------------------------------

| | The
fair value of financial instruments traded in active markets is based on the quoted
prices as of the balance sheet date. The fair value of financial instruments that are not
traded in an active market will be determined on the market prices of similar financial
instruments and in the absence thereof, based on accepted valuation methods. The Company
uses several valuation techniques, which are accompanied by assumptions based on the
existing economic conditions at each balance sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
applied valuation methods include the current value of cash flows, economic models for
the valuation of options and additional acceptable valuation methods.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Offset
of Financial instruments
| | -- | -------------------------------

| | Financial
assets and financial liabilities are presented on the balance sheet at their net amount,
only when the Company has a legally enforceable right to effect such set off, and subject
to the existence of intent to settle the asset and the liability on a net basis, or to
realize the asset and settle the liability simultaneously.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | Share-based
payment
| | -- | -------------------

| | Commencing
January 1, 2006, the company applies Israel Accounting Standard No. 24 of the
IASB, Share-Based Payment (hereafter - Standard 24), which prescribes
the recognition and measurement principles, as well as the disclosure requirements,
relating to share-based payment transactions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the company has not granted any equity-settled awards, nor made modifications to existing
grants, subsequent to March 15, 2005, the measurement criteria of the standard do
not apply to past grants made by the company, and its application has not had any effect
on the financial statements of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Transactions
between the Company and Controlling Shareholders Therein
| | -- | ---------------------------------------------------------------------

| | 1. | Until
December 31, 2006, transactions between the Company and a controlling
               shareholder therein were treated in accordance with the provisions of
Securities                Regulations (Presentation of Transactions between a Company and
a Controlling                Shareholder Therein in the Financial Statements), 1996
(hereinafter                the Regulations).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, the Company has been implementing Accounting Standard No. 23: The
Accounting Treatment of Transactions between an Entity and the Controlling Shareholder
Therein.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
standard stated that the basis of valuation in transactions between an entity and the
controlling shareholder therein is the fair value. Transactions such as loans of
controlling shareholders or distribution pf dividend to controlling shareholders are not
be recorded in shareholders equity and should to be included in the operating
results of the controlled entity. The differences between the proceeds determined in the
transactions between an entity and a controlling shareholder therein and the fair value
of these transactions, shall be carried to shareholders equity. Current taxes and
deferred taxes that relate to items carried to shareholders equity in respect of
transactions with controlling shareholders, shall also be carried directly to shareholders equity.
The provisions of the standard do not apply to transactions of business combinations
under the same controlling interest. The implementation of the standard did not have any
effect on the financial statements of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | 2. | Until
December 31, 2006, loans provided/received to/from a controlling           shareholder,
not under market conditions, were presented in the financial           statements at
their fair value only if the difference between the proceeds of           the loan and
its fair value exceeded 5 percent.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, loans provided/received are presented on the date of the initial
recognition of the fair value, while the difference between the amount of the loan and
its fair value is carried to shareholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
standard applies to transactions between an entity and a controlling shareholder therein,
which were carried out after January 1, 2007, as well as to loans provided or received
from a controlling shareholder prior to January 1, 2007, starting from this date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the standard, the balance of loans that were granted by the Company to an associated
company, as at January 1, 2007, is measured at fair value. The implementation of the
standard did not have material effect on the financial statements of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Cash
equivalents
| | -- | ----------------

| | The
Company 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Net
income per share
| | -- | --------------------

| | The
computation of basic net income per share is generally based on earnings available for
distribution to holders of ordinary shares, divided by the weighted average number of
ordinary shares outstanding during the period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
computing diluted net incomeper share, the weighted average number of shares to be
issued, assuming that all dilutive potential shares are converted into shares, is to be
added to the average number of ordinary shares used in the computation of the basic
income (loss) per share. Potential shares are taken into account, as above, only when
their effect is dilutive (reducing net income per share from continuing activities).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comparative
net income per share figures for the year 2005 included in these financial statements
reflect a retrospective application of the new standards computation directives.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the data used in the computation of net income per share, as above  see note 11
| | --------------------------------------------------------------------------------------

| | w. | Israel
Accounting Standard No. 29  Adoption of International Reporting
FinancialStandards (IFRS)"
| | -- | ---------------------------------------------------------------------------------------------------

| | In
July 2006, the Israel Accounting Standards Board issued Israel Accounting Standard No. 29
 Adoption of International Reporting Financial Standards (IFRS)(hereafter
 the standard or Standard 29).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

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---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | The
standard stipulates that companies, which are subject to the Securities Law, and are
required to report pursuant to regulations issued thereunder, except for offshore
corporations, shall draw up their financial statements under International Financial
Reporting Standards (IFRS) and the clarifications thereto, which are issued by the IASB
(The International Accounting Standards Board).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
entity implementing the IFRS as of January 1, 2008, which elected to report comparative
data for one year only (2007), shall be required to prepare an opening balance sheet as
of January 1, 2007 (hereafter  opening balance sheet) in accordance
with IFRS provisions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
transition to reporting under IFRS shall be conducted in accordance with the provisions
of IFRS 1, First-Time Adoption of International Financial Reporting Standards.
IFRS 1 prescribes rules on how an entity should make the transition from financial
reporting based on previous local accounting rules, to financial reporting based on
international accounting standards. IFRS 1 supersedes all the transitional provisions
established by other IFRS (including transitional provisions established in previous
local accounting standards) and states that all IFRS should be adopted retroactively in
the opening balance sheet. At the same time, IFRS 1 provides reliefs concerning mandatory
retroactive implementation with regard to certain defined topics. In addition, IFRS 1
specifies several exceptions to the principle of retrospective application of certain
aspects of other IFRS.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys management has elected to adopt IFRS starting from January 1, 2008, see
Note 16 regarding reconciliations to be carried out during the transition to reporting
under IFRS and the reliefs which the Company has chosen pursuant to the provisions of
IFRS1.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

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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 (Mondi Business Paper Hadera Ltd.           formerly
Neusiedler Hadera Paper Ltd, NHP  Hogla-Kimberly Ltd and Carmel           container
system Ltd.) are attached to these financial statements.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Composed
as follows:
| | -- | --------------------

| |                                                                | December 31
| | -------------------------------------------------------------- | -----------
|
|
|
|
| | Shares:                                                        |            
| | Cost                                                           |            
| | Excess of cost of investment - net                             |            
| | L e s s - accumulated amortization                             |            
| | Gain on issuance of shares of an associated                    |            
| | company to a third party                                       |            
| | Differences 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 and rate of interest, the total amounts of the loans and capital notes
are as follows:
| | - | ------------------------------------------------------------------------------------------------------------------

| |                                  | Weighted averageinterest rateat December 31,2006 | December 31
| | -------------------------------- | ------------------------------------------------ | -----------
|
|
|
|
| | Capital notes in dollars         |                                                  |            
| | Unlinked loans and capital notes |                                                  |            
| |                                  |                                                  |            
| |                                  |                                                  |            
| |                                  |                                                  |            

| | As
of December 31, 2007, the repayment dates of the balance of the loans and capital
notes have not yet been determined.
| | ------------------------------------------------------------------------------------------------------------------------

F - 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 2007 are as follows:
| | -- | ----------------------------------------------------------

| |                                                                  | NIS in thousands
| | ---------------------------------------------------------------- | ----------------
|
|
|
|
| | Balance at the beginning of the year                             |                 
| |                                                                  |                 
| | Changes during the year:                                         |                 
| | Share in losses of associated companies - net                    |                 
| | Dividend from associated companies                               |                 
| | Adjustments resulting from translation of foreign currency       |                 
| | financial statements                                             |                 
| | Share in capital surplus from capital note to associated company |                 
| | Increase in balance of long-term loans and capital notes - net   |                 
| |                                                                  |                 
| | Balance at end of year                                           |                 
| |                                                                  |                 

| | d. | Mondi
Business Paper Hadera Ltd. (hereafter - Mondi Hadera;           formerly  Neusiedler
Hadera Paper Ltd.  NHP):
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | Mondi Hadera is held to the extent of
49.9% by the Company and also by Mondi Business Paper LTD (hereafter  MBP), under an
agreement dated November 21, 1999. According to the said agreement, Mondi Hadera
purchased the Groups activities in the field of printing and writing paper, and
issued to MBP 50.1% of its shares. As part of the said agreement, Neusiedler was granted
an option to sell to the Company its holdings in Mondi Hadera, at a price that is 20%
lower than the value (as defined in the agreement) or $ 20 million less 20%, whichever is
higher. According to oral understandings between persons in the company and persons in
MBP, which were formulated in proximity to signing the agreement, MBP will exercise the
option only in extremely extraordinary circumstances, such as those which obstruct
manufacturing activities in Israel over a long period In view of the extended period which
has passed since the date of such understandings and due to changes in the management of
MBP, occurring recently, the company has chosen to take a conservative approach, and,
accordingly, to reflect the economic value of the option in the context of the transition
to reporting according to international standards, see note 16 e7.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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)
| | -- | -------------------------------------------------------------------

| | Carmel
Container Systems was held to the extent of 26.25% by the Company. During the second
quarter an affiliated company (Carmel Container Systems Limited hereafter  Carmel)
acquired its own shares which were held by part of its minority shareholders. As a result
of this acquisition the share of holding in Carmel increased from 26.25% to 36.21%. The
increase in the share of holding yielded to the company negative excess of cost in the
amount of NIS 4,923 thousands which according to standard 20 (adjusted) was related to
non financial assets, which will be realized according to the rate of realization of
these assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the period the Company included in the profits from affiliated companies, profit amount
of NIS 2,439 thousands form the realization of these assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

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

NOTE 2  INVESTMENTS IN
ASSOCIATED COMPANIES (continued):

| | g. | Investment
in T.M.M Integrated Recycling Industries Ltd.
| | -- | --------------------------------------------------------

| | On
January 4, 2007, the Company entered into an agreement with Veolia Israel CGEA Ltd.
(hereinafter: CGEA), whereby it will sell to CGEA its holdings in Barthelemi,
along with its remaining holdings in T.M.M.Pursuant to the agreement, CGEA has
acquired all of the Companys holdings in Barthelemi.CGEA also acquired all
of the Companys holdings in T.M.M, as part of a complete tender offer and starting
February 2007, the Company is no longer a shareholder in T.M.M.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
sale of the holdings in T.M.M was made in consideration of a sum approximately similar to
the book value, after taking into account, the impairment as mention above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

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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           majorclassifications,
and changes therein during 2007, are as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Cost | Accumulated depreciation |  |          
|--------------------------------- | ---- | ------------------------ |  | ---------
|
|
|
|
|                                  |      |                          |  |          
|Land and buildings thereon        |      |                          |  | 228,747  
|Machinery and equipment           |      |                          |  | 702,206  
|Vehicles                          |      |                          |  | 35,339   
|Office furniture    and equipment |      |                         
|(including computers)             |      |                          |  | 70,913   
|Payments on account of            |      |                         
|machinery and    equipment, net   |      |                          |  | 49,329   
|Spare parts - not current, net    |      |                          |  | 22,705   
|                                  |      |                          |  |          
|                                  |      |                          |  | 1,109,239
|                                  |      |                          |  |          

F - 24

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---

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).
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | c. | The Companys real estate is partly owned and partly leased  to the
          extent of NIS 37.5 million, in respect of which lease fees of approximately
          NIS 25.8 million have been capitalized. The leasehold rights are for 49-57 year
          periods ending in the years 2008 to 2059, with options to extend for an
          additional 49 years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | As
of December 31, 2007 and 2006, 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 34,865,000, NIS 31,957,000 and NIS 31,604,000 , for the  years ended December
31, 2007, 2006 and 2005, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

# 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, 2007 is redeemable in two installments, due
in June of each of the years 2008-2009, each installment amounting to 6.66% of the
original par value of the notes, which is NIS 105,055,000, in December 2007 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 known CPI
(base CPI of February 1992).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
balance of the notes as of December 31, 2007 is redeemable in 6 equal, annual
installments due in December of each of the years 2008-2013; 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 known CPI (based CPI of November 2003).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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---

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

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

| | 3) | As
of December 31 2007 the balance of the notes represents in deduction of
               issuance costs amounts to NIS 625 thousands. As to the change from January
2006                in the presentation of deferred issuance costs  see note 1j
above.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Long-Term
Loans
| | -- | ---------------

| | The
section refers to two long-term loans that were received from banks, as detailed below:
| | -------------------------------------------------------------------------------------------

| |                           | 2007 | 2006
| | ------------------------- | ---- | ----
|
|
|
|
| | Loan 1                    |      |     
| | Loan 2                    |      |     
| | Less - current maturities |      |     
| |                           |      |     
| |                           |      |     
| |                           |      |     

| | 1) | Loan
1
| | -- | ------

| | In
July 2006, the Company assumed a loan of NIS 15 million.The outstanding balance as
at December 31, 2007, is scheduled for repayment in 17 quarterly installments through to
January 2012, each in the sum of NIS 0.7 million.The outstanding balance of the
loan carries a variable rate of interest, linked to the Prime lending rate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Loan
2
| | -- | ------

| | In
July 2006, the Company assumed a loan of NIS 25 million.The outstanding balance as
at December 31, 2007, is scheduled for repayment in 27 quarterly installments through to
July 2014, each in the sum of NIS 1.0 million including principal and interest component
on the outstanding balance of principal.The outstanding balance of the loan
carries a variable rate of interest, linked to the Prime lending rate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Other
liability
| | -- | ---------------

| | The
capital note from 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, 2009.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

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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 employment 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 9,398,000,           NIS 8,849,000 and
NIS 8,710,000 in 2007, 2006, and 2005, 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 |  |            
| |                  |  |            
| | Amount in NIS    |  |            
| |                  |  |            

| | 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, 2007 are NIS 249.2 and $ 65.50 (NIS 251.91),
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the Companys arrangement for the financing of the acquisition of the new
machine for the manufacture of packaging paper in November 2007, the Company performed a
private allotment of 1,012,585 ordinary shares of NIS 0.01 par value of the Company,
which, as of the date of allotment, accounted for 20% of the issued share capital of the
Company against an investment in the total sum of $213 million (hereinafter in this
section: the raised amount). About 60% of the shares (607,551 shares) were
allotted to the shareholders in the Company, Clal Industries and Investments and Discount
Investments (hereinafter: the special offerees), in accordance with the
pro-rata holdings in the Company, and 40% of the shares (405,034 shares) were offered by
way of a tender to institutional entities and private entities. The price per share for
institutional entities and private entities as determined in the tender was NIS 210.
Accordingly, the price per share for Clal Industries and Investments and Discount
Investments considering the amount of shares offered to Clal Industries and Investments
and Discount Investments, was set at NIS
211.05 (the price per share in the tender plus a rate of 0.5%). The Company paid the
distributors a rate of 1.2% of the total consideration received from institutional
entities and private entities, that is, a sum of NIS 1,020,686.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

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

NOTE 6  SHAREHOLDERS
EQUITY(continued):

| | The
share capital was increased as a result from this issuance in amounts of NIS 10 thousands
and the capital surplus that divided from the issuance in deduction of cost issuance as
mentioned above amounts of NIS 211,635 thousands.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Employee
stock option plans:
| | -- | ----------------------------

| | 1) | 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%. The 2001 plan for senior officers expired during July 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2007, 2006 and 2005, 35,425, 44,998 and 13,877 options, respectively, were exercised
under the 2001 plan for senior officers, and 15,466, 24,303 and 4,307 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) and 10,225 options expired in 2006 (from the
second batch). In 2006 12,225 option were cancelled from the third batch and 12,225 were
cancelled from the forth batch.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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), the Company credited the tax
saving derived from the exercise of benefits by employees in the years 2005, 2006 and
2007 to capital surplus.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

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---

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

NOTE 6  SHAREHOLDERS
EQUITY (continued):

| | 2) | 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.
| | ------------------------------------------------------------------------------

| | 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%. The 2001 employee Plan was expired during November 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006 and 2005 10,091 and 2,405 options, respectively, were exercised under the 2001
employee plan, and 6,215 and 1,224 shares of NIS 0.01, respectively, were issued
following the exercise of options, as above. The last of the options that were granted
and were not exercised, expired during 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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), the Company credited the tax
saving derived from the exercise of benefits by employees in the years 2006 and 2005 to
capital surplus.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The
2008 plan for senior officers in the Group
| | -- | ----------------------------------------------

| | With
regard to the 2008 plan for senior officers in the group see note 15  events
subsequent balance sheet date.
| | -----------------------------------------------------------------------------------------------------------------

F - 29

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---

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. As of
the Financial Statements date, the company is not entitled to tax benefits under the law
for the Encouragement of Capital Investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the companies fulfilling the
conditions stipulated by the law, regulations published there under 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 26, 2008, the Knesset ratified the third reading of the Income Tax Law
(Inflation Adjustments) (Amendment 20) (Limitation of Term of Validity)  2008
(hereinafter: The Amendment), pursuant to which the application of the
inflationary adjustment law will terminate in tax year 2007 and as of tax year 2008, the
law will no longer apply, other than transition regulations whose intention it is to
prevent distortions in tax calculations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

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

NOTE 7  TAXES ON INCOME (continued):

| | According
to the amendment, in tax year 2008 and thereafter, the adjustment of revenues for tax
purposes will no longer be considered a real-term basis for measurement. Moreover, the
linkage to the CPI of the depreciated sums of fixed assets and carryover losses for tax
purposes will be discontinued, in a manner whereby these sums will be adjusted until the
CPI at the end of 2007 and their linkage to the CPI will end as of that date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 24,334,000 and NIS 24,036,000 as of
December 31, 2007 and 2006, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

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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 2007 and 2006, are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------

|                             | In respect of balance sheet items |  | 
|---------------------------- | --------------------------------- |  | 
|
|
|
|
|Balance at January 1, 2006   |                                   |  | 
|Changes in 2006 -            |                                   | 
|amounts carried to income    |                                   |  | 
|                             |                                   |  | 
|Balance at December 31, 2006 |                                   |  | 
|Changes in 2007 -            |                                   | 
|amounts carried to income    |                                   |  | 
|                             |                                   |  | 
|Balance at December 31, 2007 |                                   |  | 
|                             |                                   |  | 

| | The
deferred taxes are computed at the rate of 25%-27%.
| | -------------------------------------------------------

| | 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  - net     |            
|                               |            

F - 32

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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:
| | -- | -----------

| |                                     | 2007 | 2006 | 2005
| | ----------------------------------- | ---- | ---- | ----
|
|
|
|
| | For the reported year:              |      |      |     
| | Current                             |      |      |     
| | Previous years                      |      |      |     
| | Deferred, see f. above:             |      |     
| | In respect of changes to tax rates, |      |     
| | see d. above                        |      |      |     
| | In respect of the reporting period  |      |      |     
| |                                     |      |      |     
| |                                     |      |      |     
| |                                     |      |      |     

| | Current
taxes in 2007 were computed at an average tax rate of 29%, 2006  31% and 2005- 34%,
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:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                | 2007 | 2006 | 2005
|------------------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Income before taxes on income, as reported                                      |      |      |     
|in the statements of income                                                     |      |      |     
|                                                                                |      |      |     
|Theoretical tax on the above amount                                             |      |      |     
|                                                                                |      |     
|Decrease in taxes resulting from computation                                    |      |     
|of deferred taxes at a rate which is                                            |      |     
|different from the theoretical rate                                             |      |      |     
|Decrease in taxes resulting from adjustment to                                  |      |     
|deferred tax balances due to changes                                            |      |     
|in tax rates, see d. above                                                      |      |      |     
|Differences at equity and non financial assetsdefinition for the purpose of tax |      |      |     
|Previous years tax                                                              |      |      |     
|Nondeductible expenses                                                          |      |      |     
|Other - net                                                                     |      |      |     
|                                                                                |      |      |     
|Taxes on income for the reported year                                           |      |      |     
|                                                                                |      |      |     

| | h. | Tax
assessments
| | -- | ---------------

| | The
Company and most of its subsidiaries have received final tax assessments through the year
ended December 31, 2005.
| | ----------------------------------------------------------------------------------------------------------------------

F - 33

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

# NOTE 8  LINKAGE
TERMS OF MONETARY BALANCES:

| | a. | As
follows:
| | -- | -----------

|                                                      | December 31, 2007 | December 31, 2006
|----------------------------------------------------- | ----------------- | -----------------
|
|
|
|
|Assets:                                               |                   |                  
|Current assets:                                       |                   |                  
|Cash and cash equivalents                             |                   |                  
|Receivables                                           |                   |                  
|Investments in associated companies - long-term       |                   |                  
|loans and capital notes                               |                   |                  
|                                                      |                   |                  
|                                                      |                   |                  
|                                                      |                   |                  
|Liabilities:                                          |                   |                  
|Current liabilities:                                  |                   |                  
|Short-term credit from banks                          |                   |                  
|Accounts payables and accruals                        |                   |                  
|Long-term liabilities (including current maturities): |                   |                  
|Long -term loans                                      |                   |                  
|Notes                                                 |                   |                  
|Other liability                                       |                   |                  
|                                                      |                   |                  
|                                                      |                   |                  
|                                                      |                   |                  

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

F - 34

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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:
| | -- | -----------------------------------------------------

| |                     | Exchange rate of
one dollar | CPI*
| | ------------------- | --------------------------- | ----
|
|
|
|
| | At end of year:     |                             |     
| | 2007                |                             |     
| | 2006                |                             |     
| | 2005                |                             |     
| |                     |                             |     
| | Change in the year: |                             |     
| | 2007                |                             |     
| | 2006                |                             |     
| | 2005                |                             |     

| | * | 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:

| | a. | Subsidiaries
provided guarantees to various entities, in connection with                tenders, in
the aggregate amount of approximately NIS 2,902,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | 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 former 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 or until the time of
termination of duty in certain conditions, the                earlier. Up to December 31
2006, all of the remuneration was exercised.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

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---

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

NOTE 9  COMMITMENTS, CONTINGENT LIABILITIES: (continued)

| | d. | On May 13, 2007, the Companys
Audit Committee and Board of Directors approved an employment contract with the
Companys General Manager. The employment contract is not time-limited and consists
of the following principal terms of employment: Monthly wages of NIS 95,000, linked to the
Consumer Price Index (CPI) starting in 2007, an annual bonus equal to 6-9 monthly
paychecks, to be determined at the discretion of the Companys Board of Directors.
Retirement conditions  In addition to the liberation of the funds accrued in the
Managers Insurance, upon leaving his position, the general manager will receive a
retirement bonus equal to his last monthly paycheck  prior to leaving his position
 multiplied by the number of years during which he was employed by the Company
(starting August 1998), including advanced notice of 6 months in the event of termination
or resignation and additional auxiliary conditions. It has to be noted that the amounts
transferred to managerial insurance policies in respect of severance pay ,will include
current completion on basis of last monthly salary for each year of work in the Group.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
should be noted that in proximity to the appointment of the General Manager, who entered
his position in January 2005, a brief memorandum was drafted regarding the said
employment, with terms similar to those mentioned above. This memorandum was not approved
by the Companys Board of Directors and the Companys management, based on the
opinion of legal counsel, is doubtful whether it is legally binding. The impact of the
agreement will be expressed in the second quarter results and will amount to NIS 1.3
million (net, after taxes) on account of the retirement terms.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | The
Company converted during October 2007 its energy-generation plant in Hadera
               to using natural gas, instead of fuel oil.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

| | 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 $ 35 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
 1.74 million, for the purchase of the systems needed for the conversion and
assistance with their installation at the plant in Hadera. Up to December 31, 2007 the
remainder of the agreement was worth approximately  0.6 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | In
the beginning of 2008, the Company has engaged in a contract with the main
               equipment suppliers for the new manufacturing facility of packaging
papers, for                the total sum of 48.4 million. Some of the equipment
will be supplied                during 2008 and the rest will be supplied in the
beginning of 2009.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | In
the last quarter of 2007, the Company signed an agreement with a gas company
               for the transmission of gas for a period of 6 years with a two-year
extension                option. The total financial value of the transaction is NIS 13.8
million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | In November 2006, the Environmental
Protection Ministry announced that, even though the company plant at Hadera has made
considerable investments in sewage treatment and environmental protection issues, an
investigation may be launched against it to review deviations from certain emission
standards into the air. Based on the opinion of its legal advisors, the Company
anticipates that the investigation will not materially impact its operations.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

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---

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

NOTE 9  COMMITMENTS, CONTINGENT LIABILITIES AND LIABILITIES: (continued)

| | i. | On
October 21, 2007, the tax authorities issued a demand for payment of a
               betterment levy in the amount of NIS 8 million in respect of change of
land use,                which is designed for the construction of a new production line
for the                manufacture of packaging papers. The Company contested the amount
of the levy                through counter-assessment in the sum of NIS 400,000. In
addition, it should be                noted that as a result, these financial statements
do not include a provision                for said demand. When the levy is recognized in
the financial statements, it                will be included in the cost of the land and
therefore will not have any effect                on the operating results of the
Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

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

# NOTE 10 
SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

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

| | a. | Receivables:
| | -- | ------------

| |                                                                | December 31
| | -------------------------------------------------------------- | -----------
|
|
|
|
| | 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                             |            
| | Proceeds from sale of land in trustee's control (see note 10i) |            
| | Accounts Receivable                                            |            
| | Sundry                                                         |            
| |                                                                |            
| |                                                                |            
| |                                                                |            

| | b. | Inventories:
| | -- | ------------

| |                                                |  | 
| | ---------------------------------------------- |  | 
|
|
|
|
| | For industrial activities:                     |  | 
| | Finished goods                                 |  | 
| | Raw materials and supplies                     |  | 
| |                                                |  | 
| |                                                |  | 
| | For commercial activities - purchased products |  | 
| |                                                |  | 
| |                                                |  | 
| | Maintenance and spare parts *                  |  | 
| |                                                |  | 
| |                                                |  | 
| |                                                |  | 

* Including inventories for the use
of associated companies.

| | c. | Credit
from banks:
| | -- | ------------------

| |          | Weighted averageInterest rateon December 31,2007 | December 31
| | -------- | ------------------------------------------------ | -----------
|
|
|
|
| | Unlinked |                                                  |            

F - 38

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

NOTE 10  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION (continued):

| | d. | 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:
| | ---------------------

| |    |                                             | 2007 | 2006 | 2005
| | -- | ------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | e. | Sales
- net (1):                            |      |      |     
| |    |                                             |      |      |     
| |    | Industrial operations (2)                   |      |      |     
| |    | Commercial operations                       |      |      |     
| |    |                                             |      |      |     
| |    |                                             |      |      |     
| |    |                                             |      |      |     
| |    | (1) Including sales to associated companies |      |      |     
| |    |                                             |      |      |     
| |    | (2) Including sales to export               |      |      |     
| |    |                                             |      |      |     

| | f. | Cost
of sales:
| | -- | --------------

| |                                               |  |  | 
| | --------------------------------------------- |  |  | 
|
|
|
|
| | Industrial operations:                        |  |  | 
| | Materials consumed                            |  |  | 
| | Payroll and related expenses                  |  |  | 
| | Depreciation                                  |  |  | 
| | Other manufacturing costs                     |  |  | 
| | Decrease (increase) in inventory of           |  | 
| | finished goods                                |  |  | 
| |                                               |  |  | 
| |                                               |  |  | 
| | Commercial operations - cost of products sold |  |  | 
| |                                               |  |  | 
| |                                               |  |  | 
| |                                               |  |  | 
| | Including purchases from associated           |  | 
| | companies                                     |  |  | 
| |                                               |  |  | 

F - 39

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---

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

NOTE 10  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION (continued):

| |    |                                                          | 2007 | 2006 | 2005
| | -- | -------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | g. | Selling,
marketing, administrative and general expenses: |      |      |     
| |    |                                                          |      |      |     
| |    | Selling and marketing:                                   |      |      |     
| |    | Payroll and related expenses                             |      |      |     
| |    | Packaging, transport and shipping                        |      |      |     
| |    | Commissions                                              |      |      |     
| |    | Depreciation                                             |      |      |     
| |    | Other                                                    |      |      |     
| |    |                                                          |      |      |     
| |    |                                                          |      |      |     
| |    |                                                          |      |      |     
| |    |                                                          |      |     
| |    | Administrative and general:                              |      |     
| |    | Payroll and related expenses                             |      |      |     
| |    | Office supplies, rent and maintenance                    |      |      |     
| |    | Professional fees                                        |      |      |     
| |    | Depreciation                                             |      |      |     
| |    | Doubtful accounts and bad debts                          |      |      |     
| |    | Other                                                    |      |      |     
| |    |                                                          |      |      |     
| |    |                                                          |      |      |     
| |    | L e s s - rent and participation from                    |      |     
| |    | associated companies                                     |      |      |     
| |    |                                                          |      |      |     
| |    |                                                          |      |      |     
| |    |                                                          |      |      |     

| | h. | Financial
expenses - net*:
| | -- | --------------------------

| |                                                                        |  |  | 
| | ---------------------------------------------------------------------- |  |  | 
|
|
|
|
| | Expenses:                                                              |  |  | 
| | In respect of long-term loans                                          |  |  | 
| | In respect of notes - including amortization of deferred               |  | 
| | charges and net of related hedges                                      |  |  | 
| | In respect of exchange differences from operating monetary balance-net |  |  | 
| | In respect of short-term balances                                      |  |  | 
| |                                                                        |  |  | 
| |                                                                        |  |  | 
| |                                                                        |  |  | 
| | Income:                                                                |  | 
| | In respect of long-term loans                                          |  |  | 
| | In respect of exchange differences from operating monetary balances    |  |  | 
| | In respect of short-term balances                                      |  |  | 
| |                                                                        |  |  | 
| |                                                                        |  |  | 
| |                                                                        |  |  | 
| |                                                                        |  |  | 
| |                                                                        |  |  | 
| | ** Including financial income (expenses) in respect                    |  | 
| | of loans to associated companies                                       |  |  | 
| |                                                                        |  |  | 

F - 40

---

---

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

NOTE
10  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

| | i. | Other
income
| | -- | ------------

| |                                                          | 2007 | 2006 | 2005
| | -------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Proceeds from sale of land                               |      |      |     
| | Capital gain from sale of fixed assets                   |      |      |     
| | Gains (losses) from sale of the operation in Switzerland |      |      |     
| | Capital loss from sale of associated company             |      |      |     
| |                                                          |      |      |     
| |                                                          |      |      |     
| |                                                          |      |      |     

| | * | On
December 31, 2006, the Company sold a land estate. As a result of this sale, the Company
recorded a capital gain in the amount of approximately NIS 28.5 million, net of tax,
betterment levy, and expenses related to the sale. The proceeds of the sale, in the
amount of NIS 43 million, were deposited on December 31, 2006 with a trustee in order to
secure the liabilities of the Company. At the beginning of January 2007, the balance in
the amount of approximately NIS 30 million was received, and in during the course of
February this balance was transferred from the trustee to the Company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 11  NET
INCOME PER SHARE

| | Following
are data relating to the net income and the number of shares (including adjustments to
such data) used for the purpose of computing the basic and fully diluted net income per
ordinary share. (The data for the year 2005 are after retroactive application of the
provisions of Accounting Standard No. 21 of the IASB, see note 1v):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                | Net income
Year ended December 31
| | ---------------------------------------------- | ---------------------------------
|
|
|
|
| | Net income  for the period, as reported in the |                                  
| | income statements, used in computation of      |                                  
| | basic net income per share                     |                                  
| |                                                |                                  
| | Total net income for the purpose of computing  |                                  
| | diluted income per share                       |                                  
| |                                                |                                  

| |                                                         | Number of shares
Year ended December 31
| | ------------------------------------------------------- | ---------------------------------------
|
|
|
|
| | Weighted average number of shares used for              |                                        
| | computing the basic income  per share                   |                                        
| | Adjustment in respect of incremental shares of warrants |                                        
| |                                                         |                                        
| | Weighted average number of shares used for              |                                        
| | computing the diluted income  per share                 |                                        
| |                                                         |                                        

F - 41

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---

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

# 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 economic 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
December 2006 the Company entered into forward transactions for a period of one year, in
order to hedge an amount of NIS 100 million against increases in the CPI, following
the termination of the 2005 transaction that was finalized. In January 2007, the Company
entered into forward transactions for a period of one year, in order to hedge an amount
of NIS 120 million against increases in the CPI, following the termination of the 2005
transaction that was finalized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2008, the Company entered into forward transactions for a period of one year, in
order to hedge an amount of NIS 90 million against increases in the CPI, following
the termination of the aforementioned transaction. In February 2008, the Company entered
into additional forward transactions for a period of one year, in order to hedge an
amount of NIS 50 million against increases in the CPI, following the termination of
the aforementioned transaction.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Credit
risks
| | -- | ------------

| | The
Company and its subsidiaries cash and cash equivalents as of December 31, 2007 and
2006 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. | Exchange
rate risks
| | -- | -------------------

| | Approximately
half of the Companys sales are nominated in US dollars, while a substantial part of
its expenditures and its liabilities are in NIS, and as a result, the Company has an
exposure to the changes in the rate of exchange of the NIS against the US dollar. This
exposure includes an economic exposure (resulting from the excess of receipts over
payments, in foreign currency or linked to it) and reporting exposure (relating to the
excess of dollar linked assets over liabilities).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has trade receivables balances linked to the US dollar  see note 8(a).
| | -----------------------------------------------------------------------------------

F - 42

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

NOTE 12  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT (continued):

| | d. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
following table specifies the carrying amount and fair value of financial instrument
groups that are not presented in the financial statements at their value:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Carrying Amount | Fair Value
| | -------------------------------- | --------------- | ----------
|
|
|
|
| | Financial Assets                 |                 |           
| | Long term loans and capital note |                 |           
| |                                  |                 |           
| | Financial Liabilities            |                 |           
| | Notes - series 1*                |                 |           
| | Notes - series 2*                |                 |           
| | Other liability*                 |                 |           
| |                                  |                 |           
| |                                  |                 |           
| |                                  |                 |           

| | * | The
above carrying amounts are based on the computation of the present value of cash flows at
interest rates applicable to similar characterized loans (in 2007  4%).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 13 
INTERESTED PARTIES  TRANSACTIONS AND BALANCES:

| | a. | Transactions:
| | -- | -------------

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

| |                    | 2007 | 2006 | 2005
| | ------------------ | ---- | ---- | ----
|
|
|
|
| | Sales              |      |      |     
| |                    |      |      |     
| | Costs and expenses |      |      |     
| |                    |      |      |     
| | Financial expenses |      |      |     
| |                    |      |      |     

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

F - 43

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

NOTE 13  INTERESTED PARTIES
 TRANSACTIONS AND BALANCES (continued):

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

| |                                              | 2007 | 2006 | 2005
| | -------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Payroll to interested parties employed       |      |      |     
| | by the Company - NIS  in thousands           |      |      |     
| |                                              |      |      |     
| | Number of people to whom the benefits relate |      |      |     
| |                                              |      |      |     
| | Remuneration of directors who are not        |      |     
| | employed by the Company -                    |      |     
| | NIS in thousands                             |      |      |     
| |                                              |      |      |     
| | Number of people to whom                     |      |     
| | the benefits relate                          |      |      |     
| |                                              |      |      |     

| | * | In 2007 because of the payroll of
CEO. In 2006 includes the payroll of CEO and of the former Chairman of the Board of
Directors and, in addition a payment to the former chairman of the Board of directors as a
result of exercise of a bonus according to a remuneration plan. In 2005 including the CEO
and the former Chairman of the Board of Directors. 2005 includes a special bonus to the
Chairman of the Board of Directors, in a sum of NIS 800,000.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | During
2007, an interested party employed by the Company (the CEO) held 1,975           options
under the 2001 plan for senior employees in the group (see note 6b(1)).           As of
December 31, 2007 all the options were exercised.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | As
to the plan for the remuneration of the Companys former chairman of           the
Board of Directors  see note 9b.
| | -- | -----------------------------------------------------------------------------------------------------------------------

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

F - 44

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---

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)                                             |                     |                              |          
|                                                           |                     |                              |          
|Income (loss) from ordinary operations                     |                     |                              |          
|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)                            |                     |                              |          
|Unallocated corporate assets (at end of year) (2)          |                     |                              |          
|                                                           |                     |                              |          
|Consolidated total assets (at end            of year)      |                     |                              |          
|                                                           |                     |                              |          
|Segment liabilities (at end of year)                       |                     |                              |          
|Unallocated corporate liabilities (at end of year)         |                     |                              |          
|                                                           |                     |                              |          
|Consolidated total liabilities (at            end of year) |                     |                              |          
|                                                           |                     |                              |          
|Depreciation and amortization                              |                     |                              |          
|                                                           |                     |                              |          
|Investments in fixed assets                                |                     |                              |          
|                                                           |                     |                              |          

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

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

F - 45

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---

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

# NOTE 15  EVENTS SUBSEQUENT
BALANCE SHEET DATE

| | On
January 14, 2008, the Companys Board of Directors approved, pursuant to approval by
the Audit Committee, adoption of a compensation plan for senior employees of the Company
and/or its subsidiaries and/or associated companies, whereby up to 285,750 stock options,
each of which is exercisable into one ordinary share of the company of NIS 0.01 par
value, would be allocated to senior employees and officers of the Group, including the
Company CEO, which at the time of approval of said allocation comprised 5.65% of the
Companys issued share capital. The offerees in the said plan are not interested
parties in the company, except for the CEO who is an interested party by virtue of his
position. Pursuant to the conditions of the said option warrants, the offerees who will
exercise the option warrants will not be allocated all of the shares derived there from,
but only a quantity of shares that reflects the sum of the financial benefit that is
inherent to the option warrants at the exercise date only. As at the reported date, the
said option warrants have yet to be allocated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
influence of the plan at the consolidated financial statements was estimated at NIS 13.5
million.
| | -----------------------------------------------------------------------------------------------------

| | The
option warrants are not registered for trade. The company has obtained approval from the
stock exchange and from AMEX to register for trade the ordinary shares that shall be
allocated to the offerees upon exercise of the option warrants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 20, 2008 an associated Company, Hogla-Kimberly Ltd received from the Israeli tax
authority compensation in the amount of about NIS 4.5 millions. The compensation is due
to damages during the second Lebanon war that caused the associated Company to partially
stop its manufacturing activity in its northern plant. The associated Company will record
a pre tax income for the second quarter of 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
companys share in the compensation above is NIS 2,250 thousand.
| | --------------------------------------------------------------------

F - 46

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

# NOTE 16  DISCLOSURE
REGARDING THE ADOPTION OF IFRS

| | A. | General
| | -- | -------

| | Following
the publication of Account Standard No. 29, the Adoption of International Financial
Reporting Standards (IFRS) in July 2006, the Company plans to adopt IFRS starting
from January 1, 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the provisions of IFRS1, which deals with the first-time adoption of IFRS, and
considering the date in which the Company elected to adopt these standards for the first
time, the financial statements which the Company must draw up in accordance with IFRS
rules, are the consolidated financial statement as of December 31, 2008, and for the year
ended on that date. The date of transition of the Company to reporting under IFRS, as it
is defined in IFRS 1, is January 1, 2007 (hereinafter: the transition date),
with an opening balance sheet as of January 1, 2007 (hereinafter: Opening Balance).
The Companys interim financial statements for 2008 will also be drawn up in
accordance with IFRS, and shall include comparative figures for the year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the opening balance sheet, the Company performed the following reconciliations:
| | -------------------------------------------------------------------------------------

| |  | Recognition
of all assets and liabilities whose recognition is required by IFRS.
| | - | --------------------------------------------------------------------------------

| |  | De-recognition
of assets and liabilities if IFRS do not permit such recognition.
| | - | --------------------------------------------------------------------------------

| |  | Classification
of assets, liabilities and components of equity according to IFRS.
| | - | ---------------------------------------------------------------------------------

| |  | Application
of IFRS in the measurement of all recognized assets and liabilities.
| | - | --------------------------------------------------------------------------------

| | IFRS
1 states that all IFRS shall be adopted retroactively for the opening balance sheet. At
the same time, IFRS 1 includes 14 reliefs, in respect of which the mandatory retroactive
implementation does not apply. As to the reliefs implemented by the Company, see section
f. below.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the accounting policy which the Company implemented retroactively in the opening
balance sheet under IFRS, compared to the accounting policy in accordance with Generally
Accepted Accounting Principles in Israel, were recognized directly under Retained
Earnings or another item of Shareholders Equity, as the case may be. This note is
formulated on the basis of International Financial Reporting Standards and the notes
thereto as they stand today, that have been published and shall enter into force or that
may be adopted earlier as at the Groups first annual reporting date according to
IFRS, December 31, 2008. Pursuant to the above, the Companys management has made
assumptions regarding the anticipated financial reporting regulations that are expected
to be implemented when the first annual financial statements are prepared according to
IFRS, for the year ended December 31, 2008. The IFRS standards that will be in
force or that may be adopted in the financial statements for the year ended December 31,
2008 are subject to changes and the publication of additional þclarifications.
Consequently, the financial reporting standards that shall be applied to the represented
periods, will be determined finally only upon preparation of the first financial
statements according to IFRS, as at December 31, 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Note above includes all the financial data required by the Accounting Standard No. 29 and
accordingly to the publicity of the Israel Securities Authority FAQ 6.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Listed
below are the Companys consolidated balance sheets as of January 1, 2007 and
December 31, 2007, the consolidated statement of income for the year ended on December
31, 2007, and the Companys shareholders equity prepared in accordance with
International Accounting Standards. In addition, the table presents the material
reconciliations required for the transition from reporting under Israeli GAAP to
reporting under IFRS.                      According to IFRS 1, the adoption of IFRS in the opening balance sheet as of the transition
                     date will be done retrospectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

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

# NOTE 16 
DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

| | B. | Reconciliation
of balance sheets from Israeli GAAP to IFRS:
| | -- | -----------------------------------------------------------

|                                   | December 31, 2007 | January 1, 2007
|---------------------------------- | ----------------- | ---------------
|
|
|
|
|CURRENT ASSETS:                    |                   |                
|Cash and cash equivalents          |                   |                
|Accounts receivables               |                   |                
|Other receivable                   |                   |                
|Inventories                        |                   |                
|                                   |                   |                
|Total Current Assets               |                   |                
|                                   |                   |                
|                                   |                   |                
|Non-Current Assets                 |                   |                
|Property, plant and equipment      |                   |                
|Investment in associated companies |                   |                
|Deferred tax assets                |                   |                
|Lease receivables                  |                   |                
|Other assets                       |                   |                
|Employee benefit assets            |                   |                
|                                   |                   |                
|Total Non-Current Assets           |                   |                
|                                   |                   |                
|Total Assets                       |                   |                
|                                   |                   |                

* Reclassified

F - 48

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

# NOTE 16 
DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

| | B. | Reconciliation
of balance sheets from Israeli GAAP to IFRS:
| | -- | -----------------------------------------------------------

|                                    | December 31, 2007 | January 1, 2007
|----------------------------------- | ----------------- | ---------------
|
|
|
|
|
|CURRENT LIABILITIES:                |                   |                
|                                    |                   |                
|Credit from banks and others        |                   |                
|Current maturities to long-term     |                   |                
|notes and long-term loans           |                   |                
|Trade payables                      |                   |                
|Other payables and accrued          |                   |                
|expenses                            |                   |                
|Financial liabilities at fair value |                   |                
|through Profit and loss             |                   |                
|Current tax liabilities             |                   |                
|                                    |                   |                
|                                    |                   |                
|Total Current Liabilities           |                   |                
|                                    |                   |                
|                                    |                   |                
|NON-CURRENT LIABILITIES:            |                   |                
|Loans from banks and others         |                   |                
|Notes                               |                   |                
|Deferred taxes                      |                   |                
|Employee benefit liabilities        |                   |                
|Other non-current liabilities       |                   |                
|                                    |                   |                
|Total Non-Current Liabilities       |                   |                
|                                    |                   |                
|                                    |                   |                
|SHAREHOLDERS EQUITY                 |                   |                
|                                    |                   |                
|                                    |                   |                
|Total liabilities and shareholders  |                   |                
|equity                              |                   |                
|                                    |                   |                

* Reclassified.

F - 49

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

# NOTE 16 
DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

| | C. | Reconciliation
of profit and loss from Israeli GAAP to IFRS:
| | -- | ------------------------------------------------------------

|                                                     |  | December 31, 2007
|---------------------------------------------------- |  | -----------------
|
|
|
|
|Revenue                                              |  |                  
|Cost of sales                                        |  |                  
|                                                     |  |                  
|Gross profit                                         |  |                  
|                                                     |  |                  
|Operating Costs and Expenses                         |  |                  
|Selling expenses                                     |  |                  
|General and administrative expenses                  |  |                  
|Other expenses, net                                  |  |                  
|                                                     |  |                  
|Operating profit                                     |  |                  
|                                                     |  |                  
|Finance income                                       |  |                  
|Finance expenses                                     |  |                  
|                                                     |  |                  
|Finance income (expenses), net                       |  |                  
|                                                     |  |                  
|                                                     |  |                  
|Profit (loss) after financial income (expenses), net |  |                  
|Share of profit (loss) of associated companies, net  |  |                  
|                                                     |  |                  
|Profit (loss) before taxes on income                 |  |                  
|Taxes on income                                      |  |                  
|                                                     |  |                  
|Net income                                           |  |                  
|                                                     |  |                  
|                                                     |  |                  
|Earnings Per Share (NIS)                             |  |                  
|Primary                                              |  |                  
|                                                     |  |                  
|                                                     |  |                  
|Full diluted                                         |  |                  
|                                                     |  |                  
|                                                     |  |                  
|Number of shares used to compute the primary         |  |                  
|earnings per share                                   |  |                  
|                                                     |  |                  
|Number of shares used to compute the fully diluted   |  |                  
|earnings per share                                   |  |                  
|                                                     |  |                  

*Reclassified.

F - 50

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | D. | Equity
reconciliation:
| | -- | ----------------------

|                                                   | Share Capital | Premium on shares | Capital surplusShare-basedpayment (inrespect ofemployee options) | Capital surplusfrom translationdifferences | Retained Earnings | Total
|-------------------------------------------------- | ------------- | ----------------- | ---------------------------------------------------------------- | ------------------------------------------ | ----------------- | -----
|
|
|
|
|As at January 1, 2007                              |               |                   |                                                                  |                                            |                   |      
|Israeli GAAP                                       |               |                   |                                                                  | 125,257                                    |                   |      
|                                                   |               |                  
|Adjustments of investment in associated companies  |               |                  
|by the equity method                               |               |                   |                                                                  | -                                          |                   |      
|Classification of adjustments deriving from        |               |                  
|translations of financial statements of foreign    |               |                  
|operations                                         |               |                   |                                                                  | -                                          |                   |      
|Employee benefits net of tax effects               |               |                   |                                                                  | -                                          |                   |      
|Amortization of pre-paid expenses in respect of    |               |                  
|lease of land                                      |               |                   |                                                                  | -                                          |                   |      
|Put option on affiliated Company                   |               |                   |                                                                  | -                                          |                   |      
|Effect of classifying a doubtful debt provision as |               |                  
|specific after being classified as general         |               |                   |                                                                  | -                                          |                   |      
|                                                   |               |                   |                                                                  |                                            |                   |      
|                                                   |               |                  
|Under IFRS rules                                   |               |                   |                                                                  | 125,257                                    |                   |      
|                                                   |               |                   |                                                                  |                                            |                   |      

*Reclassified.

F - 51

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | D. | Equity
reconciliation (continued):
| | -- | ----------------------------------

|                                             | Share Capital | Premium on
shares | Capital surplus
Share-based
payment (in
respect of
options to
employees) | Capital
surplus from
hedging
reserves | Capital surplus
from translation
differences | Retained
Earnings | Total  
|-------------------------------------------- | ------------- | ----------------- | ------------------------------------------------------------------------ | ------------------------------------- | -------------------------------------------- | ----------------- | -------
|
|
|
|
|As at December 31, 2007                      |               |                   |                                                                          |                                       |                                              |                   |        
|Israeli GAAP                                 |               |                   |                                                                          | 125,267                               |                                              |                   | 301,695
|Adjustments of investment in associated      |               |                  
|companies by the equity method               |               |                   |                                                                          | -                                     |                                              |                   | -      
|Classification of adjustments deriving from  |               |                  
|translations of financial statements of      |               |                  
|foreign operations                           |               |                   |                                                                          | -                                     |                                              |                   | -      
|Cash flow hedges                             |               |                   |                                                                          | -                                     |                                              |                   | -      
|Benefits to employees net of tax effects     |               |                   |                                                                          | -                                     |                                              |                   | -      
|Amortization of pre-paid expenses in respect |               |                  
|of lease of land                             |               |                   |                                                                          | -                                     |                                              |                   | -      
|Put option on affiliated Company             |               |                   |                                                                          | -                                     |                                              |                   | -      
|Financial expenses on capital note from      |               |                  
|affiliated Company                           |               |                   |                                                                          | -                                     |                                              |                   | -      
|Effect of classifying a doubtful debt        |               |                  
|provision as specific after being classified |               |                  
|as general                                   |               |                   |                                                                          | -                                     |                                              |                   | -      
|                                             |               |                   |                                                                          |                                       |                                              |                   |        
|Under IFRS rules                             |               |                   |                                                                          | 125,267                               |                                              |                   | 301,695
|                                             |               |                   |                                                                          |                                       |                                              |                   |        

*Reclassified.

F - 52

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | E. | Additional
information (1) (2) (3)
| | -- | ----------------------------------

| | (1) | Deferred
Taxes
| | --- | --------------

| | In
accordance with generally accepted accounting principles in Israel, deferred tax assets
or liabilities were classified as current or non-current assets or liabilities depending
on the classification of the assets in respect of which they were created.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to IAS 12, deferred tax assets or liabilities are classified as non-current assets or
liabilities, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

| | Consequently,
amounts of NIS 7,856,000 and NIS 9,116,000 which were previously presented under accounts
receivable were reclassified to deferred taxes under non-current taxes as of January 1,
2007 and December 31, 2007, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Land
leased from the Israel Land Administration
| | --- | -----------------------------------------------

| | In
accordance with generally accepted accounting principles in Israel, land leased from the
Israel Land Administration, was classified as fixed assets and included in the amount of
the capitalized leasing fees that were paid. The amount paid was not depreciated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to IAS 17, Lease, land lease arrangements, whereunder at the end of the
leasing period, the land is not transferred to the lessor, are classified as operating
lease arrangements. As a result, the Companys lands in Hadera and Nahariya,
which were leased from the Israel Land Administration and the Companys land in
Tel-Aviv, which was leased from the Tel-Aviv Municipality, and which do not constitute
real estate for investment that is measured at fair value, shall be presented in the
Companys balance sheet as pre-paid expenses in respect of lease, and amortized over
the remaining period of the lease.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consequently,
the pre-paid expense balance in respect of an operating lease increased by NIS 30,023
thousands and by NIS 29,263 thousands and the balance of fixed assets decreased by NIS
34,814 thousands and by NIS 34,701 thousands. The change was partly carried to retained
earnings in the sums of NIS 1,868 thousands and NIS 1,508 thousands and partly against
deferred taxes in the sums of NIS 2,923 thousands and NIS 3,927 thousands on January 1,
2007 and on December 31, 2007, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Employee
benefits
| | --- | -----------------

| | In
accordance with generally accepted accounting principles in Israel, the companys
liability for severance pay is calculated based on the recent salary of the employee
multiplied by the number of years of employment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to IAS 19, the provision for severance pay is calculated according to an actuarial basis
taking into account the anticipated duration of employment, the value of time, the
expected salary increases until retirement and the possible retirement under conditions
not entitling severance pay.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 53

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | E. | Additional
information (3) (continued)
| | -- | --------------------------------------

| | In
addition, under Israeli GAAP, deposits made with regular policies or directorsinsurance
policies which are not in the employees name, but in the name of the employer, were
also deducted from the companys liability.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
IFRS, regular policies or directors insurance policies as aforesaid, which do not
meet the definition of plan assets under IAS 19, will be presented in the balance sheet
under a separate item and will not be deducted from the employers liability.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Most
of the Groups employees are covered according to Section 14 of the Compensation
Law. Employee deposits are not reflected in the companys financial statements and
accordingly, no provision is necessary in the books. However, the Company is required to
pay employees differences from entitlement to severance pay and unutilized vacation pay.
These liabilities are computed in accordance with the actuarys assessment based on
an estimate of their utilization and redemption.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, net liabilities in respect of benefits to employees after retirement, which
relate to defined benefit plans, are measured based on actuarial estimates and discounted
amounts.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
impact of the aforesaid on the balance sheet is an increase in liabilities in respect of
net benefits to employees, as of January 1, 2007 and December 31, 2007, in the amount of
NIS 5,563,000 and NIS 5,762,000, respectively, and an increase in deferred taxes as of
January 1, 2007 and December 31, 2007, in the amounts of NIS 1,391,000 and NIS 1,436,000,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Moreover,
assets with regard to employee benefits were classified from other current liabilities to
non current assets. The amount of approximately NIS 1,179 thousands, NIS 1,132 thousands
as of December 31, 2007 and January 1, 2007 , respectively .
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | CPI-linked
assets and liabilities
| | --- | ---------------------------------

| | The
Company has assets and liabilities that are linked to the Consumer Price Index
(hereinafter  the CPI), which are not measured at fair value under the statement of
income. The Company determines the effective interest rate in respect of these assets and
liabilities as a real rate with the addition of linkage differences in line with actual
changes in the CPI until the balance sheet date. This is also the approach used under
generally accepted accounting principles in Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the balance sheet date, the Company has CPI-linked financial liabilities in the total
sum of NIS 196,150,000.
| | -------------------------------------------------------------------------------------------------------------------

F - 54

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | E. | Additional
information (4) (continued)
| | -- | --------------------------------------

| | There
is another interpretation of IFRS, under which the effective interest rate in respect of
these assets and liabilities should include the anticipated inflation up to the relevant
repayment dates (instead of accumulation of real interest plus linkage differences in
line with changes in the CPI until the balance sheet date).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
vast majority of loans and long-term and medium-term financing arrangements in Israel are
linked to the CPI. Therefore, the Israeli Institute for Accounting Standards has
submitted a request to the International Financial Reporting Interpretation Committee
(IFRIC) to clarify the applicable method in the measurement of the effective interest
rate of such assets and liabilities under IFRS.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Committees response in this matter and the implications thereof cannot be reliably
predicted. If the Committees response indicates that the method used in Israel (and
which was implemented in these financial statements/ as described in this note) is not
appropriate in accordance with IFRS, the Company will have to change the method of
measurement of these assets and liabilities and it may have to do so by way of restating
its financial statements. Under the present circumstances, the Company is unable to
reliably measure the potential impact on its financial statements in such a case.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Financial
Revenues and Expenses
| | --- | -------------------------------

| | In
accordance with generally accepted accounting principles in Israel, financing income and
expenses are presented under the statement of income in one amount.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to IAS 1, financing income and expenses should be presented separately.
| | --------------------------------------------------------------------------------

| | Consequently,
financing expenses in the sum of NIS 31,766,000 and financing expenses in the sum of NIS
10,648,000 were presented in the statement of income for the year ended December 31, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Investment
in Associated Companies
| | --- | ----------------------------------

| | In
the course of the second quarter, Carmel, an associated company, made a repurchase of its
own shares, held by some of its minority shareholders.As a result of this
repurchase, the Companys holdings in Carmel rose from 26.25% to reach 36.21%.This
increase in the holding rate led to a negative cost surplus of NIS 4,923,000 for the
Company. According to Standard 20 (amended), this was allocated to non-monetary items and
will be realized in accordance with the realization rate of these items.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2007, the Company included a sum of NIS 2,439,000 in earnings from associated companies,
as a result of the realization of these items.According to the directives of IAS
28 regarding the equity method of accounting, the balance of the negative cost surplus in
the amount of NIS 4,923 thousand will be allocated to the Companys share in
earnings of associated companies during 2007, thereby increasing the Companys
earnings for the year ended on December 31, 2007 by a sum of NIS 2,484,000.The
Investments in Associated Companies item in the balance sheet will also grow by the said
sum.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 55

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | E. | Additional
information (continued)
| | -- | ----------------------------------

| | (7) | Put
option for investee
| | --- | -----------------------

| | As
part of an agreement dated November 21, 1999 with Mondi Business Paper (hereafter MBP,
formerly Neusiedler AG), Mondi Hadera purchased the operations of the Group in the area
of writing and typing paper and issued 50.1% of its shares to MBP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of this agreement, MBP was granted an option to sell its holdings in Mondi Hadera to
the company, at a price 20% lower than its value (as defined in the agreement) or $ 20
million less 20%, whichever is higher. According to oral understandings between persons
in the company and persons in MBP, which were formulated in proximity to signing the
agreement, MBP will exercise the option only in extremely extraordinary circumstances,
such as those which obstruct manufacturing activities in Israel over a long period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
view of the extended period which has passed since the date of such understandings and
due to changes in the management of MBP, occurring recently, the company has chosen to
take a conservative approach, and, accordingly, to reflect the economic value of the
option in the context of the transition to reporting according to international
standards. Under accounting principles generally accepted in Israel, it was not required
to give a value to the PUT option. According to the international standards, the value of
the option was computed and recognized as a liability, measured according to fair value,
with changes in fair value being recorded to operations in accordance with IAS 39.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, a liability with respect to the option for sale of the shares of the
investee in the amount of approximately NIS 1,612 thousands was presented.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, a liability with respect to the option for sale of the shares of
the subsidiary in the amount of approximately NIS 3,901 thousands was presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Provision
for doubtful debts
| | --- | ----------------------------

| | Under
generally accepted accounting principles in Israel, the provision for doubtful debts is
calculated both by means of a general provision on the basis of approximations and past
experience, ascertained by the company in accordance with the structure and nature of the
customers in the various companies, and also on the basis of a specific provision for
customers where the likelihood of collection was low in reliance on indicators in the
hand of the company and was made in a specific manner.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to international standards, the provision for doubtful debts is calculated solely on the
basis of a specific provision.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | As
a result, the amount of the provision for doubtful debts increased as of January 1, 2007
by the amount of NIS 218 thousands and deferred taxes decreased by NIS 63 thousands.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 56

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | E. | Additional
information (8) (continued)
| | -- | --------------------------------------

| | The
amount of the provision for doubtful debts increased as of December 31, 2007 by the
amount of NIS 218 thousands and deferred taxes decreased by NIS 59 thousands.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (9) | Capital
note issued to an investee
| | --- | ----------------------------------

| | The
companys balance sheet includes a capital note that was issued to an investee. Due
to the fact that no repayment date was set for the capital note, and in view of the fact
that the company is not a controlling interest in the investee, the capital note was
presented under Israeli standards at its nominal value, and financial expenses in respect
of same were not recorded in the statement of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the directives of the international standards, the capital note was
classified as a financial liability under IAS 39. Therefore, the capital note will be
measured at unamortized cost, while using the effective interest method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with understandings reached between the company and the investee, that the
capital note will not be repayable prior to January 1, 2009, the amortized cost of the
capital note in the financial statements of the company prepared according to the
directives of the international standards will be considered as if it were repayable on
such date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (10) | Current
Taxes
| | ---- | -------------

| | In
accordance with generally accepted accounting principles in Israel, current tax assets or
liabilities were classified as other current assets or liabilities, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to International Standards (IAS 1) current tax assets or liabilities are classified as
separate balance in the balance sheet. Consequently, amounts of NIS 19,824 thousands and
NIS 908 thousands which were previously presented under other current liabilities were
reclassified to current tax liabilities as of January 1, 2007 and December 31, 2007,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Reliefs
with respect to the retroactive implementation of IFRS adopted by the Company
| | -- | -------------------------------------------------------------------------------------

| | IFRS
1 includes several reliefs, in respect of which the mandatory retroactive implementation
does not apply. The following reliefs are those which the Company elected to adopt in its
opening balance sheet under IFRS as of January 1, 2007 (hereinafter: the opening
balance sheet):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Share-Based
Payment
| | -- | -------------------

| | The
provisions of IFRS 2, which deals with share-based payments, have not been retroactively
implemented with respect to equity instruments granted before November 7, 2002 and which
have vested prior to the transition date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 57

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

# NOTE 16  FINANCIAL
INFORMATION IN ACCORDANCE WITH IFRS (continued)

| | F. | Reliefs
with respect to the retroactive implementation of IFRS adopted by the
                    Company(continued)
| | -- | --------------------------------------------------------------------------------------------------------------------

| | 2. | Translation
Differences
| | -- | -----------------------

| | The
Company chose not to retroactively implement the provisions of IAS 21 regarding
translation differences accumulated as of January 1, 2007, with respect to overseas
operations. Consequently, the opening balance sheet does not include cumulative
translation differences in respect of overseas operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Deemed
Cost For Items Of Fixed Assets
| | -- | -------------------------------------

| | IFRS
1 allows to measure fixed assets, as of the transition date, or before it, based on
revaluation that was carried out in accordance to prior accounting principles, as deemed
cost, on the time of the revaluation, if the revaluation was comparable in general, to
the cost or to the cost net of accumulated depreciation according to the IFRS standards,
adjusted to changes such as changes in the CPI.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Until
December 31, 2003 the Company adjusted its financial statements to the changes in foreign
rate of the U.S dollar, in accordance with opinion No. 36 of the institute of Certified
Accountancy in Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the purpose of adapting the IFRS standards, the Company chose to implement the above said
relief allowed under IFRS 1, and to measure fixed assets items that were purchased or
established up to December 31, 2003 according to the affective cost for that date, based
on their adjusted value to the foreign exchange rate of the U.S dollar up to that date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# AMERICAN ISRAELI PAPER
MILLS LIMITED

Schedule

Details of Subsidiaries and Associated Companies
At December 31, 2007

|                                                        | Percentage of direct and
indirect holding in shares
conferring equity and
voting rights
|------------------------------------------------------- | ---------------------------------------------------------------------------------------
|
|
|
|
|Main subsidiaries:                                      |                                                                                        
|                                                        |                                                                                        
|Amnir Recycling Industries Limited                      |                                                                                        
|Graffiti Office Supplies and Paper Marketing Ltd.       |                                                                                        
|Attar Marketing Office Supplies Ltd.                    |                                                                                        
|American Israeli Paper Mills Paper Industry (1995) Ltd. |                                                                                        
|                                                        |                                                                                        
|Main associated companies:                              |                                                                                        
|Hogla-Kimberly Ltd.                                     |                                                                                        
|Subsidiaries of Hogla-Kimberly Ltd.:                    |                                                                                        
|Hogla-Kimberly Marketing Limited                        |                                                                                        
|Molett Marketing Limited                                |                                                                                        
|Shikma For Personal Comfort Ltd.                        |                                                                                        
|Turketim Mallari Sanayi ve Ticaret A.S (KCTR)           |                                                                                        
|Mondi Business Paper Hadera Ltd.                        |                                                                                        
|Subsidiary of Mondi Business Paper Hadera Ltd.:         |                                                                                        
|Mondi Business Paper Hadera Marketing Ltd.              |                                                                                        
|Carmel Container Systems Limited                        |                                                                                        
|Frenkel C.D.  Limited**                                 |                                                                                        

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

|** | Frenkel
C.D. Limited is partly held through Carmel Container Systems Limited (an associated
company); the holding in voting shares of C.D. Packaging Systems Limited is 27.85%.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 59

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| | Enclosed
please find the financial reports of the following associated companies:
| | ---------------------------------------------------------------------------------

| |  | Mondi
Business Paper Hadera Ltd.
| | - | --------------------------------

| |  | Hogla-Kimberly
Ltd.
| | - | -------------------

| |  | Carmel
Containers Systems Ltd.
| | - | ------------------------------





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# MONDI BUSINESS PAPER
HADERA LTD.

# FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2007



---

---

# MONDI BUSINESS PAPER HADERA
LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007

# TABLE OF CONTENTS

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | M-1       
|                                                       
|Financial Statements:                                  
|                                                       
|Balance Sheets                                          | M-2       
|                                                       
|Statements of Operations                                | M-3       
|                                                       
|Statements of Changes in Shareholders' Equity           | M-4       
|                                                       
|Statements of Cash Flows                                | M-5 - M-6 
|                                                       
|Notes to the Financial Statements                       | M-7 - M-30



---

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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders ofMondi
Business Paper Hadera Ltd.

We have audited the accompanying
balance sheets of Mondi Business Paper Hadera Ltd. (the Company) as of
December 31, 2007 and 2006, 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, 2007. These financial statements are the responsibility of
the Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audits in accordance
with generally accepted auditing standards in Israel, including those prescribed under the
Auditors Regulations (Auditors Mode of Performance), 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 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, 2007 and 2006, and the results of operations, changes in shareholders equity and
cash flows  of the Company and on consolidated basis  for each of the three
years in the period ended December 31, 2007, in conformity 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 described in Note 2A, the
financial statements are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board.

# /s/ Brightman Almagor &
Co.Brightman Almagor &
Co.Certified Public Accountants A Member Firm of
Deloitte Touche Tohmatsu

# IsraelMay 26, 2008

M - 1

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

|                                       |  | Consolidated | Company
|-------------------------------------- |  | ------------ | -------
|
|
|
|
|Current Assets                         |  |              |        
|Cash and cash equivalents              |  |              |        
|Trade receivables                      |  |              |        
|Subsidiaries                           |  |              |        
|Other receivables                      |  |              |        
|Inventories                            |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|Long-Term Investments                  |  |             
|Investments in Subsidiaries            |  |              |        
|                                       |  |              |        
|                                       |  |             
|Fixed Assets                           |  |              |        
|Cost                                   |  |              |        
|Less - accumulated depreciation        |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|Long -Term Assets                      |  |             
|Long term Trade receivables            |  |              |        
|Goodwill                               |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |             
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |             
|Current Liabilities                    |  |             
|Short term bank credit                 |  |              |        
|Current maturities of long-term        |  |             
|bank loans                             |  |              |        
|Capital notes to shareholders          |  |              |        
|Trade payables                         |  |              |        
|American Israeli Paper Mills           |  |             
|Group, net                             |  |              |        
|Other payables and accrued expenses    |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|Long-Term Liabilities                  |  |             
|Long-term bank loans                   |  |              |        
|Capital notes to shareholders          |  |              |        
|Deferred taxes                         |  |              |        
|Accrued severance pay, net             |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|Commitments and Contingent Liabilities |  |              |        
|                                       |  |             
|Shareholders' Equity                   |  |             
|Share capital                          |  |              |        
|Premium                                |  |              |        
|Capital reserves                       |  |              |        
|Retained earnings                      |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |              |        
|                                       |  |             
|                                       |  |              |        
|                                       |  |              |        

|/s/ David Muhlgay  | /s/ Avner Solel   | /s/ Zvi Livnat                         
|------------------ | ----------------- | ---------------------------------------
|
|
|
|
|D. Muhlgay         | A. Solel          | Z. Livnat                              
|Financial Director | Managing Director | Vice-Chairman of the Board of Directors

Approval date of the financial
statements: May 26, 2008. (*) Reclassified

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

M - 2

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---

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

|                            |  | Consolidated | Company
|--------------------------- |  | ------------ | -------
|
|
|
|
|Net sales                   |  |              |        
|                            |  |             
|Cost of sales               |  |              |        
|                            |  |              |        
|                            |  |             
|Gross profit                |  |              |        
|                            |  |             
|Selling expenses            |  |              |        
|General and                 |  |             
|administrative expenses     |  |              |        
|                            |  |              |        
|                            |  |             
|Operating profit (loss)     |  |              |        
|                            |  |             
|Financing expenses, net     |  |              |        
|                            |  |             
|Other income, net           |  |              |        
|                            |  |              |        
|                            |  |             
|Income (loss) before income |  |             
|taxes                       |  |              |        
|                            |  |             
|tax benefits (Income        |  |             
|taxes)                      |  |              |        
|                            |  |              |        
|                            |  |             
|Income (loss) after         |  |             
|income taxes (tax           |  |             
|benefits)                   |  |              |        
|                            |  |             
|Equity in net earnings      |  |             
|(losses) of                 |  |             
|Subsidiaries                |  |              |        
|                            |  |              |        
|                            |  |             
|Net income (loss) for       |  |             
|the year                    |  |              |        
|                            |  |              |        

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

M - 3

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

|                                | Share
capital | Premium | Capital
reserves | Retained
earnings | Total
|------------------------------- | ------------- | ------- | ---------------- | ----------------- | -----
|
|
|
|
|Balance - January 1, 2005       |               |         |                  | 1                 |      
|                                |               |        
|Changes during 2005:            |               |        
|                                |               |        
|Loss for the year               |               |         |                  | -                 |      
|                                |               |         |                  |                   |      
|                                |               |        
|Balance - December 31, 2005     |               |         |                  | 1                 |      
|                                |               |        
|Changes during 2006:            |               |        
|                                |               |        
|Loss for the year               |               |         |                  | -                 |      
|                                |               |         |                  |                   |      
|                                |               |        
|Balance - December 31, 2006     |               |         |                  | 1                 |      
|                                |               |        
|Changes during 2007:            |               |        
|                                |               |        
|Recognition in capital reserves |               |        
|due to presentation of          |               |        
|shareholders                    |               |        
|capital notes at fair value (*) |               |         |                  | -                 |      
|                                |               |        
|Profit for the year             |               |         |                  | -                 |      
|                                |               |         |                  |                   |      
|                                |               |        
|Balance - December 31, 2007     |               |         |                  | 1                 |      
|                                |               |         |                  |                   |      

(*)              The
company created the Capital reserves due to initial application of standard           No.
23.

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

M - 4

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

|                                   | Consolidated | Company
|---------------------------------- | ------------ | -------
|
|
|
|
|Cash flows - operating activities  |              |        
|Net income (loss) for the year     |              |        
|Adjustments to reconcile net       |              |        
|income (loss) to net cash provided |              |        
|by (used in) operating activities  |              |        
|(Appendix A)                       |              |        
|                                   |              |        
|Net cash provided by (used in)     |              |        
|operating activities               |              |        
|                                   |              |        
|                                   |              |        
|Cash flows - investing activities  |              |        
|Acquisition of fixed assets        |              |        
|Proceeds from sale of fixed assets |              |        
|                                   |              |        
|Net cash used in investing         |              |        
|activities                         |              |        
|                                   |              |        
|                                   |              |        
|Cash flows - financing activities  |              |        
|Short-term bank credit, net        |              |        
|Repayment of long-term bank  loans |              |        
|Proceeds of long-term bank loans   |              |        
|Repayment of long-term capital     |              |        
|notes to shareholders              |              |        
|                                   |              |        
|Net cash provided by (used in)     |              |        
|financing activities               |              |        
|                                   |              |        
|                                   |              |        
|Increase (decrease) in             |              |        
|cash and cash equivalents          |              |        
|Cash and cash equivalents -        |              |        
|beginning of year                  |              |        
|                                   |              |        
|Cash and cash equivalents -        |              |        
|end of year                        |              |        
|                                   |              |        

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

M - 5

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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       |              |        
|   | Deferred taxes, net                 |              |        
|   | Decrease in liability for severance |              |        
|   | pay, net                            |              |        
|   | Capital gain                        |              |        
|   | from sale of fixed assets           |              |        
|   | Effect of exchange rate and linkage |              |        
|   | differences of long-term bank       |              |        
|   | loans and long-term loan to         |              |        
|   | Subsidiary                          |              |        
|   | Effect of exchange rate             |              |        
|   | differences of long-term            |              |        
|   | capital notes to shareholders       |              |        
|   |                                     |              |        
|   | Changes in assets and liabilities:  |              |        
|   | Increase in trade receivables       |              |        
|   | Decrease (increase)                 |              |        
|   | in other receivables                |              |        
|   | Decrease (increase)                 |              |        
|   | Increase in Subsidiaries            |              |        
|   | in inventories                      |              |        
|   | Increase in long term trade         |              |        
|   | receivables                         |              |        
|   | Increase (decrease) in trade        |              |        
|   | payables                            |              |        
|   | Increase (decrease) in              |              |        
|   | American Israeli Paper Mills        |              |        
|   | Group, net                          |              |        
|   | Increase (decrease) in other        |              |        
|   | payables and accrued expenses       |              |        
|   |                                     |              |        
|   |                                     |              |        
|   |                                     |              |        
|   |                                     |              |        
|B. | Non-cash activities                 |              |        
|   | Acquisition of fixed                |              |        
|   | assets on credit                    |              |        
|   |                                     |              |        

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

(*) Reclassified

M - 6

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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 Holdings BV. (NHBV or the Parent
Company) (50.1%) and American-Israeli Paper Mills Ltd. (AIPM) (49.9%).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 6C.                                                                                                                                                  
| |                        
| | 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         | - | Until January 1, 2007as defined by Opinion No. 29 of the Institute of Certified Public Accountants in Israel. As of January 1, 2007 as defined by standard No.23 published by the Israeli Accounting Standard board.        
| |                        
| | Interested Parties      | - | Until January 1, 2007 as defined in the Israeli Securities Regulations (Presentation of Financial Statements), 1993. As of January 1, 2007 as defined in Standard No.23 published by the Israeli Accounting Standards board.
| |                        
| | 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.                                                                                                                                                                                               
| |                        
| | Reported Amount         | - | see Note 2A(1) below.                                                                                                                                                                                                       
| |                         |   |                                                                                                                                                                                                                             

M - 7

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MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES 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 standard No.27 Fixed assets, standard No.28  Amendment
of the transitional orders in accounting standard No. 27 , accounting standard No.
23 Accounting for transactions between an entity and a controlling party and
accounting standard No. 30 Intangible assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 FinancialStatements
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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 23.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 8

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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 in reporting           amounts
| | --- | -------------------------------------------------------------------------------------------

| | 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 in accordance with 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 in accordance with the guidance of Standard No.
12.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 9

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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
unallocated excess cost due to investment in an investee deriving from the difference
between the fair value of the investees identifiable assets (including intangible
assets) over the fair value of its identifiable liabilities (after deferred taxes) at the
acquisition date is goodwill, which has been depreciated by December 31, 2005 over about
4 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
note I below for the accounting for goodwill as of January 1, 2006.
| | -----------------------------------------------------------------------

| | 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
| | -- | -----------

| | As
of January 1, 2007 the Company applies Accounting Standard NO.26 Inventories.
Inventories are stated at the lower of cost or net realizable value. Inventory cost
includes purchase cost, direct labor cost, variable and fixed manufacturing overhead and
any other costs incurred in bringing the inventories to their present location and
condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
realizable value is the estimated selling price in the ordinary course of business, less
the estimated cost of completion and the estimated costs necessary to make the sale. Any
reduction of inventory to net realizable value as well as any other inventory loss is
recorded in the current period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequent
elimination of a write-down that stems from an increase in net realizable value is
allocated to operations during the period in which the elimination is taking place.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. For amortization of goodwill
included in an investment in a Subsidiary, see I below.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

M - 10

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---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | G. | Fixed
Assets
| | -- | ------------

| | As
of January 1, 2007 the Company applies accounting standard No. 27 Property plant
and equipment and accounting standard No. 28 Amendment of the transitional
orders in accounting standard No. 27 Property plant and equipment
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
method- fixed assets are presented at cost, including interest and other
capitalizable costs (capitalizable costs include only incremental direct costs that are
identifiable with, and related to, the property and equipment and are incurred prior to
its initial operation), less accumulated depreciation and amortization.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007 Any fixed asset with a meaningful cost in relation to the items
total cost should be depreciated separately. Moreover, the depreciation method used will
be reviewed at least once at yearend and, if any meaningful change had taken place in the
estimated consumption of future economic benefits inherent in the asset, the method
should be modified to reflect such changes. This change will be treated as a change in
accounting estimate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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         | 10              
| | Machinery and equipment        | 5-20 (mainly 5%)
| | Motor vehicles                 | 15-20           
| | Office furniture and equipment | 7-33            

| | Scrap
value, depreciation method and the assets useful lives are being reviewed by management
in the end of every financial year. Changes are handled as a change of estimation and are
applied from here on.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Profit
of loss due to the sale or abandon of an asset is determined by the difference between
the proceeds from the sale to the net book value of the asset and is attributed to profit
and loss statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the application of this standards the Company reclassified major spare parts
and standby equipment, that had been recorded as inventory, to property plant and
equipment in the amount of NIS 2,715 thousand as of December 31,2007 (NIS 2,927 thousand
as of December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 11

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MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | H. | Impairment
of Long-Lived Assets
| | -- | -------------------------------

| | At
each balance sheet date, the Group reviews the carrying amounts of its tangible and
intangible assets to determine whether there is any indication that those assets have
suffered an impairment loss. If any such indication exists, the recoverable amount of the
asset is estimated in order to determine the extent of the impairment loss (if any).
Where it is not possible to estimate the recoverable amount of an individual asset, the
Group estimates the recoverable amount of the cash-generating unit to which the asset
belongs. Where a reasonable and consistent basis of allocation can be identified,
corporate assets are also allocated to individual cash-generating units, or otherwise
they are allocated to the smallest group of cash-generating units for which a reasonable
and consistent allocation basis can be identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets with indefinite useful lives and intangible assets not yet available for use are
tested for impairment annually, and whenever there is an indication that the asset may be
impaired.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recoverable
amount is the higher of fair value less costs to sell and value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using
a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset for which the estimates of future cash flows
have not been adjusted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the recoverable amount of an asset (or cash-generating unit) is estimated to be less than
its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced
to its recoverable amount. An impairment loss is recognized immediately in profit or
loss, unless the relevant asset is carried at a revalued amount, in which case the
impairment loss is treated as a revaluation decrease.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Where
an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable amount,
but so that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognized for the asset
(cash-generating unit) in prior years. A reversal of an impairment loss is recognized
immediately in profit or loss, unless the relevant asset is carried at a revalued amount,
in which case the reversal of the impairment loss is treated as a revaluation increase.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 12

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MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | I. | Other
Assets  Goodwill
| | -- | -----------------------

| | As
of January 1, 2006 the Company applies Standard No. 20 (revised) Accounting
Treatment for Goodwill and Other Intangibles upon the Acquisition of an Investee (in
this paragraph- the standard).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | By
December 31, 2005 the Company had systematically amortized its goodwill deriving from the
Acquisition of investees using the straight line method over periods of 15 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007 the Company applies Standard No. 30
In
accordance with the standard, goodwill is the unallocated excess cost due to investment
in an investee deriving from the difference between the fair value of the investees
identifiable assets (including intangible assets) over the fair value of its identifiable
liabilities (after deferred taxes) at the acquisition date. Goodwill is no longer
amortized in a systematic manner, but is examined for impairment annually or more
frequently if events or changes in circumstances indicate that it might be impaired.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the purpose of impairment testing, goodwill is allocated to each of the Groups
cash-generating units expected to benefit from the synergies of the combination.
Cash-generating units to which goodwill has been allocated are tested for impairment
annually, or more frequently when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less than the carrying amount of
the unit, the impairment loss is allocated first to reduce the carrying amount of any
goodwill allocated to the unit and then to the other assets of the unit pro-rata on the
basis of the carrying amount of each asset in the unit. An impairment loss recognized for
goodwill is not reversed in a subsequent period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
disposal of a subsidiary or a jointly controlled entity, the attributable amount of
goodwill is included in the determination of the profit or loss on disposal.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | 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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 13

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---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | L. | Transaction
between the company and a controlling party.
| | -- | --------------------------------------------------------

| | As
of January 1, 2007 the company is implementing accounting Standard NO.23 Accounting
for transactions between an entity and a controlling party.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | The Standard stipulates
that transactions between an entity and a controlling party will be measured based on
fair value; transactions which in nature are owner investments or distributions to owners
should be reported directly in equity and not be recognized in the controlled entitys
profit and loss; the differences between the consideration in transactions between an
entity and a controlling party and their fair value will be recognized directly in
equity. Current and deferred taxes pertaining to the items recognized in equity due to
transactions with controlling parties will be recognized directly in equity as well.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans-As
of January 1, 2007 loans granted from controlling party will be measured on fair value,
the differences between the consideration in transactions between an entity and a
controlling party and their fair value will be recognized directly in equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is effective for transactions between an entity and a controlling party taking
place subsequent to January 1, 2007 and for loans granted from or given to a controlling
party prior to the Standards effective date, starting on the Standards
effective date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of initial application of the standard the companys share holders equity
increased in the sum of NIS 929 thousand , the current liabilities decreased in the sum
of NIS 823 thousand and the results of operation decreased in the sum of NIS 556 thousand
during the period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 14

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---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | M. | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2007 |                                                         |                                
| | December 31, 2006 |                                                         |                                
| | December 31, 2005 |                                                         |                                

| | Increase (decrease)
during the year ended: | % | %
| | ------------------------------------------ | - | -
|
|
|
|
| | December 31, 2007                          |   |  
| | December 31, 2006                          |   |  
| | December 31, 2005                          |   |  

| | (3) | Exchange-rate
differences are charged to operations as incurred.
| | --- | ----------------------------------------------------------------

M - 15

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---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | O. | Recent
Accounting Standards
| | -- | ---------------------------

| | Application
of Standard No.29 Adoption of International Financial Reporting Standards
| | ---------------------------------------------------------------------------------------

| | In
July 2006, the Israeli Accounting Standards Board published Accounting Standard No. 29 -Adoption
of International Financial Reporting Standards  IFRS (the Standard).
According to this Standard, the financial statements of an entity subject to the Israeli
Securities Law and authoritative Regulations thereunder, other than foreign corporations
as defined by this Law that prepares its financial statements in other than Israeli GAAP,
will be prepared for the reporting periods commencing January 1, 2008, including interim
periods, in accordance with the IFRS and related interpretations published by the
International Accounting Standards Board.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
entity adopting IFRS as of January 1, 2008 and electing to report comparative figures in
accordance with the IFRS for only 2007, will be required to prepare opening balance-sheet
amounts as of January 1, 2007 based on the IFRS.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reporting
in accordance with the IFRS will be carried out based on the provisions of IFRS No. 1,
First-time Adoption of IFRS Standards, which establishes guidance on
implementing the transition from financial reporting based on domestic national
accounting standards to reporting in accordance with the IFRS.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IFRS
No. 1 supersedes the transitional provisions established in other IFRSs (including those
established in former domestic national accounting standards), stating that all IFRSs
should be adopted retroactively for the opening balance-sheet amounts. Nevertheless, IFRS
No. 1 grants allowances on certain issues by not applying the retroactive application in
respect thereof. In addition, IFRS No. 1 contains certain exceptions with regard to the
retroactive application of certain aspects stipulated in other IFRSs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
decided to adopt IFRS standards starting January 1, 2008.
| | --------------------------------------------------------------------

M - 16

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---

MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

|NOTE 3 |  | TRADE RECEIVABLES
|------ | - | -----------------

| |                                        | Consolidated
| | -------------------------------------- | ------------
|
|
|
|
| | Domestic                               |             
| | Open accounts                          |             
| | Checks receivable                      |             
| |                                        |             
| |                                        |             
| |                                        |             
| | Foreign                                |             
| | Open accounts                          |             
| | Related parties                        |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             
| | Less - allowance for doubtful accounts |             
| |                                        |             
| |                                        |             
| |                                        |             

|NOTE 4 |  | OTHER RECEIVABLES
|------ | - | -----------------

| |                           | Consolidated | Company
| | ------------------------- | ------------ | -------
|
|
|
|
| | Deferred taxes (Note 20D) |              |        
| | Prepaid expenses          |              |        
| | Advances to suppliers     |              |        
| | Value Added Tax           |              |        
| | Income tax advances, net  |              |        
| | Others                    |              |        
| |                           |              |        
| |                           |              |        
| |                           |              |        

M - 17

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---

MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

|NOTE 5 |  | INVENTORIES
|------ | - | -----------

| |                                        | Consolidated | Company
| | -------------------------------------- | ------------ | -------
|
|
|
|
| | Raw and auxiliary materials            |              |        
| | Finished products and goods in process |              |        
| |                                        |              |        
| |                                        |              |        
| |                                        |              |        
| |                                        |              |        
| | Includes products in transit           |              |        
| |                                        |              |        
| |                                        |              |        
| | The inventories are presented net of   |              |        
| | impairment provision                   |              |        
| |                                        |              |        

| | The
cost of inventories recognised as an expense includes NIS 770 thousand in respect of
write-downs of inventory to net realisable value.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | (*) | As
a result of applying standard No.27, spare parts in the sum of NIS 2,927
          thousand were defined as fixed assets.
| | --- | ----------------------------------------------------------------------------------------------------------------------------

|NOTE 6 |  | INVESTMENTS IN SUBSIDIARIES
|------ | - | ---------------------------

| | A. | Composition
| | -- | -----------

| |                                           | Company
| | ----------------------------------------- | -------
|
|
|
|
| | Cost of shares                            |        
| | Accumulated losses since acquisition, net |        
| |                                           |        
| |                                           |        
| |                                           |        

| | B. | Goodwill
| | -- | --------

| |                                 | Consolidated
| | ------------------------------- | ------------
|
|
|
|
| | Cost                            |             
| | Less - accumulated amortization |             
| |                                 |             
| |                                 |             
| |                                 |             

| | C. | Consolidated
Subsidiaries
| | -- | -------------------------

| | The
consolidated financial statements as of December 31, 2007, include the financial
statements of the following Subsidiaries:
| | ------------------------------------------------------------------------------------------------------------------------------

| |                                            | Ownership and control
As of December 31,
2 0 0 7
| | ------------------------------------------ | ------------------------------------------------
|
|
|
|
| | Mondi Business Paper Hadera Marketing Ltd. |                                                 
| | Grafinir Paper Marketing Ltd.              |                                                 
| | Yavnir (1999) Ltd.                         |                                                 
| | Miterani Paper Marketing 2000 (1998) Ltd.  |                                                 

| | (*) Reclassified
| | ----------------

M - 18

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MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

|NOTE 7 |  | FIXED ASSETS
|------ | - | ------------

|                            | Leasehold
improvements | Machinery
and
equipment | Motor
vehicles | Office
Furniture,
Computers
and
equipment | Total
|--------------------------- | ---------------------- | ----------------------- | -------------- | ----------------------------------------- | -----
|
|
|
|
|Consolidated                |                        |                         |                |                                           |      
|                            |                        |                        
|Cost:                       |                        |                        
|Balance - January 1, 2007   |                        |                         |                | 3,724                                     |      
|Changes during 2007:        |                        |                        
|Additions                   |                        |                         |                | 71                                        |      
|Dispositions                |                        |                         |                | -                                         |      
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2007 |                        |                         |                | 3,795                                     |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|Accumulated depreciation:   |                        |                        
|Balance - January 1, 2007   |                        |                         |                | 2,593                                     |      
|Changes during 2007:        |                        |                        
|Additions                   |                        |                         |                | 394                                       |      
|Dispositions                |                        |                         |                | -                                         |      
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2007 |                        |                         |                | 2,987                                     |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|Net book value:             |                        |                        
|December 31, 2007           |                        |                         |                | 808                                       |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|December 31, 2006           |                        |                         |                | 1,131                                     |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|Company                     |                        |                        
|                            |                        |                        
|Cost:                       |                        |                        
|Balance - January 1, 2007   |                        |                         |                | 2,651                                     |      
|Changes during 2007:        |                        |                        
|Additions                   |                        |                         |                | 71                                        |      
|Dispositions                |                        |                         |                | -                                         |      
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2007 |                        |                         |                | 2,722                                     |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|Accumulated depreciation:   |                        |                        
|Balance - January 1, 2007   |                        |                         |                | 1,835                                     |      
|Changes during 2007:        |                        |                        
|Additions                   |                        |                         |                | 272                                       |      
|Dispositions                |                        |                         |                | -                                         |      
|                            |                        |                         |                |                                           |      
|Balance - December 31, 2007 |                        |                         |                | 2,107                                     |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|Net book value:             |                        |                        
|December 31, 2007           |                        |                         |                | 615                                       |      
|                            |                        |                         |                |                                           |      
|                            |                        |                        
|December 31, 2006           |                        |                         |                | 816                                       |      
|                            |                        |                         |                |                                           |      

|(*) | Reclassified
|--- | ------------

M - 19

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MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

|NOTE 8 |  | TRADE PAYABLES
|------ | - | --------------

| |                                       | Consolidated | Company
| | ------------------------------------- | ------------ | -------
|
|
|
|
| | In Israeli currency                   |              |        
| | In foreign currency or linked thereto |              |        
| |                                       |              |        
| |                                       |              |        
| |                                       |              |        

|NOTE 9 |  | OTHER PAYABLES AND ACCRUED EXPENSES
|------ | - | -----------------------------------

| |                                | Consolidated | Company
| | ------------------------------ | ------------ | -------
|
|
|
|
| | Accrued payroll and            |              |        
| | related expenses               |              |        
| | Value Added Tax                |              |        
| | Advances from customers        |              |        
| | NHBV - Accrual for license fee |              |        
| | Interest payable               |              |        
| | Other                          |              |        
| |                                |              |        
| |                                |              |        
| |                                |              |        

|NOTE 10 |  | LONG-TERM BANK LOANS
|------- | - | --------------------

| | A. | Composition
| | -- | -----------

| |                           | Interestrate | Consolidatedand Company
| | ------------------------- | ------------ | -----------------------
|
|
|
|
| | In U.S. dollar            |              |                        
| | In NIS indexed to the CPI |              |                        
| |                           |              |                        
| |                           |              |                        
| | Less - current maturities |              |                        
| |                           |              |                        
| |                           |              |                        
| |                           |              |                        

| | (*) | Average
interest rate as of December 31, 2007.
| | --- | ----------------------------------------------

M - 20

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MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

|NOTE 10 |  | LONG-TERM BANK LOANS (Cont.)
|------- | - | ----------------------------

| | B. | Maturities
| | -- | ----------

| |                    | Consolidated
and Company
| | ------------------ | ------------------------
|
|
|
|
| | First year - 2008  |                         
| | Second year - 2009 |                         
| | Third year - 2010  |                         
| | Fourth year - 2011 |                         
| | Fifth year - 2012  |                         
| |                    |                         
| |                    |                         
| |                    |                         

| | C. | According
to the loan agreements with the banks, as amended in the second half           of 2005,
the Company has 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 22%. 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, 2007, the Company was in full compliance with the covenants stipulated in
the bank agreements and this financial ratio amounted to 22.16%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | As
to a negative pledge agreement signed by the Company, see Note           13B.
| | -- | ----------------------------------------------------------------------------------

| | E. | The
Company and its Subsidiaries have been granted a total 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 290,000           thousand. As
of the balance sheet date, the Group utilized NIS 183,000 thousand           of the
credit facility as long & short term borrowings and as bank           guarantees
granted to third parties.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 11 |  | 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, 2007 the total capital notes amount is NIS 5,514 thousand. Management
intends to repay NIS 5,514 thousand of the capital note balance during 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 12 |  | 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, 2007 reflects the severance pay liability in
respect of temporary employees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 21

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MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

|NOTE 13 |  | COMMITMENTS AND CONTINGENT LIABILITIES
|------- | - | --------------------------------------

| | A. | Commitments:
| | -- | ------------

| | (1) | 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, 2007 are as follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |      | Consolidated | Company
| | ---- | ------------ | -------
|
|
|
|
| | 2008 |              |        
| | 2009 |              |        
| |      |              |        
| |      |              |        
| |      |              |        

| | B. | Liens
| | -- | -----

| | To
secure long-term bank loans and short-term bank credits (the balance of which as of
December, 31 2007 is NIS 154,182 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 course of its ongoing operations provides guarantees.
| | ----------------------------------------------------------------------------------------------

|NOTE 14 |  | SHARE CAPITAL
|------- | - | -------------

| | A. | As
of December 31, 2007 and 2006, 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).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

M - 22

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MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

|NOTE 15 |  | NET SALES
|------- | - | ---------

| |                       | Consolidated | Company
| | --------------------- | ------------ | -------
|
|
|
|
| | Industrial operations |              |        
| | Commercial operations |              |        
| |                       |              |        
| |                       |              |        
| |                       |              |        

|NOTE 16 |  | COST OF SALES
|------- | - | -------------

| |                               | Consolidated | Company
| | ----------------------------- | ------------ | -------
|
|
|
|
| | Purchases (*)                 |              |        
| | Materials consumed            |              |        
| | Salaries and related expenses |              |        
| | Subcontracting                |              |        
| | Energy costs                  |              |        
| | Depreciation                  |              |        
| | Other manufacturing costs     |              |        
| | and expenses (including rent) |              |        
| |                               |              |        
| |                               |              |        
| | Change in finished goods ,    |              |        
| | goods in process, and         |              |        
| | products in transit (**)      |              |        
| |                               |              |        
| |                               |              |        
| |                               |              |        

| | (*) | The
purchases of the Group are related principally to commercial operations.
| | --- | ----------------------------------------------------------------------------

| | (**) | Change
in raw and auxiliary materials are included in materials consumed.
| | ---- | -------------------------------------------------------------------------

M - 23

---

---

MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

|NOTE 17 |  | SELLING EXPENSES
|------- | - | ----------------

|                                    | Consolidated | Company
|----------------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses       |              |        
|Packaging and shipping to customers |              |        
|Maintenance and rent                |              |        
|Advertising                         |              |        
|Commissions and license fees        |              |        
|to a shareholder                    |              |        
|Depreciation                        |              |        
|                                    |              |        
|                                    |              |        
|                                    |              |        

|(*) | Reclassified.
|--- | -------------

|NOTE 18 |  | GENERAL AND ADMINISTRATIVE EXPENSES
|------- | - | -----------------------------------

|                              | Consolidated | Company
|----------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses |              |        
|Office maintenance            |              |        
|Professional and              |              |        
|management fees               |              |        
|Depreciation                  |              |        
|Amortization of goodwill      |              |        
|Bad and doubtful debts        |              |        
|Other                         |              |        
|                              |              |        
|                              |              |        
|                              |              |        

|NOTE 19 |  | FINANCING INCOME (EXPENSES), NET
|------- | - | --------------------------------

# 

|                                 | Consolidated | Company
|-------------------------------- | ------------ | -------
|
|
|
|
|
|Interest on long-term bank loans |              |        
|                                 |              |        
|Erosion of monetary assets and   |              |        
|liabilities, net                 |              |        
|                                 |              |        
|Forward transaction              |              |        
|                                 |              |        

M - 24

---

---

MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

|NOTE 20 |  | 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 benefit the Company
is                entitled to under this law is accelerated depreciation rates.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Composition
| | -- | -----------

| |                                 | Consolidated | Company
| | ------------------------------- | ------------ | -------
|
|
|
|
|
| | Current taxes                   |              |        
| | Taxes in respect of prior years |              |        
| | Deferred taxes (D. below)       |              |        
| |                                 |              |        
| |                                 |              |        
| |                                 |              |        

| | C. | Reconciliation
of the statutory tax rate to the effective tax rate
| | -- | ------------------------------------------------------------------

| |                                    | Consolidated | Company
| | ---------------------------------- | ------------ | -------
|
|
|
|
| | Income (loss) before income taxes  |              |        
| |                                    |              |        
| |                                    |              |        
| | Statutory tax rate                 |              |        
| | Tax computed by statutory tax      |              |        
| | rate                               |              |        
| |                                    |              |        
| | Tax increments (savings)           |              |        
| | due to:                            |              |        
| | Non-deductible expenses            |              |        
| | Non-taxable income                 |              |        
| | Reduction in corporate tax rates - |              |        
| | (E. below)                         |              |        
| | Differences arising from           |              |        
| | basis of measurement               |              |        
| | Prior years income taxes           |              |        
| |                                    |              |        
| |                                    |              |        
| |                                    |              |        

M - 25

---

---

MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

|NOTE 20 |  | INCOME TAXES (TAXES BENEFITS) (Cont.)
|------- | - | -------------------------------------

| | D. | Deferred
Taxes
| | -- | --------------

| |                           | Consolidated | Company
| | ------------------------- | ------------ | -------
|
|
|
|
| | Balance as of beginning   |              |        
| | of year                   |              |        
| | Changes during the year   |              |        
| | Adjustment due to         |              |        
| | change in income          |              |        
| | tax rates                 |              |        
| |                           |              |        
| |                           |              |        
| | Balance as of end of year |              |        
| |                           |              |        

| |                                             | Consolidated | Company
| | ------------------------------------------- | ------------ | -------
|
|
|
|
| | Deferred taxes are presented in the         |              |        
| | balance sheets as follows:                  |              |        
| |                                             |              |        
| | Other receivables and prepayments (Note 4): |              |        
| |                                             |              |        
| | Allowance for doubtful accounts             |              |        
| | Vacation and recreation pay                 |              |        
| | Carry forward tax losses                    |              |        
| |                                             |              |        
| |                                             |              |        
| |                                             |              |        
| |                                             |              |        
| | Long-term liabilities:                      |              |        
| | Depreciable fixed assets                    |              |        
| | Accrued severance pay, net                  |              |        
| | Less- Carry forward tax losses              |              |        
| |                                             |              |        
| |                                             |              |        
| |                                             |              |        
| |                                             |              |        
| |                                             |              |        

For
2006-2007  Deferred taxes were computed at rates between 29%-25%, primarily 
25%.

Deferred
taxes are recognized in respect of all carry forward losses of the Group, see F.

M - 26

---

---

MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

|NOTE 20 |  | 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 50,271 thousand as           of December
31, 2006 and NIS 33,086 thousand as of December 31, 2007,           respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | The
Company and its Subsidiaries have tax assessments that are final through           the
2002 tax year.
| | -- | ---------------------------------------------------------------------------------------------------------

|NOTE 21 |  | RELATED PARTIES AND INTERESTED PARTIES
|------- | - | --------------------------------------

| | A. | Balances
with Related Parties and Subsidiaries
| | -- | ----------------------------------------------

| |                                            | Consolidated | Company
| | ------------------------------------------ | ------------ | -------
|
|
|
|
| | Trade receivables - related parties        |              |        
| |                                            |              |        
| | Trade payables - AIPM                      |              |        
| |                                            |              |        
| | Trade payables - related parties           |              |        
| |                                            |              |        
| | Other payables and accrued expenses - AIPM |              |        
| |                                            |              |        
| | Other payables and accrued expenses -      |              |        
| | related parties                            |              |        
| |                                            |              |        
| | Capital notes to shareholders              |              |        
| |                                            |              |        

M - 27

---

---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS
                                                (Reported amounts)
                                                (NIS in thousands)

|NOTE 21 |  | RELATED PARTIES AND INTERESTED PARTIES (Cont.)
|------- | - | ----------------------------------------------

| | B. | Transactions
with Related Parties and Subsidiaries
| | -- | --------------------------------------------------

| |                           | Consolidated | Company
| | ------------------------- | ------------ | -------
|
|
|
|
| | Sales to related parties  |              |        
| |                           |              |        
| |                           |              |        
| | Sales to Subsidiaries     |              |        
| |                           |              |        
| |                           |              |        
| | Cost of sales             |              |        
| |                           |              |        
| |                           |              |        
| | Selling expenses, net     |              |        
| | (Participation in selling |              |        
| | expenses, net)            |              |        
| |                           |              |        
| |                           |              |        
| | General and               |              |        
| | administrative expenses   |              |        
| |                           |              |        
| |                           |              |        
| | Financing expenses        |              |        
| | (income), net             |              |        
| |                           |              |        

| | C. | (1) | The
Company leases its premises from AIPM and receives services (including           energy,
water, maintenance and professional services) under agreements, which           are
renewed every year.
| | -- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
Group is obligated to pay commissions to NAG.
| | --- | -------------------------------------------------

|NOTE 22 |  | DISCLOSURE
AND PRESENTATION OF FINANCIAL INSTRUMENTS
|------- | - | ----------------------------------------------------

| | A. | Credit
Risk
| | -- | -----------

| | The Groups revenue derives 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 and
other current assets. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------

M - 28

---

---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS
                                                (NIS in thousands)

|NOTE 23 |  | COMPANYS FINANCIAL STATEMENTS IN NOMINAL VALUESFOR TAX PURPOSES
|------- | - | ----------------------------------------------------------------

| | A. | Balance
Sheets
| | -- | --------------

| |                                            | Company
| | ------------------------------------------ | -------
|
|
|
|
| | Current Assets                             |        
| | 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                       |        
| |                                            |        
| |                                            |        
| |                                            |        

(*)
Reclassified

M - 29

---

---

MONDI BUSINESS PAPER HADERA LTD.
                                          NOTES TO FINANCIAL STATEMENTS
                                                (NIS in thousands)

|NOTE 23 |  | 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, net                               |                        
| |                                                 |                        
| | Income (loss) before income tax benefits        |                        
| |                                                 |                        
| | Income tax benefits (expenses)                  |                        
| |                                                 |                        
| | 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 | Capital
reserves | Retained
earnings | Total
| | --------------------------- | ------------- | ------- | ---------------- | ----------------- | -----
|
|
|
|
| | Balance - January 1, 2005   |               |         |                  | 1                 |      
| |                             |               |        
| | Changes during 2005:        |               |        
| | Loss for the year           |               |         |                  | -                 |      
| |                             |               |         |                  |                   |      
| |                             |               |        
| | Balance - December 31, 2005 |               |         |                  | 1                 |      
| |                             |               |        
| | Changes during 2006:        |               |        
| | Loss for the year           |               |         |                  | -                 |      
| |                             |               |         |                  |                   |      
| |                             |               |        
| | Balance - December 31, 2006 |               |         |                  | 1                 |      
| |                             |               |        
| | Changes during 2007:        |               |        
| | Loss for the year           |               |         |                  | -                 |      
| |                             |               |         |                  |                   |      
| |                             |               |        
| | Balance - December 31, 2007 |               |         |                  | 1                 |      
| |                             |               |         |                  |                   |      

M - 30

---

---

# HOGLA-KIMBERLY LTD. FINANCIAL
STATEMENTS 
AS OF DECEMBER 31, 2007



---

---

# HOGLA-KIMBERLY LTD. FINANCIAL STATEMENTS 
AS OF DECEMBER 31, 2007

# TABLE OF CONTENTS

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|Report of Independent Registered Public Accounting Firm | H-1       
|                                                       
|Financial Statements:                                  
|                                                       
|Balance Sheets                                          | H-2       
|                                                       
|Statements of Operations                                | H-3       
|                                                       
|Statements of Changes in Shareholders' Equity           | H-4       
|                                                       
|Statements of Cash Flows                                | H-5 - H-7 
|                                                       
|Notes to the Financial Statements                       | H-8 - H-38



---

---

| | Brightman Almagor
Haifa Office
5 Ma'aleh Hashichrur Street
Haifa, 33284
P.O.B. 5648, Haifa 31055
Israel
Tel: +972 (4) 860 7373
Fax: +972 (4) 867 2528
Info-haifa@deloitte.co.il
www.deloitte.com
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders ofHogla
 Kimberly Ltd.

We have audited the accompanying
balance sheets of Hogla  Kimberly Ltd. (the Company) as of
December 31, 2007 and 2006, 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, 2007. These financial statements are the responsibility of
the Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audits in accordance
with generally accepted auditing standards in Israel, including those prescribed under the
Auditors Regulations (Auditors Mode of Performance), 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 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, 2007 and 2006, and the results of operations, changes in shareholders equity and
cash flows  of the Company and on consolidated basis  for each of the three
years in the period ended December 31, 2007, in conformity 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 described in Note 2A, the
financial statements are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board.

# /s/ Brightman Almagor &
Co. Brightman Almagor &
Co.Certified Public AccountantsA Member Firm of
Deloitte Touche Tohmatsu

# IsraelMay 26, 2008

H - 1

---

---

HOGLA-KIMBERLY LTD.
BALANCE SHEETS
(REPORTED AMOUNTS)(NIS in thousands)

|                                         |  | Consolidated | Company
|---------------------------------------- |  | ------------ | -------
|
|
|
|Current Assets                           |  |              |        
|Cash and cash equivalents                |  |              |        
|Trade receivables                        |  |              |        
|Other receivables                        |  |              |        
|Inventories                              |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|Long-Term Investments                    |  |             
|Capital note of shareholder              |  |              |        
|VAT receivable                           |  |              |        
|Investments in Subsidiaries              |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|Property plant and equipment             |  |              |        
|Cost                                     |  |              |        
|Less - accumulated depreciation          |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|Other Assets                             |  |             
|Goodwill                                 |  |              |        
|Deferred taxes                           |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|Current Liabilities                      |  |             
|Short-term bank credit                   |  |              |        
|Trade payables                           |  |              |        
|Other payables and accrued expenses      |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|Long-Term Liabilities                    |  |             
|Liability for employee rights upon early |  |             
|retirement                               |  |              |        
|Deferred taxes                           |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|Commitments and Contingent Liabilities   |  |              |        
|                                         |  |             
|Shareholders' Equity                     |  |             
|Share capital                            |  |              |        
|Capital reserves                         |  |              |        
|Translation adjustments relating to      |  |             
|foreign held autonomous Subsidiary       |  |              |        
|Accumulated other comprehensive income   |  |              |        
|Retained earnings                        |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        
|                                         |  |              |        

|(*) | Reclassified.
|--- | -------------

|/s/ Tom Davis T. DavisChairman of the Board of Directors | /s/ O. Argov O. ArgovChief Financial Officer | /s/ A. Schor A. SchorChief Executive Officer
|---------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------------------------

Approval date of the financial
statements: May 26, 2008.

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

H - 2

---

---

HOGLA-KIMBERLY LTD.
STATEMENTS OF OPERATIONS
(REPORTED AMOUNTS)(NIS in thousands)

|                           |  | Consolidated | Company
|-------------------------- |  | ------------ | -------
|
|
|
|Net sales                  |  |              |        
|                           |  |             
|Cost of sales              |  |              |        
|                           |  |              |        
|                           |  |             
|Gross profit               |  |              |        
|                           |  |             
|Selling and marketing      |  |             
|expenses                   |  |              |        
|                           |  |             
|General and                |  |             
|administrative expenses    |  |              |        
|                           |  |              |        
|                           |  |             
|Operating profit           |  |              |        
|                           |  |             
|Financing income           |  |             
|(expenses), net            |  |              |        
|                           |  |             
|Other income, net          |  |              |        
|                           |  |              |        
|                           |  |             
|Income before income taxes |  |              |        
|                           |  |             
|Income taxes               |  |              |        
|                           |  |              |        
|                           |  |             
|Income (loss) after income |  |             
|taxes                      |  |              |        
|                           |  |             
|Equity in losses           |  |             
|of Subsidiaries            |  |              |        
|                           |  |             
|Minority interest in       |  |             
|losses (earnings) of       |  |             
|Subsidiary                 |  |              |        
|                           |  |              |        
|                           |  |             
|Net income (loss) for      |  |             
|the year                   |  |              |        
|                           |  |              |        
|                           |  |              |        

|(*) | Reclassified.
|--- | -------------

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

H - 3

---

---

HOGLA-KIMBERLY LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(REPORTED AMOUNTS)(NIS in thousands)

|                             | Share capital | Capital
reserves | Translation
adjustments
relating to
foreign held
autonomous
Subsidiary | Accumulate other
comprehensive
income | Retained
earnings | Total
|---------------------------- | ------------- | ---------------- | ---------------------------------------------------------------------- | ------------------------------------- | ----------------- | -----
|
|
|
|Balance - January 1, 2005    |               |                  |                                                                        | 29,038                                |                   |      
|                             |               |                 
|Changes during 2005:         |               |                 
|                             |               |                 
|Translation adjustments      |               |                 
|relating to foreign held     |               |                 
|autonomous Subsidiary        |               |                  |                                                                        | -                                     |                   |      
|Dividend paid                |               |                  |                                                                        | -                                     |                   |      
|Net income for the year      |               |                  |                                                                        | -                                     |                   |      
|                             |               |                  |                                                                        |                                       |                   |      
|                             |               |                 
|Balance - December 31, 2005  |               |                  |                                                                        | 29,038                                |                   |      
|                             |               |                  |                                                                        |                                       |                   |      
|                             |               |                 
|Changes during 2006:         |               |                 
|                             |               |                 
|Shares issued                |               |                  |                                                                        | 600                                   |                   |      
|Translation adjustments      |               |                 
|relating to foreign held     |               |                 
|autonomous Subsidiary        |               |                  |                                                                        | -                                     |                   |      
|Movement in capital reserve  |               |                 
|of hedging transactions, net |               |                  |                                                                        | -                                     |                   |      
|Dividend paid                |               |                  |                                                                        | -                                     |                   |      
|Loss for the year            |               |                  |                                                                        | -                                     |                   |      
|                             |               |                  |                                                                        |                                       |                   |      
|                             |               |                 
|Balance - December 31, 2006  |               |                  |                                                                        | 29,638                                |                   |      
|                             |               |                  |                                                                        |                                       |                   |      
|                             |               |                 
|Changes during 2007:         |               |                 
|                             |               |                 
|Translation adjustments      |               |                 
|relating to foreign held     |               |                 
|autonomous Subsidiary        |               |                  |                                                                        | -                                     |                   |      
|Movement in capital reserve  |               |                 
|of hedging transactions, net |               |                  |                                                                        | -                                     |                   |      
|Capitalization of retained   |               |                 
|earnings from Approved       |               |                 
|Enterprise earnings          |               |                  |                                                                        | -                                     |                   |      
|Loss for the year            |               |                  |                                                                        | -                                     |                   |      
|                             |               |                  |                                                                        |                                       |                   |      
|                             |               |                 
|Balance - December 31, 2007  |               |                  |                                                                        | 29,638                                |                   |      
|                             |               |                  |                                                                        |                                       |                   |      

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

H - 4

---

---

HOGLA-KIMBERLY LTD.
STATEMENTS OF CASH FLOWS
(REPORTED AMOUNTS)(NIS in thousands)

|                                            | Consolidated | Company
|------------------------------------------- | ------------ | -------
|
|
|
|Cash flows - operating activities           |              |        
|Net income (Loss) for the year              |              |        
|Adjustments to reconcile net income to      |              |        
|net cash provided by operating              |              |        
|activities (Appendix A)                     |              |        
|                                            |              |        
|Net cash provided by (used in)              |              |        
|operating activities                        |              |        
|                                            |              |        
|                                            |              |        
|Cash flows - investing activities           |              |        
|Withdrawal of long-term bank deposit        |              |        
|Capital notes and loans to Subsidiary       |              |        
|Merger of subsidiaries (Appendix B)         |              |        
|Acquisition of Property plant and equipment |              |        
|Proceeds from sale of Property plant        |              |        
|and equipment                               |              |        
|                                            |              |        
|Net cash provided by (used in)              |              |        
|investing activities                        |              |        
|                                            |              |        
|                                            |              |        
|Cash flows - financing activities           |              |        
|Dividend paid                               |              |        
|Repayment of long-term loans                |              |        
|Short-term bank credit                      |              |        
|                                            |              |        
|Net cash provided by                        |              |        
|(used in) financing activities              |              |        
|                                            |              |        
|                                            |              |        
|Translation adjustments of cash             |              |        
|and cash equivalents of foreign             |              |        
|held autonomous Subsidiary                  |              |        
|                                            |              |        
|                                            |              |        
|Increase (decrease) in cash and             |              |        
|cash equivalents                            |              |        
|Cash and cash equivalents -                 |              |        
|beginning of year                           |              |        
|                                            |              |        
|Cash and cash equivalents -                 |              |        
|end of year                                 |              |        
|                                            |              |        

|(*) | Reclassified.
|--- | -------------

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

H - 5

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HOGLA-KIMBERLY LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(REPORTED AMOUNTS)(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                      |              |        
|   | Equity in losses of                |              |        
|   | Subsidiaries                       |              |        
|   | Depreciation and                   |              |        
|   | amortization                       |              |        
|   | Deferred taxes, net                |              |        
|   | Loss (Gain) from sale of           |              |        
|   | Property plant and                 |              |        
|   | equipment                          |              |        
|   | Effect of exchange rate            |              |        
|   | differences, net                   |              |        
|   |                                    |              |        
|   | Changes in assets and liabilities: |              |        
|   | Decrease (Increase) in trade       |              |        
|   | receivables                        |              |        
|   | Decrease (Increase) in other       |              |        
|   | receivables                        |              |        
|   |                                    |              |        
|   | Increase in inventories            |              |        
|   | Increase (Decrease) in trade       |              |        
|   | payables                           |              |        
|   | Net change in balances             |              |        
|   | with related parties               |              |        
|   | Increase in other long term        |              |        
|   | asset                              |              |        
|   | Increase in other payables and     |              |        
|   | accrued expenses                   |              |        
|   | Long term liability for            |              |        
|   | employee rights upon early         |              |        
|   | retirement                         |              |        
|   |                                    |              |        
|   |                                    |              |        
|   |                                    |              |        
|   |                                    |              |        

|(*) | Reclassified.
|--- | -------------

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

H - 6

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HOGLA-KIMBERLY LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(REPORTED AMOUNTS)(NIS in thousands)

|   |                                      | Consolidated | Company
|-- | ------------------------------------ | ------------ | -------
|
|
|
|B. | Assets and liabilities of            |              |        
|   | mergered subsidiaries:               |              |        
|   | Working capital (other than cash     |              |        
|   | and cash equivalents)                |              |        
|   | Property plant and equipment         |              |        
|   | Investments                          |              |        
|   | Other assets                         |              |        
|   | Long-term liabilities                |              |        
|   | Short-term liabilities               |              |        
|   |                                      |              |        
|   |                                      |              |        
|   |                                      |              |        
|   |                                      |              |        
|C. | Non-cash activities                  |              |        
|   | Acquisition of property plant and    |              |        
|   | equipment on credit                  |              |        
|   |                                      |              |        
|   |                                      |              |        
|   | Conversion of capital note issued by |              |        
|   | subsidiary to capital                |              |        
|   |                                      |              |        
|   |                                      |              |        
|   | Shares issue to share holders        |              |        
|   | considering there share in the       |              |        
|   | merged subsidiaries                  |              |        
|   |                                      |              |        

|(*) | Reclassified.
|--- | -------------

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

H - 7

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|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 22).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company  is  owned  by  Kimberly  Clark  Corp.  ("KC"  or  the  "Parent   Company")
  (50.1%)  and                     American-Israeli Paper Mills Ltd. ("AIPM") (49.9%).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |                         |   |                                                                                                                                                                                  
| | ----------------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
| | The Company             |  | Hogla-Kimberly Ltd.                                                                                                                                                              
| |                        
| | The Group               |  | the Company and its Subsidiaries, a list of which is presented in Note 8D.                                                                                                       
| |                        
| | 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 Annual 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.                                                                                                                                                                 
| |                        
| | YTL                     |  | the Turkish New Lira.                                                                                                                                                            
| |                        
| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 8

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|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. 23  Accounting for Transactions
between an Entity and a controlling party, Standard No. 26Inventory,
Standard No. 27 Property plant and equipment and Standard No. 28 Amendment
of the transitional orders in accounting standard No. 27 Property plant and
equipment", Standard No. 30Intangible Assets .
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
StatementsAdjustment 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commencing
January 1, 2004, the Groups financial statements are prepared and presented in
Reported 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 25.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 9

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | A. | Cessation
of Financial Statement Adjustment and Change toReporting in Reported Amounts  Standard
No. 12 (Cont.)
| | -- | ----------------------------------------------------------------------------------------------------------------

| | (3) | Principles
of Adjustment applicable for financial statements in reporting           amounts
| | --- | -------------------------------------------------------------------------------------------

| | a. | Balance
Sheet Items
| | -- | -------------------

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

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

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

H - 10

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | B. | Translation
of Foreign Operations Financial Statements
| | -- | -------------------------------------------------------

| | Principles
of Translation of financial Statements of Foreign Held Autonomous Subsidiary applicable
forfinancial statements relating to reporting periods ended in December 31, 2007,
2006 and 2005
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Property plant and equipment and is
amortized at the rate applicable to those assets, or upon their realization. The
unallocated excess cost deriving from the difference between the fair value of the
subsidiary identifiable assets (including intangible assets) over the fair value of the
subsidiary identifiable liabilities (after deferred taxes), at the acquisition date,
reflects goodwill, which is presented in the consolidated balance sheets defined as other
assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
note I below for the accounting for goodwill as of January 1, 2006.
| | -----------------------------------------------------------------------

H - 11

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | 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 a specific provision in respect
of accounts, which on management estimate are doubtful of collection.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Inventories
| | -- | -----------

| | As
of January 1, 2007 the Company applies accounting standard No. 26 Inventory.
| | ---------------------------------------------------------------------------------

| | The
standard establishes, among other things, that inventory should be stated at the lower
between cost and net realizable value. Cost is determined by the first in, first out
(FIFO) method or by average weighted cost used consistently for all types of inventory of
similar nature and uses. In certain circumstances the standard requires cost
determination by a specific identification of cost, which includes all purchase and
production costs, as well as any other costs incurred in reaching the inventorys
present stage.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Any
reduction of inventory to net realizable value as well as any other inventory loss is
recorded in the current period.
| | -------------------------------------------------------------------------------------------------------------------------

| | Subsequent
elimination of a write-down that stems from an increase in net realizable value is
allocated to operations during the period in which the elimination is taking place.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Until
December 31, 2007 inventories were presented at the lower of cost or market value.
| | ----------------------------------------------------------------------------------------

| | Cost
determined as follows:
| | ---------------------------

| |                     |   |                                 
| | ------------------- | - | --------------------------------
|
|
|
| | Finished products   | - | Based on actual production cost.
| | Raw, auxiliary      |   |                                 
| | materials and other | - | Based on moving-average basis.  
| |                     |   |                                 

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

H - 12

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | H. | Property
plant and equipment
| | -- | ----------------------------

| | As
of January 1, 2007 the Company applies accounting standard No. 27 Property plant
and equipment and accounting standard No. 28 Amendment of the transitional
orders in accounting standard No. 27 Property plant and equipment".
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
method  an item will be presented at net book value, less accumulated impairment
losses.
| | ----------------------------------------------------------------------------------------------

| | Revaluation
method  an item whose fair value can be measured reliably will be presented at its
estimated amount, which equals its fair value at the revaluation date, net of
depreciation accumulated subsequently and less accumulated impairment losses.
Revaluations should take place on a current basis in order to ensure that book value does
not materially differ from the fair value that would have been determined on the
balance-sheet date. The revaluation of a single item calls for the revaluation of the
entire Company and if the assets book value rises following this revaluation, this
increase should be allocated directly to shareholders equity (revaluation
reserve). Nevertheless, this increase will be recognized as an operating item up to
the amount offsetting the decrease from that assets revaluation recognized
previously as income or loss. Should book value decline following revaluation, this
decline will be recognized as an operating item yet allocated directly to shareholders equity
(revaluation reserve) up to the amount leaving any credit balance in that
reserve in respect of that asset.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has adopted the cost method.
| | ----------------------------------------

| | Until
December 31, 2006, Property plant and equipment components with different useful lives
were not depreciated separately in accordance to their useful lives.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Any
Property plant and equipment with a meaningful cost in relation to the items total
cost should be depreciated separately. Moreover, the depreciation method used will be
reviewed at least once at yearend and, if any meaningful change had taken place in the
estimated consumption of future economic benefits inherent in the asset, the method
should be modified to reflect such changes. This change will be treated as a change in an
accounting estimate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
is calculated using the straight-line method at rates considered adequate to depreciate
the assets over their estimated useful lives. Amortization of leasehold improvements is
computed over the shorter of the term of the lease, including any option period, where
the Company intends to exercise such option, or their useful life.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
annual depreciation and amortization rates are:
| | ---------------------------------------------------

| |                                | %    
| | ------------------------------ | -----
|
|
|
| | Buildings                      | 2-4  
| | Leasehold improvements         | 10-25
| | Machinery and equipment        | 5-10 
| | Motor vehicles                 | 15-20
| | Office furniture and equipment | 6-33 

H - 13

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | H. | Property
plant and equipment (Cont.)
| | -- | ------------------------------------

| | Scrap
value, depreciation method and the assets useful lives are being reviewed by management
in the end of every financial year. Changes are handled as a change of estimation and are
applied from here on.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Profit
of loss due to the sale or abandon of an asset is determined by the difference between
the proceeds from the sale to the net book value of the asset and is attributed to profit
and loss statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the application of this standards the Company reclassified major spare parts
and standby equipment, that had been recorded as inventory, to property plant and
equipment in the amount of NIS 5,307 thousand as of December 30,2007 (NIS 5,153 thousand
as of December 31, 2006).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
of Long-Lived Assets excluding Goodwill
| | --------------------------------------------------

| | At
each balance sheet date, the Group reviews the carrying amounts of its tangible and
intangible assets to determine whether there is any indication that those assets have
suffered an impairment loss. If any such indication exists, the recoverable amount of the
asset is estimated in order to determine the extent of the impairment loss (if any).
Where it is not possible to estimate the recoverable amount of an individual asset, the
Group estimates the recoverable amount of the cash-generating unit to which the asset
belongs. Where a reasonable and consistent basis of allocation can be identified,
corporate assets are also allocated to individual cash-generating units, or otherwise
they are allocated to the smallest group of cash-generating units for which a reasonable
and consistent allocation basis can be identified. Intangible assets with indefinite
useful lives and intangible assets not yet available for use are tested for impairment
annually, and whenever there is an indication that the asset may be impaired.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recoverable
amount is the higher of fair value less costs to sell and value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using
a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset for which the estimates of future cash flows
have not been adjusted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the recoverable amount of an asset (or cash-generating unit) is estimated to be less than
its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced
to its recoverable amount. An impairment loss is recognized immediately in profit or
loss, unless the relevant asset is carried at a revalued amount, in which case the
impairment loss is treated as a revaluation decrease.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Where
an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable amount,
but so that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognized for the asset
(cash-generating unit) in prior years. A reversal of an impairment loss is recognized
immediately in profit or loss, unless the relevant asset is carried at a revalued amount,
in which case the reversal of the impairment loss is treated as a revaluation increase.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 14

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | I. | Other
Assets  Goodwill
| | -- | -----------------------

| | As
of January 1, 2006 the Company applies Standard No. 20 (revised) Accounting
Treatment for Goodwill and Other Intangibles upon the Acquisition of an Investee (in
this paragraph- the standard).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | By
December 31, 2005 the Company had systematically amortized its goodwill deriving from the
Acquisition of investees using the straight line method over a period of 15 years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007 the Company applies Standard No. 30
| | ---------------------------------------------------------

| | In
accordance with the standard, goodwill is the unallocated excess cost due to investment
in an investee deriving from the difference between the fair value of the investees
identifiable assets (including intangible assets) over the fair value of its identifiable
liabilities (after deferred taxes) at the acquisition date. Goodwill is no longer
amortized in a systematic manner, but is examined for impairment annually or more
frequently if events or changes in circumstances indicate that it might be impaired.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the purpose of impairment testing, goodwill is allocated to each of the Groups
cash-generating units expected to benefit from the synergies of the combination.
Cash-generating units to which goodwill has been allocated are tested for impairment
annually, or more frequently when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less than the carrying amount of
the unit, the impairment loss is allocated first to reduce the carrying amount of any
goodwill allocated to the unit and then to the other assets of the unit pro-rata on the
basis of the carrying amount of each asset in the unit. An impairment loss recognized for
goodwill is not reversed in a subsequent period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
disposal of a subsidiary or a jointly controlled entity, the attributable amount of
goodwill is included in the determination of the profit or loss on disposal.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

H - 15

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|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 Property plant and equipment. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company reclassified participation in advertising expenses paid to customers as reduction
of revenue, instead of marketing expenses as was presented in previous accounting
periods, in order to conform to the current format of presentation in the consolidated
financial statements as of December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 16

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | N. | Freestanding
derivative financial instruments
| | -- | ---------------------------------------------

| | The
Company recognizes freestanding derivative financial instruments as either assets or
liabilities in its balance sheets and measures those instruments at fair value.
Accounting for changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. For a foreign exchange derivative
instrument designated as a cash flow hedge, the effective portion of the derivative is
initially reported as a component of shareholders equity as accumulated other
comprehensive income subsequently recognized into earnings as the hedged item affects
earnings. The ineffective portion of the derivative is recognized in earnings
immediately. For derivative instruments that are not designated as cash flow hedges,
changes in fair value are recognized in earnings according to changes in their fair value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company formally documents all relationships between hedging instruments and hedged items
and the risk management objective and strategy for each hedge transaction. At inception
of the hedge and quarterly thereafter, the Company performs a correlation assessment to
determine whether changes in the fair values or cash flows of the derivatives are deemed
highly effective in offsetting changes in the fair values or cash flows of the hedged
items. If at any time subsequent to the inception of the hedge, the correlation
assessment indicates that the derivative is no longer highly effective as a hedge, the
Company discontinues hedge accounting and recognizes all subsequent derivative gains and
losses in the results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (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, 2007 |                                                         |                                                                      |                                
| | December 31, 2006 |                                                         |                                                                      |                                
| | December 31, 2005 |                                                         |                                                                      |                                

| | Increase (decrease)
during the year ended: | % | % | %
| | ------------------------------------------ | - | - | -
|
|
|
| | December 31, 2007                          |   |   |  
| | December 31, 2006                          |   |   |  
| | December 31, 2005                          |   |   |  
| |                                            |   |   |  

H - 17

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | ---------------------------------------

| | P. | Recent
Accounting Standards
| | -- | ---------------------------

| | Application
of Standard No.29 Adoption of International Financial Reporting Standards
| | ---------------------------------------------------------------------------------------

| | In
July 2006, the Israeli Accounting Standards Board published Accounting Standard No. 29 -Adoption
of International Financial Reporting Standards  IFRS (the Standard).
According to this Standard, the financial statements of an entity subject to the Israeli
Securities Law and authoritative Regulations thereunder, other than foreign corporations
as defined by this Law that prepares its financial statements in other than Israeli GAAP,
will be prepared for the reporting periods commencing January 1, 2008, including interim
periods, in accordance with the IFRS and related interpretations published by the
International Accounting Standards Board.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
entity adopting IFRS as of January 1, 2008 and electing to report comparative figures in
accordance with the IFRS for only 2007, will be required to prepare opening balance-sheet
amounts as of January 1, 2007 based on the IFRS.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reporting
in accordance with the IFRS will be carried out based on the provisions of IFRS No. 1,
First-time Adoption of IFRS Standards, which establishes guidance on
implementing the transition from financial reporting based on domestic national
accounting standards to reporting in accordance with the IFRS.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IFRS
No. 1 supersedes the transitional provisions established in other IFRSs (including those
established in former domestic national accounting standards), stating that all IFRSs
should be adopted retroactively for the opening balance-sheet amounts. Nevertheless, IFRS
No. 1 grants allowances on certain issues by not applying the retroactive application in
respect thereof. In addition, IFRS No. 1 contains certain exceptions with regard to the
retroactive application of certain aspects stipulated in other IFRSs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
decided to adopt IFRS standards starting January 1, 2008.
| | --------------------------------------------------------------------

|NOTE 3 |  | CASH AND CASH EQUIVALENTS
|------ | - | -------------------------

| |                       | Consolidated | Company
| | --------------------- | ------------ | -------
|
|
|
|
| | In NIS                |              |        
| | In foreign currencies |              |        
| |                       |              |        
| |                       |              |        
| |                       |              |        
| |                       |              |        

H - 18

---

---

# HOGLA-KIMBERLY LTD. 
NOTES
TO FINANCIAL STATEMENTS 
(REPORTED AMOUNTS)

|NOTE 4 |  | TRADE RECEIVABLES
|------ | - | -----------------

| | A. | Composition
| | -- | -----------

| |                               |  |  | Consolidated | Company
| | ----------------------------- |  |  | ------------ | -------
|
|
|
|
| | Domestic                      |  |  | -            |        
| |                               |  |  | -            |        
| |                               |  |  | -            |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| |                               |  | 
| |                               |  |  |              |        
| | Foreign                       |  |  | -            |        
| |                               |  |  | -            |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| | Less - allowance for doubtful |  |  |              |        
| | accounts                      |  |  |              |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| |                               |  |  |              |        
| |                               |  |  |              |        

| |  | 
| |  | 

| | (*) | Reclassified
| | --- | ------------

| | (**) | Balances
with Israeli related parties are linked to the CPI and bear 4% annual           interest
| | ---- | -------------------------------------------------------------------------------------------------

| | B. | The
Companys products are marketed principally by its Subsidiaries.
| | -- | --------------------------------------------------------------------

| | C. | Commencing
November 2007 Hogla Kimberly is covered by a credit insurance           policy, which
partially covers its most major customers. In accordance           with the policy
conditions, the company will be reimbursed starting from an           annual loss of US
dollars 150 thousands to a maximum of US dollars 7 million,           subject to
deductible conditions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 |  | OTHER RECEIVABLES
|------ | - | -----------------

| |                           | Consolidated | Company
| | ------------------------- | ------------ | -------
|
|
|
|
| | Deferred taxes (Note 21D) |              |        
| | Prepaid expenses          |              |        
| | Advances to suppliers     |              |        
| | Value Added Taxes         |              |        
| | Income tax advances, net  |              |        
| | Loans to employees        |              |        
| | Related party             |              |        
| | Other                     |              |        
| |                           |              |        
| |                           |              |        
| |                           |              |        
| |                           |              |        

| | (*) | Reclassified
| | --- | ------------

H - 19

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 6 |  | INVENTORIES
|------ | - | -----------

| | A. | Composition
| | -- | -----------

| |                             | Consolidated | Company
| | --------------------------- | ------------ | -------
|
|
|
|
| | Raw and auxiliary materials |              |        
| |                             |              |        
| | Finished goods              |              |        
| |                             |              |        
| | Spare parts and other       |              |        
| |                             |              |        
| |                             |              |        
| |                             |              |        
| |                             |              |        

| | (*) | Reclassified.
| | --- | -------------

| | B. | The
cost of inventories recognised as an expense:
| | -- | -------------------------------------------------

|                    | Consolidated | Company
|------------------- | ------------ | -------
|
|
|
|
|Change in inventory |              |        
|                    |              |        
|                    |              |        

| | C. | See
note 2F with regards to the initial application of accounting standard No.26
          Inventory
| | -- | ------------------------------------------------------------------------------------------------------

|NOTE 7 |  | CAPITAL NOTE OF SHAREHOLDER
|------ | - | ---------------------------

| | The
capital note of AIPM, denominated in NIS, is not linked and does not bear interest.
| | ---------------------------------------------------------------------------------------

| | As
of the signing date of the financial statements, negotiations are in process between the
shareholders, and the Company, regarding repayment of the capital note not before early
2009.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 20

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 8 |  | INVESTMENTS IN SUBSIDIARIES
|------ | - | ---------------------------

| | A. | Composition
| | -- | -----------

| |                                                    | Company
| | -------------------------------------------------- | -------
|
|
|
|
| | Cost of shares                                     |        
| | Capital Injections (see also F below)              |        
| | Equity in post-acquisition earnings, net           |        
| | Merger of subsidiaries (see also E below)          |        
| | Dividend received from subsidiary                  |        
| |                                                    |        
| | Translation adjustments relating to                |        
| | foreign held autonomous Subsidiary                 |        
| |                                                    |        
| |                                                    |        
| |                                                    |        
| |                                                    |        
| | Capital notes (see also F(1) below)                |        
| | Translation adjustments on loans and capital notes |        
| |                                                    |        
| |                                                    |        
| |                                                    |        
| |                                                    |        
| |                                                    |        
| |                                                    |        

| | (*) | Reclassified.
| | --- | -------------

| | B. | Goodwill
(see Note 2C and 2I above)
| | -- | -----------------------------------

| |                                     | Consolidated
| | ----------------------------------- | ------------
|
|
|
|
| | Cost                                |             
| | Translation adjustments             |             
| |                                     |             
| |                                     |             
| | Less - accumulated amortization (*) |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             

| | (*) | As
of January 1, 2006 goodwill is no linger amortized in a systematic manner see
          also Note 2I.
| | --- | --------------------------------------------------------------------------------------------------------

H - 21

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 8 |  | INVESTMENTS IN SUBSIDIARIES (Cont.)
|------ | - | -----------------------------------

| | C. | Investment
in Kimberli Clark Tuketim Mallari Sanayi Ve Ticaret A.S. (KCTR)
(formerly: Ovisan)
| | -- | -----------------------------------------------------------------------------------------------

| | As
of December 31, 2007 and 2006, the Groups investment in KCTR (a Turkish Subsidiary)
amounted to NIS 144,992 and 116,041 thousand respectively (including goodwill  see
above). In the recent years KCTR incurred significant losses from operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company examined the investment in KCTR for impairment in accordance to its revocable
amount. Based on the said examination, companys business forecast and estimates, no
impairment is required.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
years 2005  2007, the Company provided KCTR NIS 377,829 thousand for the
continuation of its on going operations. In addition, the Company has committed to
financially support KCTR in 2008. Such finance support may be granted to KCTR either by
cash injections, long-term loans, or guaranties if required so by banks according to the
financing needs of KCTR.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Consolidated
Subsidiaries
| | -- | -------------------------

| | The
consolidated financial statements as of December 31, 2007, include the financial
statements of the following Subsidiaries:
| | ------------------------------------------------------------------------------------------------------------------------------

| |                                                  | Ownership and
control as of
December 31,
2007
| | ------------------------------------------------ | ---------------------------------------------
|
|
|
|
| | Hogla-Kimberly Marketing Ltd. ("Marketing")      |                                              
| |                                                  |                                              
| | Kimberly Clark Tuketim Mallari Sanayi Ve Ticaret |                                              
| | A.S. ("KCTR")                                    |                                              
| | Mollet Marketing Ltd. ("Mollet")                 |                                              
| | H-K Overseas (Holland) B.V.                      |                                              
| | Hogla-Kimberly Holding Anonim Sirketi (*)        |                                              
| |                                                  |                                              

| | (*) | The
company is inactive.
| | --- | ------------------------

| | E. | Merger
of subsidiaries
| | -- | ----------------------

| | In
July 2006, the Israeli Tax Authority approved the merger of Rakefet Marketing and trade
services Ltd. (Rakefet) and Shikma Ltd. (Shikma) into the Company. According to the
merger, the assets and liabilities of Shikma and Rakefet were merged into those of the
Company on July 1, 2006. The Company is in the process of issuing shares to its
shareholders, KC and AIPM, in respect of their holdings in Rakefet.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Capital
Injections
| | -- | ------------------

| | 1. | In
December, 2007 the capital notes to KCTR were converted to capital           injections
at the amount of NIS 44,609 thousands.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

| | 2. | In December 2007, Hogla Kimbely made a share premium contribution to its
          subsidiary, H-K Overseas (Holland) B.V, in the amount of NIS 18,045 thousands.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 22

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 9 |  | PROPERTY PLANT AND EQUIPMENT
|------ | - | ----------------------------

|CONSOLIDATED                | Buildings (1) | Leasehold
Improvements | Machinery
And
Equipment | Motor
Vehicles | Furniture
and
Equipment | Total (2)
|--------------------------- | ------------- | ---------------------- | ----------------------- | -------------- | ----------------------- | ---------
|
|
|
|
|Cost:                       |               |                        |                         |                |                         |          
|Balance - January 1, 2007   |               |                        | (*)                     | 57,131         |                         | (*)      
|Changes during 2007:        |               |                       
|Additions                   |               |                        |                         | 1,158          |                         |          
|Dispositions                |               |                        |                         | -              |                         |          
|Foreign currency            |               |                       
|translation adjustments     |               |                        |                         | 2,900          |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|Balance - December 31, 2007 |               |                        |                         | 61,189         |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|Accumulated depreciation:   |               |                       
|Balance - January 1, 2007   |               |                        | (*)                     | 20,005         |                         | (*)      
|Changes during 2007:        |               |                       
|Additions                   |               |                        |                         | 1,157          |                         |          
|Dispositions                |               |                        |                         | -              |                         |          
|Foreign currency            |               |                       
|translation adjustments     |               |                        |                         | 474            |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|Balance - December 31, 2007 |               |                        |                         | 21,636         |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|Net book value:             |               |                       
|December 31, 2007           |               |                        |                         | 39,553         |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|December 31, 2006           |               |                        | (*)                     | 37,126         |                         | (*)      
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|COMPANY                     |               |                       
|Cost:                       |               |                       
|Balance - January 1, 2007   |               |                        | (*)                     | 26,750         |                         | (*)      
|Changes during 2007:        |               |                       
|Additions                   |               |                        |                         | 677            |                         |          
|Dispositions                |               |                        |                         | -              |                         |          
|                            |               |                        |                         |                |                         |          
|Balance - December 31, 2007 |               |                        |                         | 27,427         |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|Accumulated depreciation:   |               |                       
|Balance - January 1, 2007   |               |                        | (*)                     | 14,988         |                         | (*)      
|Changes during 2007:        |               |                       
|Additions                   |               |                        |                         | 604            |                         |          
|Dispositions                |               |                        |                         | -              |                         |          
|                            |               |                        |                         |                |                         |          
|Balance - December 31, 2007 |               |                        |                         | 15,592         |                         |          
|                            |               |                        |                         |                |                         |          
|Net book value:             |               |                       
|December 31, 2007           |               |                        |                         | 11,835         |                         |          
|                            |               |                        |                         |                |                         |          
|                            |               |                       
|December 31, 2006           |               |                        | (*)                     | 11,762         |                         | (*)      
|                            |               |                        |                         |                |                         |          
|                            |               |                        |                         |                |                         |          

|(*) | Reclassified
|--- | ------------

|(1) | Company
 leasehold improvements of industrial buildings on lands leased by           the
Company from AIPM (until 2007). The lease agreements are renewed annually.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
majority of the Groups Property plant and equipment are located in           Israel
with the remaining located in Turkey.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(3) | See
note 2H with regards to the initial application of accounting standard No.27
          Property plant and equipment
|--- | -------------------------------------------------------------------------------------------------------------------------

H - 23

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 10 |  | TRADE PAYABLES
|------- | - | --------------

| |                      | Consolidated | Company
| | -------------------- | ------------ | -------
|
|
|
|
| | In Israeli currency: |              |        
| | Open accounts        |              |        
| | Related parties      |              |        
| | In foreign currency: |              |        
| | Open accounts        |              |        
| | Related parties      |              |        
| |                      |              |        
| |                      |              |        
| |                      |              |        
| |                      |              |        

|NOTE 11 |  | OTHER PAYABLES AND ACCRUED EXPENSES
|------- | - | -----------------------------------

| |                              | Consolidated | Company
| | ---------------------------- | ------------ | -------
|
|
|
|
|
| | Accrued income taxes,        |              |        
| | net of advances              |              |        
| | Accrued payroll and related  |              |        
| | expenses                     |              |        
| | Value Added Tax              |              |        
| | Advances from customers      |              |        
| | Deratives liabilities        |              |        
| | Liability for employee       |              |        
| | rights upon early retirement |              |        
| | Other                        |              |        
| |                              |              |        
| |                              |              |        
| |                              |              |        
| |                              |              |        

|NOTE 12 |  | SHORT TERM BANK LOANS
|------- | - | ---------------------

| |               |  | Consolidated | Company
| | ------------- |  | ------------ | -------
|
|
|
|
| | NIS nominated |  |              |        
| | YTL nominated |  |              |        
| |               |  |              |        
| |               |  |              |        
| |               |  |              |        
| |               |  |              |        

| | On
January 2008, KCTR repaid all remaining bank loans in the amount of US dollars 24.5
million (NIS 91.9 million) .The repayments were financed by the Companys capital
injection.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 24

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 13 |  | LONG TERM EMLOYEES LIABILITIES
|------- | - | ------------------------------

| | A. | 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 statement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Liability
for employee rights upon early retirement
| | -- | ---------------------------------------------------

| | The
liability is for payments to employees and former employees who are on early retirement
until the day of their legal retirement.
| | ------------------------------------------------------------------------------------------------------------------------------------

|NOTE 14 |  | COMMITMENTS AND CONTINGENT LIABILITIES
|------- | - | --------------------------------------

| | A. | Commitments
| | -- | -----------

| | (1) | The
Group is obligated to pay royalties to a shareholder  see also Note           22B.
| | --- | ---------------------------------------------------------------------------------------

| | (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, 2007 are as follows:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                     | Consolidated | Company
| | ------------------- | ------------ | -------
|
|
|
|
| | 2008                |              |        
| | 2009                |              |        
| | 2010                |              |        
| | 2011                |              |        
| | 2012 and thereafter |              |        
| |                     |              |        
| |                     |              |        
| |                     |              |        
| |                     |              |        

| | 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, 2007           amounted
to NIS 96,042 thousand.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As
part of their normal course of business, the Company and its Subsidiaries
          provided third parties with bank guarantees for contract performance, the
          balance of which as of December 31, 2007 amounted to NIS 4,257 thousand.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | A
Subsidiary provided letters of guarantees to the Customs Authority the           balance
of which as of December 31, 2007 amounted to NIS 2,581 thousands.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 25

---

---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 14 |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | C. | Legal
proceedings
| | -- | -----------------

| | (1) | The
Company received in November, 2003 a claim and a petition that was filed in
               the Tel-Aviv district court for the approval of a class action suit
against the                Company. According to the petition the Company has reduced the
number of units                of diapers in a package of its Huggies Freedom brand,
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 defended itself against the
action. In addition, a                court hearing took place in which plaintiffs
and defendants                witnesses were cross- examined, and plaintiff
submitted its closing statement.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 2007, the court dismissed the plaintiffs petition for that
               class action suit against the Company.
| | ----------------------------------------------------------------------------------------------------------------------------

| | (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. The customer appealed and was denied again. Customer faild to pay legal
          fee, and therefore court erased his lawsuit. The customer appealed again. 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, and it is probable that its arguments will be accepted. Therefore,
          no provision was recorded in the financial statements relating to this lawsuit.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | On August 23, 2006 a petition was filed against the Company in the Tel-Aviv
          district court for the approval of a class action suit against the Company.
          According to the petition the Company has reduced the number of diapers in the
          Titulim Premium brand Packages, and thus misled the public
according           to the Israeli Consumer Protection Act. The plaintiff estimates the
scope of the           class action to be NIS 47 million. The Company rejected the claim
and defended           itself against the action.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 17, 2007, the court approved a withdrawal of the plaintiffs from his petition
for that class action suit against the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | (4) | On
December 10, 2006 a petition was filed against the Company in the Tel-Aviv
          district court for the approval of a class action suit against the Company.
          According to the petition the Company has reduced the number of Tissue paper in
          the Kleenex Premium Packages brand, and thus misled the public
          according to the Israeli Consumer Protection Act. The plaintiff estimates the
          scope of the class action to be NIS 43 million. The Company rejects the request
          and acting to dismiss it.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 27, 2007, the court approved a withdrawal of the plaintiffs from his petition
for that class action suit against the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | (5) | On
January 02, 2007 a petition was filed against the Company in the Tel-Aviv
               district court for the approval of a class action suit against the
Company.                According to the petition the Company has reduced the number of
Wet Wipes in the                Titulim premium wet wipes Packages, and thus
misled the public                according to the Israeli Consumer Protection Act. The
plaintiff estimates the                scope of the class action to be NIS 28 million.
The Company rejects the request                and acting to dismiss it. On July 4, 2007,
the court approved a withdrawal of                the plaintiffs from his petition
for that class action suit against the                Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 26

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 14 |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | C. | Legal
proceedings (Cont.)
| | -- | -------------------------

| | (6) | 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 about 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 2007 a compromise was made between the trustees and the company, which was
approved by the court, that the total approved debt of clubmarket to the company is NIS
23.9 million. Until December 31, 2007, NIS 9.3 million were received as part of the
creditors settlement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | There
is not any remaining net balance of Clubmarket as of December 31, 2007, that is in excess
of the doubtful accounts provision recorded in the financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | On
July 12, 2007 a lawsuit filled against KCTR, a Hogla Kimberly subsidiary, by           a
former distributer, claiming financial loss caused to him. The amount claimed
          is approximately YTL 880 thousands (NIS 2,690 thousands).KCTR filled a counter
          claim for its damage in the amount of approximately YTL 355 thousands (
          NIS 1,086 thousands). Based on the Companys legal counsels, management
          estimates that the Company has valid arguments to oppose the lawsuit, and it is
          probable that its arguments will be accepted. Therefore, no provision was
          recorded in the financial statements relating to this lawsuit.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 15 |  | SHARE CAPITAL
|------- | - | -------------

| | A. | Composition
of Share Capital in Nominal NIS as of December 31, 2007 and           2006:
| | -- | ---------------------------------------------------------------------------------------

| |                                       | Number of Shares (*)
| | ------------------------------------- | --------------------
|
|
|
|
| | Ordinary Shares of NIS 1.00 par value |                     
| |                                       |                     

| | (*) | As
of December 31, 2006 the Company has commenced a process of registering 600
          shares by the registrar of companies. The shares were issued to the
shareholders           of the Company as part of the merger process (see also note 8E).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 27

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 15 |  | SHARE CAPITAL (Cont.)
|------- | - | ---------------------

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

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

| | D. | According
to the decision of the Board of Directors which took place at March           1, 2007,
the Company approved the capitalization of NIS 5.455 million of the           Companys
retained earnings that were derived from Approved Enterprise           activities of
previous years, by transferring the said amount from retained           earnings to
capital reserve.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 16 |  | NET SALES
|------- | - | ---------

| |    |  | Consolidated
| | -- |  | ------------
|
|
|
|
| | A. |  |             
| |    |  |             

| |    |  | % | %                                    | %
| | -- |  | - | ------------------------------------ | -
|
|
|
|
| | B. |  |   | Sales to major customers             |  
| |    |  |   | (as percentage from total net sales) |  
| |    |  |   | Customer A                           |  
| |    |  |   | Customer B                           |  
| |    |  |   |                                      |  

|NOTE 17 |  | COST OF SALES
|------- | - | -------------

|                              | Consolidated | Company
|----------------------------- | ------------ | -------
|
|
|
|
|Purchases (*)                 |              |        
|Salaries and related expenses |              |        
|Manufacturing expenses        |              |        
|Depreciation                  |              |        
|                              |              |        
|                              |              |        
|Change in finished            |              |        
|goods inventory               |              |        
|                              |              |        
|                              |              |        
|                              |              |        
|                              |              |        

|(*) | The
purchases of the Company are related to manufacturing operations.
               Consolidated purchases in excess of Company purchases relate principally
to                commercial operations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 28

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 18 |  | SELLING EXPENSES
|------- | - | ----------------

|                                | Consolidated | Company
|------------------------------- | ------------ | -------
|
|
|
|
|Salaries and related expenses   |              |        
|Maintenance and                 |              |        
|transportation expenses         |              |        
|Advertising and sales promotion |              |        
|Commissions to distributors     |              |        
|Royalties                       |              |        
|Depreciation                    |              |        
|Other                           |              |        
|                                |              |        
|                                |              |        
|                                |              |        

|(*) | Reclassified.
|--- | -------------

|NOTE 19 |  | GENERAL AND ADMINISTRATIVE EXPENSES
|------- | - | -----------------------------------

|                                | Consolidated | Company
|------------------------------- | ------------ | -------
|
|
|
|
|
|Salaries and related expenses   |              |        
|Administrative and computer     |              |        
|services                        |              |        
|Services provided by            |              |        
|Shareholder                     |              |        
|Office maintenance              |              |        
|Depreciation                    |              |        
|Goodwill amortization           |              |        
|Provision for doubtful accounts |              |        
|Other                           |              |        
|                                |              |        
|                                |              |        
|                                |              |        
|                                |              |        

H - 29

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 20 |  | FINANCING INCOME (EXPENSES), NET
|------- | - | --------------------------------

|                                     | Consolidated | Company
|------------------------------------ | ------------ | -------
|
|
|
|
|
|Interest on long-term bank loans     |              |        
|Interest on Short-term bank loans    |              |        
|Exchange rate differences            |              |        
|Finance Expenses from                |              |        
|derivative                           |              |        
|                                     |              |        
|Interest from long-term and          |              |        
|short-term bank deposits             |              |        
|Interest expenses to tax authorities |              |        
|Interest from (to) related parties   |              |        
|Other                                |              |        
|                                     |              |        
|                                     |              |        
|                                     |              |        

|NOTE 21 |  | INCOME TAXES
|------- | - | ------------

| | A. | Composition
| | -- | -----------

| |                     | Consolidated | Company
| | ------------------- | ------------ | -------
|
|
|
|
|
| | Current taxes       |              |        
| | Taxes in respect of |              |        
| | prior years         |              |        
| | Deferred taxes - D. |              |        
| | below               |              |        
| |                     |              |        
| |                     |              |        
| |                     |              |        

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

H - 30

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---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 21 |  | INCOME TAXES (Cont.)
|------- | - | --------------------

| | B. | (Cont.)
| | -- | -------

| | 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 97 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Reconciliation
of the statutory tax rate to the effective tax rate:
| | -- | -------------------------------------------------------------------

| |                                     |  | Consolidated | Company
| | ----------------------------------- |  | ------------ | -------
|
|
|
|
|
| | Income before income taxes          |  |              |        
| |                                     |  |              |        
| |                                     |  |              |        
| | Statutory tax rate (see E. below)   |  |              |        
| | Tax computed by statutory tax rate- |  |              |        
| |                                     |  |             
| | Tax increments (savings) due to:    |  |             
| | Income (Expenses) in reduced        |  |             
| | tax rate                            |  |              |        
| | Non-deductible expenses             |  |              |        
| | Non-taxable income                  |  |              |        
| | Unrecorded deferred taxes in        |  |             
| | connection with tax loss carry      |  |             
| | forward                             |  |              |        
| | Change in deferred taxes due to     |  |             
| | decrease in tax rate in Turkey      |  |              |        
| | Deferred taxes prior years          |  |              |        
| | Reduction in corporate tax rates    |  |             
| | (see E. below)                      |  |              |        
| | Differences arising from            |  |             
| | basis of measurement (*)            |  |              |        
| | Income (Expenses) taxes for         |  |             
| | prior years                         |  |              |        
| | Other differences, net              |  |              |        
| |                                     |  |              |        
| |                                     |  |              |        
| |                                     |  |              |        

| | (*) | Commencing year 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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 31

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---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 21 |  | INCOME TAXES (Cont.)
|------- | - | --------------------

| | D. | Deferred
Taxes
| | -- | --------------

| |                           | Consolidated | Company
| | ------------------------- | ------------ | -------
|
|
|
|
|
| | Balance as of             |              |        
| | beginning of year         |              |        
| | Changes during the year   |              |        
| | Adjustment due to change  |              |        
| | in income tax rates       |              |        
| | Foreign currency          |              |        
| | translation adjustments   |              |        
| |                           |              |        
| | Balance as of end of year |              |        
| |                           |              |        

| |                                                   | Consolidated | Company
| | ------------------------------------------------- | ------------ | -------
|
|
|
|
| | Deferred taxes are presented in the               |              |        
| | balance sheets as follows:                        |              |        
| |                                                   |              |        
| | Long-term liabilities (in respect of  depreciable |              |        
| | assets)                                           |              |        
| | Other receivables (in respect of  temporary       |              |        
| | differences) See Note 5                           |              |        
| | Other assets                                      |              |        
| |                                                   |              |        
| |                                                   |              |        
| |                                                   |              |        

| | For
2007  Deferred taxes were computed at rates between 20%-28%, primarily  24.5%.
| | ------------------------------------------------------------------------------------

| | For
2006  Deferred taxes were computed at rates between 20%-29%, primarily  20%.
| | ----------------------------------------------------------------------------------

| | Deferred
taxes at the amount of NIS 519 thousand due to revaluation of financial instruments
treated as cash flow hedges were recognized directly to equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007 carryforward tax losses deriving from the Turkish subsidiary sum
up to NIS 247.3 millions.
| | ------------------------------------------------------------------------------------------------------------------

| | The
Company has examined the validity of the deferred tax assets deriving from its Turkish
subsidiary. As a result of this examination, the deferred tax asset due to carry-forward
tax losses in the Turkish subsidiary was fully amortized in the amounts of NIS 26,509
thousand for the year ended December 31, 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 32

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---

HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 21 |  | INCOME TAXES (Cont.)
|------- | - | --------------------

| | E. | Reduction
of Corporate Tax Rates
| | -- | --------------------------------

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

| | 2. | During
the second quarter of 2006 the corporate tax in Turkey was reduced from           30% to
20%. The change in the corporate tax resulted in additional tax expenses           in the
amount of NIS 10.6 millions which reflected the impact on the deferred           tax
assets.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. | Following
a tax assessment of the companys tax return, performed by the           tax
authorities in Israel with respect of tax-years 2003 and 2002 the company
          recorded additional provision for tax expenses, in the amount of NIS 4.2
          millions for the year ended December 31, 2006.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | The
Company and its subsidiary Shikma Ltd. possess final tax assessments           through
2002. Hogla Kimberly Marketing Ltd., a subsidiary of the Company,           posses final
tax assessments through 2003. Mollet Marketing Ltd., a           subsidiary of the
Company, posses final tax assessments through 2003.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 22 |  | RELATED PARTIES AND INTERESTED PARTIES
|------- | - | --------------------------------------

| | A. | Balances
with Related Parties
| | -- | -----------------------------

| |                                  | Consolidated | Company
| | -------------------------------- | ------------ | -------
|
|
|
|
| | Trade receivables (*)            |              |        
| |                                  |              |        
| | Capital note - shareholder       |              |        
| |                                  |              |        
| | Other receivables                |              |        
| |                                  |              |        
| | Capital notes - Subsidiaries     |              |        
| |                                  |              |        
| | Capital injection - Subsidiaries |              |        
| |                                  |              |        
| | Trade payables (*)               |              |        
| |                                  |              |        

| | (*) | Company
 excludes Subsidiaries. See also Notes 4 and 10.
| | --- | ---------------------------------------------------------

H - 33

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

|NOTE 22 |  | RELATED PARTIES AND INTERESTED PARTIES
|------- | - | --------------------------------------

| | B. | Transactions
with Related Parties and Subsidiaries
| | -- | --------------------------------------------------

| |                       | Consolidated | Company
| | --------------------- | ------------ | -------
|
|
|
|
|
|
| | Sales to related      |              |        
| | parties               |              |        
| |                       |              |        
| | Sales to Subsidiaries |              |        
| |                       |              |        
| | Cost of sales         |              |        
| |                       |              |        
| | Royalties to the      |              |        
| | shareholders          |              |        
| |                       |              |        
| | General and           |              |        
| | administrative        |              |        
| | expenses (*)          |              |        
| |                       |              |        

| | (*) | Company
 excludes Subsidiaries.
| | --- | --------------------------------

|NOTE 23 |  | 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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 34

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS

|NOTE 23 |  | DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS (Cont.)
|------- | - | ------------------------------------------------------------

| | B. | Fair
Value of Financial Instruments (Cont.)
| | -- | -------------------------------------------

| | As
of December 31, 2007 the Company had entered into 42 hedge transaction in respect of
anticipated purchases amounting to NIS 68.2 million, (in U.S. dollar and Euro currency).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
hedge transactions are shown in the balance sheet at fair value. The fair value of future
transactions is based on future exchange rates, as quoted the balance sheet date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007 the fair value of the cash flow hedging transaction is a net
liability of NIS 2.4 million.
| | ------------------------------------------------------------------------------------------------------------------

|NOTE 24 |  | SUBSEQUENT EVENTS
|------- | - | -----------------

| | A. | On
January 2008, Hogla Kimberly made an agreement with an Israeli bank for an prime linked
interest loan in the amount of NIS 100 million which will be repaid during 4 year period.
As part of the agreement the company agreed to the following covenants:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Its
shareholders equity will not be less than NIS 250 million and           not less
than 25% of the total consolidated assets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

| | 2. | Both
the companys shareholders Kimbely Clark and AIPM separately or
               together, will not hold less than 51% of the companys share capital.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | On May 20, 2008 the Company received from the Israeli tax authority a compensation in the amount of
about NIS 4.5 millions. The compensation is due to loss of earnings during a security situation that
occurred in July 2006 in northern Israel and caused the Company to partially stop its manufacturing
activity in its Naharia plant. The Company will record a pre tax income of 4.5 million NIS for the
second quarter of 2008.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

H - 35

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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                         |        
| |                                                     |        
| |                                                     |        
| |                                                     |        
| |                                                     |        
| | Property plant and equipment, net                   |        
| |                                                     |        
| |                                                     |        
| |                                                     |        
| | Current Liabilities                                 |        
| | Short-term bank credit                              |        
| | Trade payables                                      |        
| | Other payables and accrued expenses                 |        
| |                                                     |        
| |                                                     |        
| |                                                     |        
| |                                                     |        
| | Liability for employee rights upon early retirement |        
| |                                                     |        
| |                                                     |        
| | Shareholders' Equity                                |        
| |                                                     |        
| |                                                     |        
| |                                                     |        

H - 36

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HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS

|NOTE 25 |  | COMPANYS FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX PURPOSES (Cont.)
|------- | - | --------------------------------------------------------------------------

| | B. | Statement
of Operations
| | -- | -----------------------

| |                                     | Company
| | ----------------------------------- | -------
|
|
|
|
| | Net sales                           |        
| |                                     |        
| | Cost of sales                       |        
| |                                     |        
| |                                     |        
| | Gross profit                        |        
| |                                     |        
| | Selling expenses                    |        
| |                                     |        
| | General and administrative expenses |        
| |                                     |        
| |                                     |        
| | Operating profit                    |        
| |                                     |        
| | Financing income (expenses), net    |        
| |                                     |        
| | Other income                        |        
| |                                     |        
| |                                     |        
| | Income before income taxes          |        
| |                                     |        
| | Income taxes                        |        
| |                                     |        
| |                                     |        
| | Income after income taxes           |        
| |                                     |        
| | Equity in losses of Subsidiaries    |        
| |                                     |        
| |                                     |        
| | Net income (loss) for the year      |        
| |                                     |        

H - 37

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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 | Accumulate
other
comprehensive
income | Total
| | ----------------------------------- | ------------- | ---------------- | ---------------------------------------------------------------------- | ----------------- | ------------------------------------- | -----
|
|
|
|
| | Balance - January 1, 2005           |               |                  |                                                                        | 8,513             |                                       |      
| |                                     |               |                 
| | Changes during 2005:                |               |                 
| | Dividend paid                       |               |                  |                                                                        | -                 |                                       |      
| | Translation adjustments             |               |                 
| | relating to foreign held            |               |                 
| | autonomous Subsidiary               |               |                  |                                                                        | -                 |                                       |      
| | Net income for the year             |               |                  |                                                                        | -                 |                                       |      
| |                                     |               |                  |                                                                        |                   |                                       |      
| |                                     |               |                 
| | Balance - December 31, 2005         |               |                  |                                                                        | 8,513             |                                       |      
| |                                     |               |                  |                                                                        |                   |                                       |      
| |                                     |               |                 
| | Changes during 2006:                |               |                 
| | Dividend paid                       |               |                  |                                                                        | -                 |                                       |      
| | Shares issued                       |               |                  |                                                                        | 600               |                                       |      
| | Translation adjustments             |               |                 
| | relating to foreign held            |               |                 
| | autonomous Subsidiary               |               |                  |                                                                        | -                 |                                       |      
| | Movement in capital reserve         |               |                 
| | of hedging transactions, net        |               |                  |                                                                        | -                 |                                       |      
| | Loss for the year                   |               |                  |                                                                        | -                 |                                       |      
| |                                     |               |                  |                                                                        |                   |                                       |      
| |                                     |               |                 
| | Balance - December 31, 2006         |               |                  |                                                                        | 9,113             |                                       |      
| |                                     |               |                  |                                                                        |                   |                                       |      
| |                                     |               |                 
| | Changes during 2007:                |               |                 
| | Translation adjustments             |               |                 
| | relating to foreign held            |               |                 
| | autonomous Subsidiary               |               |                  |                                                                        | -                 |                                       |      
| | Movement in capital reserve         |               |                 
| | of hedging transactions, net        |               |                  |                                                                        | -                 |                                       |      
| | Capitalization of retained earnings |               |                 
| | from Approved Enterprise earnings   |               |                  |                                                                        | -                 |                                       |      
| | Loss for the year                   |               |                  |                                                                        | -                 |                                       |      
| |                                     |               |                  |                                                                        |                   |                                       |      
| |                                     |               |                 
| | Balance - December 31, 2007         |               |                  |                                                                        | 9,113             |                                       |      
| |                                     |               |                  |                                                                        |                   |                                       |      

H - 38

---

---

|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|----------------------------------------------

# CONSOLIDATED FINANCIAL
STATEMENTS
AS OF DECEMBER 31, 2007



---

---

|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|----------------------------------------------

# CONSOLIDATED FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2007

INDEX

|                                                                             | Page       
|---------------------------------------------------------------------------- | -----------
|
|
|
|
|Report of Independent Auditors                                               | C-2        
|                                                                            
|Balance Sheets                                                               | C-3 - C-4  
|                                                                            
|Statements of Operations                                                     | C-5 - C-6  
|                                                                            
|Statements of Changes in Shareholders' Equity                                | C-7        
|                                                                            
|Statements of Cash Flows                                                     | C-8 - C-11 
|                                                                            
|Notes to Consolidated Financial Statements                                   | C-12 - C-63
|                                                                            
|Appendix to Consolidated Financial Statements - List of Affiliated Companies | C-64       



---

---

| |   |                                                                    |   |                                             
| | - | ------------------------------------------------------------------ | - | --------------------------------------------
| | n | Kost Forer Gabbay & Kasierer    2 Pal-Yam Ave.
Haifa 33095, Israel | n | Phone: 972-4-8654000Fax:       972-4-8654022

# REPORT OF INDEPENDENT
REGISTERED 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, 2007 and 2006, 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, 2007. These financial statements are the responsibility of the
Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
did not audit the financial statements of a certain affiliate, whose revenues constitute
approximately 8% of total consolidated revenues for the year ended December 31, 2005.
The financial statements of this affiliate were audited by other auditors, whose reports
have been furnished to us, and our opinion, insofar as it relates to amounts included for
this affiliate, 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 under the Auditors Regulations (Auditors Mode of
Performance), 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 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, based on our audits
and the reports of other auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company and
consolidated as of December 31, 2007 and 2006, and the results of their operations,
changes in shareholders equity and cash flows- of the company and consolidated -for
each of the three years in the period ended December 31, 2007, 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 2, the financial statements referred to above are presented in reported
amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

|Haifa, Israel
March 3, 2008 Except for Note 23, as which
the date is May 26, 2008 | /s/ Kost Forer Gabbay & Kasierer KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------

C - 2

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|BALANCE SHEETS                                
|                                              

|                                      |  | The Company | Consolidated | Convenience
translation
(Note 2a)
|------------------------------------- |  | ----------- | ------------ | ---------------------------------
|
|
|
|
|
|ASSETS                                |  |             |              |                                  
|                                      |  |            
|CURRENT ASSETS:                       |  |            
|Cash and cash equivalents             |  |             |              |                                  
|Trade receivables, net                |  |             |              | 3                                
|Other accounts receivable and prepaid |  |            
|expenses                              |  |             |              | 4                                
|Inventories                           |  |             |              | 5                                
|                                      |  |             |              |                                  
|                                      |  |            
|Total current assets                  |  |             |              |                                  
|                                      |  |             |              |                                  
|                                      |  |            
|LONG TERM ASSETS AND INVESTMENTS      |  |            
|Other accounts receivable             |  |             |              |                                  
|Severance pay fund, net               |  |             |              | 14                               
|Investment in affiliated company      |  |             |              | 6                                
|                                      |  |             |              |                                  
|                                      |  |            
|Total                                 |  |             |              |                                  
|                                      |  |             |              |                                  
|                                      |  |            
|PROPERTY AND EQUIPMENT, NET           |  |             |              | 7                                
|                                      |  |             |              |                                  
|                                      |  |            
|INTANGIBLE ASSETS  (see Note 23)      |  |             |              | 8                                
|                                      |  |             |              |                                  
|                                      |  |            
|Total assets                          |  |             |              |                                  
|                                      |  |             |              |                                  

(*) Reclassified-see
note 2 g(1), v

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

C - 3

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|BALANCE SHEETS                                
|                                              

|                                                 |  | The Company | Consolidated | Convenience
translation
(Note 2a)
|------------------------------------------------ |  | ----------- | ------------ | ---------------------------------
|
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY             |  |             |              |                                  
|                                                 |  |            
|CURRENT LIABILITIES:                             |  |            
|Short-term credit from banks                     |  |             |              | 9                                
|Current maturities of long-term loans            |  |             |              | 12                               
|Trade payables                                   |  |             |              | 10                               
|Other accounts payable and accrued               |  |            
|expenses                                         |  |             |              | 11                               
|                                                 |  |             |              |                                  
|                                                 |  |            
|Total current liabilities                        |  |             |              |                                  
|                                                 |  |             |              |                                  
|                                                 |  |            
|LONG-TERM LIABILITIES:                           |  |            
|Long-term loans from banks less current          |  |            
|maturities                                       |  |             |              | 12                               
|Accrued severance pay, net                       |  |             |              | 14                               
|Deferred income taxes                            |  |             |              | 18f                              
|                                                 |  |             |              |                                  
|                                                 |  |            
|Total long-term liabilities                      |  |             |              |                                  
|                                                 |  |             |              |                                  
|                                                 |  |            
|CONTINGENT LIABILITIES AND COMMITMENTS (Note 15)
|                                                 |  |            
|SHAREHOLDERS' EQUITY:                            |  |            
|Share capital - Ordinary shares of NIS 1 par     |  |            
|value:                                           |  |            
|10,000,000 shares authorized at                  |  |            
|December 31, 2006 and 2007; 2,520,000            |  |            
|shares issued and 2,400,187 shares               |  |            
|outstanding at December 31, 2006 and             |  |            
|1,739,937 shares outstanding at December         |  |            
|31, 2007                                         |  |             |              | 17                               
|Additional paid-in capital                       |  |             |              |                                  
|Cumulative other comprehensive loss              |  |             |              |                                  
|Retained earnings                                |  |             |              |                                  
|                                                 |  |             |              |                                  
|                                                 |  |            
|                                                 |  |             |              |                                  
|Less - treasury shares                           |  |             |              |                                  
|                                                 |  |             |              |                                  
|                                                 |  |            
|                                                 |  |             |              |                                  
|                                                 |  |             |              |                                  
|                                                 |  |            
|Total liabilities and shareholders' equity       |  |             |              |                                  
|                                                 |  |             |              |                                  

(*)           Reclassified-see note
2 g(1), v

|                        |                    |                        |                   |                        
|----------------------- | ------------------ | ---------------------- | ----------------- | -----------------------
|
|
|
|
|May 26, 2008            | /s/ Robert Kraft   | /s/ Zvika Livnat       | /s/ Doron Kempler | /s/ Jacob Konkol       
|                        |                    |                        |                   |                        
|Date of approval of the | Robert Kraft       | Zvika Livnat           | Doron Kempler     | Jacob Konkol           
|financial statements    | Chairman of the    | Vice Chairman of       | General Manager   | Chief Financial Officer
|                        | Board of Directors | the Board of Directors

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

C - 4

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|CONSOLIDATED STATEMENTS OF OPERATIONS         
|                                              

|                                              |  |  |  |    
|--------------------------------------------- |  |  |  | ---
|
|
|
|
|
|
|Revenues                                      |  |  |  |    
|Cost of revenues                              |  |  |  | 20a
|                                              |  |  |  |    
|                                              |  | 
|Gross profit                                  |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Selling and marketing expenses                |  |  |  | 20b
|General and administrative expenses           |  |  |  | 20c
|                                              |  |  |  |    
|                                              |  | 
|                                              |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Operating income                              |  |  |  |    
|Financial expenses, net                       |  |  |  | 20d
|                                              |  |  |  |    
|                                              |  | 
|                                              |  |  |  |    
|Other income, net                             |  |  |  | 20e
|                                              |  |  |  |    
|                                              |  | 
|Income before taxes on income                 |  | 
|(tax benefit)                                 |  |  |  |    
|Taxes on income (tax benefit)                 |  |  |  | 18 
|                                              |  |  |  |    
|                                              |  | 
|Income after taxes on income (tax benefit)    |  |  |  |    
|Equity in earnings (losses) of an affiliated  |  | 
|company                                       |  |  |  | 6  
|Minority interest in losses of a subsidiary   |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Net income                                    |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Basic and diluted net income per shares (in   |  | 
|NIS)                                          |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Weighted average number of shares outstanding |  | 
|during the year (in thousands)                |  |  |  |    
|                                              |  |  |  |    

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

C - 5

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|COMPANYS STATEMENTS OF OPERATIONS            
|                                              

|                                              |  |  |  |    
|--------------------------------------------- |  |  |  | ---
|
|
|
|
|
|
|Revenues                                      |  |  |  |    
|Cost of revenues                              |  |  |  | 20a
|                                              |  |  |  |    
|                                              |  | 
|Gross profit                                  |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Selling and marketing expenses                |  |  |  | 20b
|General and administrative expenses           |  |  |  | 20c
|                                              |  |  |  |    
|                                              |  | 
|                                              |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Operating income                              |  |  |  |    
|Financial expenses, net                       |  |  |  | 20d
|                                              |  |  |  |    
|                                              |  | 
|                                              |  |  |  |    
|Other income, net                             |  |  |  | 20e
|                                              |  |  |  |    
|                                              |  | 
|Income (loss) before taxes on income          |  | 
|(tax benefit)                                 |  |  |  |    
|Taxes on income (tax benefit)                 |  |  |  | 18 
|                                              |  |  |  |    
|                                              |  | 
|Income after taxes on income (tax benefit)    |  |  |  |    
|Equity in earnings of an affiliated company   |  |  |  | 6  
|                                              |  |  |  |    
|                                              |  | 
|Net income                                    |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Basic and diluted net income per NIS          |  | 
|1 par value of shares (in NIS)                |  |  |  |    
|                                              |  |  |  |    
|                                              |  | 
|Weighted average number of shares outstanding |  | 
|during the year (in thousands)                |  |  |  |    
|                                              |  |  |  |    

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

C - 6

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
|                                              

|                             |  |  |  |        |  | 
|---------------------------- |  |  |  | ------ |  | 
|
|
|
|
|
|Balance at January 1, 2005   |  |  |  | 23,716 |  | 
|                             |  | 
|Net income                   |  |  |  | -      |  | 
|                             |  |  |  |        |  | 
|                             |  | 
|Balance at December 31, 2005 |  |  |  | 23,716 |  | 
|                             |  | 
|Net income                   |  |  |  | -      |  | 
|                             |  |  |  |        |  | 
|                             |  | 
|Balance at December 31, 2006 |  |  |  | 23,716 |  | 
|                             |  | 
|Unrealized loss on hedging   |  | 
|Derivative, net- (*)         |  |  |  | -      |  | 
|                             |  | 
|Repurchase of company shares |  | 
|(Treasury shares)            |  |  |  | -      |  | 
|                             |  | 
|Net income                   |  |  |  | -      |  | 
|                             |  |  |  |        |  | 
|                             |  | 
|Balance at December 31, 2007 |  |  |  | 23,716 |  | 
|                             |  |  |  |        |  | 
|                             |  | 
|
|
|
|
|
|
|Balance at January 1, 2007   |  |  |  | 6,166  |  | 
|Repurchase of company shares |  | 
|(Treasury Shares)            |  |  |  | -      |  | 
|Net income                   |  |  |  |        |  | 
|Unrealized loss on hedging   |  | 
|derivative                   |  |  |  | -      |  | 
|                             |  |  |  |        |  | 
|                             |  | 
|Balance at December 31, 2007 |  |  |  | 6,166  |  | 
|                             |  |  |  |        |  | 

(*)See note 2(o).

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

C - 7

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                                              

|                                                            |  |  | 
|----------------------------------------------------------- |  |  | 
|
|
|
|
|
|
|Cash flows from operating activities:                       |  |  | 
|Net income                                                  |  |  | 
|Adjustments required to reconcile net income to net cash    |  | 
|provided by operating activities:                           |  | 
|Equity in earnings (losses) of an affiliated company        |  |  | 
|Minority interest in losses (earnings) of subsidiary, net   |  |  | 
|Depreciation                                                |  |  | 
|Deferred income taxes, net                                  |  |  | 
|Accrued severance pay, net                                  |  |  | 
|Erosion and Linkage differentials of long-term loans        |  | 
|from banks                                                  |  |  | 
|Capital gain on sale of property and equipment, net         |  |  | 
|Increase in trade receivables                               |  |  | 
|Decrease (increase) in other accounts receivable and        |  | 
|prepaid expenses                                            |  |  | 
|Decrease (increase) in inventories                          |  |  | 
|Increase (decrease) in trade payables                       |  |  | 
|Increase in other accounts payable and accrued expenses     |  |  | 
|                                                            |  |  | 
|Net cash provided by operating activities                   |  |  | 
|                                                            |  |  | 
|                                                            |  | 
|Cash flows from investing activities:                       |  | 
|Purchase of property and equipment                          |  |  | 
|Proceeds from sale of property and equipment                |  |  | 
|Advance in respect of sale of real estate                   |  |  | 
|Refund of investment grants                                 |  |  | 
|Transition from consolidated to equity(c)                   |  |  | 
|Lending long term loan                                      |  |  | 
|Repayment of long term loan                                 |  |  | 
|                                                            |  |  | 
|Net cash used in investing activities                       |  |  | 
|                                                            |  |  | 
|                                                            |  | 
|Cash flows from financing activities:                       |  | 
|Purchase of equipment with credit                           |  |  | 
|Proceeds from long-term loans from banks and others         |  |  | 
|Principal payments of long-term loans from banks and others |  |  | 
|Short-term credit from bank, net                            |  |  | 
|Repurchase of the Company's shares                          |  |  | 
|Payment of dividend by affiliated company                   |  |  | 
|                                                            |  |  | 
|Net cash provided by (used in) financing activities         |  |  | 
|                                                            |  |  | 
|Increase (decrease) in cash and cash equivalents            |  |  | 
|Cash and cash equivalents at the beginning of the year      |  |  | 
|                                                            |  |  | 
|Cash and cash equivalents at the end of the year            |  |  | 
|                                                            |  |  | 

(*)
          Reclassified-see note 2 g(1).

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

C - 8

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                                              

|   |                                                   |  |  |  | Convenience
translation
(Note 2a)
|-- | ------------------------------------------------- |  |  |  | ---------------------------------
|
|
|
|
|
|a. | Non-cash transactions:                            |  |  |  |                                  
|   | Unpaid declared dividend                          |  |  |  | 2,650                            
|   |                                                   |  |  |  |                                  
|   | Differed tax on unrealized loss                   |  |  |  | -                                
|   |                                                   |  |  |  |                                  
|   | Unrealized loss                                   |  |  |  | -                                
|   |                                                   |  |  |  |                                  
|   | Purchase of property and equipment with credit    |  |  |  | -                                
|   |                                                   |  |  |  |                                  
|   |                                                   |  | 
|b. | Supplemental disclosure of cash flows activities: |  | 
|   | Cash paid during the year for:                    |  | 
|   | Interest                                          |  |  |  | 3,540                            
|   |                                                   |  |  |  |                                  
|   | Income taxes                                      |  |  |  | 230                              
|   |                                                   |  |  |  |                                  
|   |                                                   |  | 
|c. | Transition from consolidated to equity:           |  | 
|   |                                                   |  | 
|   | Working capital, net (except cash and cash        |  | 
|   | equivalents)                                      |  |  |  | -                                
|   | Property and equipment, net                       |  |  |  | -                                
|   | Investment in affiliated company                  |  |  |  | -                                
|   | Long-term liabilities                             |  |  |  | -                                
|   | Minority interests                                |  |  |  | -                                
|   |                                                   |  |  |  |                                  
|   |                                                   |  |  |  | -                                
|   |                                                   |  |  |  |                                  

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

C - 9

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|COMPANY'S STATEMENTS OF CASH FLOWS            
|                                              

|                                                            |  |  | 
|----------------------------------------------------------- |  |  | 
|
|
|
|
|
|
|Cash flows from operating activities:                       |  |  | 
|Net income                                                  |  |  | 
|Adjustments required to reconcile net income to net cash    |  | 
|provided by operating activities:                           |  | 
|Equity in earnings  of an affiliated company                |  |  | 
|Depreciation                                                |  |  | 
|Deferred income taxes, net                                  |  |  | 
|Accrued severance pay, net                                  |  |  | 
|Erosion and Linkage differentials of long-term loans        |  | 
|from banks                                                  |  |  | 
|Capital gain on sale of property and equipment, net         |  |  | 
|Increase in trade receivables                               |  |  | 
|Decrease (increase) in other accounts receivable and        |  | 
|prepaid expenses                                            |  |  | 
|Decrease (increase) in inventories                          |  |  | 
|Increase (decrease) in trade payables                       |  |  | 
|Increase in other accounts payable and accrued expenses     |  |  | 
|                                                            |  |  | 
|Net cash provided by operating activities                   |  |  | 
|                                                            |  |  | 
|                                                            |  | 
|Cash flows from investing activities:                       |  | 
|Purchase of property and equipment                          |  |  | 
|Proceeds from sale of property and equipment                |  |  | 
|Advance in respect of sale of real estate                   |  |  | 
|Refund of investment grants                                 |  |  | 
|Lending long term loan                                      |  |  | 
|Repayment of long term loan                                 |  |  | 
|                                                            |  |  | 
|Net cash used in investing activities                       |  |  | 
|                                                            |  |  | 
|                                                            |  | 
|Cash flows from financing activities:                       |  | 
|Purchase of equipment with credit                           |  |  | 
|Proceeds from long-term loans from banks and others         |  |  | 
|Principal payments of long-term loans from banks and others |  |  | 
|Short-term credit from bank, net                            |  |  | 
|Repurchase of the Company's shares                          |  |  | 
|Payment of dividend by affiliated company                   |  |  | 
|                                                            |  |  | 
|Net cash provided by (used in) financing activities         |  |  | 
|                                                            |  |  | 
|                                                            |  | 
|Increase (decrease) in cash and cash equivalents            |  |  | 
|Cash and cash equivalents at the beginning of the year      |  |  | 
|                                                            |  |  | 
|Cash and cash equivalents at the end of the year            |  |  | 
|                                                            |  |  | 

(*) Reclassified-see note 2 g(1).

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

C - 10

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|COMPANY'S STATEMENTS OF CASH FLOWS (CONT.)    
|                                              

|   |                                                   |  |  |  | Convenience
translation
(Note 2a)
|-- | ------------------------------------------------- |  |  |  | ---------------------------------
|
|
|
|
|
|
|a. | Non-cash transactions:                            |  |  |  |                                  
|   | Unpaid declared dividend                          |  |  |  | 2,650                            
|   |                                                   |  |  |  |                                  
|   | Differed tax on unrealized gain                   |  |  |  | -                                
|   |                                                   |  |  |  |                                  
|   | Unrealized gain                                   |  |  |  | -                                
|   |                                                   |  |  |  |                                  
|   | Purchase of property and equipment with credit    |  |  |  |                                  
|   |                                                   |  |  |  |                                  
|   |                                                   |  | 
|b. | Supplemental disclosure of cash flows activities: |  | 
|   | Cash paid during the year for:                    |  | 
|   | Interest                                          |  |  |  | 3,540                            
|   |                                                   |  |  |  |                                  
|   | Income taxes                                      |  |  |  | 230                              
|   |                                                   |  |  |  |                                  

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

C - 11

---

---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 1: |  | GENERAL
|------- | - | -------

| | a. | Carmel
Container Systems Ltd. (Carmel Systems or the           Company),
is an Israeli industrial company. The Company and its subsidiary           (the
Group) designs, manufactures and markets shipping containers,           consumer
packaging products and packaging wooden pallets and boxes (see Note           21). The
Groups sales are to a large number of customers mainly in Israel.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys subsidiary is Tri-Wall Containers (Israel) Ltd. (Tri-Wall)
which is 100% controlled. Until January 1, 2006 CD Packaging Systems Ltd. (CD)
was subsidiary of the Company (See Note 1b).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
January 1, 2006, an agreement between CD and its shareholders and           Frenkel
and Sons (Frenkel) and its shareholders, for the acquisition of           Frankels
operations was consummated. Frankel is engaged in the           manufacturing and
marketing of packaging and display stands from carton.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the agreement, CD acquired from Frenkel its operations, including Frenkels
assets and liabilities (except for Frenkels holdings in one of its subsidiaries
which holds an industrial building in Caesarea and except for certain liabilities that
were defined as protected) in exchange for 4,429,000 Ordinary A shares and 795 Ordinary B
shares of CD that have been issued to Frenkels shareholders according to a
mechanism prescribed in the agreement. As a result of the above, the Companys
effective holding percentage in CD declined from 50.1% to 27.85%. Due to loss of control
in CD, the Company ceased consolidating this subsidiary commencing January 1, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
gain or loss was recorded in connection with the above mentioned transaction.
| | --------------------------------------------------------------------------------

| | c. | Definitions:
| | -- | ------------

| | In
these financial statements:
| | ------------------------------

| |                    |   |                                                                                                                                                                                                                                                                 
| | ------------------ | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Subsidiaries       | - | Companies in which more than 50% of the voting equity is owned or controlled by the Company (as defined in Opinion No. 57 of the Institute of Certified Public Accountants in Israel) and their financial statements are consolidated with those of the Company.
| |                    |   |                                                                                                                                                                                                                                                                 
| | Related parties    | - | As defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel.                                                                                                                                                                        
| |                    |   |                                                                                                                                                                                                                                                                 
| | Affiliated company | - | Company in which the Company exercises material influence and that are not subsidiaries, and the Company's investment in which is recorded in the financial statement according to the equity method.                                                           
| |                    |   |                                                                                                                                                                                                                                                                 

C - 12

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
consolidated financial statements presented herein are prepared in accordance with
generally accepted accounting principles (GAAP) in Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | The company
prepared its financial statements in accordance with the Securities Regulations  (Preparation
of Annual Financial Statements,) 1993, for the first time, and therefore presents  the
Company statements, that were reclassified (See g(1) and v).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
significant accounting policies applied in the preparation of the financial statements on
a consistent basis, except as described in f, g and t below are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Reporting
basis of the financial statements:
| | -- | --------------------------------------------

| | 1. | In
the past, the Company prepared its financial statements based on the           historical
cost convention adjusted for the changes in the Israeli Consumer           Price Index (Israeli
CPI). The adjusted amounts, as included in the           balance sheet as of
December 31, 2003, served as a starting point for nominal           financial reporting
beginning January 1, 2004. Additions made after the           transition date are
included at nominal values.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
accordance with Accounting Standard No. 12 with respect to the
          discontinuance of the adjustment of financial statements, the adjustment of
          financial statements for the effects of inflation was discontinued on December
          31, 2003 and, as of that date, the Company began preparing its financial
          statements in reported amounts.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
amounts for non-monetary assets do not necessarily represent realizable          value or
current economic value, but only the reported amounts for those assets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Cost
in these financial statements represents cost in the reported amount.
| | -- | --------------------------------------------------------------------------

| | 5. | Convenience
translation into US Dollars:
| | -- | ----------------------------------------

| | The
reported financial statements as of December 31, 2007 and for the year then ended, have
been translated into US Dollars using the representative exchange rate of US Dollars as
of such date (U.S.$ 1=NIS 3.846). The translation was made solely for the convenience of
the readers. It should be noted that the reported New Israel Shekel figures do not
necessarily represent the current costs of the various elements presented, and that the
translated US Dollar figures should not be construed unless otherwise indicated in these
statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Consolidated
financial statements:
| | -- | ----------------------------------

| | The
consolidated financial statements include the accounts of companies over which the
Company exercises control. Significant inter-company balances and transactions between
the Group companies have been eliminated in the consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Investments
in affiliated company:
| | -- | ----------------------------------

| | 1. | The
Companys investment in affiliated company is presented by the equity
          method of accounting.
| | -- | ---------------------------------------------------------------------------------------------------------

| | 2. | The
Company evaluates in each reporting period the necessity to record an
          impairment loss, in accordance with the provisions of Accounting Standard No.
15           (see h below).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 13

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | d. | Cash
equivalents:
| | -- | -----------------

| | The
Group considers all highly liquid investments, including unrestricted short-term bank
deposits purchased with original maturities of three months or less, to be cash
equivalents
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | Such
allowance is determined in respect of specific debts whose collection, in the opinion of
the Group management, is doubtful.
| | --------------------------------------------------------------------------------------------------------------------------------

| | f. | Inventories:
| | -- | ------------

| | 1. | As
of January 1, 2007, the Company applies Accounting Standard No. 26,           Inventories.
Inventories are measured at the lower of cost or net           realizable value. Net
realizable value is the estimated selling price in the           ordinary course of
business less the estimated costs of completion and costs           necessary to make the
sale. An evaluation of net realizable value is carried out           in each subsequent
period.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
of inventory includes the inventory purchase costs and the costs required to bring the
inventory to its current location and condition. Cost is determined as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Raw Materials and goods in transit  using the first-in, first-out method.
| | ----------------------------------------------------------------------------

| | Supplies
and packaging material  on the basis of moving  average cost
| | -----------------------------------------------------------------------

| | Work
in progress and Finished products  on the basis of computed with allocable indirect
manufacturing cost.
| | -------------------------------------------------------------------------------------------------------------

| | The
Company periodically evaluates the condition and age of inventories and provides for slow
moving inventories accordingly. If in a particular period, production is not at normal
capacity, the cost of inventories does not include fixed overhead costs in excess of
those allocated based on normal capacity. Such unallocated overhead costs are recognized
as an expense in the statement of income in the period in which they are incurred.
Furthermore, cost of inventories does not include abnormal amounts of materials, labor
and other costs resulting from inefficiency.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | When
inventories are purchased under credit terms whereby the arrangement           involves a
financing element, the inventories are presented at cost reflecting           the cash
purchase price, and the financing element is recognized as a financial           expense
over the period of the financing.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
initial adoption of the standard had no material effect on the interim financial
statements.
| | ------------------------------------------------------------------------------------------------

| | g. | Fixed
assets:
| | -- | -------------

| | 1. | As
of January 1, 2007, the Company applies the provision of accounting           standards
No. 27 Fixed assets of the Israel Accounting Standards           Board (the
Standards).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fixed
assets are stated at cost, including           direct acquisition costs, less accumulated
impairment losses, accumulated           depreciation and investment grants, and
excluding day-to-day servicing expenses.           Cost includes spare parts and
auxiliary equipment that can be used only in           connection with the machinery and
equipment. Borrowing costs related to           financing the acquisition or the
construction of fixed assets during the           pre-operating period are included in
the cost of the assets. Expenditures for           improvements and upgrading are added
to cost.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 14

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | g. | Fixed
assets (cont.):
| | -- | ---------------------

| | The
cost of spare parts and auxiliary equipment which do not meet the definition of fixed
assets is charged to operations as incurred. Base inventory of spare parts and auxiliary
equipment, which has not been depreciated and meets the definition of fixed assets, is
depreciated over its useful life and comparative data have been restated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
our effects of the changes of the financial statements:
| | -----------------------------------------------------------------

| | 1. | Balance
sheets:
| | -- | ---------------

| |                                         | Consolidated
| | --------------------------------------- | ------------
|
|
|
|
| | Inventories                             |             
| |                                         |             
| |                                         |             
| | Fixed assets - cost                     |             
| |                                         |             
| |                                         |             
| | Fixed assets - accumulated depreciation |             
| |                                         |             
| |                                         |             
| | Intangible assets                       |             
| |                                         |             

| | Statements
of operations:
| | -------------------------

| |                     | Consolidated
| | ------------------- | ------------
|
|
|
|
|
| | Cost of revenues    |             
| |                     |             
| | Other manufacturing |             
| | costs               |             
| |                     |             
| |                     |             
| | Depreciation        |             
| |                     |             
| |                     |             
| | Total               |             
| |                     |             

C - 15

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | g. | Fixed
assets (cont.):
| | -- | ---------------------

| | 1. | Balance
sheets:
| | -- | ---------------

| |                                         | The Company
| | --------------------------------------- | -----------
|
|
|
|
| | Inventories                             |            
| |                                         |            
| |                                         |            
| | Fixed assets - cost                     |            
| |                                         |            
| |                                         |            
| | Fixed assets - accumulated depreciation |            
| |                                         |            
| |                                         |            
| | Intangible assets                       |            
| |                                         |            

| | Statements
of operations:
| | -------------------------

| |                           | The Company
| | ------------------------- | -----------
|
|
|
|
|
| | Cost of revenues          |            
| |                           |            
| | Other manufacturing costs |            
| |                           |            
| |                           |            
| | Depreciation              |            
| |                           |            
| |                           |            
| | Total                     |            
| |                           |            

| | g. | Fixed
assets (cont.):
| | -- | ---------------------

| | The
Group recognizes the cost of replacing a part of a fixed asset as part of the fixed assets
carrying amount when the cost has been incurred, the economic benefits associated with
the part are expected to flow to the Group and the cost of the part can be measured
reliably. Ongoing maintenance costs are recognized in the income statement as incurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
depreciation of assets is discontinued at the earlier of the date on which the asset is
classified as held for sale and the date on which the asset is derecognized. An asset is
derecognized upon disposal or when no future economic benefits are expected from its use
or disposal. Any gain or loss arising on derecognition of the asset (calculated as the
difference between the net disposal proceeds and the carrying amount of the asset) is
included in the income statement in the year the asset is derecognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 16

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
cost of a fixed asset also includes an initial estimate of the costs of dismantling and
removing the asset and restoring the site on which the asset is located, for which the
Company has incurred an obligation when the asset is acquired or as a result of the use
of the asset during a certain period not for the manufacture of inventories.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the initial adoption of the provisions of the standard, the Company
reclassified some of its auxiliary equipment to inventories in an amount of NIS 500
thousand.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | h. | Costs
of software development:
| | -- | ------------------------------

| | Costs
of software development for internal use, including costs of developing and establishing
a website infrastructure, are capitalized after completion of the planning stage, when
the development is expected to be completed and the software will be used according to
plan. Capitalization of costs is discontinued when the software is substantially
completed and is ready for its designated use. The costs are amortized over the estimated
useful life of the software. As of January 1, 2007, pursuant to Accounting Standard No.
30, the Company reclassified such costs from fixed assets to intangible assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 17

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | i. | Impairments
of fixed assets and investments:
| | -- | --------------------------------------------

| | 1. | Impairment
of fixed assets:
| | -- | ---------------------------

| | The
Group applies Accounting Standard No. 15, Impairment of Assets. The Standard
applies to all of the assets included in the balance sheet other than inventories, assets
arising from employee benefits, deferred tax assets and financial assets (with the
exception of investments in affiliates). According to the Standard, whenever there is an
indication that an asset may be impaired, the Company should determine if there has been
an impairment of the asset by comparing the carrying amount of the asset to its
recoverable amount. The recoverable amount is the higher of an assets net selling
price or value in use, which is determined based on the present value of estimated future
cash flows expected to be generated by the continuing use of an asset and by its disposal
at the end of its useful life. If the carrying amount of an asset exceeds its recoverable
amount, the impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value. An impairment loss recognized should be
reversed only if there have been changes in the estimates used to determine the assets
recoverable amount since the impairment loss was recognized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, no impairment losses were identified.
| | --------------------------------------------------------------

| | 2. | Impairment
of investments in other companies:
| | -- | ---------------------------------------------

| | The
Company generally evaluates the fair value of its investments in each reporting period
and whenever changes in circumstances or occurrence of other events indicate a decline in
value that is other than temporary.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
evaluation of the fair value takes into consideration, among others, estimates and
valuations of the investments, the conditions of the industry in which the portfolio
company is operating, the portfolio companys business condition, off- market
transactions in the portfolio companys securities, prices of equity transactions in
the portfolio company and additional information that the portfolio company presents to
its board of directors (if the Company is represented on the board) or to its
shareholders.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, no impairment losses were identified.
| | --------------------------------------------------------------

| | j. | Deferred
taxes:
| | -- | ---------------

| | 1. | As
of January 1, 2005, the Group applies Accounting Standard No. 19,           Taxes
on Income (the Standard). The Standard prescribes           the
principles for recognition, measurement, presentation and disclosures of           taxes
on income and deferred taxes in the financial statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
taxes are computed in respect of temporary differences between the amounts included in
the financial statements and the amounts allowable for tax purposes, other than a limited
number of exceptions described in the Standard.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 18

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | j. | Deferred
taxes (cont.):
| | -- | -----------------------

| | Deferred
tax balances are measured using the enacted tax rates expected to be in effect when the
differences are expected to reverse, based on the applicable tax laws at balance sheet
date. The amount for deferred taxes in the statement of income represents the changes in
said balances during the reported year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Taxes
that would apply in the event of the sale of investments in investees           have not
been taken into account in computing the deferred taxes, as long as it           is
probable that the sale of the investments is not expected in the foreseeable
          future.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Similarly,
deferred taxes that would apply in the event of distribution of earnings by investees as
dividends have not been taken into account in computing the deferred taxes, since it is
the Companys policy not to initiate distribution of dividends that involves an
additional tax liability.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Revenue
recognition:
| | -- | --------------------

| | Revenues
are recognized in the income statement when they can be measured reliably, the economic
benefits associated with the transaction are expected to flow to the Company and the
costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenues are measured at the fair value of the consideration in the transaction less
commercial rebates, volume discounts and returns.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from sale of goods:
| | ----------------------------

| | Revenues
from sale of goods are recognized once all the significant risks and rewards of ownership
of the goods have been transferred to the buyer, the seller no longer retains continuing
managerial involvement to the degree usually associated with ownership and no longer
retains effective control over the goods sold.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Customer
discounts:
| | -- | -------------------

| | Current
customer discounts are recognized in the financial statements upon receipt and are
deducted from sales revenues.
| | ------------------------------------------------------------------------------------------------------------------------

| | Customer
discounts given at the end of the year and in respect of which the customer is not
obligated to comply with certain targets, are recognized in the financial statements as
the purchases which entitle the customer to said discounts are made.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Customer
discounts for which the customer is required to meet certain targets, such as a minimum
amount of annual purchases (either quantitative or monetary), an increase in purchases
compared to previous periods, etc. are recognized in the financial statements in
proportion to the purchases made by the customer during the year that qualify for the
target, provided that it is expected that the targets will be achieved and the amount of
the discount can be reasonably estimated. The estimate as to meeting the targets is
based, among others, on past experience, on the Companys relationship with the
customers and on the expected amount of purchases by the customers in the remaining
period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 19

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | m. | Supplier
discounts:
| | -- | -------------------

| | Current
supplier discounts are recognized in the financial statements upon receipt and are
deducted from cost of sales.
| | -----------------------------------------------------------------------------------------------------------------------

| | Supplier
discounts received at the end of the year and in respect of which the Company is not
obligated to comply with certain targets, are recognized in the financial statements as
the purchases which entitle the Company to said discounts are made.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Supplier
discounts for which the Company is required to meet certain targets, such as a minimum
amount of annual purchases (either quantitative or monetary), an increase in purchases
compared to previous periods, etc. are recognized in the financial statements in
proportion to the purchases made by the Company during the year that qualify for the
target, provided that it is expected that the targets will be achieved and the amount of
the discount can be reasonably estimated. The estimate as to meeting the targets is
based, among others, on past experience, on the Companys relationship with the
suppliers and on the expected amount of purchases from the suppliers in the remaining
period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Exchange
rates and linkage basis:
| | -- | ---------------------------------

| | 1. | Assets
and liabilities in or linked to foreign currency are presented according           to the
representative exchange rates published by the Bank of Israel at balance           sheet
date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Assets
and liabilities linked to the Israeli CPI are presented according to the
          relevant index for each linked asset or liability.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

| | Below
are data about the exchange rates of the U.S. dollar and the Israeli CPI:
| | -------------------------------------------------------------------------------

| | As of             | Representative
exchange rate of
U.S. dollar | Israeli CPI
for December
| | ----------------- | ------------------------------------------- | ------------------------
|
|
|
|
| | December 31, 2007 |                                             |                         
| | December 31, 2006 |                                             |                         
| | December 31, 2005 |                                             |                         

| | Change during the year ended | % | %
| | ---------------------------- | - | -
|
|
|
|
| | December 31, 2007            |   |  
| | December 31, 2006            |   |  
| | December 31, 2005            |   |  

| | (*) | The
index on an average basis of 1993 = 100.
| | --- | --------------------------------------------

C - 20

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | o. | Hedging
activities:
| | -- | -------------------

| | Cash
flow hedges
| | ----------------

| | At
December 31, 2007, the Company forward exchange contracts designated as hedges of
expected future purchases of raw materials from suppliers in U.S. dollar for which the
Company has firm commitments. The forward exchange contracts are being used to hedge the
foreign currency risk of the firm commitments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cash flow hedges of the expected future purchases in 2008 were assessed to be highly
effective and as at December 31, 2007, a unrealized loss of NIS 537 thousands and
deferred tax asset of NIS 145 thousand were included in equity as a net amount of NIS 392
in respect of these contracts, see note 10.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Earnings
(loss) per share:
| | -- | --------------------------

| | Earnings
per share are computed based on the number of Ordinary shares. Basic earnings per share
only include shares that are actually outstanding during the period. Dilutive potential
Ordinary shares (such as convertible debentures and warrants) are only included in the
computation of diluted earnings per share. Convertible securities that have been
converted during the period are included in diluted earnings per share only until the
conversion date and starting from that date in basic earnings per share. The investors
share of earnings of an investee is included based on the earnings per share of the
investee multiplied by the number of shares held by the investor.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Financial
instruments:
| | -- | ----------------------

| | As
of January 1,  2006,  the  Company  applies  Accounting  Standard  No. 22  regarding
 financial                      instruments: disclosure and presentation ("The Standard").
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Company
shares held by the Company and by subsidiaries are carried at cost and presented as a
deduction from shareholders equity (treasury shares).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Use
of estimates for the preparation of financial statements:
| | -- | -------------------------------------------------------------

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

| | s. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
carrying amount of cash and cash equivalents, trade receivables, other accounts
receivable, short and long-term credit from banks and others, trade payables and other
accounts payable approximate their fair value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 21

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | t. | Presentation
of transactions between the Company and the controlling shareholder           therein:
| | -- | ---------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, the Company applies the provisions of Accounting Standard No. 23,
Accounting Treatment of Transactions between an Entity and its Controlling
Shareholder of the Israel Accounting Standards Board (the Standard).
The Standard is applicable, among others, to transactions involving the transfer of
assets, the assumption of liabilities, indemnification, and the waiver of loans between a
company and its controlling shareholder and between companies under common control that
occur subsequent to January 1, 2007 as well as to a loan granted or received from the
controlling shareholder prior to January 1, 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard is not applicable to business combinations involving companies under common
control. According to a decision promulgated by the Israel Securities Authority, as of
January 1, 2007, business combinations involving entities controlled by the same
shareholder will be accounted for similar to a pooling of interests and not based on the
use of fair values. In cases of transactions that have the characteristics of shareholders investments,
the Standard may also apply to transactions with non-controlling shareholders in their
capacity as shareholders.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard provides that the assets and liabilities involved in a transaction between a
company and its controlling shareholder or between companies under common control be
recognized at their fair value on the date of the transaction. The difference between the
fair value and the consideration stipulated in the transaction is to be recorded in
shareholders equity, net of any tax effect. A charge to equity essentially
constitutes a dividend, consequently resulting in a reduction in retained earnings. A
credit to equity essentially constitutes an investment by shareholders and, consequently,
is presented as a separate component of shareholders equity, Capital reserve
from transactions with a controlling shareholder. If the company is not wholly
owned by the controlling shareholder, the minoritys share of the difference,
whether a charge or credit, is to be recorded in minority interest in the
statement of income. The amount recorded in shareholders equity will not be
transferred to the statement of income, even if in subsequent periods, the items that
were the subject of the transactions are derecognized from the financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
intangible asset with no active market (as defined in Accounting Standard No. 30), which
is transferred to a company from its controlling shareholder, is to be measured at the
carrying value in the controlling shareholders books of account and the difference
between the consideration and the carrying value is to be recorded in shareholdersequity,
net of any tax effect.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
loan without a fixed maturity is to be considered as if it had been granted or received
for a period of one year. Consequently, its fair value will be determined annually based
on the present value of the expected cash flows from the loan, discounted at the interest
rate applicable to the Company for each year.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
initial adoption of the standard had no material effect on the financial statements.
| | ----------------------------------------------------------------------------------------

C - 22

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | u. | Disclosure
of the effects of new Accounting Standards in the period prior to           their
adoption/Disclosure of the effects of a new Accounting Standard in the           period
prior to its adoption:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Disclosure
of the effects of new Accounting Standards in the period prior to their
adoption/Disclosure of the effects of a new Accounting Standard in the period prior to
its adoption (cont.):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
 Standard  No. 29 - Adoption  of  International  Financial  Reporting  Standards
                            (IFRS):
| | -------------------------------------------------------------------------------------------------------------------------------

| | In
July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29,
Adoption of International Financial Reporting Standards (IFRS)(Accounting
Standard No. 29).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | International
Financial Reporting Standards comprise standards and interpretations adopted by the
International Accounting Standards Board, and include:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | International
Financial Reporting Standards (IFRS)
| | -- | --------------------------------------------------

| | b) | International
Accounting Standards (IAS)
| | -- | ----------------------------------------

| | c) | Interpretations
issued by the International Financial Reporting Interpretations           Committee
(IFRIC) and by its predecessor, the Standing Interpretations Committee           (SIC).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company will first present its financial position and operating results pursuant to IFRS
in its interim financial statements as of March 31, 2008, with a date of transition to
IFRS as of January 1, 2007 (the transition date). For purposes of the
transition, the Company will adopt the provisions of IFRS 1, First-time Adoption of
International Financial Reporting Standards (IFRS 1).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to Accounting Standard No. 29 and FAQ 6 of the Israel Securities Authority, the Company
presents an opening balance sheet as of January 1, 2007, a balance sheet as of December
31, 2007 and an income statement for the year then ended, prepared in accordance with
IFRS. The Company also presents reconciliations between the amounts reported under
generally accepted accounting policies in Israel (Israeli GAAP) and amounts
reported under IFRS on the transition date, as of December 31, 2007 and for the year then
ended, as detailed in Note 23.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Reclassification
| | -- | ----------------

| | Certain
amounts from prior years have been reclassified to conform to the current period
presentation.
| | ------------------------------------------------------------------------------------------------------

| | The reclassification had no effect on previously reported net loss,
shareholders equity or cash flows.
| | -------------------------------------------------------------------------------------------------------

C - 23

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 3: |  | TRADE RECEIVABLES, NET
|------- | - | ----------------------

| |                               | The Company | Consolidated | 
| | ----------------------------- | ----------- | ------------ | 
|
|
|
|
| |                               |             |              | 
| | Open accounts (*)             |             |              | 
| | Notes receivable              |             |              | 
| |                               |             |              | 
| |                               |             |             
| |                               |             |              | 
| | Less - allowance for doubtful |             |             
| | debts                         |             |              | 
| |                               |             |              | 
| |                               |             |             
| |                               |             |              | 
| |                               |             |              | 

| | (*) | For
balances with shareholders and other related parties, see Note 19b.
| | --- | -----------------------------------------------------------------------

| | (**) | Reclassified.
| | ---- | -------------

|NOTE 4: |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                                                         | The Company | Consolidated | 
| | ------------------------------------------------------- | ----------- | ------------ | 
|
|
|
|
| |                                                         |             |              | 
| | Employees                                               |             |              | 
| | Government authorities                                  |             |              | 
| | Deferred income taxes (*)                               |             |              | 
| | Prepaid expenses and Other
                 receivables |             |              | 
| |                                                         |             |              | 
| |                                                         |             |             
| |                                                         |             |              | 
| |                                                         |             |              | 

| | (*) | See
Note 18f.
| | --- | -------------

C - 24

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |  | 
| |  | 

| |                          | The Company | Consolidated | 
| | ------------------------ | ----------- | ------------ | 
|
|
|
|
| |                          |             |              | 
| | a.                       |             |              | 
| |                          |             |              | 
| | Raw materials            |             |              | 
| | Supplies and packaging   |             |             
| | materials                |             |              | 
| | Work in progress         |             |              | 
| | Finished products        |             |              | 
| |                          |             |              | 
| |                          |             |             
| |                          |             |              | 
| | Raw materials in transit |             |              | 
| |                          |             |              | 
| |                          |             |             
| |                          |             |              | 
| |                          |             |              | 

| | (*) | Reclassified-see
note 2 g(1).
| | --- | -----------------------------

| | b. | For the year ended December 31, 2007  Inventory impairment was recorded in the cost of
sales in the amount  of NIS 200,000.
| | -- | ----------------------------------------------------------------------------------------------------------------------------

|NOTE 6: |  | INVESTMENT IN SUBSIDIARY AND AFFILIATED COMPANY
|------- | - | -----------------------------------------------

| | The
movement in the investment during 2006 and 2007:
| | ----------------------------------------------------

| |                                | The Company (**) | Consolidated (*) | 
| | ------------------------------ | ---------------- | ---------------- | 
|
|
|
|
| |                                |                  |                  | 
| | Balance at the beginning of    |                  |                  | 
| | the year                       |                  |                  | 
| |                                |                  |                 
| | Movement during the year:      |                  |                 
| | Equity in earnings (losses)    |                  |                  | 
| | Dividend                       |                  |                  | 
| |                                |                  |                  | 
| |                                |                  |                 
| | Balance at the end of the year |                  |                  | 
| |                                |                  |                  | 

| | (*) | The
investment is in CD Packing Systems Ltd. (See note 1 b).
| | --- | ------------------------------------------------------------

| | (**) | The investment
is in CD Packing Systems Ltd. and in Tri-Wall Ltd.
| | ---- | -----------------------------------------------------------------

C - 25

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 7: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| | a. | Composition:
| | -- | ------------

| | CONSOLIDATED
| | ------------

|                                      | Land andBuildings(***) | Machineryandequipment(**) | Motorvehiclesandforklifts | Officefurnitureandequipment | LeaseholdImprovements | Spare parts, die print/cut and pallets (****) | Total   | Conveniencetranslation(Note 2a)
|------------------------------------- | ---------------------- | ------------------------- | ------------------------- | --------------------------- | --------------------- | --------------------------------------------- | ------- | -------------------------------
|
|
|
|
|Cost:                                 |                        |                           |                           |                             |                       |                                               |         |                                
|Balance as of January 1, 2007         |                        |                           |                           | 5,343                       |                       |                                               | 340,040 | (*)                            
|Additions during the year             |                        |                           |                           | 24                          |                       |                                               | 3,839   | (*)                            
|Disposals during the year             |                        |                           |                           | -                           |                       |                                               | 1,973   |                                
|                                      |                        |                           |                           |                             |                       |                                               |         |                                
|                                      |                        |                          
|Balance at December 31, 2007          |                        |                           |                           | 5,367                       |                       |                                               | 341,906 |                                
|                                      |                        |                           |                           |                             |                       |                                               |         |                                
|                                      |                        |                          
|Accumulated depreciation:             |                        |                          
|Balance as of January 1, 2007         |                        |                           |                           | 4,825                       |                       |                                               | 270,361 |                                
|Additions during the year             |                        |                           |                           | 46                          |                       |                                               | 17,212  |                                
|Disposals during the year             |                        |                           |                           | -                           |                       |                                               | 1,973   |                                
|                                      |                        |                           |                           |                             |                       |                                               |         |                                
|                                      |                        |                          
|Balance at December 31, 2007          |                        |                           |                           | 4,871                       |                       |                                               | 285,600 |                                
|                                      |                        |                           |                           |                             |                       |                                               |         |                                
|                                      |                        |                          
|Depreciated cost at December 31, 2007 |                        |                           |                           | 496                         |                       |                                               | 56,306  |                                
|                                      |                        |                           |                           |                             |                       |                                               |         |                                
|                                      |                        |                          
|Depreciated cost at December 31, 2006 |                        |                           |                           | 518                         |                       |                                               | 69,679  | (*)                            
|                                      |                        |                           |                           |                             |                       |                                               |         |                                

| | (*) | Reclassified
Intangible assets-see note 8.
| | --- | ------------------------------------------

| | (**) | Net
of investment grant amounting to reported NIS 50,000 ($ 12,000) and
          reported NIS 210,000 as of December 31, 2006 and 2005, respectively.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (***) | Owned
by the Group.
| | ----- | -------------------

| | (****) | Reclassified
spare parts, die print/cut and pallets.
| | ------ | ----------------------------------------------------

| | b. | As
for charges, see Note 16.
| | -- | ----------------------------

| | c. | Depreciation
expenses amounted to reported NIS 21,920,000 ($ 5,699,000)           reported NIS
20,178,000 and reported NIS 21,165,000 for the years ended December           31, 2007,
2006 and 2005, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 26

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 7: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| | a. | Composition:
| | -- | ------------

| | THE
COMPANY
| | -----------

|                                      | Machineryand

equipment
(**) | Motor

vehicles

and
forklifts | Office
furniture
and
equipment | Leasehold
Improvements | Spare
parts,
die
print/cut
and
pallets (***) | Total
|------------------------------------- | ---------------------------- | ------------------------------ | ------------------------------ | ---------------------- | -------------------------------------------- | -----
|
|
|
|
|Cost:                                 |                              |                                |                                |                        |                                              |      
|Balance as of January 1, 2007         |                              |                                |                                | 314,442                |                                              |      
|Additions during the year             |                              |                                |                                | 2,941                  |                                              |      
|Disposals during the year             |                              |                                |                                | 1,514                  |                                              |      
|                                      |                              |                                |                                |                        |                                              |      
|                                      |                              |                               
|Balance at December 31, 2007          |                              |                                |                                | 315,869                |                                              |      
|                                      |                              |                                |                                |                        |                                              |      
|                                      |                              |                               
|Accumulated depreciation:             |                              |                               
|Balance as of January 1, 2007         |                              |                                |                                | 249,382                |                                              |      
|Additions during the year             |                              |                                |                                | 16,220                 |                                              |      
|Disposals during the year             |                              |                                |                                | 1,514                  |                                              |      
|                                      |                              |                                |                                |                        |                                              |      
|                                      |                              |                               
|Balance at December 31, 2007          |                              |                                |                                | 224,008                |                                              |      
|                                      |                              |                                |                                |                        |                                              |      
|                                      |                              |                               
|Depreciated cost at December 31, 2007 |                              |                                |                                | 51,781                 |                                              |      
|                                      |                              |                                |                                |                        |                                              |      
|                                      |                              |                               
|Depreciated cost at December 31, 2006 |                              |                                |                                | 64,362                 | (*)                                          |      
|                                      |                              |                                |                                |                        |                                              |      

| | (*) | Reclassified
Intangible assets-see note 8.
| | --- | ------------------------------------------

| | (**) | Net
of investment grant amounting to reported NIS 50,000 ($ 12,000) and
          reported NIS 210,000 as of December 31, 2006 and 2005, respectively.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (***) | Reclassified
spare parts, die print/cut and pallets.
| | ----- | ----------------------------------------------------

| | b. | As
for charges, see Note 16.
| | -- | ----------------------------

| | c. | Depreciation expenses amounted to reported NIS 21,920,000 ($ 5,699,000)
          reported NIS  20,178,000 and reported NIS 21,165,000 for the years ended
          December 31, 2007, 2006  and 2005, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 27

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 8 |  | INTANGIBLE ASSETS
|------ | - | -----------------

| | ERP
Assimilation:
| | -----------------

| | The
Company and Consolidated
| | ----------------------------

| |                                 | Costs
December 31, | Convenience
Translation (Note 2a)
December 31,
| | ------------------------------- | ------------------ | ----------------------------------------------
|
|
|
|
| | Costs:                          |                    |                                               
| |                                 |                    |                                               
| | Balance as of January 1, 2007   |                    |                                               
| |                                 |                    |                                               
| | Additions during the year       |                    |                                               
| |                                 |                    |                                               
| |                                 |                    |                                               
| | Balance as of December 31, 2007 |                    |                                               
| |                                 |                    |                                               

|NOTE 9 |  | SHORT-TERM CREDIT FROM BANKS
|------ | - | ----------------------------

| | a. | Composition:
| | -- | ------------

| | The
Company and Consolidated
| | ----------------------------

| |                        | Weighted interest rate | Unlinked | Convenience
Translation
(Note 2a)
| | ---------------------- | ---------------------- | -------- | ---------------------------------
|
|
|
|
|
| | Overdrafts             |                        |          |                                  
| |                        |                        |         
| | Short-term credit from |                        |         
| | banks                  |                        |          |                                  
| |                        |                        |          |                                  
| |                        |                        |          |                                  
| |                        |                        |          |                                  

| | b. | As
of December 31, 2007, the Group had authorized credit lines from several           banks
in the amount of reported NIS 3,000,000 ($ 780,000), which bear
          interest at the average rate of Prime +1.46%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | As
for charges to collateralize part of the short-term loans and credit, see           Note
16.
| | -- | -----------------------------------------------------------------------------------------------

C - 28

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 10 |  | TRADE PAYABLES
|------- | - | --------------

| |                    | The Company | Consolidated | 
| | ------------------ | ----------- | ------------ | 
|
|
|
|
|
|
| | Trade payables (*) |             |              | 
| | Notes payable      |             |              | 
| |                    |             |              | 
| |                    |             |             
| |                    |             |              | 
| |                    |             |              | 

| | (*) | For
balances with shareholders and other related parties see note 19a.
| | --- | ----------------------------------------------------------------------

|NOTE 11 |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

| |                          | The Company | Consolidated | 
| | ------------------------ | ----------- | ------------ | 
|
|
|
|
|
|
| | Related company (*)      |             |              | 
| | Liabilities to employees |             |             
| | and payroll accruals     |             |              | 
| | Government authorities   |             |              | 
| | Provision for tax        |             |              | 
| | Accrued expenses         |             |              | 
| | Derivative               |             |              | 
| | Other                    |             |              | 
| |                          |             |              | 
| |                          |             |              | 
| |                          |             |              | 
| |                          |             |              | 

| | (*) | See
Note 19a.
| | --- | -------------

| | (**) | Reclassified.
| | ---- | -------------

C - 29

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 12: |  | LONG-TERM LOANS FROM BANKS
|-------- | - | --------------------------

| | a. | Composition
of long-term loans from banks.
| | -- | ------------------------------------------

| | The
Company and Consolidated
| | ----------------------------

| |                           |  |  | Convenience
Translation
(Note 2a)
| | ------------------------- |  |  | ---------------------------------
|
|
|
|
| |                           |  |  |                                  
| | Banks                     |  |  |                                  
| | Less - current maturities |  |  |                                  
| |                           |  |  |                                  
| |                           |  |  |                                  
| |                           |  |  |                                  

| | As
to pledges to secure these liabilities, see Note 16.
| | -------------------------------------------------------

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

| | The
Company and Consolidated
| | ----------------------------

| |                       | Weighted
interest rate |  |  | Convenience
Translation
(Note 2a)
| | --------------------- | ---------------------- |  |  | ---------------------------------
|
|
|
|
|
|
| | Unlinked              |                        |  |  | 6.2                              
| | Linked to Israeli CPI |                        |  |  | 4.1                              
| |                       |                        |  |  |                                  
| |                       |                        | 
| |                       |                        |  |  |                                  
| |                       |                        |  |  |                                  

C - 30

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 12: |  | LONG-TERM LOANS FROM BANKS (CONT.)
|-------- | - | ----------------------------------

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

| | The
Company and Consolidated
| | ----------------------------

| |                                 | December 31, | Convenience
translation
(Note 2a)
December 31,
2007
| | ------------------------------- | ------------ | ---------------------------------------------------
|
|
|
|
| | First year (current maturities) |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    
| | Second year                     |              |                                                    
| | Third year                      |              |                                                    
| | Fourth year                     |              |                                                    
| | Fifth year                      |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    
| |                                 |              |                                                    

|NOTE 13: |  | FINANCIAL INSTRUMENTS
|-------- | - | ---------------------

| | The
Groups activities expose it to various financial risks, such as credit risk and
exchange rate risks. The Companys comprehensive risk management program is focused
on transactions to reduce to a minimum the possible negative effects on the Companys
financial performance.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Credit
risk
| | -- | -----------

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

| | Concentrations
of credit risk with respect to trade receivables are limited due to the large number of
entities comprising the Groups customer base and their dispersion across many
different industries. The Group performs ongoing credit evaluations of its debtors. In
managements estimations, the allowance for doubtful debts adequately covers
anticipated losses in respect of its accounts receivable credits risks. Commencing
January 1, 2005 the company has insured its trade receivables credit in a risk insurance
which is limited to certain conditions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Groups cash and cash equivalents(no material) are invested in deposits in major
Israeli banks. Management believes that the financial institutions that hold the Group
investments are financially sound and, accordingly, minimal credit risk exists with
respect to these investments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 31

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 13: |  | FINANCIAL INSTRUMENTS (CONT.)
|-------- | - | -----------------------------

| | b. | Foreign
currency exchange risk
| | -- | ------------------------------

| | The
Company enters into call forwards contracts to hedge certain of its balance sheet
exposure against changes in foreign currency exchange rates. Such exposure is a result of
the portion of the Companys liabilities being denominated in currencies other than
NIS(mainly in USD). Managements policy is to hedge projected transactions of raw
materials import in U.S$ for the next year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
nominal amount of the open contracts is $25,120 thousand as of December 31, 2007.
| | ---------------------------------------------------------------------------------------

| | Unrealized
loss net after taxes recorded in 2007 was 392 thousands NIS and the  derivative was 537
thousands NIS that was recorded in Other Account Payables.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
of the call forwards contracts are due until November 28, 2008.
| | -------------------------------------------------------------------

| | c. | Interest
rate risk
| | -- | ------------------

| | The
Groups exposure to the risk of changes in market interest rates relates primarily
to the Groups long-term debt obligations with floating interest rates. The Companys
exposure is to variable cash flows as a result of interest changes.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 32

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 13: |  | FINANCIAL INSTRUMENTS (CONT.)
|-------- | - | -----------------------------

| | d. | Linkage
terms of monetary balances
| | -- | ----------------------------------

| | Consolidated
| | ------------

| |                                                | December 31, 2006 | December 31, 2007
| | ---------------------------------------------- | ----------------- | -----------------
|
|
|
|
| | Assets:                                        |                   |                  
| | Cash and cash equivalents                      |                   |                  
| | Trade receivables                              |                   |                  
| | Other accounts receivable and prepaid expenses |                   |                  
| | Long-term accounts receivables                 |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  
| | Liabilities:                                   |                   |                  
| | Short-term credit from banks and others        |                   |                  
| | Trade payables                                 |                   |                  
| | Other accounts payable and accrued expenses    |                   |                  
| | Long-term loans from banks (including current  |                   |                  
| | maturities)                                    |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  

| | The
Company
| | -----------

| |                                                | December 31, 2006 | December 31, 2007
| | ---------------------------------------------- | ----------------- | -----------------
|
|
|
|
| | Assets:                                        |                   |                  
| | Cash and cash equivalents                      |                   |                  
| | Trade receivables                              |                   |                  
| | Other accounts receivable and prepaid expenses |                   |                  
| | Long-term accounts receivables                 |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  
| | Liabilities:                                   |                   |                  
| | Short-term credit from banks and others        |                   |                  
| | Trade payables                                 |                   |                  
| | Other accounts payable and accrued expenses    |                   |                  
| | Long-term loans from banks (including current  |                   |                  
| | maturities)                                    |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  
| |                                                |                   |                  

| | (*) mainly
U.S Dollars.
| | -----------------------

C - 33

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 13: |  | FINANCIAL INSTRUMENTS (CONT.)
|-------- | - | -----------------------------

| | d. | Linkage
terms of monetary balances (cont.)
| | -- | ------------------------------------------

| |                                                | Consolidated
| | ---------------------------------------------- | ------------
|
|
|
|
|
| | Assets:                                        |             
| | Cash and cash equivalents                      |             
| | Trade receivables                              |             
| | Other accounts receivable and prepaid expenses |             
| | Long-term accounts receivables                 |             
| |                                                |             
| |                                                |             
| |                                                |             
| | Liabilities:                                   |             
| | Short-term credit from banks and others        |             
| | Trade payables                                 |             
| | Other accounts payable and accrued expenses    |             
| | Long-term loans from banks (including current  |             
| | maturities)                                    |             
| |                                                |             
| |                                                |             
| |                                                |             

| | (*)
Mainly U.S. Dollars
| | -----------------------

|NOTE 14: |  | ACCRUED SEVERANCE PAY, NET
|-------- | - | --------------------------

| | a. | Severance
pay and retirement grants:
| | -- | ------------------------------------

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

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

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

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

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

C - 34

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 14: |  | ACCRUED SEVERANCE PAY, NET (CONT.)
|-------- | - | ----------------------------------

| | b. | The
amounts funded for compensation are deposited in some Central Funds for
          Compensation and with provident funds in the name of the employees. The amounts
          funded may be withdrawn provided that the provisions of the severance pay law
          are fulfilled.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Below
are the amounts for accrued severance pay.
| | -- | ------------------------------------------------

| |                       | The Company | Consolidated | 
| | --------------------- | ----------- | ------------ | 
|
|
|
|
| |                       |             |              | 
| | Severance pay         |             |              | 
| | Less - amounts funded |             |              | 
| |                       |             |              | 
| |                       |             |             
| |                       |             |              | 
| |                       |             |              | 

|NOTE 15: |  | CONTINGENT LIABILITIES AND COMMITMENTS
|-------- | - | --------------------------------------

| | a. | An
investee of a shareholder, who is also a supplier of raw materials, has a           right
of first refusal regarding the sale of part of the purchases of the           Groups
raw materials for a period of ten years commencing October, 1998,           which
automatically renewed in October, 2007 for five years commencing October,           2008.
The Group purchases raw materials from the investee of a shareholder in           the
ordinary course of business (see Note 19c. with respect to purchases from
          shareholders).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
facilities that include offices and warehouses of the Group are rented           under
operating leases for various periods ending in 2016. Future minimum rental
          commitments under the non-cancelable leases are most linked to the Israeli CPI
          in effect as of balance sheet date, as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                   | The Company | Consolidated | Convenience
translation
(Note 2a)
U.S. $
| | --------------------------------- | ----------- | ------------ | ----------------------------------------
|
|
|
|
| | For the years ending December 31, |             |              |                                         
| |                                   |             |             
| | 2008                              |             |              |                                         
| | 2009                              |             |              |                                         
| | 2010                              |             |              |                                         
| | 2011                              |             |              |                                         
| |                                   |             |              |                                         
| |                                   |             |              |                                         
| |                                   |             |              |                                         

C - 35

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 15: |  | CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
|-------- | - | ----------------------------------------------

| | b. | Consolidated:
| | -- | -------------

| | Rent
expenses amounted to approximately reported NIS 13,339,000 (3,468,279$) NIS 13,513,000
and NIS 13,815,000 for the years ended December 31, 2007, 2006 and 2005, respectively
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company:
| | ------------

| | Rent
expenses amounted to approximately reported NIS 12,247,000 ($3,184,347) NIS 12,337,000
and NIS 11,746,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
Company leases motor vehicles and motor forklifts under long-term operating
          lease agreements. The lease agreements expire on various dates ending in 2007
           2012. The following is a schedule of future minimum lease payments under
          these agreements which are linked to the Israeli CPI and to the Euro in effect
          of balance sheet date, as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                   | The Company | Consolidated | Convenience
translation
(Note 2a)
U.S. $
| | --------------------------------- | ----------- | ------------ | ----------------------------------------
|
|
|
|
| | For the years ending December 31, |             |              |                                         
| |                                   |             |             
| | 2008                              |             |              |                                         
| | 2009                              |             |              |                                         
| | 2010                              |             |              |                                         
| | 2011                              |             |              |                                         
| |                                   |             |              |                                         
| |                                   |             |              |                                         
| |                                   |             |              |                                         

| | d. | At
the end of September 2007, the Company received a demand from the           municipality
of Netanya for a payment in the amount of NIS 1,840 thousand           (including
interest and linkage differences of NIS 663 thousand) based on a
          reassessment of real estate taxes for 2000-2007, in respect of the
          Companys manufacturing plant in Netanya. The Company submitted an
          objection to the demand, which objection the municipality has rejected. The
          Company has filed an appeal on the rejection. The Companys management
          believes, based on the opinion of its legal advisors, that there is likelihood
          that the municipality will succeed in its demand. The financial statements
          include a provision for damage that management believes is sufficient in these
          circumstances.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 36

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 16: |  | CHARGES (ASSETS PLEDGED)
|-------- | - | ------------------------

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

| | b. | Liabilities
secured by pledges are as follows:
| | -- | ----------------------------------------------

| | The
Company and Consolidated
| | ----------------------------

| |                                         |  |  | Convenience
translation
(Note 2a)
| | --------------------------------------- |  |  | ---------------------------------
|
|
|
|
| |                                         |  |  |                                  
| | Short-term loans and credit             |  |  |                                  
| | Long-term liabilities including current |  | 
| | maturities                              |  |  |                                  
| |                                         |  |  |                                  
| |                                         |  | 
| |                                         |  |  |                                  
| |                                         |  |  |                                  

|NOTE 17: |  | SHARE CAPITAL
|-------- | - | -------------

| | a.
| | --

| |                        | December 31, 2007 | December 31, 2006
| | ---------------------- | ----------------- | -----------------
|
|
|
|
| | Ordinary shares of NIS |                   |                  
| | 1 par value each       |                   |                  
| |                        |                   |                  

| | (*) | As
of December 31, 2006 and 2007, the Companys treasury shares are           119,813
and 780,063, respectively, of the Ordinary shares at a cost of NIS           4,258,000
and NIS 27,565,000 which is shown as a deduction in shareholders          equity.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

C - 37

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 17: |  | SHARE CAPITAL (CON.)
|-------- | - | --------------------

| | 
| | 

| | b. | 1. | In its meeting dated March 5, 2007, the Companys Board of
          Directors resolved to purchase 522,350 shares held by Ampal and 137,900 shares
          held by Shenhav family. In addition, the transaction to purchase the shares of
          Ampal was ratified in the general meeting held on April 15, 2007.
| | -- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
May, Ampal and the Shenhav family transferred all their shares held to the
          Company.
| | -- | ------------------------------------------------------------------------------------------------

| | 3. | Following
the consummation of these transactions, the new holding percentages           are
American Israeli Paper Mills Ltd. (AIPM) 36.2%, Kraft group           49.6%
and the public holds 14.2%.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Dividends:
| | -- | ----------

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

|NOTE 18: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | The
laws applicable to the Group companies:
| | -- | -------------------------------------------

| | Income
Tax (Inflationary Adjustments) Law, 1985:
| | ------------------------------------------------

| | According
to the law, the results for tax purposes are measured based on the changes in the Israeli
CPI.
| | --------------------------------------------------------------------------------------------------------

| | The
Law for the Encouragement of Capital Investments, 1959 (the Law):
| | -----------------------------------------------------------------------

| | According
to the law, the companies are entitled to various tax benefits by virtue of the approved
enterprise status granted to part of their enterprises, defined by this law. The
principal benefit is:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | During
2003, Tri-Wall received final approval of implementation of the investment program.
| | ------------------------------------------------------------------------------------------

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

C - 38

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---

|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 18: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | a. | The
laws applicable to the Group companies (cont.):
| | -- | ---------------------------------------------------

| | If
dividends are distributed out of tax exempt profits, the Company will then become liable
for tax and the rate applicable from its profits of the approved enterprise in the year
in which the income is earned, as if it had not chosen the alternative track of benefits.
The Companys policy is not to distribute dividends out of these profits.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Conditions
for the entitlements to the benefits:
| | ------------------------------------------------

| | The
above benefits are conditional upon the fulfillment of the conditions stipulated by the
Law, regulations published there under and the letters of approval for the specific
investment in the approved enterprises. In the event of failure to comply with these
conditions, the benefits may be cancelled and the Company may be required to refund the
amount of the benefits, in whole or in part, including interest. The management believes
that the Companies are meeting the afore-mentioned conditions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
Law for the Encouragement of Industry (Taxation), 1969:
| | -- | -------------------------------------------------------------

| | The
Company and its subsidiary are industrial companies, as defined by this law.
Accordingly by virtue of regulations published, the companies have claimed, a deduction
for accelerated depreciation on equipment used in industrial activity, as determined in
the regulations effective under the Inflationary Law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and Tri-Wall are being assessed together for tax purposes
| | ---------------------------------------------------------------------

| | c. | Capital
gains/losses:
| | -- | ---------------------

| | Pursuant
to the provisions of the Law for Amendment of the Income Tax Ordinance (No. 132),
2003, (the reform law), tax at a reduced rate of 25% will apply on capital
gains accrued after January 1, 2003, instead of the regular tax rate. In case of the sale
of properties purchased before the adoption of the reform law, the reduced tax rate will
apply only to the portion of the profit which accrued after the adoption of the law, as
computed according to the law. Further, the reform law states that capital losses carried
forward for tax purposes may be offset against capital gains for an indefinite period.
The reform law also provides for the possibility to offset capital losses from sales of
properties outside Israel against capital gains in Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Changes
in the tax laws applicable to the Company:
| | -- | --------------------------------------------------

| | In
February 2008, the Knesset (Israeli parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
starting 2008 and thereafter. Starting 2008, the results for tax purposes will be
measured in nominal values, excluding certain adjustments for changes in the
Consumer Price Index carried out in the period up to December 31, 2007. The
amended law includes, inter alia, the elimination of the inflationary additions
and deductions and the additional deduction for depreciation starting 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Tax
assessments:
| | -- | ----------------

| | The
Company and Tri-Wall had Final tax assessments up to and including the 2003 tax year.
| | -----------------------------------------------------------------------------------------

| | f. | Tax
rates applicable to the income of the Group companies:
| | -- | ----------------------------------------------------------

| | In
June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision),
2004 was passed by the Knesset (Israeli parliament) and on July 25, 2005,
another law was passed, the amendment to the Income Tax Ordinance (No. 147) 2005,
according to which the corporate tax rate is to be progressively reduced to the following
tax rates: 2004  35%, 2005  34%, 2006  31%,2007-29%, 2008  27%,
2009  26%, 2010 and thereafter  25%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C - 39

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 18: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | g. | Deferred
taxes:
| | -- | ---------------

| | 1. | Significant
components of the Company and its subsidiaries deferred tax           liabilities and
assets are as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------

| |                              | The Company | Consolidated | 
| | ---------------------------- | ----------- | ------------ | 
|
|
|
|
|
|
| | Deferred tax assets:         |             |              | 
| | Cumulative other             |             |             
| | comprehensive income         |             |              | 
| | Tax loss carry forward       |             |              | 
| | Provision for employee       |             |             
| | rights                       |             |              | 
| | Allowance for doubtful debts |             |              | 
| |                              |             |              | 
| |                              |             |             
| | Net deferred tax assets      |             |              | 
| |                              |             |             
| | Deferred tax liabilities:    |             |             
| | Depreciable property and     |             |             
| | equipment                    |             |              | 
| |                              |             |              | 
| |                              |             |             
| | Net deferred tax liabilities |             |              | 
| |                              |             |              | 

| | (*)
         Deferred taxes computed at weighted tax rate of approximately 27%.
| | -------------------------------------------------------------------------------

C - 40

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 18: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | g. | Deferred
taxes (cont.):
| | -- | -----------------------

| | 2. | Deferred
income taxes are presented in the balance sheet as follows:
| | -- | --------------------------------------------------------------------

| |                              | The Company | Consolidated | 
| | ---------------------------- | ----------- | ------------ | 
|
|
|
|
|
|
| | In other accounts receivable |             |              | 
| | and prepaid expenses         |             |              | 
| | As long-term liabilities     |             |              | 
| |                              |             |              | 
| |                              |             |             
| |                              |             |              | 
| |                              |             |              | 

| | h. | The
movement in deferred taxes during 2007:
| | -- | -------------------------------------------

| | Consolidated:
| | -------------

| |                                                                     | Reported NIS
in thousands
| | ------------------------------------------------------------------- | -------------------------
|
|
|
|
| | Balance at the beginning of the year                                |                          
| | Deferred taxes resulting from cumulative other comprehensive income |                          
| |                                                                     |                          
| | Income taxes resulting from changes in deferred taxes               |                          
| |                                                                     |                          
| |                                                                     |                          
| | Balance at the end of the year                                      |                          
| |                                                                     |                          

| | The
movement in deferred taxes during 2007:
| | -------------------------------------------

| | The
Company:
| | ------------

| |                                                              | Reported NIS
in thousands
| | ------------------------------------------------------------ | -------------------------
|
|
|
|
| | Balance at the beginning of the year                         |                          
| | Deferred taxes resulting from cumulative other comprehensive |                          
| | income                                                       |                          
| |                                                              |                          
| | Income taxes resulting from changes in deferred taxes        |                          
| |                                                              |                          
| |                                                              |                          
| | Balance at the end of the year                               |                          
| |                                                              |                          

C - 41

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 18: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | i. | Income
tax reconciliation:
| | -- | --------------------------

| | The
reconciliation of the theoretical tax expense assuming all income is taxed at the
statutory rate, applicable to corporate tax in Israel and the actual tax expense is as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated:
| | -------------

| |                                             |  |  |  | Convenience
Translation
(Note 2a)
| | ------------------------------------------- |  |  |  | ---------------------------------
|
|
|
|
| |                                             |  |  |  |                                  
| | Income before taxes on income               |  |  |  | 1,044                            
| |                                             |  |  |  |                                  
| |                                             |  | 
| | Theoretical tax expense computed at the     |  | 
| | Israeli statutory tax rate: 2005 - 34% ,    |  | 
| | 2006 - 31%,  2007 - 29%                     |  |  |  | 355                              
| |                                             |  | 
| | Increase (decrease) in income taxes         |  | 
| | resulting from:                             |  | 
| |                                             |  | 
| | Tax adjustments in respect of inflation in  |  | 
| | Israel and others                           |  |  |  | (521                             
| |                                             |  | 
| | Adjustment of deferred tax due to change in |  | 
| | tax rate                                    |  |  |  | (660                             
| |                                             |  | 
| | Non-deductible expenses (tax exempt income) |  | 
| | and others, net                             |  |  |  | 86                               
| |                                             |  | 
| | Adjustment to other income with low tax     |  | 
| | rate or tax exempt income                   |  |  |  | -                                
| |                                             |  | 
| | Increase (decrease) in tax expense due to   |  | 
| | reduced tax rates in companies which        |  | 
| | were granted approved enterprise status     |  |  |  | (7                               
| |                                             |  | 
| | Depreciation of capital lease from previous |  | 
| | years                                       |  |  |  | (642                             
| |                                             |  |  |  |                                  
| |                                             |  | 
| | Actual taxes on income                      |  |  |  | (1,389                           
| |                                             |  |  |  |                                  

C - 42

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 18: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | i. | Income
tax reconciliation (cont):
| | -- | ---------------------------------

| | The
Company:
| | ------------

| |                                                                   | Year ended December 31,
| | ----------------------------------------------------------------- | -----------------------
|
|
|
|
| | Income before taxes on income (loss)                              |                        
| |                                                                   |                        
| |                                                                   |                        
| | Theoretical tax expense computed at the Israeli statutory tax     |                        
| | rate: 2005 - 34% , 2006 - 31%,  2007 - 29%                        |                        
| |                                                                   |                        
| | Increase (decrease) in income taxes resulting from:               |                        
| |                                                                   |                        
| | Tax adjustments in respect of inflation in Israel and others      |                        
| |                                                                   |                        
| | Adjustment of deferred tax due to change in tax rate              |                        
| |                                                                   |                        
| | Non-deductible expenses (tax exempt income) and others, net       |                        
| |                                                                   |                        
| | Adjustment to other income with low tax rate or tax exempt income |                        
| |                                                                   |                        
| | Increase (decrease) in tax expense due to reduced tax rates in    |                        
| | companies which were granted approved enterprise status           |                        
| |                                                                   |                        
| | Depreciation of capital lease from previous years                 |                        
| |                                                                   |                        
| |                                                                   |                        
| | Actual taxes on income                                            |                        
| |                                                                   |                        

C - 43

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|                                              
|----------------------------------------------
|CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
|                                              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                              

|NOTE 18: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | j. | Taxes
on income (tax benefit) included in the statements of operations:
| | -- | -----------------------------------------------------------------------

| | Consolidated
| | ------------

| |                            |  |  |  | Convenience
Translation
(Note 2a)
| | -------------------------- |  |  |  | ---------------------------------
|
|
|
|
|
| | Deferred income taxes, net |  |  |  | (880                             
| | Current taxes              |  |  |  | 151                              
| | Adjustment                 |  |  |  | (660                             
| |                            |  |  |  |                                  
| |                            |  |  |  | (1,389                           
| |                            |  |  |  |                                  

| | The
Company
| | -----------

| |                            | Year ended December 31,
| | -------------------------- | -----------------------
|
|
|
|
| | Deferred income taxes, net |                        
| | Current taxes              |                        
| |                            |                        
| |                            |                        
| |                            |                        

|NOTE 19: |  | TRANSACTIONS AND BALANCES WITH RELATED PARTIES
|-------- | - | ----------------------------------------------

| | a. | Current
liabilities to related parties:
| | -- | ---------------------------------------

| | Consolidated
| | ------------

| |    |                   |  |  |          |  | Convenience
translation
(Note 2a)
| | -- | ----------------- |  |  | -------- |  | ---------------------------------
|
|
|
|
|
| | 1. | Trade payables:   |  |  |          |  |                                  
| |    | Shareholder       |  |  | U.S. $   |  |                                  
| |    |                   |  |  | Unlinked |  |                                  
| |    | Related companies |  | 
| |    | of a shareholder  |  |  | Unlinked |  |                                  
| |    |                   |  | 
| | 2. | Other accounts    |  | 
| |    | payable and       |  | 
| |    | accrued expenses: |  | 
| |    |                   |  | 
| |    | Related companies |  |  | Unlinked |  |                                  

C - 44

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# CARMEL CONTAINER SYSTEMS
LTD. AND SUBSIDIARIES

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

---

|NOTE 19: |  | TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)
|-------- | - | ------------------------------------------------------

| | a. | Current
liabilities to related parties:
| | -- | ---------------------------------------

| | 
| |