Edgar Filing: CARMEL CONTAINER SYSTEMS LTD

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

FORM 20-F

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

[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
-----------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 1-9274

CARMEL CONTAINER SYSTEMS, LTD.
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(Exact name of Registrant as specified in its charter)

N/A
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(Translation of Registrant's name into English)

Israel
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(Jurisdiction of incorporation or organization)

2 CHALAMISH STREET, CAESAREA INDUSTRIAL PARK 38900, ISRAEL
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(Address of principal executive offices)

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

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE

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

ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
--------------------------------------------
(Title of Class)

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

NONE
----
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

2,520,000 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE

(119,813 of these shares are held by a subsidiary of the issuer)

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

[X] Yes [ ] No

Indicate by check mark which financial statement item the registrant has elected
to follow.

[ ] Item 17 [X] Item 18

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No [X] N/A

INTRODUCTION

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

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

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

Our consolidated financial statements appearing in this annual report
are prepared in New Israeli Shekels, or NIS, and in accordance with accounting
principles generally accepted in Israel, or Israeli GAAP. All references in this
annual report to dollars or "$" are to U.S. dollars. In accordance with Israeli
GAAP, all financial information presented in this annual report in NIS is
presented in adjusted NIS, together with a convenience translation of the
adjusted amounts to dollars. The representative exchange rate between the NIS
and the dollar, as published by the Bank of Israel for December 31, 2003, was
NIS 4.379 per $1.00.

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

TABLE OF CONTENTS

PAGE

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

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

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

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

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

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................................................................. 23

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.......................................................... 32

ITEM 8. FINANCIAL INFORMATION...................................................................................... 34

ITEM 9. THE OFFER AND LISTING...................................................................................... 35

ITEM 10. ADDITIONAL INFORMATION..................................................................................... 37

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................. 51

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

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

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

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

ITEM 15. CONTROLS AND PROCEDURES.................................................................................... 52

ITEM 16. (Reserved)................................................................................................. 52

PART III ........................................................................................................... 53

ITEM 17. FINANCIAL STATEMENTS....................................................................................... 53

ITEM 18. FINANCIAL STATEMENTS....................................................................................... 54

ITEM 19. EXHIBITS................................................................................................... 54

NOTE 1: - GENERAL.................................................................................................... 10

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES............................................................................ 10

NOTE 3: - TRADE RECEIVABLES.......................................................................................... 20

NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES............................................................. 21

NOTE 5: - INVENTORIES................................................................................................ 21

TABLE OF CONTENTS
(CONTINUED)

PAGE

NOTE 6: - PROPERTY AND EQUIPMENT, NET................................................................................ 22

NOTE 7: - LEASES..................................................................................................... 23

NOTE 8: - SHORT-TERM CREDIT FROM BANKS AND OTHERS.................................................................... 23

NOTE 9: - TRADE PAYABLES............................................................................................. 24

NOTE 10: - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES............................................................... 24

NOTE 11: - LONG-TERM LOANS FROM BANKS AND OTHERS AND CAPITAL LEASE OBLIGATIONS........................................ 25

NOTE 12: - ACCRUED SEVERANCE PAY, NET................................................................................. 27

NOTE 13: - CONTINGENT LIABILITIES AND COMMITMENTS..................................................................... 28

NOTE 14: - CHARGES (ASSETS PLEDGED) AND GUARANTEES.................................................................... 29

NOTE 15: - SHARE CAPITAL.............................................................................................. 30

NOTE 16: - INCOME TAXES............................................................................................... 31

NOTE 17: - LINKAGE TERMS OF MONETARY BALANCES......................................................................... 37

NOTE 18: - TRANSACTIONS AND BALANCES WITH RELATED PARTIES............................................................. 39

NOTE 19: - SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS.................................................. 41

NOTE 20: - OPERATING SEGMENTS DATA.................................................................................... 43

NOTE 21: - DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES..................... 47

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. SELECTED FINANCIAL DATA.

The selected consolidated statement of income data set forth below
with respect to the years ended December 31, 1999, 2000, 2001, 2002 and 2003 and
the consolidated balance sheet data as of December 31, 1999, 2000, 2001, 2002
and 2003 have been derived from our audited consolidated financial statements
that have been prepared in accordance with Israeli GAAP, which differs in
certain respects from accounting principles generally accepted in the United
States, or U.S. GAAP. See Note 21 to the consolidated financial statements for
the differences between U.S. GAAP and Israeli GAAP, as applicable to the
Company. The selected consolidated financial data set forth below should be read
in conjunction with "Item 5. Operating and Financial Review and Prospects"
contained herein, the consolidated financial statements which have been audited
by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, independent
auditors, and the notes to those statements included elsewhere in this document.

Selected Consolidated Financial Data
------------------------------------

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

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($U.S.)
1999 2000 2001 2002 2003 2003
--------- --------- --------- --------- --------- ---------

INCOME STATEMENT DATA:
Revenues from sales, net.......................... 418,965 405,050 350,031 337,633 349,968 79,920
Cost of sales..................................... 346,644 350,878 316,328 311,238 314,305 71,776
Gross profit...................................... 72,321 54,171 33,703 26,395 35,663 8,144
Selling, general and administrative expenses...... 40,437 45,483 37,531 34,447 35,085 8,012

--------------------
(1) We maintain our accounting records in nominal NIS. All amounts are
presented in adjusted NIS, which have a constant purchasing power. The
purchasing power of adjusted NIS reflects the average price level in
December 2003, according to the Israeli Consumer Price Index, or CPI,
published on January 15, 2004. See note 2 (b) to consolidated financial
statements.

($U.S.)
-----------------------------------------------------------------------------
1999 2000 2001 2002 2003 2003
--------- --------- --------- --------- --------- ---------
Operating income (loss)........................... 31,884 8,689 (3,828) (8,052) 578 132
Financial expenses, net........................... 11,641 8,504 10,862 6,078 5,159 1,178
Other income (expenses), net...................... 47 736 152 (1,155) 94 22
Income (loss) before taxes on income.............. 20,290 921 (14,538) (15,285) (4,487) (1,024)
Taxes on income (tax benefit)..................... 7,324 (631) (5,567) (5,926) (2,578) (589)
Minority interest in losses (earnings) of a
subsidiary........................................ (230) (545) 232 807 66 15
Net income (loss) for the year.................... 12,736 1,007 (8,739) (8,552) (1,843) (420)
Basic earnings (loss) per share................... 5.08 0.40 (3.64) (3.56) (0.77) (0.18)
Weighted average number of shares outstanding..... 2,509 2,491 2,400 2,400 2,400 2,400

BALANCE SHEET DATA:
Working capital................................... 50,235 67,683 57,915 41,795 53,095 12,128
Total assets...................................... 389,580 361,224 316,427 300,806 287,346 65,621
Long-term debt, including current maturities...... 93,401 91,057 84,694 67,637 54,937 12,546
Shareholders' equity.............................. 133,766 130,813 122,069 113,454 111,611 25,490

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

NIS PER DOLLAR
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CALENDAR
YEAR AVERAGE(1) HIGH LOW DECEMBER 31,
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1999 4.1340 4.2760 4.0340 4.1530
2000 4.0745 4.1980 3.9670 4.0410
2001 4.2050 4.4160 4.0410 4.4160
2002 4.7490 4.9940 4.4370 4.7370
2003 4.5483 4.9240 4.2830 4.3790

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

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

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

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

B. CAPITALIZATION AND INDEBTEDNESS.

Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS.

Not applicable.

D. RISK FACTORS.

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

WE INCURRED A NET LOSS IN THE YEAR ENDED DECEMBER 31, 2003. WE MAY
NOT BE ABLE TO RETURN TO PROFITABILITY IN THE NEAR FUTURE.

We reported a net loss of NIS 1.8 million ($0.4 million) for the year
2003. If our volume of sales and the prices at which we sell our products do not
increase, or if our expenses increase at a greater pace than our revenues, we
will not return to profitability. Even if we return to profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis.

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

We compete directly with a number of manufacturers of paper-based
packaging products. Increased competition, direct or indirect, has adversely
affected, and could adversely affect, our revenues and profitability through
pricing pressure, loss of market share and other factors. We cannot assure you
that we will be able to compete successfully against existing or new competitors
as the market for our products evolves. Moreover, our existing and prospective
competitors may have established, or may in the future establish, relationships
with our existing and potential customers, which could have a material adverse
effect on our ability to compete. In addition, we cannot assure you that our
customers will not seek to manufacture their products through alternative
sources and thereby eliminate the need to purchase our products. See "Item 4.
Information on Our Company - B. Business Overview - Competition."

WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

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

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

While sales and payments for our products are made in NIS, we incur a
significant portion of our expenses in dollars. As a result, we are exposed to
the risk that the rate of devaluation of the NIS in relation to the dollar will
exceed the rate of inflation in Israel. In the years 2001 and 2002, and in the
three month period ending March 31, 2004, the rate of devaluation of the NIS
against the dollar exceeded the rate of inflation in Israel (contrary to the
circumstances in the years 1999, 2000 and 2003). We cannot predict any future
trends. See "Item 5. Operating and Financial Review and Prospects - B. Liquidity
and Capital Resources -Impact of Inflation and Devaluation on Results of
Operations, Liabilities and Assets."

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

We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are directly
influenced by the political, economic and military conditions in Israel. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors, and the continued state
of hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since October 2000, there has been a significant escalation
in violence between Israel and the Palestinians. Israel has experienced
terrorist incidents within its borders, including in the West Bank and Gaza
Strip. As a result, as of June 2004, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. We could be adversely affected by hostilities involving
Israel, the interruption or curtailment of trade between Israel and its trading
partners or a continuous downturn in the economic or financial condition of
Israel. In addition, several countries continue to restrict business with Israel
and with companies having operations in Israel. We could be negatively affected
by adverse developments in the peace process, including the recent violence, or
by restrictive laws or practices directed towards Israel or Israeli exporters.

officers and employees are currently obligated to perform annual reserve duty.
No assessment can be made as to the full impact of such requirements on our
workforce or business if conditions in Israel should change, and no prediction
can be made as to the effect of any expansion or reduction of such military
obligations on us. See "Item 5. Operating and Financial Review and Prospects -
B. Liquidity and Capital Resources - Political Conditions."

ITEM 4. INFORMATION ON OUR COMPANY

A. HISTORY AND DEVELOPMENT OF OUR COMPANY.

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

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

B. BUSINESS OVERVIEW.

GENERAL

We are a leading Israeli designer and manufacturer of paper-based
packaging and related products. We manufacture a varied line of products,
including corrugated shipping containers, moisture-resistant packaging, consumer
packaging, triple-wall packaging and wooden pallets and boxes. Our subsidiaries
are: C.D. Packaging Systems Ltd. ("C.D."), a leading manufacturer of corrugated
board-based and other consumer packaging in Israel, and Tri-Wall Containers
(Israel) Limited ("Tri-Wall"), a manufacturer of heavy duty and bulk packaging
made of triple-wall corrugated board and of wooden pallets and boxes for
agricultural exports and other uses. In December 1995, C.D., together with Kappa
Packaging International BV ("KPI"), a Dutch company, formed Solid Packaging
Board Ltd. ("Solid") which marketed products manufactured by C.D. using the
expertise and materials supplied by KPI. In December 2003, the operations of
Solid were transferred to C.D. and Solid became inactive. Prior to November 24,
2003, the financial statements of Solid were consolidated into C.D.'s financial
statements in accordance with the proportionate consolidation method. As of
December 31, 2003, the financial statements of Solid were fully consolidated
with C.D.'s financial statements.

Most of our products are made from corrugated board that we produce.
We manufacture additional products made from duplex carton and wood. See "-
Sources of Raw Materials." In 2003, we sold approximately 76,788 metric tons of
paper-based corrugated packaging, compared to approximately 73,800 metric tons
in 2002. One metric ton equals approximately 2,205 pounds.

Our products are marketed to a wide variety of customers in Israel
for diverse uses. Our sales to Israeli exporters amounted to approximately 10.8%
and 11.7% of total sales in 2003 and 2002, respectively. The decline in sales to
Israeli exporters in 2003 resulted from the overall decline in citrus exports
from Israel.

SHIPPING CONTAINERS

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

Corrugated board containers conserve shipping and storage space
because they are delivered knocked-down, unitized and can be adapted to modern
material handling systems. Sales of corrugated board containers in 2003 were NIS
276.7 million ($63.2 million), compared to NIS 260.7 million in 2002. Revenues
from sales of corrugated board and corrugated board containers in 2003 increased
by 6% as compared to 2002 due to increased sales and higher selling prices.

AUTOMATIC PACKAGING SYSTEMS

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

PAPER-BASED CONSUMER PACKAGING

Through C.D., we manufacture and market folding cartons and
Micro-Fine corrugated board packaging, formerly known as E Flute, for use as
packaging by manufacturers of consumer products. Sales of consumer packaging
products in 2003 amounted to NIS 33.7 million ($7.7 million) (approximately 9.6%
of our consolidated sales), compared to NIS 31.5 million (approximately 9.3% of
our consolidated sales) in 2002.

OUR SUBSIDIARIES

C.D. PACKAGING SYSTEMS LTD.

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

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

Pursuant to the joint venture agreement between us and AIPM, C.D.
must purchase, and we must supply, all of C.D.'s requirements for Micro-Fine
board at prices acceptable to both parties, subject to certain limitations. We
continue to sell Micro-Fine board to various customers in addition to C.D., and
C.D. purchases raw materials from other suppliers. In 2003, C.D. purchased
approximately 903 metric tons of Micro-Fine board from us for an aggregate sum
of NIS 3.1 million ($0.7 million), compared to 830 metric tons of Micro-Fine
board that they purchased from us in 2002 for an aggregate sum of NIS 3.3
million.

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

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

In December 1995, C.D., together with KPI, formed Solid Packaging
Board Ltd., a company that markets products manufactured by C.D. using the
expertise and materials supplied by KPI. KPI's sales in 2003 totaled
approximately NIS 1.04 million ($240,000), compared to sales of NIS 1.3 million
in 2003. In December 2003, the operations of Solid were transferred to C.D. and
Solid became inactive. Prior to November 24, 2003, the financial statements of
Solid were consolidated into C.D.'s financial statements in accordance with the
proportionate consolidation method. As of December 31, 2003, the financial
statements of Solid were fully consolidated with C.D.'s financial statements.

TRIPLE-WALL PACKAGING AND WOODEN PALLETS AND BOXES

Tri-Wall, our wholly-owned subsidiary, is a leading Israeli
manufacturer of heavy duty and bulk packaging made of triple-wall corrugated
board and of wooden pallets and boxes for agricultural exports and other uses.
Tri-Wall manufactures triple-wall packaging in its Netanya, Israel plant. The
wooden pallets and boxes are manufactured in Tri-Wall's plant in Netivot,
Israel. Tri-Wall's sales in 2003 were NIS 52.8 million ($12.0 million)
(approximately 15.1% of our consolidated sales), compared to NIS 59.7 million
(approximately 17.7% of our consolidated sales) in 2002. We manufacture the
triple-wall board utilized by Tri-Wall and sell the board to Tri-Wall at current
market rates. In 2003, Tri-Wall purchased 1,710 tons of triple-wall board from
us at an aggregate sum of NIS 6.0 million ($1.4 million), compared to the 1,720
tons of triple-wall board purchased by Tri-Wall at an aggregate sum of NIS 6.8
million in 2002.

In May 1991, pursuant to the Investment Law, Tri-Wall was granted
approved enterprise status with respect to an expansion program at its
manufacturing facility in Netivot, Israel. The cost of the program was an
aggregate amount of approximately $550,000. In 1995, Tri-Wall invested
approximately $461,000 and received approximately $175,000 of state grants with
respect to such approved enterprise. In February 1997, Tri-Wall received
approval for an investment of $576,000 to be used for further expansion, of
which 34% ($195,840) is to be funded by the Government of Israel in the form of
grants. As of December 31, 2000, Tri-Wall invested approximately NIS 2.1 million
($474,000) with respect to such approved enterprise, of which NIS 663,000
($150,000) was funded by a state grant. Tri-Wall did not invest with respect to
such approved enterprise in the years ended December 31, 2001, 2002 and 2003.

We provide certain management services and license certain technology
relating to the manufacture of triple-wall corrugated board to Tri-Wall. In
2003, Tri-Wall paid us management fees and royalties amounting to approximately
NIS 2.1 million ($480,000), compared to NIS 2.3 million in 2002.

SALES AND MARKETING

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

Our products are sold to over 500 customers in Israel. In 2003,
approximately 70 of our customers accounted for approximately 80% of our net
sales, in the aggregate. In 2003, we sold approximately 76,768 metric tons of
paper-based corrugated packaging, compared to approximately 73,800 metric tons
in 2002, an increase of 4.0% as compared to 2002.

Packaging for exported agricultural products constitutes a
significant portion of our sales. Total sales of containers for export decreased
by approximately 4% in 2003, as compared to 2002. This decrease was primarily
caused by a 8% decrease in sales of containers used for the export of citrus
fruit, as compared to 2002. Sales to Tri-Wall of containers used for the export
of hi-tech products and the sale of containers for non-citrus agricultural
exports remained the same as in 2002. Sales of containers to be used for
domestic agricultural products increased by approximately 2% compared to 2002.
In 2003, sales of containers for use in the food industry increased by 6%
compared to 2002. Sales of containers for the beverage industry increased by 7%
in 2003, compared to 2002. Sales of containers for other industries increased by
10% in 2003, compared to 2002. Sales of boards for miscellaneous use increased
by 2%, compared to 2002. In 2003, the average price of our products increased by
2%, compared to 2002. This increase was the result of improvements in quality,
delivery times, product mix and customer service.

SEASONALITY

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

SOURCES OF RAW MATERIALS

Our principal raw material is paper, mainly kraft linerboard,
semi-chemical paper and recycled paper. In 2003, we purchased approximately 48%
of our paper supplies, in terms of value, from domestic suppliers in Israel and
imported 52% of our paper supplies. Of our imported paper supply, 15% is
imported from the United States and 37% is imported from Europe and other
countries. In 2003, we purchased all of our domestic paper supply from AIPM, and
22% of our imported paper supply, in terms of value, from International Forest
Products Corporation (see "Item 7. Major Shareholders and Related Party
Transactions"). We obtain our supply of recycled paper from Israeli sources and
all other types of paper from import sources.

Prices of imported paper were stable through 1998 and until the end
of the third quarter of 1999. Prices increased slightly in the fourth quarter of
1999 and continued to increase until the third quarter of 2000. Prices began to
decrease in the fourth quarter of 2000 and continued to decrease through 2001
and the first quarter of 2002. Prices stabilized in the second quarter of 2002
and remained stable through the third quarter of 2002. In the fourth quarter of
2002, prices began to increase and continued to increase through the first
quarter of 2003. Prices began to decrease in the second quarter of 2003 and
remained stable throughout 2003. Prices decreased in the first quarter of 2004.

Prices of recycled domestic paper were stable in 1999 and through the
third quarter of 2000, but slightly decreased in the fourth quarter of 2000,
throughout the year 2001 and in the first quarter of 2002. Prices stabilized in
the second quarter of 2002 through the fourth quarter of 2002. Prices began to
decrease slightly in the first quarter of 2003 and remained stable throughout
2003. Prices increased substantially in the first and second quarter of 2004.

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

COMPETITION

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

We estimate that in 2003, we and Cargal accounted for approximately
30% and 26%, respectively, of the total Israeli market for corrugated board and
corrugated board shipping containers. We, Cargal and a third company, I.M.A.
Itzur Mutzarei Ariza, collectively, manufacture approximately 77% of the
corrugated board packaging in Israel. Our competitive strategy is based
principally on customer service and the diversity of our products. The fourth
manufacturer of corrugated board and containers in Israel is Best Carton Ltd.,
which entered the market in 1998. The entry of Best Carton Ltd., which
manufactures approximately 18% of the corrugated board packaging in Israel, has
contributed to the erosion of prices in the market, particularly in the market
for packaging agricultural goods. See "Item 10. Additional Information - C.
Material Contracts." During the year 2003 we experienced competition from
Turkish importers of packaging products for agricultural goods. Imported
packaging products from Turkey are significantly cheaper than domestic products
and accounted for approximately 3% of the total Israeli market. The entry of
imported packaging products from Turkey in 2001 significantly contributed to the
decrease of prices in the market.

We, through C.D., are the leading manufacturer of corrugated
board-based consumer packaging in Israel. There are four major manufacturers of
corrugated board-based consumer packaging in Israel, including C.D., as well as
a number of smaller manufacturers. Of the four major Israeli producers of
corrugated board packaging, we are the only producer of consumer packaging. We
compete in the consumer packaging field with three other companies, as well as
with direct and indirect imports amounting to approximately 17% of the market.

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

ENVIRONMENTAL REGULATION MATTERS

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

C. ORGANIZATIONAL STRUCTURE.

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

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

(Operating Subsidiaries)
Tri-Wall Containers (Israel) Ltd. 100
C.D. Packaging Systems Ltd. 50 (2)
Solid Packaging Board Ltd. (3) 50

(Inactive Subsidiaries)

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

D. PROPERTY, PLANTS AND EQUIPMENT.

Our Caesarea plant began partial-capacity operations at the end of
1996 and became fully operational in 1997. The plant consists of approximately
377,000 square feet and is leased through our wholly-owned subsidiary, Plaro
Container Systems (1989) Ltd. ("Plaro"). Plaro entered into a 20-year lease
agreement that commenced in June 1996 with Gev-Yam High-Tech Ltd. ("Gev Yam"),
for the lease of approximately 935,000 square feet of land (the "Site"), on
which Gev Yam built the plant. We installed newly-purchased equipment and
relocated equipment from our Tirat HaCarmel and Holon facilities. In 2003, we
paid NIS 9.2 million ($2.1 million) in rent with respect to the Site.

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

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

(3) C.D. Packaging Systems Ltd. holds 50% of Solid Packaging Board Ltd.'s
equity interests. Solid ceased its activities by November 24, 2003.

We lease a building in Carmiel, with an area of approximately 85,700
square feet, pursuant to a lease that commenced in June 1994. Since 1994, we
expanded the plant at a cost of approximately $730,000, which was paid by the
landlord. Following the above-mentioned expansion of the plant, the lease
agreement was extended until May 31, 2007. The annual rent for our Carmiel
facility in 2003 was NIS 937,000 ($214,000). This facility principally produces
Micro-Fine boards for consumer packaging as well as other corrugated board
products. In June 1998, we began to lease 13,000 square feet of storage in a
nearby building, and in May 2000, we began to lease an additional 7,300 square
feet of storage in this same building. Recently, we amended the two lease
agreements in order to synchronize the agreement terms and options. The term for
both agreements terminated on June 30, 2003, and we renewed for two additional
years. We intend to renew both agreements for a term of at least one year. The
annual rent for the two additional leases, which is linked to the Israeli
consumer price index, or CPI, amounted in 2003 to NIS 268,000 ($61,000).

C.D. leases approximately 81,000 square feet of industrial building
space in Migdal Haemek near Haifa. The lease expired in January 2004, and we
extended it on the same terms until December 2006. In 2003, the annual rent
payment for C.D.'s Migdal Haemek facility, which is linked to the dollar and the
CPI, was approximately NIS 1.3 million ($297,000).

Tri-Wall owns land (with an area of approximately 53,000 square feet)
and an industrial building (with an area of approximately 30,000 square feet)
located in Netanya's industrial area. Tri-Wall entered into an agreement with an
unaffiliated third party to lease a portion of the Netanya facility for a term
of three years beginning June 1, 1999 at an annual rent of $78,000. This lease
was amended in 2000 to include the entire Netanya Facility. In 2002, the total
income generated from this lease amounted to NIS 474,000 ($108,000). Tri-Wall
has extended the term of this lease until 2004.

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

Tri-Wall's container manufacturing plant consists of approximately
56,000 square feet on a plot of approximately 135,000 square feet. This plant is
located in a facility in Netanya which Tri-Wall sub-leased from Rav Kol-Bo Tagar
(Wechselman) Ltd. The term of the sub-lease expired in November 1997. Tri-Wall
has not entered into any formal agreement to extend the sub-lease, but continues
to make monthly payments in accordance with the terms set forth in the expired
sub-lease agreement. The annual rent reserved by Tri-Wall for this plant in 2003
was approximately NIS 1.0 million ($230,000).

In 2003, Tri-Wall was notified by the municipality of Netanya of the
municipality's intention to expropriate, without consideration, approximately
24,000 square feet of the property on which Tri-Wall's factory is situated in
order to construct a public road. See "Item 8. Financial Information - A.
Consolidated Statements and Other Financial Information - Legal Proceedings."

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. OPERATING RESULTS.

CERTAIN CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in Israel
which differ in certain respects from generally accepted accounting principles
in the United States (See Note 21 to the consolidated financial statements). For
additional information regarding our significant accounting principles see Note
2 to our consolidated financial statements included as a part of this annual
report on Form 20-F. While all the accounting policies impact the financial
statements, certain policies may be viewed to be critical. These policies are
those that are both most important to the portrayal of our financial condition
and results of operations and require our management's most difficult,
subjective and complex judgments and estimates. Actual results could differ from
those estimates.

We maintain our accounts and present our financial statements in NIS
adjusted for changes in the general purchasing power of the Israeli currency. In
accordance with Israeli GAAP, all financial information presented in this annual
report in NIS is presented in adjusted NIS. This presentation permits the
financial information to be set forth in constant terms as measured by changes
in the CPI with a convenience translation of the adjusted amounts to dollars.
See note 2(b) to consolidated financial statements. These accounting principles
require management to make certain estimates, judgments and assumptions based
upon information available at the time that they are made, historical experience
and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
periods presented.

In many cases, the accounting treatment of a particular transaction
is specifically dictated by generally accepted accounting principles in Israel
and in the United States and does not require management's judgment in its
application. There are also areas in which management's judgment in selecting
among available alternatives would not produce a materially different result.
Our management has reviewed these critical accounting policies and related
disclosures with the Audit Committee.

Our management believes the significant accounting policies which
affect management's more significant judgments and estimates used in the
preparation of our consolidated financial statements and which are the most
critical to aid in fully understanding and evaluating our reported financial
results include revenue recognition, allowance for doubtful accounts, inventory
valuation, impairment of long-lived assets and deferred income taxes.

REVENUE RECOGNITION

We derive our revenue primarily from one source: product revenues.
Revenue related to sales of our products is generally recognized when persuasive
evidence of an agreement exists; the product has been delivered and title and
risk of loss have passed to the buyer; the sales price is fixed and
determinable; no further obligations exist and collectibility is probable.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments, which
is included in bad debt expense. We determine the adequacy of this allowance by
regularly reviewing the complexion of our accounts receivable aging and
evaluating individual customer receivables, considering customers' financial
condition, credit history and current economic conditions. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required in future
periods.

INVENTORY

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

INVENTORY VALUATION

At each balance sheet date, we evaluate our inventory balance for
obsolescence. This evaluation includes analyses of sales levels by product line
and projections of future demand. In addition, we write off inventories that are
considered obsolete. Remaining inventory balances are adjusted to the lower of
cost or market value. If future demand or market conditions are less favorable
than our projections, additional inventory write-downs may be required and would
be reflected in cost of sales in the period the revision is made.

IMPAIRMENT OF LONG-LIVED ASSETS

Our long-lived assets include property, plant and equipment. In
assessing potential impairment of these assets, we consider this factor and
other pertinent information. We record an asset impairment charge when we
believe that the asset has experienced a decline in value that is other than
temporary.

In assessing the recoverability of our property and equipment and
other intangible assets, we must make assumptions regarding the estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future, we
may be required to record impairment charges for these assets.

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." FAS 144 is effective for fiscal years beginning after December 15,
2001, with earlier application encouraged.

DEFERRED INCOME TAXES

We record income taxes using the asset and liability approach.
Deferred income tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and net operating loss and tax credit carryforwards. Significant
management judgment is required in determining our provision for income taxes.
We have considered future taxable income, prudent and feasible tax planning
strategies and other available evidence in determining the need for a valuation
allowance. We evaluate all of these factors to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized.

EFFECTS OF NEW ACCOUNTING STANDARDS ON OUR FINANCIAL STATEMENTS

In October 2001, the Israel Accounting Standards Board published
Accounting Standard No. 12 with respect to the discontinuance of the adjustment
of financial statements, and Accounting Standard No. 13 with respect to the
effect of changes in foreign exchange rates. In December 2002, Accounting
Standard No. 17 was published with respect to the deferral of the effective date
of Accounting Standards No. 12 and No. 13 to January 1, 2004. According to
Accounting Standards No. 12 and No. 17, which deal with the discontinuance of
the adjustment of financial statements, financial statements will cease to be
adjusted for inflation in Israel beginning January 1, 2004. Until December 31,
2003, the Company continued to prepare adjusted financial statements in
accordance with Opinion No. 36 of the Institute of Certified Public Accountants
in Israel. The adjusted amounts included in the financial statements as of
December 31, 2003 will serve as the starting point for nominal financial
reporting beginning January 1, 2004.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

SALES

Our consolidated sales in 2003 were NIS 349.9 million, ($79.9
million), as compared to NIS 337.6 million for 2002. The increase in sales in
2003, as compared to 2002, reflected a quantitative increase in the amount of
goods sold, with a slight increase in selling prices.

COST OF SALES

Cost of sales in 2003 amounted to NIS 314.3 million ($71.8 million),
compared to NIS 311.2 million in 2002. The cost of sales percentage was 89.8% of
sales in 2003, compared to 92.1% of sales in 2002. This decrease in the cost of
sales percentage resulted primarily from a reduction in our cost of materials
and a decrease in depreciation expenses due to certain assets which have been
fully depreciated.

GROSS PROFIT

Gross profit for 2003 was NIS 35.7 million, ($8.1 million),
representing 10.2% of sales, as compared to NIS 26.4 million, representing 7.9%
of sales, for 2002. The increase in gross profit resulted from the slight
decrease in prices of raw materials during 2002 and a slight improvement in
selling prices, combined with a quantitative growth in the sales volume.

SELLING EXPENSES

Selling expenses in 2003 totaled NIS 17.3 million ($4.0 million),
compared to NIS 16.8 million in 2002. This increase in selling expenses resulted
primarily from an increase in salary and transportation expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses in 2003 were NIS 17.8 million
($4.1 million), or 5.1% of sales, compared to NIS 17.7 million in 2002,
representing 5.2% of sales in 2002.

OPERATING INCOME (LOSS)

Operating income before financial expenses was NIS 0.6 million ($0.1
million) for 2003, as compared to operating loss before financial expenses of
NIS 8.1 million for 2002.

FINANCIAL EXPENSES

Financial expenses for 2003 were NIS 5.2 million ($1.1 million),
representing 1.5% of sales, as compared to NIS 6.1 million, representing 1.8% of
sales, for 2002.

The decrease in actual financial expenses in 2003, as compared to
2002, resulted from the decrease in financial liabilities to banks during 2003,
as compared to 2002, and the decrease in actual interest as the result of the
ratio between the rate of inflation and the rate of devaluation of the NIS
against the U.S. dollar, as compared to this ratio in 2002.

OTHER INCOME (EXPENSES)

Other income for 2003 was NIS 0.1 million as compared to net expenses
of NIS 1.2 million in 2002. These expenses in 2003 include NIS 1.3 million ($0.3
million) that the Company incurred in the last nine months of the year for a
project designed to increase the efficiency of the Company's operating and
production systems and to reduce the costs of such operating systems.

INCOME BEFORE TAXES ON INCOME (LOSSES)

Loss before taxes for 2003 was NIS 4.5 million ($1.0 million),
representing 1.3% of sales, as compared to loss before taxes of NIS 15.3 million
for 2002, representing 4.5% of sales during that period.

TAXES

Tax benefit on income for 2003 was NIS 2.6 million ($0.6 million), as
compared with a tax benefit on income of NIS 5.9 million for 2002.

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

The minority interest in the net loss of C.D. amounted to NIS 0.0
million ($0.0) in 2003, compared to interest in net loss of NIS 0.8 million in
2002.

NET INCOME (LOSS)

Net loss for 2003 was NIS 1.8 million ($0.4 million), representing
5.2% of sales, as compared to a loss of NIS 8.6 million in 2002.

WEIGHTED INCOME (LOSS) PER SHARE

Weighted loss per share for 2003 was NIS 0.77 ($0.18), as compared to
net loss per share of NIS 3.56 ($0.81) for 2002.

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

SALES

Our consolidated sales in 2002 amounted to NIS 337.6 million,
compared to NIS 350.0 million in 2001, a decrease of 3.7%. The decrease in sales
in 2002, as compared to 2001, reflected a quantitative increase with
significantly eroded selling prices, resulting from the continuing recession and
competition in the market.

COST OF SALES

Cost of sales in 2002 amounted to NIS 311.2 million, compared to NIS
316.3 million in 2001, a decrease of 1.6%. The cost of sales as a percentage of
sales in 2002 was 92.1% of sales, compared to 90.4% of sales in 2001.

GROSS PROFIT

Gross profit in 2002 totaled NIS 26.4 million, compared to NIS 33.7
million in 2001, a decrease of 21.7%. The gross profit margins for 2002 were
7.9% of sales, compared to 9.6% of sales in 2001. The decrease in gross profit
resulted from the significant erosion of sales prices with a quantitivate
increase and slight decrease in prices of raw materials during 2002.

SELLING EXPENSES

Selling expenses totaled NIS 16.8 million in 2002, compared to NIS
18.1 million in 2001. This decrease in selling expenses resulted primarily from
a decrease in salary expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses in 2002 decreased by 9.1% and
were NIS 17.7 million, or 5.2% of sales, compared to NIS 19.5 million in 2001,
representing 5.6% of sales in 2001. This decrease in general and administrative
expenses resulted primarily from the decrease in management salaries, office
expenses and a decrease in the reserve for unpaid debts.

OPERATING INCOME (LOSS)

Operating loss in 2002 amounted to NIS 8.1 million, compared to an
operating loss of NIS 3.8 million in 2001.

FINANCIAL EXPENSES

Financial expenses in 2002 amounted to NIS 6.1 million, or 1.8% of
sales, compared to NIS 10.9 million in 2001, or 3.1% of sales. This decrease in
financial expenses of 44.0% was due primarily to a decrease in financial
liabilities to banks during 2002, and the decrease in actual interest as the
result of the ratio between the rate of inflation and the rate of devaluation of
the NIS against the U.S. dollar. The rate of inflation was 6.5% in 2002,
compared to 1.4% in 2001. The devaluation of the NIS compared to the dollar was
7.3% in 2002, compared to 9.3% in 2001.

OTHER INCOME (EXPENSES)

In 2002 we recorded other net expenses of NIS 1.2 million, compared
to other income of NIS 0.2 million in 2001. These expenses in 2002 include NIS
1.3 million for a project designed to increase the efficiency in the Company's
operating and production systems and to reduce the costs of such operating
systems.

INCOME BEFORE TAXES ON INCOME (BENEFIT)

Loss before taxes in 2002 amounted to NIS 15.3 million, or 4.5% of
sales, compared to a loss of NIS 14.5 million in 2001, or 4.2% of sales.

TAXES

Benefit from taxes in 2002 was NIS 5.9 million, compared to NIS 5.6
million in 2001.

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

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

NET INCOME (LOSS)

Our net loss for 2002 was NIS 8.6 million, or 2.5% of sales, compared
to a net loss of NIS 8.7 million in 2001, or 2.5% of sales.

WEIGHTED INCOME (LOSS) PER SHARE

Weighted loss per share in 2002 was NIS 3.56, compared to a weighted
income per share of NIS 3.64 in 2001.

B. LIQUIDITY AND CAPITAL RESOURCES.

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

During 2003, we experienced a positive cash flow of NIS 3.2 million
($0.7 million), compared with a positive cash flow of NIS 17.7 million in 2002.
This positive cash flow included depreciation of NIS 23.8 million ($5.4
million), compared to a depreciation of NIS 25.6 million in 2002. Furthermore,
we decreased our reserve for postponed taxes by NIS 2.6 million ($0.6 million),
compared to a decrease of NIS 6.3 million in 2002.

In 2003, we purchased equipment and invested in the infrastructure of
our plants in an aggregate net amount of NIS 4.0 million ($0.9 million),
compared with similar investments in an aggregate net amount of NIS 1.9 million
in 2002. We increased our long- and short-term loans by NIS 0.9 million ($0.2
million), compared with payment of loans of NIS 15.7 million in 2002.

For the year ended December 31, 2003, we had positive working capital
of NIS 53.1 million ($12.1 million), compared with working capital of NIS 41.8
million for the year ended December 31, 2002. This increase in working capital
resulted primarily from an increase in trade receivables, a decrease in
inventories and an increase of short-term credit.

Long-term loans from banks and other financial sources amounted to
NIS 32.6 million ($7.4 million) (net of current maturities that included
short-term loans) in 2003, compared to NIS 37.0 million in 2002.

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

During 2001 and 2000, we invested in our plant and infrastructure an
aggregate amount of NIS 10.1 million and NIS 10.1 million, respectively, as part
of our normal course of business. In 2002 and 2003, we invested NIS 1.9 million
($0.4 million) and NIS 4.0 million ($0.9 million), respectively, most of which
was invested in our Caesarea plant to improve the production of corrugated
cardboard.

IMPACT OF INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS, LIABILITIES AND
ASSETS

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

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

ISRAELI INFLATION
YEAR ENDED ISRAELI INFLATION NIS DEVALUATION ADJUSTED FOR
DECEMBER 31, RATE % RATE % DEVALUATION %
------------ ------ ------ -------------
1999 1.3 (0.1) 1.4
2000 0 (2.7) 2.8
2001 1.4 9.3 (7.2)
2002 6.5 7.3 (0.7)
2003 (1.9) (7.6) (8.8)

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

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

POLITICAL CONDITIONS

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

All male adult citizens and permanent residents of Israel under the
age of 45 are, unless exempt, obligated to perform up to 39 days of military
reserve duty annually. Additionally, these residents are subject to being called
to active duty at any time under emergency circumstances. Many of our officers
and employees are currently obligated to perform annual reserve duty. While we
have maintained operations effectively under these requirements since we began
operations, we cannot assess the full impact of these requirements on our
workforce or business if conditions should change, and we cannot predict the
effect on us of any expansion or reduction of these obligations.

ECONOMIC CONDITIONS

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

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

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

TRADE AGREEMENTS

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

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

C. RESEARCH AND DEVELOPMENT.

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

D. TREND INFORMATION.

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

E. OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any material off-balance sheet arrangements. In
addition we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

Payments due by period
(NIS IN THOUSANDS )
---------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 - 2007 2008 AND THEREAFTER
----------------------- ----- ---- ----------- -------------------

Long-Term Rent Obligations (4) 124,015 12,805 32,487 78,723
Capital (Finance) Lease Obligations 7,584 3,619 3,965 -
Operating Lease Obligations 2,286 980 1,306 -
Accrued Severance Pay (5) 8,874 - - 8,874
Long-Term Loans 47,973 19,332 26,096 2,545
------- ------ ------ ------
Total 190,732 38,740 63,854 90,142
======= ====== ====== ======

G. SAFE HARBOR

Except for the historical information contained in Item 5. Operating
and Financial Review and Prospects - E. Off-Balance Sheet Arrangements and - F.
Tabular Disclosure of Contractual Obligations, the statements contained in such
sections are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including all the risks discussed in "Item 3. Key Information -
D. Risk Factors" and elsewhere in this annual report.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT.

Our directors and executive officers are as follows:

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

Robert K. Kraft 63 Director, Chairman of the Board

Yaakov Yerushalmi 62 Vice Chairman of the Board, Chairman
of the Management and Finance Committee

Richard A. Karelitz 54 Director, Chairman of the Audit Committee

Myra H. Kraft 60 Director

Jonathan A. Kraft 39 Director

--------------------
(4) We operate from leased premises in Israel.

(5) The accrued severance pay is considered to be a contractual obligation of
ours for more than 5 years, as we do not anticipate at present the
dismissal of our employees.

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

Yoram Firon 35 Director

Richard P. Morse 72 Director

Avshalom Patir (6) 56 Director

Israel Eldar 58 Director

Irit Eluz 37 Director

David Harman 59 External Director

Doron Kempler 54 General Manager

Zeev Birenboim (7) 53 (Former) External Director

Menachem Kallach External Director

Daniel Attias (8) 65 (Former) Chief Financial Officer

Nestor Szwarcberg 45 Chief Financial Officer

Moshe Balter 60 Secretary

Shimon Yarel 53 Internal Auditor

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

--------------------
(6) Avshalom Patir resigned on February 10, 2004.

(7) Mr. Zeev Birenboim resigned on September 14, 2003 and his successor, Mr.
Menachem Kallach was appointed early October 2003.

(8) Mr. Daniel Attias resigned on December 31, 2003 and was replaced by Nestor
Szwarcberg.

YAAKOV YERUSHALMI has been a director of our company since August
1992 and Executive Vice Chairman of our board of directors and Chairman of the
Management and Finance Committee since September 1992. Mr. Yerushalmi has served
as Chairman of the Board of Directors of AIPM since January 1999 and served as
General Manager of AIPM from June 1990 to March 2003. Mr. Yerushalmi currently
serves as Chairman of Amnir Recycling Industries Ltd., as well as chairman or
director of several subsidiaries or affiliates of AIPM.

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

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

JONATHAN A. KRAFT has been a director of our company since August
1992. Mr. Kraft is a director of International Forest Products Corporation,
Rand-Whitney Group LLC, Kraft Holdings Trust, CMGI, Inc., and Citizens Bank of
Massachusetts. Mr. Kraft is also Chief Executive Officer of Rand-Whitney
Containerboard, Vice Chairman of the New England Patriots, Investor-Operator of
the New England Revolution, and President of NPS LLC, which owns and operates
Gillette Stadium in Foxborough, Massachusetts. Mr. Kraft is the son of Robert K.
Kraft and Myra H. Kraft.

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

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

AVSHALOM PATIR has been a director of our company since April 2003.
Mr. Patir has served as the General Manager of AIPM since April 2003. From 1998
to April 2003 Mr. Patir served as General Manager of Barak I.T.C. (1995) - The
International Telecommunications Services Corp. Ltd. Mr. Patir holds a Masters
degree in Electrical Engineering. Mr. Patir also serves as a director of several
subsidiaries or affiliates of AIPM.

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

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

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

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

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

MENACHEM KALLACH has been a director of our company since October
2003. Mr. Kallach has served as chairman of the boards of Royal Plaza Hotel in
Tiberias, Israel and Food Club Group since 1999. He has been a director of
Mitzpe Kineret Ltd. and Kineret (1995) Ltd. since 1999. From 1994 to 1998 Mr.
Kallach served as general manager of Mitzpe Kineret Ltd. and served as chairman
or director of several companies in the real estate, retail and marketing fields
in Israel.

DANIEL ATTIAS served as our Chief Financial Officer from June 1985
until December 2003. From 1984 to 1985, Mr. Attias was General Manager of
Jerusalem Paper Products, Ltd. (which subsequently changed its name to Ofek
Paper Products Ltd. and was acquired by us).

NESTOR SZWARCBERG has been our Chief Financial Officer since January
1, 2004. Prior to joining the Company, Mr. Szwarcberg served as Chief Financial
Officer of Polygal Plastics Industries Ltd from 2000 to 2003, Chief Financial
Officer and Comptroller of Mezerplas Ltd from 1996 to 2000 and Chief Financial
Officer of Histadrut from 1990 to 1996.

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

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

EXTERNAL DIRECTORS

On July 30, 2000, Zeev Birenboim and David Harman were appointed as
external directors of our company, as required by Israeli law. Pursuant to
Israeli law, the external directors are appointed for a three-year term.
Menachem Kallach was appointed in October 2003 after Zeev Birenboim resigned.

RESIGNATION OF DIRECTORS AND OFFICERS

Mr. Yoram Shetrit resigned as a director in March 31, 2003. Mr. Zeev
Birenboim resigned on September 14, 2003 and his successor, Mr. Menachem
Kallach, was appointed early October 2003. Mr. Daniel Attias resigned as Chief
Financial Officer on December 31, 2003 and was replaced by Nestor Szwarcberg.

SHAREHOLDERS' AGREEMENT

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

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

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

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

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

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

B. COMPENSATION.

The aggregate compensation paid to or accrued for the account of all
of our directors and executive officers as a group during the 2003 fiscal year
was NIS 3.1 million ($0.71 million), of which NIS 0.8 million ($0.186 million)
was paid to or accrued for the account of our general manager. This amount
includes directors' fees, officers' compensation, amounts set aside or accrued
to provide pension, retirement or similar benefits and amounts expended by our
company for automobiles made available to our officers and expenses (including
business travel, professional and business association dues and expenses) for
which our directors were reimbursed.

C. BOARD PRACTICES.

APPOINTMENT OF DIRECTORS AND TERMS OF OFFICE

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

EXTERNAL DIRECTORS

Under the Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public in or outside of Israel are
required to appoint two external directors. The Companies Law requires that the
external directors be residents of Israel. However, the Minister of Justice of
the State of Israel has promulgated regulations exempting certain qualifying
foreign companies, such as us, from the applicability of certain provisions of
the Companies Law. The Companies Regulations (Concessions for Public Companies
Whose Shares are Registered in a Stock Exchange Outside Israel), 5760-2000, as
amended, define "foreign company" as a public company whose shares have been
offered solely to the public outside of Israel or are registered only on a stock
exchange outside of Israel. Pursuant to these regulations, an external director
of a foreign company need not be an Israeli resident.

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

No person can serve as an external director if the person's position
or other business creates, or may create, conflicts of interest with the
person's responsibilities as an external director. Until the lapse of two years
from termination of office, a company may not engage an external director to
serve as an office holder and cannot employ or receive services from that
person, either directly or indirectly, including through a corporation
controlled by that person.

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

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

AUDIT COMMITTEE

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

The role of the audit committee is to examine flaws in the business
management of the company, in consultation with the internal auditor and the
company's independent accountants, and suggest appropriate course of action. Our
audit committee meets three or four times a year, during which Mr. Yarel, our
internal auditor, presents his quarterly report.

The approval of the audit committee is required to effect specified
actions and transactions with office holders and interested parties. An
interested party is defined in the Companies Law as a 5% or greater shareholder,
any person or entity who has the right to designate one director or more or the
general manager of the company or any person who serves as a director or as a

general manager. An audit committee may not approve an action or a transaction
with an interested party or with an office holder unless at the time of approval
the two external directors are serving as members of the audit committee, at
least one of whom was present at the meeting in which any approval was granted.

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

INTERNAL AUDITOR

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

D. EMPLOYEES.

As of December 31, 2003, we had 546 employees, including
approximately 75 employees in management, finance and marketing, and
approximately 477 full-time employees and 69 temporary employees in
manufacturing. All of our employees are employed in Israel.

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

Employees
---------
Area of Employment 2001 2002 2003
------------------ ---- ---- ----

Manufacturing
Permanent Employees 467 441 402
Temporary Employees 56 50 69
Management, Finance and Marketing 82 87 75
--- --- ---
Total 605 578 546
=== === ===

We consider our relations with all of our employees to be
satisfactory. Most of our employees are covered by three collective bargaining
agreements. Certain of our employees, in particular, executive officers and
those employed in management, finance and marketing, as well as certain key
employees in manufacturing, have entered into personal employment contracts with
us. In addition, by order of the Israeli Ministry of Labor and Welfare, certain
provisions of the collective bargaining agreement between the Histadrut (General
Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (a central organization representing most of Israel's employers'

associations) are applicable to all of our employees. These provisions
principally concern the length of the work day and the work week, insurance for
work-related accidents, minimum daily wages, pension fund contributions,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. The wages of most of our employees are linked, in
part, to the CPI.

Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute (which is similar to the United States
Social Security Administration). These payments amount to approximately 14.82%
of total compensation, with the employee contributing approximately 4.50% and
the employer contributing the balance. The majority of our permanent employees
are covered by pension insurance policies and pension funds providing customary
benefits to employees, including retirement and severance benefits. We
contribute 13.3% (which includes 8-1/3% of severance pay) of base wages to such
plans and the employee contributes between 5% to 5.5% of base wages. Under
Israeli law, employees are required to contribute up to 4.8% of their total
compensation to the National Insurance Institute for health insurance coverage.

E. SHARE OWNERSHIP.

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

NUMBER OF ORDINARY PERCENTAGE OF
SHARES BENEFICIALLY OUTSTANDING ORDINARY
NAME OWNED (9) SHARES (10)
---- --------- -----------

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

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

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

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

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS.

The following table sets forth certain information as of May 31,
2004, pertaining to the beneficial ownership of our ordinary shares, by persons
known to us to own 5% or more of our ordinary shares. Except as disclosed below,
we are not directly or indirectly owned or controlled by another corporation or
by any foreign government.

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

Number of Percent of
Name of Beneficial Owner (12) Shares Owned Class (13)
----------------------------- ------------ ----------
Kraft Group LLC 275,000 (14) 11.46%
American-Israeli Paper Mills Ltd. 630,000 (15) 26.25%
Ampal Enterprises Ltd. 522,000 (15) 21.75%
Robert K. Kraft 851,174 (16) 35.46%
All Directors and executive
officers as a group (16 Persons) 863,974 (17) 36.00%

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

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

(14) Excludes 470,324 ordinary shares beneficially owned by Robert K. Kraft, the
President of the managing member and an indirect holder of membership
interests of Kraft Group; 26,250 ordinary shares beneficially owned by
Richard P. Morse (a Director of the Company), 25,000 of which Mr. Robert K.
Kraft has the right to vote pursuant to an agreement between Messrs. Morse
and Kraft; 52,500 ordinary shares owned by the Kraft Foundation (of which
Mr. Robert K. Kraft is a Trustee with shared investment and voting
authority); 2,100 ordinary shares beneficially owned by Myra H. Kraft (Mr.
Kraft's wife), an indirect holder of membership interests of Kraft Group;
and 26,250 ordinary shares beneficially owned by the Kraft Irrevocable
Family Trust (6,562 shares of which are owned for the benefit of Jonathan
A. Kraft (Mr. & Mrs. Kraft's son), an indirect holder of membership
interests of Kraft Group). See footnote 16 below.

(15) On July 31, 1992, Robert K. Kraft, AIPM and AMPAL entered into an agreement
pursuant to which Robert K. Kraft (after having purchased from Carmel Plaro
Holdings Limited, Koor Industries Ltd. and Koor Foods Ltd. all the Ordinary
Shares beneficially owned by them) transferred 630,000 ordinary shares to
AIPM and 514,000 Ordinary Shares to AMPAL. AMPAL has since increased its
Ordinary Share holdings to 522,000.

(16) Includes 26,250 Ordinary Shares beneficially owned by Mr. Richard P. Morse
(a Director of the Company), 25,000 of which Mr. Robert K. Kraft has the
right to vote pursuant to an agreement between Messrs. Morse and Kraft, and
52,500 Ordinary Shares owned by the Kraft Foundation (of which Mr. Robert
K. Kraft is a Trustee with shared investment and voting authority). Also
includes 2,100 Ordinary Shares beneficially owned by Mrs. Myra H. Kraft
(Mr. Kraft's wife), 26,250 Ordinary Shares beneficially owned by the Kraft
Irrevocable Family Trust (with respect to which Mr. Robert K. Kraft
disclaims beneficial interest), and 275,000 Ordinary Shares owned by Kraft
Group (of which Mr. Robert K. Kraft is the President of the managing member
and an indirect holder of membership interests). See footnote 14 above.

(17) Includes 26,250 Ordinary Shares beneficially owned by Mr. Richard P. Morse
(25,000 of which Mr. Robert K. Kraft has the right to vote pursuant to an
agreement between Messrs. Morse and Kraft), 52,500 Ordinary Shares owned by
the Kraft Foundation (of which Mr. Robert K. Kraft, Mrs. Myra H. Kraft and
Mr. Richard A. Karelitz are Trustees with shared investment and voting
authority) and 26,250 Ordinary Shares beneficially owned by the Kraft
Irrevocable Family Trust (of which Mr. Morse is a Trustee, but with respect
to which Mr. Robert K. Kraft, Mrs. Myra H. Kraft and Mr. Morse disclaim
beneficial interest, and as to 6,562 Ordinary Shares of which Mr. Jonathan
A. Kraft is the beneficiary). Also includes 275,000 Ordinary Shares owned
by Kraft Group (of which Mr. Kraft is the President of the managing member
and an indirect holder of membership interests; and Mrs. Myra H. Kraft and
Mr. Jonathan A. Kraft are indirect holders of membership interests). See
footnote 14 above.

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

B. RELATED PARTY TRANSACTIONS.

In the ordinary course of our business, in 2001, 2002 and 2003 we
purchased all of our supply of Israeli produced paper, and 47%, 53% and 48%,
respectively, of our overall paper requirements from AIPM, which is a principal
shareholder of our company. We believe that such transactions have been on terms
no more or less favorable than could have been obtained from unrelated third
parties. See notes 4, 9, 10, 15 and 18 of the notes to consolidated financial
statements appearing elsewhere herein.

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

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

During each of 2001, 2002 and 2003, we purchased 47%, 49% and 24%
respectively, of our imported paper supply (in terms of cost) from IFPC. We
intend to make future purchases from IFPC on a competitive basis, in our best
interests.

C. INTERESTS OF EXPERTS AND COUNSEL.

Not applicable.

ITEM 8. FINANCIAL INFORMATION.

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

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

LEGAL PROCEEDINGS

In 1993, Tri-Wall brought a claim against Rav Kol-Bo Tagar
(Wechselman) Ltd., or Kol-Bo, the party from which Tri-Wall sub-leased its
facility and property in Netanya, Israel. Tri-Wall's claim sought to enforce its
option to acquire the Netanya facility and property, or the Netanya Property, in
accordance with a sub-lease agreement between Tri-Wall, and Kol-Bo. Kol-Bo
subsequently filed a counter-claim against Tri-Wall, which, together with
Tri-Wall's claim, was submitted to arbitration. In May 1994, the arbitrator
ruled in favor of Tri-Wall and Kol-Bo appealed the ruling to the District Court
in Tel Aviv, Israel. On January 10, 2000, the District Court ruled that Tri-Wall
had the right to exercise an option to purchase the Netanya Property directly
from the landowners. Both Kol-Bo and the landowners have appealed that ruling to
the Israeli Supreme Court. In March 2000, Tri-Wall notified the landowners of
the Netanya Property that Tri-Wall had elected to exercise its option to
purchase the Netanya Property. Tri-Wall then delivered the consideration for the
purchase of the Netanya Property, as determined in the sub-lease agreement
between Tri-Wall and Kol Bo, to the landowners. The landowners rejected
Tri-Wall's payment, returned the consideration for the purchase of the Netanya
Property to Tri-Wall and, since March 2000, have demanded rental payments from
Tri-Wall. After failing to resolve this matter through a mediation process, all
parties have submitted their summation to the Israeli Supreme Court. On December
31, 2002 arguments were heard by the Supreme Court. The parties await the
court's ruling on the matter.

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

In 2002, Tri-Wall was notified by the municipality of Netanya its
intention to expropriate, without consideration, approximately 24,000 square
feet of the aforementioned property on which Tri-Wall's factory is situated in
order to construct a public road. In 2003, the municipality of Netanya
expropriated, without consideration, approximately 24,000 square feet of the
aforementioned property

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

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

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

B. SIGNIFICANT CHANGES.

Except as otherwise disclosed in this annual report, there has been
no material change in our financial position since December 31, 2003.

ITEM 9. THE OFFER AND LISTING

A. OFFER AND LISTING DETAILS.

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

PRICE PER
ORDINARY SHARE
--------------
HIGH LOW
---- ---

1999
January 1 - March 31.............................. 6.13 5.12
April 1 - June 30................................. 7.50 5.87
July 1 - September 30............................. 8.75 7.50
October 1 - December 31........................... 8.87 6.62

2000
January 1 - March 31.............................. 9.75 8.12
April 1 - June 30................................. 8.81 7.75
July 1 - September 30............................. 8.50 6.88
October 1 - December 31........................... 6.88 4.75

PRICE PER
ORDINARY SHARE
--------------
HIGH LOW
---- ---
2001
January 1 - March 31.............................. 5.60 4.62
April 1 - June 30................................. 5.20 4.70
July 1 - September 30............................. 5.20 4.90
October 1 - December 31........................... 5.20 4.90

2002
January 1 - March 31.............................. 5.40 4.80
April 1 - June 30................................. 6.05 5.35
July 1 - September 30............................. 5.50 4.35
October 1 - December 31........................... 4.35 3.50

2003
January 1 - March 31.............................. 4.20 3.50
April 1 - June 30................................. 4.30 4.00
July 1 - September 30............................. 5.10 3.50
October 1 - December 31........................... 3.70 2.70

2004
January 1 - January 31............................ 4.00 3.50
February 1 - February 28.......................... 4.10 3.80
March 1 - March 31................................ 4.20 4.20
April 1 - April 30................................ 4.19 3.85
May 1 - May 31.................................... 9.70 4.09

B. PLAN OF DISTRIBUTION.

Not applicable.

C. MARKETS.

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

D. SELLING SHAREHOLDERS.

Not applicable.

E. DILUTION.

Not applicable.

F. EXPENSES OF THE ISSUE.

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. SHARE CAPITAL.

Not applicable.

B. MEMORANDUM AND ARTICLES OF ASSOCIATION.

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

OBJECTIVE

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

OUR BOARD OF DIRECTORS

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

The Companies Law requires that a member of the board of directors or
senior management of the company promptly disclose any personal interest that he
or she may have (either directly or by way of any corporation in which he or she
is, directly or indirectly, a 5% or greater shareholder, director or general
manager or in which he or she has the right to appoint at least one director or
the general manager) and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In
addition, if the transaction is an extraordinary transaction (that is, a
transaction other than in the ordinary course of business, otherwise than on
market terms, or is likely to have a material impact on the company's
profitability, assets or liabilities), the member of the board of directors or
senior management must also disclose any personal interest held by his or her
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouses of any of the foregoing.

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

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

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

DESCRIPTION OF SECURITIES

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

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

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

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

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

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

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

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

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

C. MATERIAL CONTRACTS.

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

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

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

D. EXCHANGE CONTROLS.

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

Any amounts payable upon our dissolution, liquidation or winding up,
as well as the proceeds of any sale in Israel of our ordinary shares to an
Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli
currency, may be converted into freely repatriable dollars at the rate of
exchange prevailing at the time of conversion. Because exchange rates between
the NIS and the dollar fluctuate continuously, a U.S. shareholder will be
subject to the risk of currency fluctuations between the date when we declare
NIS-denominated dividends and the date when we pay them in NIS. See "Item 3.
Key Information - D. Risk Factors."

E. TAXATION.

Investors are advised to consult their tax own 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.

ISRAELI TAX CONSIDERATIONS

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

TAX REFORM

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

The Tax Reform introduced the following, among other things:

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

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

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

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

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

GENERAL CORPORATE TAX STRUCTURE

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

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

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

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

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

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

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

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

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

The Israeli government may reduce or eliminate tax benefits available
to approved enterprise programs in the future. We cannot assure you that our
approved program and the benefits thereunder shall continue in the future at its
current level or at any level. See "Item 3. Key Information -- D. Risk Factors
-- We are subject to various risks relating to operations in Israel" and "--Tax
Reform" above.

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

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

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

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

o accelerated depreciation rates on equipment and buildings.

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

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

CAPITAL GAINS TAX ON SALES OF OUR ORDINARY SHARES

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

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

Pursuant to the Tax Reform, generally, capital gains tax is imposed
at a rate of 15% on real gains derived on or after January 1, 2003 from the sale
of shares in companies, such as ours, whose shares are publicly traded on the
Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel.
However, this tax rate does not apply to: (i) dealers in securities; (ii)
shareholders that report in accordance with the Inflationary Adjustment Law; or

(iii) shareholders who acquired their shares prior to an initial public offering
(that are subject to a different tax arrangement). The tax basis of shares
acquired prior to January 1, 2003 will be determined in accordance with the
average closing share price in the three trading days preceding January 1, 2003.
However, a request may be made to the tax authorities to consider the actual
adjusted cost of the shares as the tax basis if it is higher than such average
price. Moreover, non-Israeli residents are exempt from Israeli capital gains tax
on any gains derived from the sale of shares publicly traded on the Tel Aviv
Stock Exchange or a recognized stock exchange outside of Israel, provided,
however, that such capital gains are not derived from a permanent establishment
in Israel and provided that such shareholders did not acquire their shares prior
to an initial public offering. However, non-Israeli corporations will not be
entitled to such exemption if an Israeli resident (i) has a controlling interest
of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is
entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.

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

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

TAXATION OF NON-RESIDENT HOLDERS OF SHARES

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

Under an amendment to the Inflationary Adjustments Law, non-Israeli
corporations might be subject to Israeli taxes on the sale of traded securities
in an Israeli company, subject to the provisions of any applicable double
taxation treaty or unless a specific exemption is available.

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

EXCHANGE CONTROLS

FOREIGN EXCHANGE REGULATIONS

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

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

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

o a citizen or resident of the United States;

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

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

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

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

This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, or the Code, current and proposed Treasury
regulations promulgated thereunder and administrative and judicial decisions as
of the date hereof, all of which are subject to change, possibly on a
retroactive basis. Under current consideration are various legislative proposals
under which, among other things, certain dividends would be excluded from income
and individual income tax rates on ordinary income would be reduced. It is not
clear at this time whether, or in what form, any of such legislative proposals
(or other proposals) will be enacted, what the effective date of any such
changes would be and what other changes would be made that could further affect
the tax consequences discussed herein. This discussion does not address all
aspects of United States federal income taxation that may be relevant to any
particular U.S. Holder in light of such U.S. Holder's individual circumstances.
In particular, this discussion does not address the potential application of the
alternative minimum tax or United States federal income tax consequences to
shareholders that are subject to special treatment, including U.S. Holders that:

o are broker-dealers or insurance companies;

o have elected mark-to-market accounting;

o are tax-exempt organizations or retirement plans;

o are financial institutions or "financial services entities;"

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

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

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

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

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

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

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

TAXATION OF ORDINARY SHARES

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

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

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

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

TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF ORDINARY SHARES

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

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

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

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

INFORMATION REPORTING AND BACK-UP WITHHOLDING

U.S. Holders generally are subject to information reporting
requirements with respect to dividends paid in the United States on ordinary
shares. Under the Code, a U.S. Holder may be subject, under certain
circumstances, to backup withholding at a rate of up to 28% with respect to
dividends paid on our ordinary shares unless the holder provides proof of an
applicable exemption or correct taxpayer identification number and otherwise
complies with applicable requirements of the backup withholding rules.

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

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

F. DIVIDENDS AND PAYING AGENTS.

Not applicable.

G. STATEMENTS BY EXPERTS.

Not applicable.

H. DOCUMENTS ON DISPLAY.

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

As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are
registered under the Exchange Act. A copy of each report submitted in accordance
with applicable United States law is available for public review at our
principal executive offices.

I. SUBSIDIARY INFORMATION.

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

FOREIGN CURRENCY RISK

Our operating expenses are influenced by changes in the exchange
rates between the NIS and foreign currencies, especially the U.S. dollar. Our
financial expenses increase when the NIS is devalued against such currencies. At
December 31, 2003, our monetary liabilities linked to the dollar amounted to NIS
42.0 million ($9.6 million). In 2003, our monetary liabilities denominated in
foreign currencies represented 26.4% of our total financial liabilities,
compared to NIS 57.3 million, amounting to 34.1% of the financial liabilities,
in 2002. Our financial assets in 2003 linked to foreign currency were NIS 2.1
million ($0.5 million), compared to NIS 1.9 million in 2002. See note 17 to our
consolidated financial statements.

In the ordinary course of our operations, we purchase option
contracts to hedge our net exposures, by currency, related to the foreign
currency and to the Israeli CPI denominated monetary assets and liabilities of
our operations. We do not use derivative financial instruments for speculative
or trading purposes. The dollar amount underlying such derivative financial
instruments at December 31, 2003 was NIS 5.0 million ($1.1 million), compared to
NIS 3.5 million at December 31, 2002. These transactions were valid until March
2004, and the expenses associated therewith were not large enough to affect our
operating results. We paid a premium of 1.34% for 90-day option warrants. To
hedge our net exposures to an increase in the Israeli CPI, we purchased a
derivative instrument which has since expired.

As of December 31, 2003, we had NIS 1.5 million ($0.3 million) of
debt linked to the Israeli CPI, amounting to 0.9% of our financial liabilities
in the year 2003, compared with NIS 6.1 million, which amounted to 3.6% of our
financial liabilities as of December 31, 2002.

Despite our hedging transactions, our outstanding financial
liabilities at December 31, 2003 are exposed to exchange rate differentials.
Based on the volume of the foreign currency liabilities described above, a 5%
rise in the exchange rate may lead to additional financial expenses of NIS 2.0
million ($0.5 million).

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

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

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

ITEM 16. (RESERVED)

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our Board has determined that Israel Eldar is an audit committee
financial expert serving on its Audit Committee.

ITEM 16B. CODE OF ETHICS

A Code of Ethics has been drafted and will be presented at the next
meeting of the Board of Directors.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The table below summarizes the audit fees paid (in thousands of NIS)
by the Company and its consolidated subsidiaries during each of 2002 and 2003.

-------------------------- -------------------------- -------------------------
FEES 2002 2003
-------------------------- -------------------------- -------------------------
Audit Fees 280 278
-------------------------- -------------------------- -------------------------
Tax Fees (18) 90 90
-------------------------- -------------------------- -------------------------

--------------------
(18) "Tax Fees" are fees for professional services rendered by the Company's
auditors for tax compliance, tax advice on actual or contemplated
transactions and tax consulting.

AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES

The auditors provided no other services than audit work and
preparation of tax returns in the ordinary course of business. For fiscal 2003
and in previous years, the principal accountants' services were preapproved by
the Company's shareholders at the Annual General Meeting of Shareholders,
pursuant to Israeli law. The Audit Committee's rules of procedure provided for
this process with respect to the prior approval at the General Meeting of all
services to be performed by the principal accountants. In fiscal 2003, all of
the services provided by the principal accountants were preapproved at the
General Meeting before May 15, 2003.

The Company will follow the procedures outlined below for fiscal 2004
and future years. The Audit Committee of the Company's board of directors will
choose and engage the Company's independent auditors to audit the Company's
financial statements. The Company's Audit Committee will adopt a policy
requiring management to obtain the Audit Committee's approval before engaging
the Company's independent auditors to provide any audit or permitted non-audit
services to the Company or its subsidiaries. This policy, which is designed to
assure that such engagements do not impair the independence or the Company's
auditors, will require the audit committee to pre-approve various audit and
non-audit services that may be performed by the Company's auditors. In addition,
the audit committee will limit the aggregate amount of fees the Company's
auditors may receive during 2004 for non-audit services in certain categories.
The Company's Chief Financial Officer will review all management requests to
engage the Company's auditors to provide services and will approve the request
if the requested services are of the type pre-approved by the audit committee.
The Company will inform the audit committee of these approvals at least
quarterly. Services of the type not pre-approved by the audit committee will
require pre-approval by the audit committee on a case-by-case basis. The audit
committee will not be permitted to approve the engagement of the Company's
auditors for any services that fall into a category of services that is not
permitted by applicable law or if the services would be inconsistent with
maintaining the auditor's independence.

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

We have not applied for any exemptions from the listing standards for
the audit committee to date.

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

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

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

ITEM 19. EXHIBITS

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

EXHIBIT
NO. DESCRIPTION
--- -----------

1.1 Memorandum of Association*

1.2 Articles of Association*

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

8 Subsidiaries of Carmel Container Systems, Ltd.***

12.1 Certification pursuant to Rule 13a-14(a) of the Exchange Act
by Doron Kempler****

12.2 Certification pursuant to Rule 13a-14(a) of the Exchange Act
by Nestor Szwarcberg****

13.1 Certification pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350 by Doron Kempler****

13.2 Certification pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350 by Nestor Szwarcberg****

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

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

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

**** Filed herewith.

CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

ADJUSTED TO THE NIS OF DECEMBER 2003

INDEX

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

REPORT OF INDEPENDENT AUDITORS F-2

CONSOLIDATED BALANCE SHEETS F-4

CONSOLIDATED STATEMENTS OF OPERATIONS F-6

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-7

CONSOLIDATED STATEMENTS OF CASH FLOWS F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10

APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS -
LIST OF SUBSIDIARIES F-52

- - - - - - - - - - -

[Ernst & Young]
Kost Forer Gabbay & Kasierer Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel

REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS OF

CARMEL CONTAINER SYSTEMS LTD.

We have audited the accompanying consolidated balance sheets of
Carmel Container Systems Ltd. ("the Company") and its subsidiaries as of
December 31, 2002 and 2003, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of subsidiaries whose assets included in the consolidation
constitute approximately 10% and 10% of total consolidated assets as of December
31, 2002 and 2003, respectively, and whose revenues included in the
consolidation constitute approximately 29%, 9% and 9% of total consolidated
revenues for the years ended December 31, 2001, 2002 and 2003, respectively.
Those financial statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those subsidiaries is based on the report of the other auditors. The
financial statements for the year ended December 31, 2001 of one of the
subsidiaries referred to above whose revenues included in the consolidation
constitute approximately 19% of total consolidated revenues for the years ended
December 31, 2001, were audited by Luboshitz Kasierer, a member of Andersen
Worldwide, who issued an unqualified opinion in their report dated January 28,
2002. Andersen Worldwide has ceased operating as a member of the Securities and
Exchange Commission Practice Section of the American Institute of Certified
Public Accountants.

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

F-2

In our opinion, based on our audit and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2002 and 2003, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel, which differ in certain respects from accounting principles generally
accepted in the United States (see Note 21 to the consolidated financial
statements).

Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 9, 2004 A Member of Ernst & Young Global

F-3

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2003

CONVENIENCE
TRANSLATION
(NOTE 2C)
-------------
DECEMBER 31, DECEMBER 31,
------------------------- -------------
2002 2003 2003
----------- ----------- -------------
ADJUSTED NIS U.S. $
-------------------------- -------------
(IN THOUSANDS)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents 636 747 171
Trade receivables, (net of allowance for doubtful debts of adjusted NIS
2,468 and adjusted NIS 2,241 ($ 514) at December 31, 2002 and 2003,
respectively) (Note 3) 119,069 133,931 30,585
Other accounts receivable and prepaid expenses (Note 4) 4,104 3,658 837
Inventories (Note 5) 48,937 41,360 9,445
----------- ----------- -----------

Total current assets 172,746 179,696 41,038
----------- ----------- -----------

PROPERTY AND EQUIPMENT, NET (Note 6) 128,060 107,650 24,583
----------- ----------- -----------

Total assets 300,806 287,346 65,621
=========== =========== ===========

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

F-4

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2003

CONVENIENCE
TRANSLATION
(NOTE 2C)
------------
DECEMBER 31, DECEMBER 31,
------------------------- ------------
2002 2003 2003
----------- ----------- ------------
ADJUSTED NIS U.S. $
-------------------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term credit from banks and others (Note 8) 10,204 24,273 5,543
Current maturities of long-term loans and capital lease obligations
(Note 11) 30,647 22,331 5,100
Trade payables (Note 9) 74,578 63,457 14,491
Other accounts payable and accrued expenses (Note 10) 15,522 16,540 3,776
----------- ----------- -----------

Total current liabilities 130,951 126,601 28,910
----- ----------- ----------- -----------

LONG-TERM LIABILITIES:
Long-term loans from banks and others (Note 11) 29,548 28,641 6,541
Capital lease obligations (Note 11) 7,442 3,965 905
Accrued severance pay, net (Note 12) 470 191 44
Deferred income taxes (Note 16g) 7,813 5,275 1,205
----------- ----------- -----------

Total long-term liabilities 45,273 38,072 8,695
----- ----------- ----------- -----------

CONTINGENT LIABILITIES AND COMMITMENTS (Note 13)

MINORITY INTEREST IN A SUBSIDIARY 11,128 11,062 2,526
----------- ----------- -----------

SHAREHOLDERS' EQUITY (Note 15):
Share capital - Ordinary shares of NIS 1.0 par value:
10,000,000 authorized at December 31, 2002 and 2003; 2,520,000 shares
issued and outstanding at December 31, 2002 and 2003 23,716 23,716 5,416
Additional paid-in capital 45,413 45,413 10,371
Retained earnings 48,583 46,740 10,675
----------- ----------- -----------

117,712 115,869 26,462
Less - shares held by subsidiary 4,258 4,258 972
----------- ----------- -----------

Total shareholders' equity 113,454 111,611 25,490
----- ----------- ----------- -----------

Total liabilities and shareholders' equity 300,806 287,346 65,621
----- =========== =========== ===========

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

F-5

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2003

CONVENIENCE
TRANSLATION
(NOTE 2C)
-------------
YEAR
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------- DECEMBER 31,
2001 2002 2003 2003
---------- ---------- ---------- ----------
ADJUSTED NIS U.S. $
------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)

Revenues from sales, net (Note 20) 350,031 337,633 349,968 79,920
Cost of revenues (Note 19a) 316,328 311,238 314,305 71,776
---------- ---------- ---------- ----------

Gross profit 33,703 26,395 35,663 8,144
---------- ---------- ---------- ----------

Selling and marketing expenses (Note 19b) 18,072 16,759 17,325 3,956
General and administrative expenses
(Note 19c) 19,459 17,688 17,760 4,056
---------- ---------- ---------- ----------

37,531 34,447 35,085 8,012
---------- ---------- ---------- ----------

Operating income (loss) (3,828) (8,052) 578 132
Financial expenses, net (Note 19d) (10,862) (6,078) (5,159) (1,178)
---------- ---------- ---------- ----------

(14,690) (14,130) (4,581) (1,046)
Other income (expenses), net (Note 19e) 152 (1,155) 94 22
---------- ---------- ---------- ----------

Loss before tax benefit (14,538) (15,285) (4,487) (1,024)
Tax benefit (Note 16) (5,567) (5,926) (2,578) (589)
---------- ---------- ---------- ----------

Loss after tax benefit (8,971) (9,359) (1,909) (435)
Minority interest in losses of a subsidiary 232 807 66 15
---------- ---------- ---------- ----------

Net loss (8,739) (8,552) (1,843) (420)
========== ========== ========== ==========

Basic and diluted net loss per NIS 1 par
value of shares (in adjusted NIS) (3.64) (3.56) (0.77) (0.18)
========== ========== ========== ==========

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

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

F-6

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2003

ADDITIONAL LESS -SHARES TOTAL
SHARE PAID-IN RETAINED HELD BY SHAREHOLDERS'
CAPITAL CAPITAL EARNINGS SUBSIDIARY EQUITY
------- ------- -------- ---------- ------
ADJUSTED NIS
-----------------------------------------------------------------------------------------
(IN THOUSANDS)

Balance at January 1, 2001 23,716 45,413 65,874 (4,258) 130,745

Net loss - - (8,739) - (8,739)
----------- ----------- ----------- ----------- -----------

Balance at December 31, 2001 23,716 45,413 57,135 (4,258) 122,006

Net loss - - (8,552) - (8,552)
----------- ----------- ----------- ----------- -----------

Balance at December 31, 2002 23,716 45,413 48,583 (4,258) 113,454

Net loss - - (1,843) - (1,843)
----------- ----------- ----------- ----------- -----------

Balance at December 31, 2003 23,716 45,413 46,740 (4,258) 111,611
=========== =========== =========== =========== ===========

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

Balance at December 31, 2003 5,416 10,371 10,675 (972) 25,490
=========== =========== =========== =========== ===========

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

F-7

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2003

CONVENIENCE
TRANSLATION
(NOTE 2C)
-------------
YEAR ENDED DECEMBER 31, YEAR ENDED
---------------------------------------------- DECEMBER 31,
2001 2002 2003 2003
------------- ------------- ------------- -------------
ADJUSTED NIS U.S. $
(IN THOUSANDS)

Cash flows from operating activities:
-------------------------------------
Net loss (8,739) (8,552) (1,843) (420)
Adjustments required to reconcile net loss to net cash
provided by operating activities:
Losses on investment in a subsidiary - - 64 16
Minority interest in losses of a subsidiary (232) (807) (66) (15)
Depreciation 26,786 25,567 23,781 5,431
Deferred income taxes, net (5,567) (6,257) (2,578) (589)
Accrued severance pay, net (404) 484 (279) (64)
Capital loss (gain) on sale of property and equipment,
net (152) (156) 129 29
Erosion (increase in value) of long-term loans from
banks and others and capital lease obligations (137) (3,865) 1,056 241
Other 64 16
Decrease (increase) in trade receivables 16,612 (10,599) (14,721) (3,362)
Decrease (increase) in other accounts receivable and
prepaid expenses 695 (828) 486 111
Decrease in inventories 10,791 5,016 7,577 1,730
Increase (decrease) in trade payables (1,501) 17,368 (11,121) (2,540)
Increase (decrease) in other accounts payable and
accrued expenses (3,491) 372 668 153
------------- ------------- ------------- -------------

Net cash provided by operating activities 34,661 17,743 3,153 721
------------- ------------- ------------- -------------

Cash flows from investing activities:
-------------------------------------
Proceeds from acquisition of subsidiary consolidated for
the first time, net (1) - - 148 34
Purchase of property and equipment (10,587) (2,385) (4,446) (1,015)
Proceeds from sale of property and equipment 662 749 946 216
Refund of an investment grant - (253) (602) (138)
------------- ------------- ------------- -------------

Net cash used in investing activities (9,925) (1,889) (3,954) (903)
------------- ------------- ------------- -------------

Cash flows from financing activities:
-------------------------------------
Proceeds from long-term loans from banks and others 15,669 9,960 18,792 4,291
Principal payments of long-term loans from banks and
others (20,015) (24,072) (31,946) (7,295)
Principal payments of loans from a related party (1,875) - - -
Short-term credit from bank and others, net (18,538) (1,587) 14,066 3,212
------------- ------------- ------------- -------------

Net cash provided by (used in) financing activities (24,759) (15,699) 912 208
------------- ------------- ------------- -------------

Increase (decrease) in cash and cash equivalents (23) 155 111 26
Cash and cash equivalents at beginning of year 504 481 636 145
------------- ------------- ------------- -------------

Cash and cash equivalents at end of year 481 636 747 171
============= ============= ============= =============

a. Non-cash transactions:
----------------------
Liability in respect of an investment grant
refund - 1,572 - -
============= ============= ============= =============

b. Supplemental disclosure of cash flows activities:
------------------------------------------------
Cash paid during the year for:
Interest 8,724 7,231 7,936 1,812
============= ============= ============= =============
Income taxes 22 28 17 4
============= ============= ============= =============

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

F-8

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
ADJUSTED TO THE NIS OF DECEMBER 2003

CONVENIENCE"
TRANSLATION
(NOTE 2C)
---------------
YEAR
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------ DECEMBER 31,
2001 2002 2003 2003
------------- ------------- ------------- -------------
ADJUSTED NIS U.S. $
-------------------------------------------------
(IN THOUSANDS)

(1) Proceeds from acquisition of subsidiary
consolidated for the first time:
Working capital, net - - 148 34
============= ============= ============= =============

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

F-9

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 subsidiaries ("the
Group") designs, manufactures and markets shipping containers,
consumer packaging products and packaging wooden pallets and boxes
(see Note 20). The Group's sales are to a large number of customers
mainly in Israel.

b. 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 57 of
the Institute of Certified Public
Accountants in Israel) and whose
accounts are consolidated with those of
the Company.

Related parties - Parties who own 10% or more of the
voting equity of the Company; as defined
in Opinion 29 of the Institute of
Certified Public Accountants in Israel.

c. Investment in Solid Board Ltd

Solid Packaging Board Ltd. (Solid) was incorporated and commenced its
operations in 1995. CD Packaging Systems Ltd. (CD) and KAPPA Packaging
International BV (KAPPA) each jointly held 50% of Solid's shares. On
November 24, 2003, CD and KAPPA signed an agreement, according to
which, CD acquired, the shares held by KAPPA. In addition, KAPPA has
forgiven Solid on a loan that was due to KAPPA in the amount of
adjusted NIS 82 thousand. In exchange for acquisition of KAPPA's
shares in Solid, KAPPA has paid CD NIS 148 thousand. In December 2003,
the operations of Solid were transferred to CD and Solid became
inactive. Prior to November 24, 2003, the financial statements of
Solid were consolidated into CD's financial statements in accordance
with the proportionate consolidation method. As of December 31, 2003,
the financial statements of Solid were fully consolidated with CD's
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, which differ in certain respects from those followed in the
United States, as described in Note 21.

F-10

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

a. Use of estimates:

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

b. Financial statements in adjusted New Israeli Shekels:

1. The Group maintains its accounting records in nominal New Israeli
Shekels (NIS). In accordance with the Statements of the Institute
of Certified Public Accountants in Israel, all the amounts in the
financial statements (including comparative figures) are
presented in adjusted NIS, which have a constant purchasing
power. The purchasing power of adjusted NIS reflects the average
price level in December 2003, according to the Israeli Consumer
Price Index ("CPI") published on January 15, 2004 (178.6 points
on the average basis of 1993 = 100). (See Note c, below)

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

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

c. Principles of adjustments:

1. Balance sheet:

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

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

F-11

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

c) Monetary items (items whose amounts in the balance sheet
reflect current or realizable values) are presented in the
balance sheet as of December 31, 2003 in their nominal
amounts (comparative figures have been adjusted to the
December 2003 Israeli CPI).

2. Statement of operations:

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

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

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

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

As for deferred income taxes, see j. below.

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

F-12

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

3. Convenience translation into U.S. dollars:

The adjusted financial statements as of December 31, 2003 and for
the year then ended, have been translated into U.S. dollars using
the representative exchange rate of the U.S. dollar as of such
date (U.S.$ 1 = NIS 4.379). The translation was made solely for
the convenience of the readers. It should be noted that the
adjusted New Israeli Shekel figures do not necessarily represent
the current costs of the various elements presented, and that the
translated U.S. dollar figures should not be construed to
represent amounts receivable or payable in dollars, or
convertible into dollars, unless otherwise indicated in these
statements.

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

1. Assets and liabilities in or linked to foreign currency are
included in the financial statements according to the
representative exchange rates as published by the Bank of
Israel on December 31, 2003.

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

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

EXCHANGE RATE
AT DECEMBER 31: ISRAELI CPI OF THE U.S. DOLLAR
-------------- -------------------------- -----------------------------
POINTS *) NIS
-------------------------- -----------------------------

2003 178.6 4.379
2002 182.0 4.737
2001 170.9 4.416
2000 168.5 4.041

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

2003 (1.9) (7.6)
2002 6.5 7.3
2001 1.4 9.3

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

F-13

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

d. Principles of consolidation:

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

e. Cash equivalents:

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

f. Allowance for doubtful debts:

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

g. Inventories:

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

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

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

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

h. Property and equipment:

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

F-14

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

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

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

i. Sale - leaseback transaction:

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

The Company entered into two sale - leaseback transactions
of machinery and equipment. The first transaction occurred
in September 1998 for the aggregate amount of adjusted NIS
15,559 thousand and the second transaction occurred in
October 2000 for the aggregate amount of adjusted NIS 17,626
thousand. The unearned gain is immaterial. The Company
retains the option to purchase the machinery and equipment
at the end of the lease period.

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

During September 2002, upon the fulfillment of its liability
under the first lease the Company exercised its option to
purchase the machinery and equipment under the lease in
consideration of adjusted NIS 64 thousand ($ 15 thousand).

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

j. Deferred income taxes:

1. Deferred income taxes are computed in respect of
temporary differences between the carrying amounts of
the assets and liabilities included in these financial
statements and those to be considered for tax purposes.
As for the main components in respect of which deferred
income taxes have been included, see Notes 16g and 16d.

F-15

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

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

k. Revenue recognition:

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

l. Earnings per share:

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

All outstanding stock options have been excluded from the
calculation of the net loss per share, because all the
outstanding stock options are anti-dilutive for all periods
presented. As of December 31, 2003, all the options have
been expired.

m. Derivative financial instruments:

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

The Company enters into call option 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.

Gains and losses on the options are included in the
statement of operations in financial expenses, net, along
with the exchange rate changes of the underlying foreign
currency denominated liabilities. During the year ended
December 31, 2003, the Company recognized a net loss of
adjusted NIS 138 thousand ($ 32 thousand). Total notional
amount of the open contracts is $ 1,150,000 as of December
31,2003.

All of the call option contracts are due until March 9,
2004.

F-16

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

n. Advertising expenses:

Advertising expenses are carried to the statement of
operations as incurred. Advertising expenses for the years
ended December 31, 2001, 2002 and 2003, were approximately
adjusted NIS 262 thousand, adjusted NIS 243 thousand, and
adjusted NIS 146 thousand ($ 33 thousand), respectively.

o. Severance pay:

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

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

Severance expenses for the years ended December 31, 2001,
2002 and 2003, amounted to approximately adjusted NIS 2,244
thousand, adjusted NIS 3,298 thousand and adjusted NIS 2,710
thousand ($ 619 thousand), respectively.

p. Fair value of financial instruments:

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

F-17

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

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

q. Accounting for stock based compensation:

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

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

r. Concentration of credit risk:

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

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

Concentrations of credit risk with respect to trade
receivables are limited due to the large number of entities
comprising the 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.

F-18

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

s. Reclassification:

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

t. Effects of new accounting standards on the financial
statements:

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

Accounting Standard No. 13 prescribes principles with
respect to the effect of changes in foreign exchange rates.
This Standard replaces Interpretations No. 8 and No. 9 of
Opinion No. 36 of the Institute of Certified Public
Accountants in Israel, which have been superseded upon the
discontinuance of the adjustment of financial statements.
The Standard deals with the translation of foreign currency
transactions and with the translation of financial
statements of foreign operations for incorporation into the
financial statements of the reporting enterprise. The
translation principles of Accounting Standard No. 13 are
different from those applied to date.

The effect of the adoption of Accounting Standard No. 12 is
dependent on the inflation rate in Israel, on the
composition of the Company's assets and its sources of
financing at that time.

F-19

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The Company believes that the effect of Standard No. 13 on
its results of operations, financial position and cash flows
is not expected to be material.

u. Pro forma information regarding net income and net earnings
per share is required by SFAS-123, and has been determined
as if the Company had accounted for its employee stock
options under the fair value method of that Statement. Such
information does not have any effect for the years 2001,
2002 and 2003.

NOTE 3: - TRADE RECEIVABLES

a. Composition:

CONVENIENCE
TRANSLATION
DECEMBER 31, --------------
------------------------------------ DECEMBER 31,
2002 2003 2003
---------- ---------- -----------
ADJUSTED NIS U.S. $
------------------------------------ -----------
(IN THOUSANDS)

Open accounts 104,250 121,193 27,676
Notes receivable 17,287 14,979 3,421
---------- ---------- ----------

121,537 136,172 31,097
Less - allowance for doubtful debts 2,468 2,241 512
---------- ---------- ----------

119,069 133,931 30,585
========== ========== ==========

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

c. The following are the changes in the allowance for doubtful
accounts for each of the three years in the period ended
December 31, 2003 (Adjusted NIS in thousand).

BALANCE AT CHARGES TO THE WRITE-OFF OF BALANCE AT END OF
OPENING OF PROFIT AND LOSS PREVIOUSLY PERIOD
PERIOD PROVIDED
ACCOUNTS

YEAR ENDED DECEMBER 31, 2003 2,468 230 (457) 2,241
YEAR ENDED DECEMBER 31, 2002 3,668 254 (1,454) 2,468
YEAR ENDED DECEMBER 31, 2001 5,595 392 (2,319) 3,668

F-20

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

CONVENIENCE
TRANSLATION
DECEMBER 31, -----------
---------------------------------- DECEMBER 31,
2002 2003 2003
---------- ---------- ----------
ADJUSTED NIS U.S. $
---------------------------------- -----------
(IN THOUSANDS)

Related parties (1) 971 382 87
Employees 146 142 32
Government authorities 394 470 107
Deferred income taxes (2) 589 629 144
Prepaid expenses 1,605 1,609 368
Other receivables 399 426 99
---------- ---------- ----------

4,104 3,658 837
========== ========== ==========

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

NOTE 5: - INVENTORIES

Raw materials 31,605 20,481 4,677
Supplies and packaging materials 2,107 2,085 476
Work in progress 1,430 1,245 284
Finished products 10,861 11,319 2,585
---------- ---------- ----------

46,003 35,130 8,022
Goods in transit 2,934 6,230 1,423
---------- ---------- ----------

48,937 41,360 9,445
========== ========== ==========

F-21

NOTE 6: - PROPERTY AND EQUIPMENT, NET

a. Composition:

PALLETS
MOTOR OFFICE AND SPARE
MACHINERY VEHICLES FURNITURE PARTS -
LAND AND AND AND AND LEASEHOLD BASE
BUILDINGS EQUIPMENT **)***) FORKLIFTS EQUIPMENT IMPROVEMENTS STOCK
--------- ----------------- --------- --------- ------------ -----

ADJUSTED NIS
(IN THOUSANDS)
--------------------------------------------------------------------------------------------

Cost:
Balance as of January 1, 2003*) 13,199 345,524 11,796 19,647 11,075 12,639
Additions during the year 48 2,903 357 467 671 -
Disposals during the year - (1,164) (1,717) (231) - (404)
---------- ---------- ---------- ---------- ---------- ----------

Balance at December 31, 2003 13,247 347,263 10,436 19,883 11,746 12,235
---------- ---------- ---------- ---------- ---------- ----------

Accumulated depreciation:
Balance as of January 1, 2003*) 10,630 239,252 8,523 16,915 10,500 -
Additions during the year 332 20,966 950 1,397 136 -
Disposals during the year - (1,039) (1,173) (229) - -
---------- ---------- ---------- ---------- ---------- ----------

Balance at December 31, 2003 10,962 259,179 8,300 18,083 10,636 -
---------- ---------- ---------- ---------- ---------- ----------

Depreciated cost at December 31, 2003 2,285 88,084 2,136 1,800 1,110 12,235
========== ========== ========== ========== ========== ==========

Depreciated cost at December 31, 2002 2,569 106,272 3,273 2,732 575 12,639
========== ========== ========== ========== ========== ==========

** TABLE CONTINUED **

CONVENIENCE
TRANSLATION
TOTAL TOTAL
----- -----
U.S. $
------------------------

Cost:
Balance as of January 1, 2003*) 413,880 94,515
Additions during the year 4,446 1,015
Disposals during the year (3,516) (803)
---------- ----------

Balance at December 31, 2003 414,810 94,727
---------- ----------

Accumulated depreciation:
Balance as of January 1, 2003*) 285,820 65,271
Additions during the year 23,781 5,431
Disposals during the year (2,441) (558)
---------- ----------

Balance at December 31, 2003 307,160 70,144
---------- ----------

Depreciated cost at December 31, 2003 107,650 24,583
========== ==========

Depreciated cost at December 31, 2002 128,060 29,244
========== ==========

** TABLE COMPLETE **

*) Reclassified.

**) Net of investment grant (see Note 2h) amounting to adjusted NIS 947
thousand and adjusted NIS 659 thousand ($ 150 thousand) for the years ended
December 31, 2002 and 2003, respectively.

***) Including machinery and equipment under capital lease - cost amounting to
adjusted NIS 31,985 thousand ($ 7,304 thousand) and accumulated
depreciation amounting to adjusted NIS 13,402 thousand ($ 3,061 thousand)
as of December 31, 2003. See Notes 7 and 11.

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

c. Depreciation expenses amounted to adjusted NIS 26,786 thousand,
adjusted NIS 25,567 thousand and adjusted NIS 23,781 thousand ($ 5,431
thousand( for the years ended December 31, 2001, 2002 and 2003,
respectively.

F-22

NOTE 7: - LEASES

a. The facilities that include offices and warehouses of the Group are
rented under operating leases for various periods ending in 2016.

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

CONVENIENCE
TRANSLATION
ADJUSTED NIS U.S. $
------------ ------------
(IN THOUSANDS)

For the years ending December 31,
2004 12,805 2,924
2005 11,800 2,695
2006 11,245 2,568
2007 and thereafter 88,165 20,134
------------ ------------

124,015 28,321
============ ============

Rent expenses amounted to approximately adjusted NIS
13,053 thousand, adjusted NIS 13,151 thousand and
adjusted NIS 12,875 thousand ($ 2,940 thousand) for
the years ended December 31, 2001, 2002 and 2003,
respectively.

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

a. Composition:

CONVENIENCE
UNLINKED TRANSLATION
AVERAGE INTEREST RATE DECEMBER 31, DECEMBER 31,
----------------------- ------------------------ ---------------
2002 2003 2002 2003 2003
---------- --------- --------- --------- ---------
% ADJUSTED NIS U.S. $
----------------------- ------------------------- ---------------
(IN THOUSANDS)

Overdrafts 11.0 10.6 464 273 62
Short-term credit from
banks 10.2 8.9 6,796 21,000 4,795
Short-term credit from
others 18.2 16.2 2,944 3,000 686
------- ------- -------

10,204 24,273 5,543
======= ======= =======

F-23

b. As of December 31, 2003, the Group had authorized credit lines from
several banks in the amount of adjusted NIS 3,725 thousand ($ 851
thousand), which bear interest at the average rate of Prime +1.8%.

The Group had an unused credit facility in the amount of approximately
adjusted NIS 3,452 thousand ($ 788 thousand) as of December 31, 2003
(there is no fee for the unused portion of the credit facility).

The weighted average interest rate of short-term credit in unlinked
NIS as of December 31, 2002 and 2003, was approximately 12.5% and
8.6%, respectively.

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

NOTE 9: - TRADE PAYABLES

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31,
----------------------------- -------------
2002 2003 2003
---------- ---------- -----------
ADJUSTED NIS U.S. $
----------------------------- -----------
(IN THOUSANDS)

Trade payables 67,564 61,897 14,135
Notes payable 7,014 1,560 356
---------- ---------- ----------

74,578 63,457 14,491
========== ========== ==========

Including shareholders (1) 21,260 20,712 4,730
========== ========== ==========

Including investee of a shareholder (1) 18,354 5,664 1,293
========== ========== ==========

(1) See Note 18a.

NOTE 10: - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Related companies of a shareholder (1) 1,313 1,253 286
Liabilities to employees and payroll
accruals 10,421 10,710 2,446
Government authorities 1,611 3,338 762
Accrued expenses (2) 1,769 1,068 244
Other 408 171 38
---------- ---------- ----------

15,522 16,540 3,776
========== ========== ==========

(1) See Note 18a.

(2) See Note 16e.

F-24

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

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

1. Banks:

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31,
2002 2003 2003
ADJUSTED NIS U.S. $
------------------------ ----------
(IN THOUSANDS)

Banks 55,991 46,991 10,731
Less - current maturities 27,407 18,712 4,273
--------- --------- ---------

28,584 28,279 6,458
========= ========= =========

2. Capital lease obligations:

Capital lease obligations 10,682 7,584 1,732
Less - current maturities 3,240 3,619 827
--------- --------- ---------
7,442 3,965 905
========= ========= =========

3. Liability in respect of an investment grant refund (Note 16a(1))

1,572 982 224
Less - current maturities (included in
other accounts payable) 608 620 141
--------- --------- ---------

964 362 83
========= ========= =========

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

F-25

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

1. Banks:

CONVENIENCE
TRANSLATION
AVERAGE INTEREST RATE DECEMBER 31, DECEMBER 31,
--------------------- --------------------- --------------
2002 2003 2002 2003 2003
---- ---- ---- ---- ----
Unlinked Israeli % ADJUSTED NIS U.S. $
---------------------- ---------------------- ---------------
CPI In or linked (IN THOUSANDS)
U.S. $

8.5 8.5 47,099 45,495 10,389
4.7 4.7 6,103 1,496 342
3.1 2.4 2,789 - -
------- ------- -------
55,991 46,991 10,731
======= ======= =======

2. Capital lease obligations:
CONVENIENCE
TRANSLATION
AVERAGE INTEREST RATE DECEMBER 31, DECEMBER 31,
--------------------- --------------------- --------------
2002 2003 2002 2003 2003
---- ---- ---- ---- ----
% ADJUSTED NIS U.S. $
---------------------- ---------------------- ---------------
(IN THOUSANDS)

Unlinked 9.3 9.3 10,682 7,584 1,732

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

1. Banks:
CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31,
------------ ------------
2003 2003
---- ----
ADJUSTED NIS U.S. $
------------ ------
(IN THOUSANDS)

First year (current maturities) 18,712 4,273
--------- ---------

Second year 9,993 2,282
Third year 10,294 2,351
Fourth year 5,447 1,244
Fifth year 2,545 581
--------- ---------

28,279 6,458
--------- ---------

46,991 10,731
========= =========

2. Capital lease obligations:

First year (current maturities) 3,619 827
--------- ---------

Second year 3,965 905
--------- ---------

7,584 1,732
========= =========

F-26

3. Liability in respect of an investment grant refund:

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31,
------------ -------------
2003 2003
------------ -------------
ADJUSTED NIS U.S. $
------------ -------------
(IN THOUSANDS)

First year (current maturities) 620 141
--------- ---------

Second year 362 83
--------- ---------

982 224
--------- ---------
NOTE 12: - 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 fully 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 subsidiaries are
to supplement the difference.

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

F-27

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.

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

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

----------------------------------------------------------------------------------------------------
CONVENIENCE
----------------------------------------------------------------------------------------------------
TRANSLATION
----------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------------------------------------------
2002 2003 2003
-------- -------- --------
----------------------------------------------------------------------------------------------------
ADJUSTED NIS U.S. $
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------
Severance pay 8,655 8,702 1,987
----------------------------------------------------------------------------------------------------
Less - amounts funded 8,344 8,683 1,982
----------------------------------------------------------------------------------------------------
311 19 5
Compensation for unutilized sick
leave 159 172 39
----------------------------------------------------------------------------------------------------
470 191 44
-------- -------- --------
----------------------------------------------------------------------------------------------------

NOTE 13: - CONTINGENT LIABILITIES AND COMMITMENTS

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

b. Option to purchase property:

A subsidiary of the Company, Tri-Wall, containers Ltd.
("Tri-Wall") leases property in Netanya on which Tri-Wall's plant
is situated, from a primary lessee ("P.L."). In accordance with
the agreement, Tri-Wall has an option to purchase the property in
consideration of approximately $ 2.2 million from the P.L., who
has an option to purchase the property from the owner.

F-28

Tri-Wall gave notice to the P.L. of its intention to exercise the
option. The owner of the property claims that the P.L. breached
certain provisions of their agreement and therefore has no rights
in the property. The matter was transferred to an arbitrator who
determined that Tri-Wall has the right to exercise the option to
purchase the land from the owner or that Tri-Wall should be
compensated in the amount of $ 2.9 million. In April 2003, the
arbitrator's decision was approved by the District Court.

In August 2003, Tri-Wall claimed the amount of NIS 20 million
(including VAT) from the P.L. The P.L. has refused to pay this
amount and is continuing its efforts to nullify all decisions
against it. The execution office is continuing enforcement
procedures against the P.L.

In separate actions filed by the owner and the P.L., on January
16, 2000, the district court ruled that the P.L. is not entitled
to exercise the option as a result of a breach of the lease
contract. Notwithstanding the above, the ruling determined that
Tri-Wall is entitled to exercise the option and acquire the
property. The consideration is to be paid directly to the owner
of the property. The Court did not specify the exercise price of
the option or the date the option can be exercised. The owner and
the P.L. have appealed to the Supreme Court, which has been
holding hearings on this matter.

The Company has transferred the monthly rent payments for the
period commencing March 2000 to a designated bank deposit. The
rent expenses have been recorded in the financial statements.

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

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

NOTE 14: - CHARGES (ASSETS PLEDGED) AND GUARANTEES

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

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

F-29

c. The Company has provided a guarantee to the State of Israel in
favor of a subsidiary (C.D. Packaging Ltd.) in connection with
investment grants received by C.D. in an amount not to exceed 50%
of C.D. liabilities in respect of its "approved enterprise". As
of December 31, 2003, a guarantee of an amount not to exceed
adjusted NIS 491 thousand ($ 112 thousand) was provided, see Note
16a(1).

d. Liabilities secured by pledges are as follows:

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31,
--------------------- ------------
2002 2003 2003
-------- -------- --------
ADJUSTED NIS U.S. $
(IN THOUSANDS)

Short-term loans and credit 7,260 21,273 4,858
Long-term liabilities including
current maturities 67,460 50,972 11,640
-------- -------- --------

74,720 72,245 16,498
======== ======== ========

NOTE 15: - SHARE CAPITAL

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

DECEMBER 31, 2002 AND 2003
-------------------------------------
ISSUED AND
AUTHORIZED OUTSTANDING *)
---------- --------------

NUMBER OF SHARES
-------------------------------------

Ordinary shares of NIS 1 par value each 10,000,000 2,520,000
========== =========

*) As of December 31, 2003, a subsidiary of the Company holds a
total of 119,813 of the Ordinary shares of NIS 1 par value of the
Company, which is netted from shareholders' equity in the amount
of adjusted NIS 4,258 thousand. The shares are presented in the
financial statements under the cost method.

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.

F-30

b. Share option plan:

In August 1996, the Company's Board of Directors has authorized
through share option plan ("the plan") the grant of options to
the Company's employees of up to 100,000 of the Company's
Ordinary shares at the exercise price of $ 8.5 per share (the
share's market price at the date the plan was approved, was $
10). Half of the options are exercisable after two years and the
other half are exercisable after three years. The options are
expired within 7 years. Any options that are canceled or
forfeited before expiration become available for future grant.

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

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

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
2001 2002 2003
---------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT AVERAGE AMOUNT AVERAGE AMOUNT AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
$ $ $
----- ----- -----

Outstanding - at
beginning of year 54,000 8.5 54,000 8.5 - -
Outstanding - at end
of year 54,000 8.5 - - - -

Exercisable options 54,000 8.5 - - - -

As of December 31, 2003, no options are available for future
grant.

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 16: - INCOME TAXES

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

1. The Company's subsidiary, C.D. Packaging Systems Ltd.
("C.D.") was granted the status of an "approved enterprise",
including an expansion plan, pursuant to the law for the
Encouragement of Capital Investments 1959, as amended.

F-31

On December 8, 2002, the Investment Center management
informed C.D on the cancellation of the approval from 1992,
retroactively since C.D. failed to comply with the terms
contained in the approval.

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

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

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

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

2. In 1997, the production facilities of the Company's
subsidiary Tri-wall containers Ltd. ("Tri-wall") have been
granted the status of an "approved enterprise" under the Law
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").

The entitlement to the above benefits is conditional upon
Tri-Wall's fulfilling the conditions stipulated by the above
law, regulations published thereunder and the instruments of
approval for the specific investments in "Approved
Enterprises". In the event of failure to comply with these
conditions, the benefits may be canceled and Tri-Wall may be
required to refund the amount of the benefits, in whole or
in part, including interest. As of December 31, 2003,
management believes that Tri-Wall is meeting all of the
aforementioned conditions.

F-32

During 2003, Tri-Wall received final approval of
implementation of the investment program.

Due to tax losses incurred by the Company, tax benefit
period for the approved enterprise program has not yet
commenced. In accordance with the law the total benefit
period will expire in 2009.

The tax exempt income attributable to the "Approved
Enterprise" can be distributed to shareholders without
imposing tax liability on the company only upon the complete
liquidation of the Company.

The subsidiary has decided not to declare dividends out of
such tax-exempt income. Accordingly, no deferred income
taxes have been provided on income attributable to the
Company's subsidiaries' "Approved Enterprise". If the
retained tax-exempt income is distributed in a manner other
than in the complete liquidation of the subsidiaries, it
would be taxed at the corporate tax rate applicable to such
profits as if the Company has not elected the alternative
tax benefits. As of December 31, 2003, the subsidiaries have
immaterial tax-exempt profits from the "Approved
Enterprise".

Income derived from sources other than approved enterprises
are taxed at the regular tax rate of 36%.

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

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

Under the above law, the Company and Tri-Wall, file consolidated
tax returns.

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

The provisions of the Income Tax (Inflationary Adjustments) Law,
1985 apply to the Company and certain of its Israeli investees.
According to the law, the results for tax purposes are measured
based on the changes in the Israeli CPI. In November 2001, an
amendment to the Income Tax (Inflationary Adjustments) Law
(Amendment No. 14), 2001 was passed by the "Knesset" (Israeli

F-33

parliament), pursuant to which until February 28 of the year
following the reported tax year, the Minister of Finance, with
the approval of the finance committee of the Knesset, is entitled
to determine by an order that the provisions of the aforesaid
law, in whole or in part, will not apply with respect to a
certain tax year if the Israeli CPI in that year did not increase
by more than 3%. In February 2004, the Minister of Finance and
the finance committee decided that the Inflationary Adjustments
Law will be implemented with respect to 2003.

The tax liability for 2003 is computed according to the law,
while taking into account the decrease in the Israeli CPI in that
year.

d. Deferred income taxes:

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

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

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

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

F-34

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31,
------------------------- -------------
2002 2003 2003
--------- --------- ---------
ADJUSTED NIS U.S. $
-------------------------- ---------
(IN THOUSANDS)

Deferred tax assets:
Tax loss carryforward 26,313 23,238 5,307
Provision for employee rights 2,105 1,876 428
Allowance for doubtful debts 854 802 183
Others 373 385 88
--------- --------- ---------

Net deferred tax assets before
valuation allowance 29,645 26,301 6,006
Valuation allowance (240) - -
--------- --------- ---------

Net deferred tax assets 29,405 26,301 6,006
--------- --------- ---------

Deferred tax liabilities:
Depreciable property and
equipment 36,124 30,947 7,067
Inventories 505 - -
--------- --------- ---------

Net deferred tax liability 36,629 30,947 7,067
--------- --------- ---------

Net deferred tax liabilities
(domestic) 7,224 4,646 1,061
========= ========= =========

e. Deferred income taxes are presented in the balance sheet as
follows:

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER
---------------------- 31,
2002 2003 2003
ADJUSTED NIS U.S. $
-------------------------- ---------
(IN THOUSANDS)

Among current assets ("Other
accounts receivable and
prepaid expenses") 589 629 144
Among long-term liabilities (7,813) (5,275) (1,205)
--------- --------- ---------

(7,224) (4,646) (1,061)
========= ========= =========

f. Income tax reconciliation:

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

F-35

CONVENIENCE
TRANSLATION
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------------- -----------------
2001 2002 2003 2003
ADJUSTED NIS U.S. $
(IN THOUSANDS)

Loss before taxes on income (14,538) (15,285) (4,487) (1,024)
========= ========= ========= =========

Theoretical tax expense (benefit)
computed at the Israeli statutory
tax rate - 36% (5,233) (5,502) (1,615) (369)

Increase (decrease) in income taxes resulting from:

Tax adjustments in respect of
inflation in Israel and others (342) (424) (305) (70)
Non-deductible expenses (tax exempt
income) and others, net 30 (180) 32 7
Increase (decrease) in tax expense
due to reduced tax rates in
companies which were granted
approved enterprise status (9) 180 (78) (18)
Utilization of losses and capital
losses which were not recorded as
an asset in the and in previous
years (13) - (612) (139)
--------- --------- --------- ---------
Actual tax benefit (5,567) (5,926) (2,578) (589)
========= ========= ========= =========

g. Income taxes included in the statements of operations
(domestic):

Deferred income taxes, net (5,567) (6,257) (2,578) (589)
Taxes in respect of previous years - 331 - -
--------- --------- --------- ---------
(5,567) (5,926) (2,578) (589)
========= ========= ========= =========

h. Income tax assessments:

Final tax assessments have been received by the Company and
its subsidiaries as follows:

Carmel Systems and Tri-Wall Containers up to and including
the 2000 tax year, C.D. Packaging Systems up to and
including the 1999 tax year. Solid Packaging Board has not
yet been assessed since incorporation.

F-36

NOTE 17: - LINKAGE TERMS OF MONETARY BALANCES

DECEMBER 31, 2002
------------------------------------------------------------------------
LINKED TO IN OR
THE ISRAELI LINKED TO
CONSUMER FOREIGN
PRICE INDEX CURRENCY UNLINKED TOTAL
---------------- ---------------- ---------------- ------------------
ADJUSTED NIS
-----------------------------------------------------------------------
(IN THOUSANDS)

Assets:

Cash and cash equivalents - 83 553 636
Trade receivables - 1,802 117,267 119,069
Other accounts receivable and prepaid expenses 394 - 1,516 1,910
---------------- ---------------- ---------------- -----------------
394 1,885 119,336 121,615
================ ================ ================ =================

Liabilities:

Short-term credit from banks and others - - 10,204 10,204
Trade payables - 53,202 21,376 74,578
Other accounts payable and accrued expenses - 1,313 14,209 15,522
Long-term loans from banks and others (including
current maturities) 6,103 2,789 48,063 56,955
Capital lease obligation (including current
maturities) - - 10,682 10,682
---------------- ---------------- ---------------- -----------------
6,103 57,304 104,534 167,941
================ ================ ================ =================

** TABLE CONTINUED **

DECEMBER 31, 2003
----------------------------------------------------------------------
LINKED TO IN OR
THE ISRAELI LINKED TO
CONSUMER FOREIGN
PRICE INDEX CURRENCY UNLINKED TOTAL
---------------- ---------------- ---------------- ----------------

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

Assets:

Cash and cash equivalents - 3 744 747
Trade receivables - 2,131 131,800 133,931
Other accounts receivable and prepaid expenses 261 - 3,397 3,658
---------------- ---------------- ---------------- ----------------
261 2,134 135,941 138,336
================ ================ ================ ================

Liabilities:

Short-term credit from banks and others - - 24,273 24,273
Trade payables - 40,778 22,679 63,457
Other accounts payable and accrued expenses - 1,253 15,287 16,540
Long-term loans from banks and others (including
current maturities) 1,496 - 45,857 47,353
Capital lease obligation (including current
maturities) - - 7,584 7,584
---------------- ---------------- ---------------- ----------------
1,496 42,031 115,680 159,207
================ ================ ================ ================

** TABLE COMPLETE **

F-37

NOTE 17:- LINKAGE TERMS OF MONETARY BALANCES (CONT.)

DECEMBER 31, 2002
-------------------------------------------------------------------
LINKED TO IN OR
THE ISRAELI LINKED TO
CONSUMER FOREIGN
PRICE INDEX CURRENCY UNLINKED TOTAL
-------------- ----------- ----------- -----------
CONVENIENCE TRANSLATION INTO U.S.$
-------------------------------------------------------------------
(IN THOUSANDS)

Assets:

Cash and cash equivalents - 1 170 171
Trade receivables - 487 30,098 30,585
Other accounts receivable and prepaid expenses 60 - 777 837
----------- ----------- ----------- -----------
60 488 31,045 31,593
=========== =========== =========== ===========

Liabilities:

Short-term credit from banks and others - - 5,543 5,543
Trade payables - 9,312 5,179 14,491
Other accounts payable and accrued expenses - 286 3,490 3,776
Long-term loans from banks and others (including
current maturities) 342 - 10,472 10,814
Capital lease obligation (including current maturities) - - 1,732 1,732
----------- ----------- ----------- -----------
342 9,598 26,416 36,356
=========== =========== =========== ===========

F-38

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 18: - TRANSACTIONS AND BALANCES WITH RELATED PARTIES

a. Current liabilities to related parties:

CONVENIENCE
TRANSLATION
DECEMBER 31, DECEMBER 31
------------ -----------
LINKAGE INTEREST 2002 2003 2003
------- -------- ---- ---- ----
TERMS RATE ADJUSTED NIS U.S. $
----- ---- ------------ ------

1. Trade payables: Interest
Shareholder U.S. $ free 21,260 20,712 4,730

Related companies of a Interest
shareholder U.S. $ free 18,354 5,664 1,293

2. Other accounts payable
and accrued
expenses:
Related companies of a Interest
shareholder U.S. $ free 1,313 1,253 286

b. Current receivables from related parties:

1. Trade receivables:
Related parties Unlinked Interest
Euro free 1,011 1,212 277
1,236 1,847 422
2. Other accounts receivable
and prepaid
expenses:
Investees of Unlinked Interest
shareholders free 723 382 87

F-39

NOTE 18:- TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)

c. Transactions with related parties:

The Company sells to, shareholders, investees of a shareholder
and purchases raw materials from investees of a shareholder and
shareholders. The terms of these transactions do not differ materially
from similar transactions with third parties. The sales, purchases and
other transactions are as follows:

CONVENIENCE
INVESTEES OF TRANSLATION
A SHAREHOLDER SHAREHOLDERS TOTAL TOTAL
------------- ------------ ----- -----
ADJUSTED NIS U.S. $
---------------------------------------------- ------
(IN THOUSANDS)

In 2003:
Expenses:
Purchases of raw
materials 18,986 71,721 90,707 20,714
Financing and
commissions (45) (1,575) (1,620) (370)
---------- ---------- ---------- ----------
18,941 70,146 89,087 20,344
========== ========== ========== ==========
Sales 9,418 4,265 13,683 3,125
========== ========== ========== ==========

INVESTEES OF
A SHAREHOLDER SHAREHOLDERS TOTAL
------------- ------------ -----
ADJUSTED NIS
-----------------------------------------------
(IN THOUSANDS)
In 2002:
Expenses:
Purchases of raw materials 30,720 74,449 105,169
Financing and commissions - 294 294
--------- --------- ---------
30,720 74,743 105,463
========= ========= =========
Sales 9,291 3,830 13,121
========= ========= =========
In 2001:
Expenses:
Purchases of raw materials 32,468 61,829 94,297
Financing and commissions - 673 673
32,468 62,502 94,970
========= ========= =========
Sales 12,044 8,513 20,557
========= ========= =========

F-40

NOTE 19: - SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS

a. Cost of revenues:

CONVENIENCE
TRANSLATION
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER
---------------------------------------- 31,
2001 2002 2003 2003
---------- ---------- ---------- ----------
ADJUSTED NIS U.S. $
----------------------------------------- ----------
(IN THOUSANDS)
---------------------------------------------------------

Raw Materials (1) 197,335 193,871 201,843 46,093
Salaries, wages and employee
benefits 53,765 52,428 52,494 11,988
Subcontracted work 3,009 3,103 2,921 667
Other manufacturing costs 36,235 36,212 35,446 8,096
Depreciation 24,246 23,364 21,874 4,995
---------- ---------- ---------- ----------
314,590 308,978 314,578 71,839
Decrease in inventories of work in
progress 1,415 476 185 42
Decrease (increase) in inventories
of finished products 323 1,784 (458) (105)
---------- ---------- ---------- ----------
316,328 311,238 314,305 71,776
========== ========== ========== ==========

(1) As for purchases from major suppliers (related parties), see Note
18c.

b. Selling and marketing expenses:

CONVENIENCE
TRANSLATION
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------- -------------
2001 2002 2003 2003
---------- ---------- ---------- ----------
ADJUSTED NIS U.S. $
----------------------------------------- -----------
(IN THOUSANDS)
----------------------------------------------------------

Salaries and employee benefits 6,920 5,163 5,415 1,237
Advertising expenses 262 243 146 33
Depreciation 342 289 162 37
Transportation and other 10,548 11,064 11,602 2,649
---------- ---------- ---------- ----------
18,072 16,759 17,325 3,956
========== ========== ========== ==========

c. General and administrative expenses:

Salaries and employee benefits 9,785 9,493 9,329 2,131
Depreciation 2,198 1,914 1,745 398
Office maintenance and other
expenses (1) 7,476 6,281 6,686 1,527
---------- ---------- ---------- ----------
19,459 17,688 17,760 4,056
========== ========== ========== ==========
(1) Including doubtful and bad
debts expenses 392 254 230 53
========== ========== ========== ==========

F-41

NOTE 19:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

d. Financial expenses, net:

CONVENIENCE
TRANSLATION
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------- ------------
2001 2002 2003 2003
--------- --------- --------- ---------
ADJUSTED NIS U.S. $
----------------------------------------- -------------
(IN THOUSANDS)
----------------------------------------------------------

Financial expenses:
Interest expenses and bank charges:
On short-term credit 6,205 3,014 2,215 506
On long-term loans 5,972 6,610 5,345 1,221
Losses arising from inflationary
erosion of the Israeli currency
and others 1,748 7,323 2,916 666
--------- --------- --------- ---------
13,925 16,947 10,476 2,393
--------- --------- --------- ---------
Financial income:
Interest income (599) (668) (3,249) (743)
Gains arising from inflationary
erosion of the Israeli currency
and others (2,464) (10,201) (2,068) (472)
--------- --------- --------- ---------
(3,063) (10,869) (5,317) (1,215)
--------- --------- --------- ---------
10,862 6,078 5,159 1,178
========= ========= ========= =========

e. Other income (expenses), net:

Capital gain (loss) on sale of
property and equipment, net 152 156 (129) (29)
Other income (expenses) - (1,311) 223 51
--------- --------- --------- ---------
152 (1,155) 94 22
========= ========= ========= =========

F-42

NOTE 20: - OPERATING SEGMENTS DATA

The Company operates in three operating segments, the manufacturing
of shipping containers, corrugated cardboard panels and other types of paper
consumer packaging, (see Note 1a. for a brief description of the Company's
business) and follows the requirements of Accounting Standard No. 11 Segment
Reporting:

YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------------------------------------------------
TRI-WALL
PACKAGING
CONSUMER WOODEN
SHIPPING PACKAGING PALLETS AND
CONTAINERS PRODUCTS BOXES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
ADJUSTED NIS
-----------------------------------------------------------------------------------------------
(IN THOUSANDS)

Revenues:
Sales to external customers 253,561 30,148 66,322 - 350,031
Intersegment sales 13,645 3,856 2,719 (20,220) -
------------ ------------ ------------ ------------ ------------

Total revenues 267,206 34,004 69,041 (20,220) 350,031
============ ============ ============ ============ ============

Segments operating income (loss) (8,753) (380) 5,305 (3,828)
============ ============ ============

Financial expenses, net (10,524) (283) (55) (10,862)
============ ============ ============
Other income, net 152
Tax benefit 5,567
Minority interest in losses of a
subsidiary 232
------------

Net loss (8,739)
============

Assets and liabilities:

Segments assets 255,413 29,170 31,031 315,614
============ ============ ============ ------------

Total assets 315,614
============

Segments liabilities 155,138 4,650 8,404 168,192
============ ============ ============ ------------

Total liabilities 168,192
============

Capital investments 9,262 451 873 10,586
============ ============ ============ ============

Depreciation 23,371 1,618 1,797 26,786
============ ============ ============ ============

F-43

NOTE 20: OPERATING SEGMENTS DATA (CONT.)

YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------------------------------
TRI-WALL
PACKAGING
CONSUMER WOODEN
SHIPPING PACKAGING PALLETS AND
CONTAINERS PRODUCTS BOXES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
ADJUSTED NIS
-----------------------------------------------------------------------------------------------
(IN THOUSANDS)

Revenues:
Sales to external customers 251,090 30,091 56,452 - 337,633
Intersegment sales 9,579 1,410 3,284 (14,273) -
------------ ------------ ------------ ------------ ------------

Total revenues 260,669 31,501 59,736 (14,273) 337,633
============ ============ ============ ============ ============

Segments operating income (loss) (11,897) (1,631) 5,476 (8,052)
============ ============ ============

Financial expenses, net (4,459) (676) (943) (6,078)
============ ============ ============
Other expenses, net (1,155)
Tax benefit 5,926
Minority interest in losses of a
subsidiary 807
------------

Net loss (8,552)
============

Assets and liabilities:

Segments assets 242,690 30,186 27,930 300,806
============ ============ ============ ------------

Total assets 300,806
============

Segments liabilities 169,558 10,130 7,664 187,352
============ ============ ============ ------------

Total liabilities 187,352
============

Capital investments 1,937 46 402 2,385
============ ============ ============ ============

Depreciation 21,860 1,941 1,766 25,567
============ ============ ============ ============

F-44

NOTE 20: OPERATING SEGMENTS DATA (CONT.)

YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------
TRI-WALL
PACKAGING
CONSUMER WOODEN
SHIPPING PACKAGING PALLETS AND
CONTAINERS PRODUCTS BOXES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
ADJUSTED NIS
-----------------------------------------------------------------------------------------------
(IN THOUSANDS)

Revenues:
Sales to external customers 267,775 32,014 50,179 - 349,968
Intersegment sales 8,946 1,739 2,652 (13,337) -
------------ ------------ ------------ ------------ ------------

Total revenues 276,721 33,753 52,831 (13,337) 349,968
============ ============ ============ ============ ============

Segments operating income (loss) (1,439) (541) 2,558 578
============ ============ ============

Financial income (expenses), net (5,540) (58) 439 (5,159)
============ ============ ============
Other income, net 94
Tax benefit 2,578
Minority interest in losses of
subsidiary 66
------------

Net loss (1,843)
============

Assets and liabilities:

Segments assets 230,888 27,926 28,532 287,346
============ ============ ============ ------------

Total assets 287,346
============

Segments liabilities 158,717 8,578 8,440 175,735
============ ============ ============ ------------

Total liabilities 175,735
============

Capital investments 2,918 49 1,195 4,162
============ ============ ============ ============

Depreciation 20,426 2,029 1,446 23,901
============ ============ ============ ============

F-45

NOTE 20:- OPERATING SEGMENTS DATA (CONT.)

YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------
TRI-WALL
PACKAGING
CONSUMER WOODEN
SHIPPING PACKAGING PALLETS AND
CONTAINERS PRODUCTS BOXES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
CONVENIENCE TRANSLATION INTO U.S. $
-----------------------------------------------------------------------------------------------
(IN THOUSANDS)

Revenues:
Sales to external customers 61,150 7,311 11,459 - 79,920
Intersegment sales 2,043 397 606 (3,046) -
------------ ------------ ------------ ------------ ------------

Total revenues 63,193 7,708 12,065 (3,046) 79,920
============ ============ ============ ============ ============

Segments operating income (loss) (329) (124) 585 132
============ ============ ============

Financial income (expenses), net (1,265) (13) 100 (1,178)
============ ============ ============
Other income, net 22
Tax benefit 589
Minority interest in losses of a
subsidiary 15
------------

Net loss (420)
============

Assets and liabilities:

Segments assets 52,728 6,377 6,516 65,621
============ ============ ============ ------------

Total assets 65,621
============

Segments liabilities 36,245 1,959 1,927 40,131
============ ============ ============ ------------

Total liabilities 40,131
============

Capital investments 666 11 273 950
============ ============ ============ ============

Depreciation 4,665 463 330 5,458
============ ============ ============ ============

For each of the years ended December 31, 2001, 2002 and 2003 more than 95% of
the Company's revenues were derived from customers located in Israel.

All long-lived assets are located in Israel.

F-46

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21: DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

The consolidated financial statements of the Company conform with
accounting principles generally accepted in Israel ("Israeli GAAP"), which
differ in certain respects from those followed in the United States ("U.S.
GAAP"), as described below:

a. Accrued severance pay, net:

According to Israeli GAAP, accrued severance pay is included in
the balance sheet net of amounts funded, and income from earnings
on amounts funded is netted from the severance pay expenses.

According to U.S. GAAP accrued severance pay is included in the
balance sheets at the total liabilities amount and total amounts
funded through provident fund and through insurance policies.
Income from earnings on amounts funded is added to severance pay
fund.

The effect of this difference on both income and equity is not
material.

b. Effect of inflation:

The Company, in accordance with Israeli GAAP, comprehensively
includes the effects of price level changes in the accompanying
consolidated financial statements, as described in Note 2b. Such
Israeli accounting principles measure the effects of price level
changes in the inflationary nature of the Israeli economy and, as
such, is considered a more meaningful presentation than financial
reporting based on historical cost for Israeli and U.S.
accounting purposes. As permitted by the United States Securities
and Exchange Commission rules for Foreign Private Issuers whose
financial statements comprehensively include the effects of
inflation, price level adjustments have not been reversed and
included in a reconciliation of Israeli accounting principles to
U.S. accounting principles.

c. Treatment of deferred income taxes:

Under Israeli GAAP, deferred income taxes are not provided on the
undistributed tax exempt profits of approved enterprise, where
such profits have been reinvested and will not be distributed to
the company shareholders.

F-47

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21: DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONT.)

Under U.S. GAAP, deferred income taxes are provided on the
undistributed tax exempt profits of domestic subsidiaries that
arose in fiscal years beginning after December 15, 1992.

The effect of this difference is not material.

d. Proportionate consolidation:

Under Israeli GAAP, a jointly controlled entity is included in
the Company's consolidated financial statements according to the
proportionate consolidation method.

Under U.S. GAAP, investments in a jointly controlled entity are
accounted for by the equity method. Proportionate consolidation
is permitted by the Securities and Exchange Commission
regulations applicable for foreign private issuers. Disclosure
required under Item 17 in form 20-F regarding the pro rata
interest in the proportionately consolidated entity was not
presented due to the immateriality of the aforementioned entity.

e. Base stock:

According to Israeli GAAP, pallets and spare parts are presented
as base stock among property and equipment and maintained at
cost, while new purchases are charged as an expense.

According to U.S. GAAP, such amounts should be capitalized and
depreciated over the useful lives of the assets.

The effect of this difference on both income and equity is not
material.

f. Derivative financial instruments:

Under Israeli GAAP derivative financial instruments are accounted
for according to the provisions prevailing under U.S. GAAP before
the adoption of Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133").

Under U.S. GAAP, SFAS No. 133, requires companies to recognize
all of its derivative instruments as either assets or liabilities
in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses)
of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and

F-48

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21: DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONT.)

further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument,
based upon the exposure being hedged, as a fair value hedge, cash
flow hedge or a hedge of a net investment in a foreign operation.

For derivative instruments that are designated and qualify as a
fair value hedge (i.e., hedging the exposure to changes in the
fair value of an asset or a liability or an identified portion
thereof that is attributable to a particular risk), the gain or
loss on the derivative instrument as well as the offsetting loss
or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in
fair values. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows that is attributable to
a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other
comprehensive income and reclassified into earnings in the same
period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument
in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current
earnings during the period of change. For derivative instruments
that are designated and qualify as a hedge of a net investment in
a foreign currency, the gain or loss is reported in other
comprehensive income as part of the cumulative translation
adjustment to the extent it is effective. For derivative
instruments not designated as hedging instruments, the gain or
loss is recognized in current earnings during the period of
change.

The Company uses purchased call options to hedge the fair value
of balance sheet accounts denominated in foreign currencies
against changes in foreign exchange rates. Due to the short-term
settlement period of the derivatives instruments, the difference
between the intrinsic values as required under Israeli GAAP and
the fair value as required under U.S. GAAP, is immaterial.

g. Consultation fees:

The Company included in 2002 an amount of adjusted NIS 1,311
thousand in other income (expenses), which relates to
consultation fee with respect to efficiency improvement of the
Company's operations. Under US GAAP, these expenses should be
included in the statements of operations as a part of operating
expenses.

F-49

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21: DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONT.)

h. Segment information:

According to Israeli GAAP, segment disclosures are provided in
accordance with the guidance of Accounting Standard No. 11
regarding segment reporting.

According to U.S. GAAP, segment disclosures are provided in
accordance with the guidance of Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"), which defines an
operating segment as a component of an enterprise that (a)
engages in business activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same enterprise); (b)
whose operating results are regularly reviewed by the
enterprise's chief operating decision-maker to make decisions
about resources to be allocated to the segment and assess its
performance; and (c) for which discrete financial information is
available.

For all years presented, there were no material differences
between those two disclosure requirements, as both definitions
resulted in the same three reportable segments.

i. Impact of recently issued accounting standards:

FASB INTERPRETATION NO. 46

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). The
objective of FIN 46 is to improve financial reporting by
companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities
that the company is not required to consolidate but in which it
has a significant variable interest.

F-50

CARMEL CONTAINER SYSTEMS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21: DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONT.)

The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period ending after March 15, 2004.
Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the
variable interest entity was established. As of December 31,
2003, the Company does not expect the adoption of FIN 46 to have
a material impact on its consolidated financial statements.

SAB NO. 104

In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition," ("SAB No. 104") which
revises or rescinds certain sections of SAB No. 101, "Revenue
Recognition," in order to make this interpretive guidance
consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the Company's
consolidated results of operations, consolidated financial
position or consolidated cash flows.

F-51

--------------------------------------------------------------------------------
KESSELMAN & KESSELMAN
Certified Public Accountants
1 Nathanson Street
Telephone +972-4-8605000
Facsimile +972-4-8605001

LIST OF SUBSIDIARIES

NAME OF COMPANY OWNERSHIP CONTROL
-------------------------------------------- --------------- ------------
AS OF DECEMBER 31, 2003
--------------------------------
SUBSIDIARIES:

C.D. Packaging Systems Ltd. 50% 50.1%
Tri-Wall Containers (Israel) Ltd. 100% 100%
Solid Packaging Board Ltd.* 100%** 100%**

INACTIVE COMPANIES:

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

* Percentage of control represents the percentage of control of C.D.
Packaging Systems Ltd.

** As of December 31, 2002 - 50%.

F-52

The following is a copy of the previously issued audit report of Arthur
Andersen. This report was issued on January 28, 2002. Arthur Andersen has not
reissued the report.

[Letterhead of Andersen]
[Luboshitz Kasierer]

AUDITORS' REPORT TO THE SHAREHOLDERS

TRI-WALL CONTAINERS (ISRAEL) LTD.

We have audited the accompanying balance sheets of TRI WALL CONTAINERS
(ISRAEL) LTD. (the Company) as of December 31, 2001 and 2000, and the related
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001 and 2000, and the results of its operations, changes in
shareholders' equity and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with generally accepted accounting
principles in Israel.

As described in Note 2A, the financial statements referred to above
have been prepared in values adjusted for changes in the general purchasing
power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

/s/ Luboshitz Kasierer
-------------------------------
Luboshitz Kasierer
Certified Public Accountants (Isr.)

Tel-Aviv.January 28, 2002

AUDITORS' REPORT

To the shareholders of

C.D. PACKAGING SYSTEMS LTD.

We have audited the financial statements of C.D. Packaging Systems Ltd.
(hereafter - the Company) and the consolidated financial statements of the
Company and its proportionately consolidated subsidiary: balance sheets as of
December 31, 2003 and 2002 and statements of income (loss), changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's board of directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position - of the Company and consolidated - as
of December 31, 2003 and 2002 and the results of operations, changes in
shareholders' equity and cash flows - of the Company and consolidated - for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted ("GAAP") in Israel, which differ in
certain respects from accounting principles generally accepted in the US (see
note 12 to the financial statements).

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

Haifa,
March 4, 2004

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.

CARMEL CONTAINER SYSTEMS LTD.

Dated: June 27, 2004 By: /s/ Doron Kempler
-----------------------------
Name: Doron Kempler
Title: General Manager