SUMMARY OF ANNUAL REPORT

As reported in the past few years, our company suffered from the illegal smuggling of foreign cigarette brands into the Palestinian market. We also reported the measures taken in cooperation with the Palestinian Customs and Excise Authority to counter this threat. We are pleased to report that 2007 saw a significant decline in the volumes of smuggled cigarettes.

This had the twin effect of safeguarding the Authority’s revenues from locally manufactured brands as well as enabling our company to continue to compete with legally imported cigarettes. The political and security situation in the Palestinian Areas continued to deteriorate in 2007. The unfortunate events that took place in Gaza in the middle of the year led to disastrous consequences. The economy of the Gaza Strip has since come to a near halt because of the Israeli blockade, which barred all human movement across the border as well as severely restricting free movement of goods and supplies. Our company has not been able to send any of its cigarette brands into Gaza for some nine months. Our sales to the strip, which in 2006 amounted to well over 20% of our total, are unlikely to resume soon. This did have an impact on our Profit and Loss statements for 2007. This impact is likely to be more severe in 2008.

Our company continued its strategy of direct sales and distribution to retailers in The West Bank in 2007. These efforts were reinforced by the introduction of a computerized live sales and distribution system. Our salesmen are now equipped with hand-held computers, connected to the company via modems, whereby live sales are communicated directly into the company’s computers. We believe that we are the first enterprise to introduce such a facility in Palestine. The system is currently being expanded to include nontobacco sales.

The company continued its diversification plans into non-tobacco distribution. Much of these sales in 2007 involved brands owned by other non-Palestinan companies. However, efforts are now underway to introduce brands developed by the company and its subsidiaries. Some of these, introduced into the market in 2008, are already showing promising results.

The decline in the value of the $ US accelerated late in 2007 and early 2008. Subsequently, and also as a result of steep increase in fuel costs there has been a continuous increase in raw material prices, including tobacco. To safeguard against this, and against delays in obtaining import licenses, the company embarked on a strategy of considerably raising its stocks of tobacco. This necessitated taking up medium term loans ( in $ US) from local banks. However, the increase in tobacco prices following the conclusion of our purchase contracts has already exceeded the expected total interest payments. Tobacco prices are expected to continue to rise in the next two years.

To accommodate the sizeable stocks of raw materials, the company continued its building program to enlarge its storage facilities. The total constructed storage and other areas built in the last two years now exceed 8000 sq. m. at a total cost of some 6 million NIS.

During 2007 discussions were held with the Palestinian tax authorities which led to a negotiated settlement. Accordingly, the company agreed to pay nearly five million NIS to settle the tax years 1999 – 2006, via monthly payments.

The financial statements for 2007, shown below, are presented in Jordanian Dinars. This is to conform to regulations by the Palestinian Securities Exchange. In the past all financial statements were presented in NIS. We are of the opinion that presentations in Dinars do introduce distortions since sales were made in NIS. Furthermore, raw materials were paid in $US, Euro, and Pounds Sterling. In reality sales and excise payments in NIS were down in 2007 by nearly 6%. Yet they appear to have gone up by 1.5% as presented in Jordanian Dinars. Income tax and dividends are paid in NIS.

We are pleased to report a net profit (before tax) of 1,854,461 Jordanian Dinars for 2007. This comes despite the loss of the Gaza Strip market. Accordingly, The Board of Directors have recommended that dividends be distributed to shareholders at the rate of 1 NIS per share, ( a total of 7,000,000 NIS).

“Mohammad Ali” M. Alami
Chairman Of The Board Of Directors
March, 2008