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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 20-F

(Mark One)

o Registration statement pursuant to Section 12(b) or
(g) of the Securities Exchange Act of 1934


or

xAnnual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the fiscal
year ended December 31, 2005

or

oTransition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the
transition period from ________ to ________

or

oShell Company pursuant to Section 13 or is (d) of the
Securities Exchange Act of 1934

Date of event
requiring this shall Company report ___________

Commission file number 000-30664

Camtek Ltd.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

Ramat Gavriel Industrial Zone, P.O. BOX 544,
Migdal HaEmek, Israel(Address of principal executive offices)

Securities registered or to be registered
pursuant to Section 12(b) of the Act:
None

Securities registered or to be registered
pursuant to Section 12(g) of the Act:
Ordinary Shares, par value NIS 0.01

Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
None

|                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate the
  number of outstanding shares of each of the issuers classes of capital or
  common stock as of the close of the period covered by the annual report:
|29,856,672 Ordinary Shares, par value NIS 0.01                                                                                                                      

| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Indicate by
  check mark if the registrant is a well-known seasoned issuer, as defined in
  Rule 405 of the Securities Act.                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                   
| | oYes          o No                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                   
| | Indicate by
  check mark whether the registrant (1) has filed all reports required to be
  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that the registrant was
  required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days.

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| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | xYes          o No                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                           
| | If this
  report is an annual or transition report, indicate by check mark if the
  registrant is not required to file reports pursuant to Section 13 or 15(d) of
  the Securities Exchange Act of 1934.                                  
| |                                                                                                                                                                                                                                           
| | oYes          x No                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                           
| | Indicate by
  check mark whether the registrant is a large accelerated filer, an
  accelerated filer, or a non-accelerated filer. See definition of accelerated
  filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
| |                                                                                                                                                                                                                                           
| | oLarge Accelerated Filer
            oAccelerated FilerxNon-Accelerated Filer                                                                                                                                                             
| |                                                                                                                                                                                                                                           
| | Indicate by
  check mark which financial statements the registrant has elected to follow.                                                                                                                                                 
| |                                                                                                                                                                                                                                           
| | Item 17 oItem
  18 x                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                           
| | If this is
  an annual report, indicate by check mark whether the registrant is a shell
  company (as defined in Rule 12b-2 of the Exchange Act).                                                                                         
| |                                                                                                                                                                                                                                           
| | oYesxNo                                                                                                                                                                                                                                   

2

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TABLE OF CONTENTS

|          |  |                                                                                |  |     
|--------- |  | ------------------------------------------------------------------------------ |  | ----
|          |  |                                                                                |  | PAGE
|          |  |                                                                                |  |     
|PART I    |  |                                                                                |  | 2   
|          |  |                                                                                |  |     
|Item 1.   |  | Identity of Directors, Senior Management and Advisers                          |  | 5   
|          |  |                                                                                |  |     
|Item 2.   |  | Offer Statistics and Expected Timetable                                        |  | 5   
|          |  |                                                                                |  |     
|Item 3.   |  | Key Information                                                                |  | 5   
|          |  |                                                                                |  |     
|Item 4.   |  | Information on the Company                                                     |  | 15  
|          |  |                                                                                |  |     
|Item 4A.  |  | Unresolved Staff Comments                                                      |  | 22  
|          |  |                                                                                |  |     
|Item 5.   |  | Operating and Financial Review and Prospects                                   |  | 22  
|          |  |                                                                                |  |     
|Item 6.   |  | Directors, Senior Management and Employees                                     |  | 30  
|          |  |                                                                                |  |     
|Item 7.   |  | Major Shareholders and Related Party Transactions                              |  | 40  
|          |  |                                                                                |  |     
|Item 8.   |  | Financial Information                                                          |  | 42  
|          |  |                                                                                |  |     
|Item 9.   |  | The Offer and Listing                                                          |  | 43  
|          |  |                                                                                |  |     
|Item 10.  |  | Additional Information                                                         |  | 44  
|          |  |                                                                                |  |     
|Item 11.  |  | Quantitative and Qualitative Disclosures About Market Risk                     |  | 58  
|          |  |                                                                                |  |     
|Item 12.  |  | Description of Securities Other than Equity Securities                         |  | 59  
|          |  |                                                                                |  |     
|PART II   |  |                                                                                |  | 59  
|          |  |                                                                                |  |     
|Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                                |  | 59  
|          |  |                                                                                |  |     
|Item 14.  |  | Material Modifications to the Rights of Security Holders and
  Use of Proceeds |  | 59  
|          |  |                                                                                |  |     
|Item 15.  |  | Controls and Procedures                                                        |  | 59  
|          |  |                                                                                |  |     
|Item 16A. |  | Audit Committee Financial Expert                                               |  | 60  
|          |  |                                                                                |  |     
|Item 16B. |  | Code of Ethics                                                                 |  | 60  
|          |  |                                                                                |  |     
|Item 16C. |  | Principal Accounting Fees and Services                                         |  | 60  
|          |  |                                                                                |  |     
|PART III  |  |                                                                                |  | 61  
|          |  |                                                                                |  |     
|Item 17.  |  | Financial Statements                                                           |  | 61  
|          |  |                                                                                |  |     
|Item 18.  |  | Financial Statements                                                           |  | 61  
|          |  |                                                                                |  |     
|Item 19.  |  | Exhibits                                                                       |  | 62  

3

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Forward-Looking Statements

Statements
in this annual report about our future results, levels of activity, performance,
goals or achievements or other future events constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ materially from
those anticipated in our forward-looking statements. These factors include,
among others, those listed under Risk Factors or described elsewhere in this
annual report.

In
some cases, you can identify forward-looking statements by our use of words
such as may, will, should, could, expects, plans,
intends,
anticipates, believes, estimates, predicts, seeks, strategy,
potential or continue or the negative or other variations of these words,
or other comparable words or phrases.

Although
we believe that the expectations reflected in our forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements or other future events. We are under no duty to
update any of our forward-looking statements after the date of this annual
report, other than as required by law. You should not place undue reliance on
forward-looking statements.

As
used in this annual report, the terms we, us, our, the Company and Camtek
mean Camtek Ltd. And its subsidiaries, unless otherwise indicated.

4

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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 Consolidated Financial Data.

We
derived the statement of operations data for the years ended December 31 2003,
2004 and 2005 and balance sheet data as of December 31 2004 and 2005 from the
audited consolidated financial statements contained in this annual report.
Those statements were jointly audited by Goldstein Sabo Tevet and Eisner LLP,
an independent member of Baker Tilly International, regarding the year ended
December 31 2003, and by Goldstein Sabo Tevet and Brightman Almagor & Co.,
a member firm of Deloitte Touche Tohmatsu, regarding the years ended December
31, 2004 and 2005, all of whom are independent auditors, and whose reports with
respect to these financial statements are included elsewhere in this annual
report. We derived the statement of operations data for the years ended
December 31 2001 and 2002 from audited financial statements that are not
included in this annual report.

For all fiscal
periods for which consolidated financial data are set forth below, our audited
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States.

|                                                          |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|--------------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------- | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                          |  | Year Ended
  December 31,             |       
|                                                          |  |                                       |       
|                                                          |  | 2001                                  |        | 2002 |   | 2003    |   | 2004 |        | 2005 |  
|                                                          |  |                                       |        |      |   |         |   |      |        |      |  
|                                                          |  | (in thousands, except per share data) |       
|Selected Statement of Operations Data:                    |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Revenues:                                                 |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Sales of products                                         |  | $                                     | 41,180 |      | $ | 19,103  |   | $    | 26,567 |      | $ | 63,353 |   | $ | 56,987 |  
|Service fees                                              |  |                                       | 2,888  |      |   | 3,490   |   |      | 4,574  |      |   | 4,066  |   |   | 6,045  |  
|Total revenues                                            |  |                                       | 44,068 |      |   | 22,593  |   |      | 31,141 |      |   | 67,419 |   |   | 63,032 |  
|Cost
  of revenues:                                       |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Cost of products sold                                     |  |                                       | 18,930 |      |   | 10,421  |   |      | 13,214 |      |   | 28,193 |   |   | 28,262 |  
|Cost of services                                          |  |                                       | 2,721  |      |   | 3,220   |   |      | 3,460  |      |   | 3,168  |   |   | 4,519  |  
|Royalties to the Government of Israel                     |  |                                       | 1,000  |      |   | 1,000   |   |      | 150    |      |   | -      |   |   | -      |  
|Write-off of inventory                                    |  |                                       | -      |      |   | 1,805   |   |      | -      |      |   | -      |   |   | -      |  
|Total cost of revenues                                    |  |                                       | 22,651 |      |   | 16,446  |   |      | 16,824 |      |   | 31,361 |   |   | 32,781 |  
|Gross profit                                              |  |                                       | 21,417 |      |   | 6,147   |   |      | 14,317 |      |   | 36,058 |   |   | 30,251 |  
|Research and development costs:                           |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Expenses                                                  |  |                                       | 9,017  |      |   | 7,194   |   |      | 5,855  |      |   | 7,328  |   |   | 8,469  |  
|Acquired in process research and
development              |  |                                       | 3,634  |      |   | -       |   |      | -      |      |   | -      |   |   | -      |  
|Research and development costs                            |  |                                       | 12,651 |      |   | 7,194   |   |      | 5,855  |      |   | 7,328  |   |   | 8,469  |  
|Selling, general and administrative expenses              |  |                                       | 13,178 |      |   | 10,057  |   |      | 10,041 |      |   | 15,953 |   |   | 18,760 |  
|Restructuring expenses                                    |  |                                       | 547    |      |   | -       |   |      | -      |      |   | -      |   |   | -      |  
|Aborted share issuance expenses                           |  |                                       |        |      |   |         |   |      |        |      |   | 1,122  |   |   | -      |  
|Operating income (loss)                                   |  |                                       | (4,959 | )    |   | (11,104 | ) |      | (1,579 | )    |   | 11,655 |   |   | 3,022  |  
|Financial and other income (expenses), net                |  |                                       | 1,400  |      |   | 331     |   |      | 235    |      |   | (359   | ) |   | (320   | )
|Income (loss) before income taxes                         |  |                                       | (3,559 | )    |   | (10,773 | ) |      | (1,344 | )    |   | 11,296 |   |   | 2,702  |  
|Provision for income taxes                                |  |                                       | 152    |      |   | 519     |   |      | 225    |      |   | 449    |   |   | -      |  
|Net income (loss)                                         |  | $                                     | (3,711 | )    | $ | (11,292 | ) | $    | (1,569 | )    | $ | 10,797 |   | $ | 2,702  |  
|                                                          |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Earnings (loss) per
  ordinary shares outstanding:        |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Basic                                                     |  | $                                     | (0.17  | )    | $ | (0.47   | ) | $    | (0.06  | )    | $ | 0.40   |   | $ | 0.10   |  
|Diluted                                                   |  | $                                     | (0.17  | )    | $ | (0.47   | ) | $    | (0.06  | )    | $ | 0.39   |   | $ | 0.10   |  
|                                                          |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Weighted average number of
  ordinary shares outstanding: |  |                                       |        |      |   |         |   |      |        |      |   |        |   |   |        |  
|Basic                                                     |  |                                       | 22,043 |      |   | 24,166  |   |      | 27,053 |      |   | 27,114 |   |   | 27,253 |  
|Diluted                                                   |  |                                       | 22,043 |      |   | 24,166  |   |      | 27,053 |      |   | 27,800 |   |   | 27,586 |  

5

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|                          |  |                |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|------------------------- |  | -------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                          |  | December
  31, |       
|                          |  |                |       
|                          |  | 2001           |        | 2002 |   | 2003   |  | 2004 |        | 2005 |  
|                          |  |                |        |      |   |        |  |      |        |      |  
|                          |  | (in thousands) |       
|Balance
  Sheet Data:     |  |                |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Cash and cash equivalents |  | $              | 7,029  |      | $ | 2,898  |  | $    | 12,837 |      | $ | 9,141  |  | $ | 8,714  | 
|Working capital           |  |                | 34,852 |      |   | 30,197 |  |      | 29,364 |      |   | 40,038 |  |   | 47,877 | 
|Total assets              |  |                | 61,254 |      |   | 48,948 |  |      | 54,186 |      |   | 68,643 |  |   | 75,239 | 
|Total debt                |  |                | 4,871  |      |   | 51     |  |      | 2,300  |      |   | 2,335  |  |   | -      | 
|Shareholders equity      |  |                | 46,021 |      |   | 40,316 |  |      | 38,851 |      |   | 49,776 |  |   | 52,618 | 

|   |                                           
|-- | ------------------------------------------
|B. | Capitalization and Indebtedness.          
|   |                                           
|   | Not
  applicable.                         
|   |                                           
|C. | Reasons for the Offer and Use of Proceeds.
|   |                                           
|   | Not
  applicable.                         
|   |                                           
|D. | Risk Factors                              

There
is a high degree of risk associated with our company and business. If any of
the following risks occur, our business, operating results and financial
condition could be materially adversely affected and the trading price of our
ordinary shares could decline.

Risk Factors Related to Our Business and Our
Markets

| |                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | The markets we target are: printed circuit board, high density
  interconnect substrate and semiconductor manufacturing and packaging
  industries. These markets are cyclical  in 2002 and 2003 the Company
  experienced a prolonged and severe downturn in the printed circuit board and
  the high density interconnect substrate; The Company does not have any
  information that enables it to predict the next downturn. | 

The
printed circuit board, high density interconnect substrate and semiconductor
manufacturing and packaging industries are cyclical; The printed circuit board
and the high density interconnect substrate experienced a prolonged and severe
downturn in 2002 and 2003, during which the overall rate of capital spending by
printed circuit board and high density interconnect substrate manufacturers had
been sharply cut and sales of our products had declined. We experienced an
expansion and growth during 2004, a seasonal adjustment down in the first
quarter of 2005, and again, an expansion during the second half of 2005. As a
result of this cyclicality we saw during 2004 an increase in capital spending
in the printed circuit board and high density interconnect substrate
industries, and sales of our automated optical inspection, or AOI, systems to
these manufacturers have increased.  In
2005, there was a decrease in demand from our clients in the printed circuit
board industry, as a result of a capacity adjustment in that market but in the
first quarter of 2006 the demand from our clients in the printed circuit board
market increased again. In the event of a permanent reduction in demand, we
have only a limited ability to reduce expenses because of the need for
significant ongoing expenditures related to engineering, research and
development and worldwide customer service and support operations. Accordingly,
we may incur losses during future downturns or capacity adjustments affecting
the markets we serve.

6

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We are in the process of increasing our
market share in the semiconductor manufacturing and packaging industry with our
Falcon system. If our share in the market fails to grow, our results of
operations will be adversely affected.

Our future
success in the semiconductor manufacturing and packaging industry depends on
our ability to sustain and increase the acceptance rate of our AOI technology
and upon the acceptance by our customers
of new applications we recently included in our AOI systems. If the
market for our AOI systems in the semiconductor manufacturing and packaging
industry does not develop at the rate we expect, whether as a result of our
inability to obtain repeated orders from our customers and to acquire customers
who would adopt our systems for new applications, an economic downturn,
intensified competition, presentation to the market of alternative
technologies, changes in technology, changes in product standards, or otherwise
- our results will be adversely affected.

We may encounter difficulties in purchasing
key components and subsystems to meet increased customer demand.

In
the current highly-competitive business environment, our customers require us
to fill orders within a very short period of time. Our products are complex and
require essential components and subsystems that are produced by a number of
suppliers and subcontractors. These suppliers and subcontractors cannot always
supply such components and subsystems within the time frame demanded by our
customers. Therefore we are required to predict future demands. If we do not
order adequate components and subsystems, or if our suppliers and
subcontractors are unable to timely meet our increased demand, we might not be
able to adequately meet our customers demands. Our inability to satisfy any
increase in customer orders could result in the loss of sales and could cause
customers to seek products from our competitors.

We
may also overestimate our future needs, which could result in our carrying
excess inventory of certain components and subsystems.

Longer sales cycles may increase our costs
and delay time to market of our products, which may increase our inventory and
negatively impact our results of operations.

We
are expanding our product lines and customer base. Compared to our sales cycles
for repeat orders from existing customers, we have longer sales cycles for new
customers who are likely to order multiple systems, for new products and for
new customers in new markets. The sales process in these cases generally
involves: demonstrations and testing against industry benchmarks in our sales
centers; sales and technical presentations and presentations regarding our
products competitive advantages; and installation of the systems at the customers
site for side-by-side competitive evaluations for a period of one to four
months. The longest evaluation period is for new customers who are likely to
order multiple systems. More evaluation time is devoted during the initial
penetration period for new products and for new customers in new markets, since
these circumstances usually require engineering efforts to fix errors,
customize tasks and add new features. As a result of all of the above factors,
our finished goods inventory has increased, and our costs may increase
disproportionately to our revenues as our product lines and customer base
expand. Moreover, our customers are increasingly requiring that we deliver our
products with short lead times. In order to meet our customers needs in the
timeframe they require, we need to pre-order components and subsystems based on
our forecasts of future orders, rather than on actual orders. This need is
compounded by the fact that, in times of increasing demand in our industry, our
suppliers and subcontractors tend to extend their delivery schedules or fail to
meet their delivery deadlines. In order to compensate for these unexpected
delays, we have had to predict our needs further into the future, which
increases the risk that our predictions may not correspond to our actual future
needs.

7

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We operate an international sales
organization. Recently, a substantial majority of our sales has been to
manufacturers in the Asia Pacific region. The concentration of our sales and
other resources within a particular geographical region subjects us to
additional risks.

We
have sold our systems in over 30 countries around the world. The majority of
our sales were in the Asia Pacific region. In 2005, our sales in the Asia
Pacific region accounted for approximately 70% of our total revenues, including
approximately 40% of our total revenues from sales in China and Hong Kong and
19% from sales in Taiwan. We further increased our presence in the region
during 2005. Changes in local legislation, changes in governmental controls and
regulations, changes in tariffs and taxes, political instability, trade
restrictions, a downturn in economic or financial conditions, as well as any
extraordinary events having an adverse effect on the economy or business
environment in this region may cause a significant decline in our future
revenues and may have an adverse effect on our results of operations. These
general risks are heightened in China, where the nature of the economy and the
legal parameters are rapidly evolving and where foreign companies may face
cultural obstacles. Our results from operations may be adversely affected by
changes in the economic or legal environment in China.

Technology in the markets in which we operate
is rapidly evolving, and we may not be able to keep pace with these changes or
with emerging industry standards. This could result in a loss of revenues.

The
markets for our products are characterized by changing technology, evolving
industry standards, changes in end-user requirements and new product
introductions. Potential new technologies and improvements to existing
production equipment and methods could improve production yields, thereby
reducing the need to use our AOI systems in these industries. In addition, new
technologies could emerge as alternatives to using our products.

Our
future success will depend on our ability to enhance our existing products and
to develop and introduce new technologies for AOI of printed circuit boards,
high density interconnect substrates and silicon wafers. These products must
keep pace with technological developments and address the increasingly
sophisticated needs of our customers. If we fail to keep pace with
technological changes, with products offered by our competitors or with emerging
industry standards, our ability to attract new business and generate revenues
may be damaged.

The markets we serve are highly competitive.
There is a dominant market participant for AOI systems both for the printed
circuit board industry and for the final inspection of silicon wafers in the
semiconductor industry, and some of our competitors have greater resources, all
of which may make it difficult for us to maintain profitability.

Competition
in the markets we serve is intense. During 2001, 2002 and early 2003 and during
the first half of 2005, competition intensified due to the low demand for the
type of products that we manufacture to the printed circuit board and the high
density interconnect industries. This resulted from the general economic
downturn or seasonal adjustments during that time. If the trend of increasingly
intense competition continues, it could mean lower prices for our products and
a corresponding reduction in our gross margin. If we have to lower prices to
remain competitive and are unable to reduce our costs to offset price
reductions or are unable to introduce new, higher performance products with
higher prices, our operating results may be adversely affected.

Competitors
currently sell systems that provide functionality similar to our products. In
the printed circuit board industry, our principal competitor and the dominant
market participant is Orbotech Ltd., with additional competitors including
Dainippon Screen and ManiaBarco. In addition, there is a market for used AOI
systems for printed circuit board manufacturers, which may reduce the demand
for our products and force us to lower our prices in certain cases. Our
competitors in the high density interconnect substrate industry include
Dainippon Screen, Orbotech and Utechzone. In the semiconductor manufacturing
and packaging industry, our principal competitor and the dominant market
participant is August Technology Corp. (merged into Rudolph Technologies in
February 2006), with additional competitors including Robotic Vision Systems,
Topcon and Toray Industries, Hitachi, Icos and Solvision.

8

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Some
of our competitors have greater financial, personnel and other resources and
offer a broader range of products and services. These competitors may be able
to respond more quickly to new or emerging technologies or changes in customer
requirements, develop additional or superior products, benefit from greater
purchasing economies, offer more aggressive pricing or devote greater resources
to the promotion of their products.

Our products may infringe on the intellectual
property rights of others, which could result in claims against us.

Third
parties may assert claims that we have violated their patents or that we have
infringed upon their intellectual property rights. Intellectual property claims
have been asserted against us in the past and may be asserted against us in the
future. Any intellectual property claims against us, even if without merit,
could lead to protracted litigation, could cost us a significant amount of
money to defend and could divert managements attention from our business.

On
May 10, 2004, a lawsuit was filed against us in the District Court in Nazareth,
Israel, by our competitor, Orbotech Ltd., alleging that the Dragon and Falcon
systems infringe upon a patent held by Orbotech Ltd. and requesting an
injunctive relief and damages. We believe that we have substantial defenses
against Orbotechs claims.

On
February 23, 2005, a lawsuit was filed against us in the District Court in
Jerusalem by Orbotech Ltd., alleging infringement of patent held by Orbotech
Ltd. regarding an illumination block, (an apparatus for illuminating and
controlling the illumination of scanned objects), seeking injunctive relief and
damages. The court ruled, based on a courts expert opinion, that Camtek
allegedly infringed the patent, and granted a provisional remedy which prevents
Camtek from manufacturing the illumination block. The Supreme Court rejected
our request to appeal from the Districts Court decision. We believe that it
has substantial defenses against Orbotechs claims.

On
July 14, 2005, a lawsuit was filed against us in the United States District
Court for the District of Minnesota by the Companys competitor in the field of
semiconductor manufacturing and packaging, August Technology Corporation,
alleging infringement of a patent and seeking injunctive relief and
damages.  We have filed an answer and
counterclaims alleging, inter-alia,
non-infringement of the patent. We believe that we have substantial defenses to
Augusts allegations.

We
believe that we have substantial defenses against the aforementioned claims.
However, we cannot assure you that we will be successful in our defense against
these claims.  If these claims are
successful, they could have a negative impact on our business by impairing our
ability to sell our systems, and they could result in pecuniary damages against
us. Pecuniary damages awarded at the discretion of the court, if any, would be
based either on the amount of any losses incurred by the claimants in sales of
products due to our sales of infringing products or on the amount of profits
earned by us from sales of infringing products. In the event we do not prevail
against these claims, we may also be liable for any court costs and attorneys
fees incurred by the claimants in connection with these litigations.

If one or more of our third-party suppliers
or subcontractors does not provide us with key components or subsystems, we may
not be able to deliver our products to our customers in a timely manner, and we
may incur substantial costs to obtain these components from alternate sources.

We
rely on single source and limited source suppliers and subcontractors for a
number of essential components and subsystems of our products. We do not have
agreements with all of these suppliers and subcontractors for the continued
supply of the components or subsystems they provide. An interruption in supply
from these sources or an unexpected termination of the manufacture of key
components or subsystems would disrupt production and adversely affect our
ability to deliver products to our customers. An unexpected termination of
supply would require an investment in capital and manpower resources in order
to shift to other suppliers and might cause a significant delay in introducing
replacement products.

We had a history of losses, and we cannot
assure you that we will not incur additional losses in the future.

9

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We
incurred net losses of $11.3 million and $1.6 million for the years ended
December 31 2002 and 2003, respectively. We had net income of $10.8 million in
2004 and $2.7 million in 2005.  We
incurred a net income of $4.4 million for the first quarter of 2006.  We may not be able to sustain or increase
profitability on a quarterly or annual basis. The failure to generate
consistent profitability could have a material adverse effect on the market
price of our shares.

If we are unable to protect our proprietary
technologies, we may not be able to compete effectively.

We
differentiate our products and technologies from those of our competitors by
using our proprietary software, our image processing algorithms and the
integration of our advanced hardware components. We rely on a combination of
copyrights, trade secrets, patents, trademarks, confidentiality and
non-disclosure agreements to protect our proprietary know-how and intellectual
property, including hardware and software components of our products. These
measures may not be adequate to protect our proprietary technologies and it may
be possible for a third party, including a competitor, to copy or otherwise
obtain and use our products or technologies without authorization or to develop
similar technologies independently. Additionally, our products may be sold in
countries, particularly in the Asia Pacific region, that provide less
protection to intellectual property than that provided under U.S. or Israeli
laws.

Fluctuations in currency exchange rates may
result in the prices of our products becoming less competitive or in additional
expenses.

Currency
exchange rate fluctuations may affect the prices of our products. Our prices in
most countries outside of Europe and Japan are denominated in dollars. In those
countries, if there is a significant devaluation in the local currency compared
to the dollar, the prices of our products will increase relative to that local
currency and may be less competitive. In addition, much of our service income
is denominated in local currencies. If a larger number of our sales were to be
denominated in currencies other than dollars, our reported revenue and earnings
would be subject to a greater degree to foreign exchange fluctuations.

We
generate most of our revenues in dollars but incur a significant portion of our
salary and operating expenses in NIS. Appreciation between US dollar and NIS
may adversely affect our result of operations in dollar terms. As a result, we
bear the risk that the rate of inflation in Israel will exceed the rate of
devaluation of the NIS in relation to the dollar, which would increase our
costs expressed in dollars.

We
incur a significant portion of our expenses in China in the Yuan, and these
expenses may rise with our increasing activities there. The Yuan is currently
linked to the dollar. While the value of the Yuan has generally been stable in
recent years and has been controlled by Chinas central government, it may
fluctuate according to substantial changes in the political and economic
conditions in China. The Chinese government is under continued international
pressure to permit the Yuan to enter a full or limited free float. The
appreciation of the Yuan against the dollar may adversely affect our results of
operations in dollar terms.

Our dependence on a single manufacturing
facility magnifies the risk of an interruption in our production capabilities.

We
have only one manufacturing facility, which is located in Migdal HaEmek,
Israel. Any event affecting this site, including natural disaster, labor
stoppages or armed conflict, may disrupt or indefinitely discontinue our
manufacturing capabilities and could significantly impair our ability to
fulfill orders and generate revenues, thus negatively impacting our
business.

We may experience fluctuations in our future
operating results, making it difficult to predict future results.

Our
revenues and net income, if any, in any particular period may be lower than
revenues and net income, if any, in a preceding or comparable period. This
complicates our planning processes and reduces the predictability of our
earnings. Period-to-period comparisons of our results of operations may not be
meaningful, and you should not rely on them as indications of our future
performance.

10

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Our
quarterly results of operations may be subject to significant fluctuations due
to the following factors:

| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | the size,
  timing and shipment of substantial orders;                                               
| |   |                                                                                                      
| |  | customer
  budget cycles and installation schedules;                                                 
| |   |                                                                                                      
| |  | product
  introductions;                                                                             
| |   |                                                                                                      
| |  | the pricing
  of our products;                                                                       
| |   |                                                                                                      
| |  | the timing
  of new product upgrades or enhancements;                                                
| |   |                                                                                                      
| |  | temporary
  shifts in industry capacity                                                              
| |   |                                                                                                      
| |  | the timing
  of installation or, in some cases, of acceptance of our products by our
  customers; and
| |   |                                                                                                      
| |  | interest and
  exchange rates.                                                                       

We depend on a limited number of key
personnel who would be difficult to replace.

Our
continued growth and success largely depends on the managerial and technical
skills of the members of our senior management and key employees. If we
continue expanding our operations, we believe that we will need to promote and
hire qualified engineering, administrative, operational, financial and
marketing personnel. In particular, we may find it difficult to hire key
personnel with the requisite knowledge of our business, products and
technologies. The process of locating, training and successfully integrating
qualified personnel into our operations can be lengthy and expensive. During
periods of economic growth, competition for qualified engineering and technical
personnel is intense.

If
our Chairman and Chief Executive Officer, Mr. Rafi Amit, who is currently
handling the development of our business in the Far East, other members of our
senior management or any of our key employees are unable or unwilling to
continue to be employed by us, our business would suffer. We do not have a key
man life insurance policy for Mr. Amit.

Our relationship with Priortech may give rise
to conflicts of interest.

From
time to time, we purchase products of, or sell products to, other companies
owned or controlled by Priortech, our principal shareholder, and act jointly
with respect to governmental and administrative matters and the purchase from
third parties of various products and services, which may create conflicts of
interest. Although Israeli law imposes procedural requirements, including
obtaining special shareholder approvals for interested party transactions, we
cannot be certain that those procedures will eliminate the possible detrimental
effects of any of these transactions and activities. In addition Mr. Rafi Amit
acts as the Chief Executive Officer of the Company, on a full time basis as
well as acting as Priortechs Chairman of the Board Of Directors. Mr. Yotam
Stern, our Executive Vice President, Business & Strategy, spends 40% of his
time serving as the Chief Executive Officer of Priortech and other positions in
the Priortech group.

We may be classified as a passive foreign
investment company, and, as a result, our U.S. shareholders may suffer adverse
tax consequences.

Generally,
if for any taxable year 75% or more of our gross income is passive income, or
at least 50% of our assets are held for the production of, or produce, passive
income, we may be characterized as a passive foreign investment company, or
PFIC, for U.S. federal income tax purposes. Our passive income would not
include income derived from the sale of our products but would include amounts
derived by reason of the temporary investment of any cash amounts. This
characterization could result in adverse U.S. tax consequences to our
shareholders, including gain realized on the sale of our ordinary shares being
treated as ordinary income rather than capital gain income and could result in
punitive interest charges being applied to such sales proceeds. U.S.
shareholders should consult with their own U.S. tax advisors with respect to
the U.S. tax consequences of investing in our ordinary shares.

11

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Based
on an analysis of our assets and income, we believe that in 2005 we were not a
PFIC. We currently expect that we will not be a PFIC in 2006. However, PFIC
status is determined as of the end of the taxable year and is dependent on a
number of factors, including the relative value of our passive assets and our
non-passive assets, our market capitalization and the amount and type of our
gross income. Therefore, there can be no assurance that we will not become a PFIC
for the year ending December 31, 2006 or in a future year. For a discussion of
how we might be characterized as a PFIC and related tax consequences, please
see U.S. Federal Income Tax Considerations-Tax Consequences if we are a
Passive Foreign Investment Company.

Our share price has been volatile in the past
and may continue to fluctuate in the future.

Our
ordinary shares have experienced significant market price and volume
fluctuations in the past. During the period from January 1, 2005 through March
31, 2006, the price of our ordinary shares ranged from  $2.56 to $5.5.Our ordinary shares may experience significant market price
and volume fluctuations in response to factors, some of which are beyond our
control, such as the following:

| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly
  variations in our operating results;                                                                                                          
| |   |                                                                                                                                                           
| |  | market
  conditions relating to our customers industries;                                                                                                
| |   |                                                                                                                                                           
| |  | operating
  results that vary from the expectations of securities analysts and
  investors;                                                               
| |   |                                                                                                                                                           
| |  | changes in
  expectations as to our future financial performance, including financial
  estimates or recommendations by securities analysts and investors;
| |   |                                                                                                                                                           
| |  | large block
  transactions in our ordinary shares;                                                                                                        
| |   |                                                                                                                                                           
| |  | announcements
  of technological innovations or new products by us or our competitors;                                                                    
| |   |                                                                                                                                                           
| |  | announcements
  by us or our competitors of significant contracts, acquisitions, strategic
  partnerships, joint ventures or capital commitments;         
| |   |                                                                                                                                                           
| |  | changes in
  the status of our intellectual property rights;                                                                                              
| |   |                                                                                                                                                           
| |  | announcements
  of significant claims or proceedings against us;                                                                                          
| |   |                                                                                                                                                           
| |  | additions or
  departures of our key personnel;                                                                                                           
| |   |                                                                                                                                                           
| |  | future sales
  of our ordinary shares; and                                                                                                                
| |   |                                                                                                                                                           
| |  | general
  stock market price and volume fluctuations.                                                                                                     

Stock
markets often experience extreme price and volume fluctuations. Market
fluctuations, as well as general economic conditions, such as a recession,
interest rate or currency rate fluctuations or political events or hostilities
in Israel or the surrounding region could adversely affect the market price of
our ordinary shares.

In
the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. In the future, we could be the target of similar litigation.
Securities litigation could be protracted, result in substantial costs and
divert managements attention and resources.

12

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Our principal shareholder, Priortech, holds a
controlling interest in us and will be able to exercise its control in ways
that may be adverse to your interests.

Priortech
beneficially holds 62.3% of our issued and outstanding ordinary shares. As a
result, Priortech has the power to control the outcome of matters submitted to
a vote of our shareholders, including the election of members of our board and
the approval of significant corporate transactions. This concentration of
ownership may also have the effect of making it more difficult to obtain
approval for a change in control of us. Messrs. Rafi Amit, Yotam Stern and
Itzhak Krell control Priortech and may be deemed to control us.

Risks Relating to
Our Operations in Israel

Conducting business in Israel entails special
risks.

Our
principal offices and sole research and development and manufacturing
facilities are located in the State of Israel. We depend on components imported
from outside of Israel and almost all of our sales occur outside of Israel.
Accordingly, we are directly influenced by the political, economic and military
conditions affecting Israel. Specifically, we could be adversely affected
by:

| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | any major
  hostilities involving Israel;                                                        
| |   |                                                                                                  
| |  | a full or
  partial mobilization of the reserve forces of the Israeli army;                      
| |   |                                                                                                  
| |  | the
  interruption or curtailment of trade between Israel and its present trading
  partners; and
| |   |                                                                                                  
| |  | a
  significant downturn in the economic or financial condition of Israel.                       

Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has been
a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or any future armed conflict, political instability or
violence in the region may have a negative effect on our business condition,
harm our results of operations and adversely affect our share price. The
execution of Israels plan of unilateral disengagement from the Gaza Strip and
some parts of the West Bank and Hamas gaining majority of the Palestinian
Parliament in the elections held recently in the Palestinian Authority, may
affect Israels security, foreign relations and the stability of the region.
Increased hostilities, future armed conflicts, political developments in other
states in the region, or continued or increased terrorism could make it more
difficult for us to conduct our operations in Israel, which could increase our
costs and adversely affect our financial results. Furthermore, there are a
number of countries, primarily in the Middle East, as well as Malaysia and
Indonesia, that restrict business with Israel or Israeli companies, and we are
precluded from marketing our products to these countries. Restrictive laws or
policies of those countries directed towards Israel or Israeli businesses may
have an adverse impact on our operations, our financial results or the
expansion of our business.

Our operations
could be disrupted as a result of the obligation of our key personnel in Israel
to perform military service. Some of our employees in Israel, including certain
key employees, are obligated to perform annual reserve duty in the Israeli army
and are subject to being called up for reserve duty at any time. The absence of
one or more of our officers and key employees for significant periods of time
due to military service could be disruptive to our operations.

13

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The Israeli government programs and tax
benefits in which we have participated in the past and in which we currently
participate or from which we receive benefits require us to meet several
conditions. These programs or benefits may be terminated or reduced in the
future, which could increase our costs.

We
benefit from certain Israeli government programs and tax benefits, particularly
from tax exemptions and reductions resulting from the Approved Enterprise
status of our manufacturing facilities in Israel. To be eligible for these
programs and tax benefits, we must continue to meet conditions, including
making specified investments in fixed assets and equipment and financing a
percentage of those investments with our share capital. If we fail to meet such
conditions in the future, these tax benefits could be cancelled, and we could
be required to refund those tax benefits already received. These programs and
tax benefits may not be continued in the future at their current levels or at
all, and our requests for future participation in these programs for any future
expansion of our manufacturing facilities may not be approved. In recent years,
the Israeli government has reduced the benefits available under certain of its
programs in which we do not participate. The termination or reduction of these
programs and tax benefits could increase our tax rates, thereby reducing our
net profits or increasing our net losses.

The government grants we received in the past
for research and development expenditures restrict our ability to manufacture
products or to transfer technologies outside of Israel.

From
our inception through 2000, we received government grants from the Office of
the Chief Scientist of the Ministry of Industry and Trade, or OCS, for the
financing of a significant portion of our product development expenditures. In
March 2001, we commenced repayment of many of these grants pursuant to an
understanding reached with the OCS. As of June 1, 2005, we have fully repaid
the grants received by us from the OCS. Except for special circumstances and if
we obtain governmental consents and pay to the OCS amounts which may be
substantial, the terms of these grants prohibit us from selling or transferring
rights in the technology developed with the grants to parties outside of Israel
and allow sale or transfer of rights within Israel only with special
governmental approvals, even after full repayment of the grants. Elements of
our technologies, including in the areas of electronic hardware, image
processing, electro-optics, physics and mechanics, were developed with OCS
grants. In addition, we may only manufacture products developed with these
grants outside of Israel pursuant to the approval of a special governmental committee,
and any approval of this nature may also require us to pay a further
significant amount of royalties than the terms of the grants required, unless
the amount of production outside Israel is less than 10% of the original rate
of production and the OCS has not resisted to the transfer of products. The
restrictions regarding the sale or transfer of technology or manufacturing
rights out of Israel could have a material adverse effect on our ability to
enter into strategic alliances or enter into merger or acquisition transactions
in the future that provide for the sale or transfer of our technology or
manufacturing rights.

It may be difficult to enforce a U.S.
judgment against us, our officers and directors and some of the experts named
in this annual report or to assert U.S. securities law claims in Israel.

We
are incorporated in Israel. Substantially all of our executive officers and
directors and our Israeli accountants and attorneys are nonresidents of the
United States, and a substantial portion of our assets and the assets of these
persons are located outside the United States. Therefore, it may be difficult
to enforce a judgment obtained in the United States against us or any of these
persons, including one based on the civil liability provisions of the U.S.
federal securities laws. Additionally, it may be difficult for you to assert
U.S. federal securities laws claims or to enforce civil liabilities under U.S.
federal securities laws in actions originally instituted in Israel.

Some provisions of Israeli law could inhibit
the acquisition of us by others.

14

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Some
provisions of Israeli corporate law may have the effect of delaying, preventing
or making more difficult a merger with, or acquisition of, us. The Israeli
Companies Law generally provides that a merger be approved by the board of
directors and by a majority of the shares present and voting on the proposed
merger at a shareholders meeting called upon at least 21 days notice. A
merger may not be completed until at least 50 days have passed since the filing
of the merger proposal with the Israeli Registrar of Companies. The Israeli
Companies Law also provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of the acquisition, the
purchaser would become a 25% or greater shareholder of the company, unless
there is already another 25% or greater shareholder of the company. Similarly,
an acquisition of shares must be made by way of a tender offer if, as a result of
the acquisition, the purchaser would become a 45% or greater shareholder of the
company, unless there is already a majority shareholder of the company. In any
event, if, as a result of an acquisition of shares, the acquirer will hold more
than 90% of a companys shares, the acquisition must be made by means of a
tender offer for all of the shares. Finally, Israeli tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and
a foreign company, less favorably than U.S. tax laws. For example, Israeli tax
law may, under certain circumstances, subject a shareholder who exchanges his
ordinary shares for shares in another corporation to taxation prior to the sale
of the shares received in such stock-for-stock swap. For more information on
the provisions of Israeli law in these contexts, please see sections  Share Capital and Israeli Taxation.

Item 4. Information on the Company.

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

Our
legal and commercial name is Camtek Ltd. We were incorporated in 1987. In our
first years of operation, we provided manual optical inspection equipment to
address the needs of the printed circuit board, or PCB, manufacturing industry.
In 1994, we introduced our first automated optical inspection, or AOI, system
for the inspection of PCBs. In late 1998, we introduced our Orion system, which
gained wide acceptance in the high-end PCB market and represented a
breakthrough for us. Applying our core technologies, we developed our Pegasus system,
which was introduced in the third quarter of 2002, for the inspection of high
density interconnect substrates, or HDI-S. In September 2001, we acquired a
developer and producer of AOI systems for the semiconductor manufacturing and
packaging industry, or MEP. This acquisition allowed us to enter the
semiconductor inspection market. After a period of intense internal research
and development, we shipped our first new Falcon system for the semiconductor
manufacturing and packaging industry in the fourth quarter of 2003. The first
revenue recognition of the Falcon was in the second quarter of 2004, and since
then, we have experienced growth in Falcon sales, reaching total revenues of
nearly $20 million in 2005 or 30% of the total 2005 revenues.

In
July 2000, we sold 5,835,000 ordinary shares in an initial public offering, in
which we  received net proceeds of  approximately $35 million.  In August 2002, we sold 5,926,730 ordinary
shares in a rights offering of ordinary shares to our then existing
shareholders (of which 5,922,228 were sold to Priortech Ltd.), in which we
received net proceeds of $6.1 million. On August 23, 2005 we raised $5 million
as a convertible loan from FIMI Opportunity Fund L.P and FIMI Israel
Opportunity Fund, Limited Partnership (FIMI).

On April 30,
2006, we completed a private placement in which we issued 2,525,252 ordinary
shares to Israeli institutional investors at a price of $5.94 per share, the
closing price of the shares on the Nasdaq National Market on Wednesday April
26, 2006. The private placement also included warrants that, during a period of
four years, are exercisable into additional 1,262,626 ordinary shares at a
price of $6.83 per share.

We
have been a public company since July 2000. In December 2005, we re-listed on
the Tel-Aviv Stock Exchange and became a dual listed company. Our headquarters
are located in Israel, and we have operations in the Asia Pacific region,
Japan, the United States and Europe.

Our principal
executive offices are located in Ramat Gavriel Industrial Zone, P.O. Box 544,
Migdal HaEmek 23150, Israel, and our telephone number is
011-972-4-604-8100. Our agent for
service of process in the United States is Camtek USA, Inc., located at 2000
Wyatt Dr., Santa Clara CA 95054, Tel: (408) 986 9640.Our website is
located at www.camtek.co.il. The
information on our website is not incorporated by reference into this annual
report.

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

For
discussion of capital expenditures and divestitures, see Item 5- Operating and
Financial Review and Prospects- Liquidity and Capital Resources.

15

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Our Business

We
design, develop, manufacture and market automated optical inspection, or AOI,
systems and related products. AOI systems are computerized systems, which
optically inspect various types of electronic product components for defects
caused during the manufacturing process. Our AOI systems are used to enhance
both production processes and yields for manufacturers in three industries: the
printed circuit board, or PCB, industry; the high density interconnect, or
HDI-S, industry; and the semiconductor manufacturing and packaging industry.
Our systems provide our customers with a high level of defect detection, are
highly reliable and offer high throughput. We have sold more than 1,600 of our
AOI systems in over 30 countries around the world, predominantly to the PCB
industry, of which we believe over 1,050 systems are still in use. Our customer
base includes a majority of the largest 100 PCB manufacturers worldwide as well
as 6 out of the top 15 semiconductor manufacturers. Our global, direct customer
support network provides responsive, localized support for our installed base.

Our
products incorporate proprietary advanced image processing software and
algorithms, as well as advanced electro-optics and precision mechanics. They
are designed for easy operation and maintenance. In addition, our AOI systems
use technology that enables our customers to handle a wide range of inspection
and verification needs.

Our Markets

We
target three industries: the PCB industry; the HDI-S industry; and the
semiconductor manufacturing and packaging industry, all part of the electronic
packaging industries and the electronics supply chain

The Printed Circuit Board Industry

A
PCB is used as the basic platform to interconnect and mount a broad range of
electronic components. PCBs consist of traces, or lines, of conductive
material, such as copper, laminated on either a rigid or a flexible insulated
base. These conductive lines provide electrical interconnections for electronic
components and are essential to the functioning of electronic products.
Imperfections in the various stages of the PCB manufacturing process may result
in defects or flaws, like open conductive lines, electrical short circuits,
nicks and inappropriate line widths.

The
trend toward compact, high-performance and highly reliable electronic products,
such as mobile phones, notebook computers, digital cameras and personal digital
assistants, drives the demand for increased complexity and miniaturization of
PCBs. In response to this demand, PCB manufacturers are increasingly producing
multi-layer PCBs with narrower and denser lines, as well as boards with higher
layer counts. Multi-layer boards consist of several layers of circuitry
laminated together to form a single board with both horizontal and
vertical electrical interconnections. In addition, multi-layer boards are
continuing to evolve with new technologies. Currently, high-end PCBs (excluding
substrates) use conductive lines and spaces 2 to 5 mil wide. One mil is the
equivalent of one-thousandth of an inch. The scan time required to inspect a
given PCB surface increases substantially in relation to the reduction in line
width.

The
manufacturing process for multi-layer boards is comprised of three stages: the
manufacture of production tools, including artwork and masks; the production of
inner layers and their lamination into a single board; and the production of
external layers. The majority of AOI systems in the PCB industry is used for
inspection of inner layers. Today, the number of inner layers in typical
multi-layer PCBs usually ranges from four to 18, though certain high
layer-count boards may consist of as many as 52 layers. Inspection by AOI
systems during the manufacturing process for the detection of defects in the
inner layers prior to the lamination process is crucial, so that any defective
individual layers may be repaired or replaced while still accessible. Once the
multi-layer board is laminated, any undetected defect in any specific layer will
result in discarding the entire board.

The High Density Interconnect Substrate
Industry

A
consistent trend in the semiconductor manufacturing industry is to increase the
number of transistors on each integrated circuit, or IC, also commonly known as
a chip. At the same time the pursuit for miniaturization and lower costs drives
the packaging industry towards smaller devices requiring more input/output
connections across smaller areas. This trend has created the need for an
advanced intermediate carrier between the IC and the PCB. In response to this
challenge, the PCB industry has developed HDI-S, in which the substrates
conductive lines and spaces are 12 to 50 μm (microns). Although HDI-S are
produced using technologies derived from those used for the production of
traditional PCBs, the complexity and high density of these substrates require
separate, specialized manufacturing facilities.

16

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The
HDI-S is connected to the PCB via an array of conductive solder balls, known as
a ball grid array, or BGA. The IC is connected to the upper side of the HDI-S,
either by wire bonding by means of small metal wires, or by flipping the IC
and directly connecting its face to the HDI-S through an array of conductive
bumps plated or stenciled on the upper side of the HDI-S and on the face of the
IC, in what is known as flip chip BGA, or FCBGA, assembly.

The
complexity of HDI-S requires high density inspection capabilities and creates
challenges in achieving high production yields. Therefore, using AOI throughout
the production line becomes even more essential than in the traditional PCB
industry. AOI of the HDI-S is required during the manufacturing process as an
in-process inspection. AOI is also required at the end of the production
process to ensure that the HDI-S meets the requirements for the assembly of the
semiconductor package.

FCBGA
packaging technology is primarily used in high-performance, high-speed ICs,
such as microprocessors, graphics processors and wireless ICs, as it allows a
higher number of input-output contact pads and also improves the performance of
the IC. In FCBGA packaging, the HDI-S must be inspected by AOI with 3-D
measurement capabilities because any deformation of the substrate or deviation
in the size, shape or placement of the bumps on the HDI-S may cause damage to
either the substrate or to the IC during the packaging process or result in an
unreliable contact with the mating pad on the IC, in either case leading to
device failure.

The Semiconductor Manufacturing and Packaging
Industry

The
semiconductor manufacturing industry produces circuits (ICS) on silicon wafers;
each wafer consists of numerous IC dice. At the end of the wafer manufacturing
process, our AOI systems inspect the wafer for various defects. At this stage,
AOI systems verify that the dice are free of defects, and that the electronic
probes used for functional testing of the finished ICs have caused no damage to
the terminal pads. AOI is important to correct any wafer manufacturing process
problems, as well as for quality assurance purposes, mainly to ensure that the
conductive pads on the IC meet the requirements for wire-bonding to either a
lead frame or to a Ball Grid Array (BGA) substrate. A lead frame is the traditional
manner of packaging the IC, where the IC is wire bonded to a thin sheet of
copper or copper alloy stamped to form an array of leads. A BGA substrate
connects the terminal pads on the die to miniature metal balls. After the IC
and lead frame or substrate are encapsulated in molded epoxy, the protruding
lead frame leads or substrate balls will serve later to connect the finished
device to the PCB.

In
the semiconductor packaging process, the finished wafers are diced, or
separated, into individual ICs, which are then mounted onto substrates,
interconnected and encapsulated to produce semiconductor packages. AOI
equipment, together with electrical probe testing, determines which ICs and
substrates are non-defective. AOI equipment is also used to inspect for any
defects that may have been caused to the ICs during the dicing of the wafer.

In
FCBGA packaging technology, the face of the IC is attached to the top of a
substrate via an array of bumps, rather than being wire bonded. Similar to
HDI-S inspection, wafers designed for FCBGA assembly interconnect go through a
process in which bumps are plated or stenciled on pads on the face of the IC.
AOI with 3-D measurement capabilities is used to detect any missing, misplaced
or deformed bumps and to determine their conformity to shape and height
specifications. Size, shape and placement deviations may cause damage to the IC
or the substrate during the packaging process, leading to device failure.

A
relatively small, but fast growing segment is Micro-Electro Mechanical Systems
(MEMS), which utilizes materials, manufacturing technologies and facilities
from the semiconductor industry to produce miniature mechanisms, such as inkjet
print heads, accelerometers, image sensors, video projection devices (DLP),
sensors and microphones. Many MEMS products are packaged between layers of
glass while still at the wafer format, and diced in several steps afterwards.
The MEMS manufacturing segment relies heavily on testing to ensure the product
performance and reliability. This testing may amount to 50-60% of the overall
product cost. AOI is implemented at various stages along the manufacturing
process to detect cracks, foreign materials or mechanical damage, as well as
confirm dimensional conformity, thus eliminating subsequent testing of
defective products, increasing yield and reducing overall production costs.

17

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Products

Our AOI
systems consist of:

A precise,
movable table;

|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An
  electro-optical assembly unit, either movable or fixed, which consists of a
  video camera, precision optics and illumination sources. The electro-optical
  unit captures the image of the inspected product
|  |                                                                                                                                                                                                                   
| | An
  electronic hardware unit, which operates the entire system and includes
  embedded components that process and analyze the captured image by using our
  proprietary algorithms.                             

The
inspected product is placed on the movable table and is scanned under the
optical assembly unit. The optical assembly unit then captures images of the
product, while the electronic hardware unit processes the image using the
analysis algorithms. Detected discrepancies are logged and reported as defects
per the user preferences. The image of the defect is immediately available for
verification by the system operator. Our systems can also compile and
communicate statistical reports of inspection findings via the customers
factory information system.

We
offer a broad range of systems for AOI of ICs, HDI-S and for PCBs. These
systems are used to enhance production yields and assist in controlling
manufacturing processes at wafer fabrication, test and assembly houses, and PCB
plants worldwide. We invest significant resources in research and development
to provide our customers with advantageous performance, low cost of ownership,
high reliability and ease of operation. We believe that a significant part of
our competitive advantage and of our ability to adapt our technologies to
evolving market needs come from our design philosophy and applicable know-how
in basing its products on software-intensive architectures.

Automated Optical Inspection Systems for the
PCB and High-Density Interconnect Substrate Industries

Our
products for these industries consist of the Dragon and Orion lines for the
inspection of inner and outer layers of PCB panels; the Pegasus line for
inspection of HDI-S; and special models dedicated for inspection of artwork and
photo masks.

Dragon

Dragon
systems are high-throughput, automation-ready systems for inspection of all PCB
types in a mass production environment. Dragon models are optimized for
specific PCB technology ranges  from mainstream circuits of typically 100 μm
(microns) conductor line width, up to high density substrates having 12 μm
(microns) wide conductive lines. All Dragon models are designed to interface
with automated material handling mechanisms provided by us or other automation
suppliers. We believe that the combination of detection ability, scanning speed
and automated material handling deliver outstanding value to customers. The
Dragon was first introduced in March 2003.

Orion

Orion
systems are stand-alone AOI systems for high volume inspection of all PCB
types. The Orion family has evolved gradually since its introduction in 2000.
All Orion models retain an ergonomic user interface that supports high
productivity and flexibility, allowing successive on-line inspection and
verification, or solely inspection followed by off-line verification on a
separate station. Like the Dragon family, Orion models are dedicated for
various PCB technology ranges.

18

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Pegasus

The
Pegasus line includes systems for automated inspection of finished organic
substrates that are subsequently used in packaging of BGA and Chip Scale
Package (CSP) devices. The Pegasus inspects the both sides of the substrate,
searching for process and mechanical defects in particular in the gold-plated
areas where the substrate will interconnect with the silicon die or the PCB.
Pegasus models handle substrates in strip format in magazines or singular
substrates in trays.

AIC

The
AIC (Automated Inspectify Center) integrates Inspection and Verification into
one efficient cell that maximizes productivity across the entire AOI operation.
Through its pickup and transfer mechanism, the AIC bridges between the Dragon
and Camteks new verification station, CVR-200. Material flow is balanced and
streamlined at the Dragons scan rate. Since panels are on and off-loaded
automatically, handling-related defects are eliminated. 
Designed to increase overall productivity and yield, AIC delivers immediate
process-control feedback to the production line, saving both time and money,
and improving the final yield.

Automated Optical Inspection Systems for the
Semiconductor Industry

Falcon

The
Falcons advanced algorithms and inspection capabilities enable its dedicated
models to detect defects in the semiconductor die, which, if left undetected,
may cause premature failure. In addition, inspection data can be used by
customers to monitor and characterize several wafer finishing processes,
troubleshoot functional testing issues or control the integrity of the
interconnect bump arrays made on dice intended for packaging in flip chip
technology. The Falcon family currently includes models for 3D and 2D metrology
of bumped-wafer prepared for packaging in the flip-chip technology; inspection
of finished wafers at the end of their manufacturing process and in test
houses, where inspection adds the value of monitoring the marks left by the
testing probe or protects expensive probe cards from damage by dust particles;
post-dicing inspection of frame-mounted wafers at assembly and packaging
facilities, where it adds the value of detecting dicing-related damage.

Customers

Our
customer base includes a majority of the largest 100 PCB manufacturers worldwide
and 7 out of the top 10 semiconductor IDM manufacturers. Our customers, many of
whom have multiple facilities, are located in over 30 countries throughout
Asia, Europe and North America. No individual customer accounted for more than
10% of our total revenues during 2003, 2004 or 2005. In the HDI-S industry, our
customers are typically dedicated HDI-S manufacturers, but also include large
PCB manufacturers who have separate HDI-S manufacturing facilities. Our HDI-S
customers are predominantly located in Taiwan, Japan and the Asia Pacific
region. In the semiconductor manufacturing and packaging industry, we target
wafer manufacturers and companies involved in the testing, assembly and
packaging of semiconductors.

The
following table shows our revenues classified by geographical region for each
of the last three years:

|                      |  |                         |        |      |   |        |  |   |        | 
|--------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                      |  | Year Ended December 31, |       
|                      |  |                         |       
|                      |  | 2003                    |        | 2004 |   | 2005   | 
|                      |  |                         |        |      |   |        | 
|                      |  | (in thousands)          |       
|China and
  Hong Kong |  | $                       | 10,520 |      | $ | 29,576 |  | $ | 24,665 | 
|Taiwan                |  |                         | 10,717 |      |   | 14,574 |  |   | 12,258 | 
|Japan                 |  |                         | 2,563  |      |   | 3,533  |  |   | 2,065  | 
|Other Asia            |  |                         | 1,139  |      |   | 5,341  |  |   | 5,036  | 
|United
  States       |  |                         | 2,465  |      |   | 8,116  |  |   | 11,484 | 
|Western
  Europe      |  |                         | 2,737  |      |   | 4,780  |  |   | 6,597  | 
|Rest of the
  World   |  |                         | 1,000  |      |   | 1,499  |  |   | 927    | 
|                      |  |                         |        |      |   |        |  |   |        | 
|Total                 |  | $                       | 31,141 |      | $ | 67,419 |  | $ | 63,032 | 
|                      |  |                         |        |      |   |        |  |   |        | 

19

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Sales, Marketing and Customer Support

We
have established a global distribution and support network throughout the
territories in which we sell our products, including the Asia Pacific region,
Japan, North America and Europe. We believe that this is an essential factor in
our customers decision to purchase our products. We primarily utilize our own
employees to provide these customer support services. We may expand our network
into additional territories as market conditions warrant.

As
of December 31, 2005, 176 of our employees were engaged in our worldwide
sales, marketing and support efforts, including support and sales
administration staff. Due to the concentration of sales in the Asia Pacific
region, we adjusted our sales organization accordingly during the past two
years, and significantly expanded our sales, marketing and support teams in
this region.

Our
marketing efforts include participation in various trade shows and conventions,
publications and trade press, product demonstrations performed at our
facilities and regular contact with customers by sales personnel. We generally
provide a 12-month warranty to our customers. In addition, for a fee, we offer
service and maintenance contracts commencing after the expiration of the
warranty period, which is typically one year. Under our service and maintenance
contracts, we provide prompt on-site customer support.

In
the second quarter of 2006, we purchased a credit insurance policy from the
ICIC  the Israeli Credit Insurance Policy Company, in order to minimize the
risk contemplated in transactions with customers which are located overseas and
which are granted with variable amount of credit. The Policy covers, among
other risks, political and financial risks of such customers.

Manufacturing

Our
manufacturing activities consist primarily of the assembly and integration of
parts, components and subassemblies, which are acquired from third-party
vendors and subcontractors. The manufacturing process for our products
generally lasts four to six weeks. We utilize subcontractors in Israel for the
production of subsystems.

We
rely on single source and limited source suppliers and subcontractors for a
number of essential components and subsystems of our products. We generally
maintain several months of inventory of critical components used in the
manufacture and assembly of our products. To date, we have been able to obtain
sufficient units of these components to meet our needs.

Competition

The
markets in which we operate are highly competitive. In the PCB industry, our
principal competitor is Orbotech, with additional competitors including
Dainippon Screen, Lloyd Doyle and ManiaBarco. Our competitors in the HDI-S
industry include Dainippon Screen, Orbotech, ATI and Utechzone. In the
semiconductor manufacturing and packaging industry, our primary competitor is
August Technology (merged into Rudolph Technology in February 2006), with
additional competitors including Robotic Vision Systems, Topcon, Toray
Industries, Hitachi, Icos, Tosko and Solvision.

We
believe that the principal elements of a sustainable competitive advantage in
the AOI market are:

|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
| | On-going
  research, development and commercial implementation of new image acquisition,
  processing and analysis technologies;

20

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|  |                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product
  architecture based on proprietary core technologies and
  commercially-available hardware. Such architecture supports shorter
  time-to-market, flexible cost structure and higher margins.
|  |                                                                                                                                                                                                      
| | Fast
  response to evolving customer needs                                                                                                                                                           
|  |                                                                                                                                                                                                      
| | Product
  copmpatibility with customer automation environment                                                                                                                                        
|  |                                                                                                                                                                                                      
| | Strong pre-
  and post-sale support (applications, service and training) deployed in
  immediate proximity to customer sites                                                                         
|  |                                                                                                                                                                                                      
| | maintaining
  a sufficient production line in order to follow the increasing demand for AOI
  products;                                                                                              

We
believe that we compete effectively on all of these factors.

Capital Expenditures

The
following table shows our principal capital expenditures in fixed assets for
the last three years:

|                                 |  |                |     |      |   |      |  |   |     | 
|-------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | --- | 
|                                 |  | December 31,   |    
|                                 |  |                |    
|                                 |  | 2003           |     | 2004 |   | 2005 | 
|                                 |  |                |     |      |   |      | 
|                                 |  | (in thousands) |    
|Real Estate                      |  | $              | -   |      | $ | 191  |  | $ | 20  | 
|Building                         |  |                | -   |      |   | 30   |  |   | 147 | 
|Machinery and equipment          |  |                | 66  |      |   | 315  |  |   | 114 | 
|Office furniture and
  equipment |  |                | 154 |      |   | 293  |  |   | 362 | 
|Automobiles                      |  |                | -   |      |   | -    |  |   | 30  | 
|                                 |  |                |     |      |   |      |  |   |     | 
|Total                            |  | $              | 220 |      | $ | 829  |  | $ | 673 | 

We
currently do not have any material capital expenditures in progress.

The following EU directives apply: Low Voltage Directive (LVD)
73/23/EEC, Directive 98/37/EC on the approximation of the laws of
the Member States relating to machinery (these directives represent the
European standard required in order to sell in Europe).

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

Priortech Ltd.,
our principal shareholder, through its affiliated companies, engages in various
aspects of electronic packaging, including the production and assembly of PCBs
and the development and sale of HDI-S. Based on sales, PCB Technologies, a
subsidiary of Priortech, is one of the largest PCB manufacturers in Israel.
Priortech currently holds 62.3% of our outstanding ordinary shares. Our
revenues from sales to affiliated and subsidiaries of Priortech, totaled
$190,000 $230,000 and $1,000 in 2003, 2004 and 2005, respectively. In addition
to these sales of products, we act jointly with Priortech with regard to
various governmental, administrative and commercial matters, which we believe
is to the mutual advantage of both parties.

|   |                               
|-- | ------------------------------
|D. | Property, Plants and Equipment

Our
main office, manufacturing and research and development facilities are located
in the Ramat Gavriel Industrial Zone of Migdal HaEmek in northern Israel. In
September 1998, we entered into a lease for these facilities to be built
by the lessor and also acquired an option to purchase the building and
underlying land from the lessor, which was exercised by us. These facilities
occupy 74,000 square feet, of which 28,000 square feet are devoted to the
manufacturing of our products. We believe that our production capacity is
sufficient for our current and expected levels of sales.

21

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Our sales offices and demonstration centers,
which we lease in various locations around the world, occupy, an aggregate, of
approximately 28,000 square feet.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review
and Prospects.

|   |                  
|-- | -----------------
|A. | Operating Results

The
following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
the notes to those statements included herein, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or United States GAAP.

Overview

We
design, develop, manufacture and market automatic optical inspection, or AOI,
systems and related products. Our AOI systems are used to enhance both
production processes and yields for manufacturers in the printed circuit board,
or PCB, industry, the high density interconnect substrate, or HDI-S, industry
and the semiconductor manufacturing and packaging industry.

We
sell our AOI systems internationally. The majority of sales of our AOI systems
in 2005 was to PCB manufacturers in the Asia Pacific region, particularly in
China and Taiwan. This trend is due, among other factors, to the migration of
PCB manufacturers into this region due to significant labor cost advantages
available there. In 2005, our sales to customers in the Asia Pacific region accounted
for approximately 70% of our total revenues, including approximately 39.1% of
our total revenues from sales in China and Hong Kong and 19% from sales in
Taiwan. We expect that this trend of increased production of PCBs and other
electronic components in the Asia Pacific region will continue for the
foreseeable future.

In
addition to revenues derived from the sale of AOI systems and related products,
we generate revenues from providing maintenance and support services for our
products. We expect our service revenues to increase as our installed base
increases. We generally provide a one-year warranty with our systems.
Accordingly, service revenues are not earned during the warranty period. Our
service revenues, and gross profit derived from these revenues, increased in
2005 since more systems were sold during the industry upturn during 2004,
therefore more warranties expired. We expect service revenues to moderately
grow in 2006 due to the general increase of our installed base.

Our
customers are increasingly requiring that we deliver our products with short
lead times. In order to meet our customers needs in the timeframe they
require, we need to pre-order components and subsystems based on our forecasts
of future orders, rather than on actual orders. This need to pre-stock our
component and subsystem inventory is compounded by the fact that, in times of
increasing demand in our industry, our suppliers and subcontractors tend to
extend their delivery schedules or fail to meet their delivery deadlines. In
order to compensate for these unexpected delays, we have had to predict our
needs further into the future, which increases the risk that our predictions
may not correspond to our actual future needs. The uncertainties involved in these
longer term estimates during times of business expansion tend to increase the
level of component and subsystem inventories. Compared to our sales cycles for
repeat orders from existing customers, we have longer sales cycles for new
customers who are likely to order multiple systems, for new products and for
new customers in new markets. The sales process generally involves:
demonstrations and testing against industry benchmarks in our sales centers;
sales and technical presentations and presentations regarding our products
competitive advantages; and installation of the systems at a customers site
for side-by-side competitive evaluations for a period of one to four months.
During the initial penetration period for new products and for new customers in
new markets, the evaluation period is typically extended, since there are
usually more intensive engineering efforts to fix errors, customize tasks and
add new features. As a result of all of the above factors, our finished goods
inventory has increased. A significant portion of our finished goods inventory
consists of systems under evaluation and demonstration systems. We expect that
this inventory will continue to increase as our business, product lines and
customer base expand.

22

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Critical Accounting Policies

The
Securities and Exchange Commission defines critical accounting policies as
those that are, in managements view, most important to the portrayal of a
companys financial condition and results of operations and most demanding on
their calls on judgment, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain and may change in
subsequent periods. We believe our most critical accounting policies relate to:

Revenue Recognition of Product Sales.
We recognize revenues from the sales of our products when the products are
installed at the customers premises and are operating in accordance with the
products specifications, signed documentation of the arrangement, such as a
signed contract or purchase order, has been received and the price is fixed or
determinable and collectability is reasonably assured.

Our
products are only installed by our qualified technicians. Thus, before we
recognize the revenue from the sale of a product and consider the sales cycle
completed, our technicians must install our product at the customers premises,
activate the product according to its specifications and then certify
completion of such installation and activation.

Our
revenue recognition policy requires that we make a judgment as to whether
collectability is reasonably assured. Our judgment is made for each customer on
a case-by-case basis, and, among other factors, we take into consideration the
individual customers payment history and its financial strength, as
demonstrated by its financial reports or through a third-party credit check. In
some cases, we secure payments by a letter of credit or other instrument.

Valuation of Accounts Receivable.
We review accounts receivable to determine which are doubtful of collection. In
making this determination of the appropriate allowance for doubtful accounts,
we consider our history of write-offs, relationships with our customers and the
overall credit worthiness of our customers. Changes in the credit worthiness of
our customers, the general economic environment and other factors may impact
the level of our future write-offs. The following table is a summary of the
allowance for doubtful accounts related to accounts receivable for the years ended
December 31, 2003, 2004 and 2005:

|                                 |  |                    |        |      |   |        |   |   |        |  
|-------------------------------- |  | ------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                 |  | As of December 31, |       
|                                 |  |                    |       
|                                 |  | 2003               |        | 2004 |   | 2005   |  
|                                 |  |                    |        |      |   |        |  
|                                 |  | (in thousands)     |       
|Balance at beginning of
  period |  | $                  | (2,387 | )    | $ | (2,090 | ) | $ | (2,236 | )
|Provisions                       |  |                    | (628   | )    |   | (1,229 | ) |   | (680   | )
|Deductions                       |  |                    | 925    |      |   | 1,083  |   |   | 710    |  
|                                 |  |                    |        |      |   |        |   |   |        |  
|Balance at end of period         |  | $                  | (2,090 | )    | $ | (2,236 | ) | $ | (2,206 | )

Valuation of Inventory.
We review inventory for obsolescence and excess quantities to determine that
items deemed obsolete or excess inventory are appropriately reserved. In making
the determination, we consider future sales of related products and the
quantity of inventory at the balance sheet date, assessed against each
inventory items past usage rates and future expected usage rates. Changes in
factors such as technology, customer demand, competing products and other
matters could affect the level of our obsolete and excess inventory in the
future.

23

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Recent Accounting Pronouncements

In December
2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R). SFAS No. 123(R) requires employee
share-based equity awards to be accounted for under the fair value method, and
eliminates the ability to account for these instruments under the intrinsic
value method prescribed by APB Opinion No. 25 and allowed under the
original provisions of SFAS No. 123. SFAS No. 123(R)
requires the use of an option pricing model for estimating fair value, which is
then amortized to expense over the service periods. Had the Company adopted
SFAS 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma
net income and income per share above. SFAS No. 123(R) allows for
either prospective recognition of compensation expense or retrospective recognition.

In January
2005, the SEC issued SAB No. 107, which provides supplemental implementation
guidance for SFAS No. 123(R). SFAS No. 123(R) was effective for the Company
beginning in the first quarter of fiscal 2006. In the first quarter of 2006,
the Company began to apply the prospective recognition method and implemented
the provisions of SFAS No. 123(R).

In May 2005,
the FASB issued SFAS No. 154, Accounting Changes and Error Corrections.
SFAS No. 154 replaces APB Opinion No. 20. Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 requires retrospective application to prior
periods financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. The Company does not expect the adoption of SFAS
No. 154 will have any material impact on its consolidated financial
statements.

In
November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (FSP 115-1 and 124-1), which clarifies when an investment is
considered impaired, whether the impairment is other than temporary, and the
measurement of an impairment loss. It also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP 115-1 and 124-1 are
effective for all reporting periods beginning after December 15, 2005. The
Company does not anticipate that the implementation of these statements will
have a significant impact on its financial position or results of operations.

Results of Operations

Year Ended December 31, 2005 compared to Year
Ended December 31, 2004.

Revenues. Revenues
decreased 6.5% to $63.0 million in the year ended December 31, 2005
from $67.4 million in the year ended December 31, 2004, primarily as
a result of a downturn in the printed board industry, which resulted in our
customers holding capital equipment spending. Sales to the PCB industries
decreased 34%, and sales to HDI-S industries decreased 11% while sales to the
semiconductor industry increased 308%. Sales of all products decreased 10% to
$57.0 million in the year ended December 31, 2005 from
$63.3 million in the year ended December 31, 2004. The mixture of
products sold and their configuration and throughput varieties make it very
difficult to estimate average selling prices and pricing trends. We estimate
that the average selling prices of our AOI systems remained unchanged during
2005 compared to 2004. However the introduction of new products with higher
throughput and higher direct costs, resulted in a reduction of the total AOI
machines shipped to satisfy the market requirements.

In
2005, our total sales increased on an absolute basis in the United States and
Europe, as a result of the successful penetration of the Falcon systems to the
semiconductor industry. In Asia and in Japan, our sales decreased as a result
of the downturn of our business to the PCB industries, which was not
compensated by the moderate increase of Falcon sales to the semiconductor
industry in Asia.

24

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Service
fees increased by 48.5% to $6.0 million in the year ended
December 31, 2005 from $4.1 million for the year ended
December 31, 2004. This increase reflected the increase in sales of system
in 2004 which resulted in higher service fees in 2005.

Gross Profit. Gross
profit consists of revenues less cost of revenues, which includes the cost of
components, production materials, labor, depreciation, factory and service
center overhead, provisions for warranties and royalty payments to the
Government of Israel. These expenditures are only partially affected by sales
volume. In 2005, we experienced a decrease in gross profit and gross margins,
primarily due to decreased sales to the PCB industries. Our gross profit on
product sales decreased by $6.4 million to $28.8 million in 2005,
compared to $35.2 million in 2004. Our gross profit on service revenue
increased by $0.6 million in 2005, to $1.5 million compared to $0.9 million in
2004. Our total gross profit decreased by $5.8 million to
$30.3 million in 2005 from $36.1 million in 2004, representing a
decrease of 16.1%. Our gross margin came down to 48.0% in 2005, compared to a
gross margin of 53.5% in 2004.

Research and Development Costs.
Research and development expenses consist primarily of salaries, materials
consumption and costs associated with subcontracting certain development
efforts. Total research and development expenses for 2005 were
$8.5 million, compared to $7.3 million in 2004. Research and
development expenses increased in 2005 due, in part, to increased research and
development projects and use of subcontractors (by $0.3) and also due to an
increase in headcount and raised salaries and bonuses (by another $0.3).

Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist primarily of expenses
associated with salaries, commissions, promotion and travel, doubtful debt,
professional services and rent costs. Our selling, general and administrative
expenses increased 17.5% to $18.8 million in 2005 from $16 million in
2004. Selling, general and administrative expenses as a percentage of revenues
increased in 2005 to 29.8% from 23.7% in 2004 mainly due to building marketing
and sales infrastructure to support the penetration of the Falcon systems to
the semiconductor industry. Moreover, in 2005 we continued the restructuring
and strengthening our overall sales infrastructure especially in the Asian
territory. We increased our sales employee headcount raising expenses by $0.6
million, and agent commissions were increased by $0.3 million. Our expenses for
professional and legal services were increased in 2005 by $0.7 million as a
result of the law suits filed against us in Israel and in the United States.

Financial and Other (Expenses) Income, Net.
We had net financial expense of $320,000 in 2005, as compared to net financial
expense of $359,000 in 2004. These changes related primarily to exchange rate
influence and interest paid. Changes in currency rates resulted in expenses of
$238,000 in 2005 and income of $80,000 in 2004.

Provision for Income Taxes.
We had no provision for income tax in 2005 compared with the provision we had
in 2004 for income tax of $499,000, due to a settlement we reached with the
Israeli Income Tax Authorities regarding certain tax assessments.

Net Income. Our net
income decreased to $2.7 million in 2005 compared to a net income of
$10.8 million in 2004. This decrease in net income was primarily due to
the increase in all expenses categories in 2005.

Year Ended December 31, 2004 Compared to
Year Ended December 31, 2003

Revenues. Revenues
increased 116% to $67.4 million in the year ended December 31, 2004
from $31.1 million in the year ended December 31, 2003, primarily as
a result of the upturn in the global electronics industry, which resulted in
our customers increasing capital equipment spending. Sales of products
increased 138% to $63.4 million in the year ended December 31, 2004
from $26.6 million in the year ended December 31, 2003. We estimate
that the average selling prices of our AOI systems increased by approximately
6% during 2004 compared to 2003. The introduction of new products and the
increased quantity of AOI systems sold during 2004 were the main factors
contributing to our revenue increase.

In
2004, our total sales increased on an absolute basis in all geographic markets;
in addition, the relative significance of certain geographic markets as a
percentage of our total sales has continued to shift from Europe and the United
States to the Asia Pacific region. Sales also increased due to the successful
penetration of our Dragon system, continuing penetration of our Pegasus system
and the introduction of our Orion Fine Line system to the packaging market. We
also started to recognize sales to the semiconductor manufacturing sector by
introducing our Falcon system.

25

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Service
fees decreased by 11.1% to $4.1 million in the year ended
December 31, 2004 from $4.6 million for the year ended
December 31, 2003. This decrease reflected the decrease in sales of
systems in 2002 which resulted in lower service fees in 2004.

Gross Profit. In
2004, we experienced an increase in gross profit and gross margins, primarily
due to increased sales, which provided the economies of scale benefits. Our
gross profit on product sales increased by $22 million to
$35.2 million in 2004, compared to $13.2 million in 2003. Our gross
profit on service revenue decreased by $216,000 in 2004, compared to $1.1
million in 2003. Our total gross profit increased by $21.8 million to $36.1 million
in 2004 from $14.3 million in 2003, representing an increase of 152.3%.
Our gross margin improved to 53.5% in 2004, compared to a gross margin of 46%
in 2003.

Research and Development Costs.
Total research and development expenses for 2004 were $7.3 million,
compared to $5.9 million in 2003. Research and development expenses
increased in 2004, due in part to increased research and development projects
(an increase of $646,000) and an increase of $447,000 resulting from an
increase in headcount and raised salaries and bonuses that had been reduced in
the past two years.

Selling, General and Administrative Expenses.
Our selling, general and administrative expenses, increased 56.5% to
$16.0 million in 2004 from $10.0 million in 2003. Selling, general
and administrative expenses as a percentage of revenues decreased in 2004 to
23.7% from 32.2% in 2003 mainly due to economies of scale. In 2004 we continued
the restructuring and strengthening our sales infrastructure especially in the
Asian territory. We increased our sales and service employee headcount raising
expenses by $2.0 million, expenses related to revenue volume such as agent
commissions were increased by $1.0 million, traveling expenses increased by
$333,000 and shipping expenses increased by $1.3 million.

Financial and Other (Expenses) Income, Net.
We had net financial expense of $359,000 in 2004, as compared to net financial
income of $235,000 in 2003. These changes related primarily to exchange rate
influence and interest paid. Changes in currency rates resulted in income of
$80,000 in 2004 and $396,000 in 2003. In 2003, this income was offset by
interest expenses of $450,000, while in 2004, we had interest expense of $
169,000.

Provision for Income Taxes.
We had a provision for income tax of $499,000 in 2004 due to a settlement we
reached with the Israeli Income Tax Authorities regarding certain tax
assessments. This compares to a provision of $225,000 in 2003.The 2003
provision reflected our estimate of the probable cost of settlement of these
tax assessments.

Net Income. Our net
income increased to $10.8 million in 2004 compared to a net loss of
$1.6 million in 2003. This increase in net income was primarily due to an
increase in our revenues.

Liquidity
and Capital Resources

Our
cash and cash equivalent balances totaled approximately $8.7 million at
December 31, 2005 and $9.1 million at December 31, 2004. Our
investments in marketable securities totaled approximately $2.1 million at
December 31, 2005, we had no investments in marketable securities at December
31, 2004. Our cash and marketable securities consisted mainly of money raised
through equity offerings in 2000 and 2002, and money raised through a
convertible loan in 2005. We raised approximately $36.0 million from our
initial public offering in 2000, approximately $6.1 million in a rights
offering of ordinary shares to our then existing shareholders in 2002 and $5.0
million as a convertible loan from FIMI Opportunity Fund L.P. and FIMI Israel
Opportunity Fund, Limited Partnership. Our working capital was approximately
$47.8 million at December 31, 2005 and $40.0 million at
December 31, 2004. On April 30, 2006 we have raised approximately $15
Million by a Private Placement to Israeli institutional investors issuing
2,525,252 ordinary shares. The Private Placement also included warrants that
are exercisable into additional 1,262,626 ordinary shares at a price of $6.83
per share, during a period of four years.

26

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Cash flow from
operating activities

For the year
ended December 31, 2005, we had negative cash flow from operations of $0.3
million, primarily due to an increase in our receivables of $5.0 million,
partially offset by an increase in our payables of $1.1 million. For the year
ended December 31, 2004, we had negative cash flow from operations of $1.8
million, primarily due to an increase in our inventories of $11.2 million, and
due to an increase in our accounts receivable of $8.8 million.

Cash
flow from investing activities

Cash
flow used by investing activities in 2005 was $2.8 million, mainly due to
investment in marketable securities of $2.1 million and investment in fixed
assets of $0.7 million.

Cash
flow used by investing activities in 2004 was $0.8 million, mainly due to
investment in fixed assets. Cash flow provided by investing activities in 2003
was $10.7 million, mainly due to the redemption of marketable securities.

Capital
expenditures for 2005 were $673,000, compared to $829,000 in 2004, and $220,000
in 2003. Most of the capital expenditures in 2005 were for the purpose of
replacing obsolete equipment and machinery and renewing office furnishings and
equipment. Our capital expenditure budget for 2006 is approximately $800,000.

We
believe that our existing sources of liquidity and anticipated cash flow from
operations will be sufficient to meet our anticipated cash requirements for at
least the next twelve months.

Effective Corporate Tax Rate

Our
production facilities are the subject of several investment programs, and
have been granted Approved Enterprise status under the Law for Encouragement of
Capital Investments, 1959. We are entitled to a tax holiday for a period of ten
years from the year in which we, as an Approved Enterprise, first earn taxable
income. The periods of benefits relating to our investment programs which
received Approved Enterprise status expire at different times. The tax benefits
with regard to our first investment program which received Approved Enterprise
status expired on December 31, 1999, and the tax benefits with regard to our
second approved investment program will expire at the end of 2007. Income
related to our first investment program is now subject to a 31% corporate tax
rate. The percentage of our income which will be subject to the 31% tax rate is
dependent on the increase in our revenues in comparison to the revenues in the
year in which each additional investment program was approved and other
factors. In 2006, approximately 2% of our taxable income will be subject to the
31% corporate tax rate.

In
the event that we operate under more than one approval or that our capital
investments are only partly approved, our effective tax rate will be a weighted
combination of the various applicable tax rates.

As
of December 31, 2005, we had net operating loss, or NOL, carryovers for Israeli
tax purposes of approximately $2.9 million, which may be used to offset taxable
income, subject to annual limitations. This NOL carryover has no expiration
date. In addition, foreign subsidiaries have NOL carryovers totaling
approximately $9.3 million, of which approximately $4.0 million expire between
2006 to 2010, approximately $1.7 million expire between 2021 to 2023 and
approximately $3.4 million have no expiration date.

Disclosure About Market Risk

The
currency of the primary economic environment in which our operations are
conducted is the dollar. Most of our revenues are derived in dollars, and the
prices of most of our materials and components are purchased in dollars or are
linked to changes in the dollar/NIS exchange rate effective on the date of
delivery of the goods to our factory. Most of our marketing expenses are also
denominated in dollars or are dollar linked. Our product prices in most
countries outside of Europe and Japan are denominated in dollars. However, most
of our service income is denominated in local currency. In Europe or Japan, if
there is a significant devaluation in the local currency as compared to the
dollar, the prices of our products will increase relative to that local
currency and may be less competitive, which was the case in 2005. The opposite
effect occurs when the dollar decreases in value in comparison to these
currencies. As the majority of our revenues are denominated in dollars, we
believe that inflation and fluctuations in the NIS/dollar exchange rate have no
material effect on our revenues. However, a portion of the costs of our Israeli
operations, mainly personnel and facility-related, are incurred in NIS. As a
result, we bear the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the dollar, which will increase
our costs expressed in dollars and have an effect on our net income. Our NIS
costs, as expressed in dollars, increase to the extent by which any increase in
the rate of inflation in Israel is not offset, or is offset on a lagging basis,
by a devaluation of the NIS in relation to the dollar or to the extent that the
NIS appreciates in relation to the dollar.

27

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An
increasing portion of our expenses is incurred in the Peoples Republic of
China. The Chinese currency is currently linked to the dollar. The Chinese
government has been under increasing international pressure to permit the Yuan
to enter a full or limited free float. Should this linkage be discontinued by
the Chinese government, and if the Chinese currency rises in value in relation
to the dollar, our results of operations, in dollar terms, would be adversely
affected.

In
our consolidated financial statements, transactions and balances originally
denominated in dollars are presented at their original amounts. Gains and
losses arising from non-dollar transactions and balances are included in the
determination of net income as part of financial expenses, net.

Currently,
we do not engage in hedging or other transactions intended to manage risks
relating to foreign currency exchange rate or interest rate fluctuations.

C.      Research
and Development, Patents and Licenses.

We
believe that intensive research and development are essential to our business.
We devote substantial research and development resources to developing new
products and to improving our existing products to meet our customers evolving
needs. We have dedicated teams with expertise in image processing software and
algorithms, electronic hardware, electro-optics, physics, mechanics and systems
design.

Our
product development efforts over the past two years have resulted in the
introduction of several new AOI systems, including the new models in the Dragon
series, and Orion series as well as automated material handling systems for the
Dragon series for the PCB market, the Pegasus the Lam, new models in the Orion
series for the HDI-S market and the Falcon for the semiconductor manufacturing
and packaging market.

Our
research and development efforts are primarily focused on:

| |   |                                                   
| | - | --------------------------------------------------
| |  | increasing
  the throughput of our AOI systems;   
| |   |                                                   
| |  | improving
  our defect detection capabilities; and
| |   |                                                   
| |  | reducing the
  number of false alarms.            

In
addition, we are focusing our efforts on leveraging our core technologies,
expertise and experience into improving our Falcon and Dragon family of
products. We believe our internal multi-disciplinary expertise will enable us
to maintain and enhance our technological edge.

As
of December 31, 2005, we had 85 employees engaged in research and development,
all of whom are based in our headquarters in Israel. We also use subcontractors
for the development of some of the hardware components of our systems. Our
research and development expenses were, $5.9 million, $7.3 million and $8.5
million for the years ended December 31, 2003, 2004 and 2005 respectively, representing
18.8% ,10.7% and 13.5% of total revenues for the years then ended.

We
will continue to devote our research and development resources to maintaining
and extending our technology leadership position. In 2006 we expect to
introduce new products and capabilities for all of our target markets.

28

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In
general, we rely on a combination of our copyrights, trade secrets, patents,
trademarks and non-disclosure agreements to protect our proprietary know-how
and intellectual property. We also enter into confidentiality agreements with
key employees and with all of the subcontractors who develop and manufacture
components for use in our products. We also employ specialists whose main role
is to maintain and protect our intellectual property from both professional and
legal perspectives. We cannot be certain that actions we take to protect our
proprietary rights will be adequate nor can we be certain that we will be able
to deter reverse engineering or that there will not be independent third-party
development of our technology.

We
have three patents pending with the Patent Cooperation Treaty organization or
PCT, ten patents pending in Israel, and four registered patents - two in the
United States, one in Japan and one in Israel. We have also sixteen patents
that were registered with the PCT and are in registration process in the United
States, Europe, Japan and Israel. Several of these patents relate to our AOI
technology developed for the semiconductor industry. We consider aspects of
many elements of our AOI systems to be proprietary to us.

D.      Trend
Information.

During
2001, 2002 and early 2003, competition in the PCB and HDI-S industries
intensified due to the low demand for AOI systems, resulting from the general
economic downturn during that time. The demand increased again during 2004. We
have also experienced a capacity correction of the demand for our AOI products
in the first quarter of 2005, due to seasonal adjustment of the markets, as
well as a decrease in the PCB business, mainly the Chinese market, but in the
next quarters of 2005 the trend changed again, and the demand for AOI systems
increased.

In
2005, the majority of sales of our AOI systems were still to manufacturers in
the Asia Pacific region, particularly in China and Taiwan. This trend is due,
among other factors, to the migration of PCB manufacturers into this region due
to significant labor cost advantages available there. We expect that this trend
toward the manufacturing of PCBs and other electronic components in the Asia
Pacific region will continue for the foreseeable future, though at a lower
rate.

The
trend of our revenues from the Falcon systems to the semiconductors industries
was very positive in 2005. The first revenue recognition of the Falcon was in
the second quarter of 2004, and since then, we have experienced growing Falcon
sales, reaching total revenues of nearly $20 million in 2005 or 30% of the
total 2005 revenues. We expect to maintain or even improve during 2006 the rate
of Falcon systems sales that we had achieved at the end of 2005.

E. Off-Balance
Sheet Arrangements.

We do not have
any arrangements or relationships with entities that are not consolidated into
our financial statements and are reasonably likely to materially affect our
liquidity or the availability of our capital resources.

F. Contractual
Obligations and Other Commercial Commitments.

As of December
31, 2005, we had contractual obligations and commercial commitments of:

|                                |  |                |       |                    |   |           |  |           |     |                     |   |     |  |   |    | 
|------------------------------- |  | -------------- | ----- | ------------------ | - | --------- |  | --------- | --- | ------------------- | - | --- |  | - | -- | 
|                                |  | Payment Due in |      
|                                |  |                |      
|Contractual
  Obligations       |  | Total          |       | Less than 1
  Year |   | 1-3 years |  | 3-5 years |     | More than 5
  years |  
|                                |  |                |       |                    |   |           |  |           |     |                     |  
|                                |  | (in
thousands) |      
|                                |  |                |       |                    |   |           |  |           |     |                     |   |     |  |   |    | 
|Long-term debt obligations      |  | $              | --    |                    | $ | --        |  | $         | --  |                     | $ | --  |  | $ | -- | 
|Capital lease obligations       |  |                | --    |                    |   | --        |  |           | --  |                     |   | --  |  |   | -- | 
|Operating lease obligations (1) |  |                | 1,194 |                    |   | 567       |  |           | 627 |                     |   | -   |  |   | -- | 
|Purchase obligations            |  |                | --    |                    |   | --        |  |           | --  |                     |   | --  |  |   | -- | 
|Other long-term obligations (2) |  |                | 721   |                    |   | 293       |  |           | 309 |                     |   | 119 |  |   | -  | 
|                                |  |                |       |                    |   |           |  |           |     |                     |   |     |  |   |    | 
|Total                           |  | $              | 1,915 |                    | $ | 860       |  | $         | 936 |                     | $ | 119 |  | $ | -  | 
|                                |  |                |       |                    |   |           |  |           |     |                     |   |     |  |   |    | 

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|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In May 2004, we entered
  into an operating lease for vehicles for a period of 36 months. As of
  December 31, 2005, the minimum future rental payments were approximately $
  994.                    
|    |                                                                                                                                                                                                        
|(2) | Our
  subsidiaries have entered into various operating lease agreements,
  principally for office space. As of December 31, 2005, minimum future rental
  payments under these leases amounted to $721.

Item 6. Directors, Senior Management and Key
Employees.

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

The
following table sets forth information with respect to our directors, executive
officers and key employee as of the date of this annual report. The address of
our directors, executive officers and key employee is c/o Camtek Ltd., Ramat Gavriel
Industrial Zone, P.O. Box 544, Migdal HaEmek 23150, Israel.

|                   |  |     |  |                                                                 
|------------------ |  | --- |  | ----------------------------------------------------------------
|Name               |  | Age |  | Title                                                           
|                   |  |     |  |                                                                 
|Rafi Amit          |  | 57  |  | Chairman of
  the Board of Directors and Chief Executive Officer
|Yotam Stern        |  | 53  |  | Executive
  Vice President, Business & Strategy and Director    
|Meir
  Ben-Shoshan |  | 75  |  | Director                                                        
|Haim
  Horowitz    |  | 57  |  | Director                                                        
|Eran Bendoly       |  | 41  |  | Director                                                        
|Moshe Amit         |  | 61  |  | Executive
  Vice President                                      
|Ronit
  Dulberg    |  | 41  |  | Vice
  President - Chief Financial Officer                      
|Miri Saar          |  | 48  |  | Vice
  President  Human Resources                              
|Yuval Attias       |  | 38  |  | Director of Finance                                             
|Amir Gilead        |  | 55  |  | Vice
  President, Semiconductor and Packaging Division          
|Adi Corem          |  | 53  |  | Vice
  President, Operations                                    
|Jacob Yavor        |  | 47  |  | Vice
  President, Printed Circuit Board and HDI-S Division      
|Roni
  Flieswasser |  | 45  |  | Chief
  Technology Officer and President of Camtek Europe       
|Roy Porat          |  | 39  |  | President of
  Camtek Hong Kong                                 

Rafi
Amit has served as our Chief Executive Officer since
January 1998 and has served as Chairman of the Board of Directors since 1987.
Since 1981, Mr. Amit has also served as the President and director of Priortech
and has been the Chairman of the Board of Directors of Priortech since 1988.
From 1981 until 2004, Mr. Amit served as Priortechs Chief Executive Officer.
Mr. Amit has a B.Sc. in Industrial Engineering and Management from Technion -
Israel Institute of Technology. Mr. Rafi Amit is the brother of Mr. Moshe Amit.

Yotam
Stern has served as an executive of ours since January
1998 and since February 2001 has served as our Executive Vice President,
Business & Strategy. He has also served as a member of our Board of
Directors since 1987. From January 1998 until February 2001, Mr. Stern served
as our Chief Financial Officer. Mr. Stern has also served as the Chief
Financial Officer of Priortech since 1981 and as Priortechs Chief Executive
Officer since 2004 as well as serving as a director of Priortech since 1985.
Mr. Stern has a B.A. in Economics from Hebrew University of Jerusalem.

Meir
Ben-Shoshan has served on our Board of Directors since
November 1998. From May 1995 until March 1999, Mr. Ben-Shoshan was a director
of AG Associates (Israel) Ltd., a manufacturer of integrated processing
equipment for the semiconductor industry, and was Chairman of its board from
April 1996 to March 1999. From 1986 to 1998, Mr. Ben-Shoshan was a vice
president of Clal Electronics Industries Ltd., a large electronics company.
From March 2000 to March 2001, Mr. Ben-Shoshan was a director of Tower
Semiconductor Ltd., a manufacturer of semiconductors. He has also been a
director of IFN Ltd., a company dealing in e-knowledge and e-content management
since January 2000 and has been the Chairman of the Board of Jordan Valley
Applied Radiation Ltd. since August 1999. Mr. Ben-Shoshan has been a member of
the Association of Production Engineers in England since 1965. He received an
M.B.A. from Tel-Aviv University.

30

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Haim
Horowitz has served on our Board of Directors since
November 1998. Mr. Horowitz has also been the manager of the operating and
financial control department of DSP Group, a fabless semiconductor company.
Between 1999 and 2003, Mr. Horowitz served as Vice President and Chief
Financial Officer of Menen Medical Ltd., a medical equipment manufacturer.
Between 1994 and 1999, he served as Treasurer of Menen Medical Ltd., and from
1993 to 1994, he served as the Chief Financial Officer of Menen Medical Corp.,
a subsidiary of Menen Medical Ltd. From 1991 to 1993, Mr. Horowitz served as
Treasurer of Elscint, Inc., a medical imaging equipment company. Mr. Horowitz
holds a B.Sc. in Industry and Management from Technion - Israel Institute of
Technology.

Eran
Bendoly has served on our Board of Directors since
November 2000. Currently, Mr. Bendoly serves as the Chief Executive Officer of
Xenia Management Ltd., which is the managing partner of Xenia Ventures LP, a
limited partnership that operates the technological incubator in Kiryat Gat,
Israel. From 2000 to 2002, Mr. Bendoly served as Director of Finance for
Europe, Middle East & Africa of Mindspeed Technologies, Inc., a U.S.-based
fabless semiconductor manufacturer. From 1998 to 2000, Mr. Bendoly served as
Chief Financial Officer of Novanet Semiconductor Ltd., and, from 1996 to 1998,
he served as Vice President, Finance and Operations of Novacom Technologies
Ltd. Mr. Bendoly holds a B.A. from Hebrew University of Jerusalem and an M.B.A.
from KU Leuven University of Belgium.

Moshe
Amit has served as one of our executive officers since
October 1994 and since February 2001 through first quarter of 2006 he served as
our Executive Vice President and Chief Financial Officer. Mr. Amit maintains
his current position as Executive Vice President and also handles various tasks
as a member of Camteks senior management. From 1987 until 1994, Mr. Amit
served as the President of PCE, Inc., a New Jersey-based company affiliated
with us, which, until 2001, sold and serviced PCBs and AOI systems. Mr. Amit
has a B.Sc. in Industrial Engineering and Management from Technion - Israel
Institute of Technology. Mr. Moshe Amit is the brother of Mr. Rafi Amit.

Ronit
Dulberghas been employed by us since March 2006 as
our new Chief Financial Officer. Previously Mrs. Dulberg served as Vice
President of Finance for Creo IL, an Israeli subsidiary of Creo International
from 2000 to 2004 and prior to that she served in other senior positions in
several high-tech companies in Israel. Mrs. Dulberg has a B.A in Economics and
Accounting from Haifa University - Israel and an LLM from Bar-Ilan University
in Israel. Mrs. Dulberg is a registered CPA in Israel, she has also completed
two Executive Management Programs of the Technion - Israel Institute of
Technology and Stanford University.

Miri
Saarhas been employed by us since March 2005 as VP
Human Resources. Previously Ms Saar served as HR Manager for Conexant Systems
Israel from 2001 to 2005 and prior to which she served in other senior
positions in several high-tech companies in Israel. Ms Saar has a BA in English
and Applied Linguistics from Tel-Aviv University, Israel, and is also a
registered mediator at the Ministry of Justice.

Yuval
Attias has served as our Controller (today Director of
Finance) since February 1999, prior to which Mr. Attias was an accountant with
Somekh Chaikin, the Israeli affiliate of KPMG Peat Marwick. Mr. Attias has a
B.A. in Economics and Accounting from Haifa University and is a registered CPA
in Israel

Amir
Gilead has been employed by us since March 2000, and
since November 2001, has served as our Vice President, Semiconductor and
Packaging Division. From 1999 until March 2000, Mr. Gilead served as President
and Chief Executive Officer of Advanced Automation International Inc., a
startup in the semiconductor equipment manufacturing industry. From 1990 until
1999, Mr. Gilead held various executive positions with Kulicke & Soffa, a
semiconductor equipment manufacturer. Mr. Gilead has a B.Sc. and an M.Sc. in
electrical engineering from Technion - Israel Institute of Technology.

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Adi
Corem has been employed by us since November 1998 and
has served as our Vice President, Operations since January 2001. From 1988 to
November 1998, Mr. Corem served as the Operations Manager of Volta Carmiel
Ltd., a manufacturer of plastic products. From 1984 to 1988, Mr. Corem worked
as a Projects Manager in Elbit Systems Ltd., a military technology developer
and producer. Mr. Corem has a B.Sc. in Industrial Engineering from Technion -
Israel Institute of Technology.

Jacob
Yavor has been employed by us since 1987 and has
served as our Vice President, Printed Circuit Board and HDI-S Division since
May 2002. Mr. Yavor has a B.Sc. in Computer Engineering from Technion - Israel
Institute of Technology.

Roni
Flieswasser established the European branch of Camtek
in September 1995, prior to the establishment of Camtek Europe NV. Prior to
joining Camtek, Mr. Flieswasser worked with AOI systems at Orbotech, and was a
partner for four years in a software company specializing in business
applications.

Roy
Porat has
served as President of Camtek Hong Kong since September 2003. From 2001 until
September 2003, Mr. Porat served as President of our U.S. subsidiary, Camtek
USA, Inc. From 1999 to 2000, Mr. Porat served as the Chief Executive Officer of
Aeronautics Ltd. From 1994 to 1999, Mr. Porat served in various executive
positions at our affiliate, PCB Technologies. Mr. Porat has a B.Sc. in
Industrial Engineering from Technion - Israel Institute of Technology.

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

Compensation of Executive Officers and Directors

The
aggregate remuneration paid by us in the year ended December 31, 2005 to all
the persons listed in Section A above (Directors and Senior Management) except
for Mr. Yuval Attias, was approximately $2,146,000, which includes amounts paid to
provide pension, retirement or similar benefits, as well as amounts expended by
us for automobiles made available to all our executive officers, and other
fringe benefits commonly reimbursed or paid by companies in Israel. Regulations
promulgated under the Israeli Companies Law regulate the annual remuneration
and remuneration for participation in meetings of outside directors and the
reimbursement of their expenses. Messrs. Rafi Amit and Yotam Stern did not
receive any additional compensation for their service as our directors.

Employment Agreements

We
maintain written employment agreements with our employees, including all of our
executive officers, that contain customary provisions, including non-compete
and confidentiality agreements. In recent years, Israeli courts have required
employers seeking to enforce non-compete undertakings of a former employee to
demonstrate that the competitive activities of the former employee will harm
one of a limited number of material interests of the employer. If we cannot
demonstrate that we will be harmed by the competitive activities of a former
employee, we may be unable to prevent our competitors from benefiting from the
expertise of our former employees.

Effective
January 1, 1998, we entered into an employment agreement with Mr. Rafi Amit,
our Chief Executive Officer. The agreement has a two-year term, which is
automatically renewed at the end of every two years thereafter. The agreement
contains confidentiality and non-compete provisions for the term of Mr. Amits
employment and for a two-year period after the termination of his employment.
Furthermore, the agreement provides that all intellectual property developed by
Mr. Amit, or in which he took part, in connection with his employment, is our
sole property. Pursuant to his employment agreement, Mr. Amit may dedicate up
to 20% of his time to work for Priortech or any of the Priortech entities. Mr.
Amit is currently engaged full time in his employment with the Company. The
employment agreement may be terminated by either party at any time, or not
renewed at the end of any successive two-year extension of its term, by written
notice of termination or non-renewal delivered to the other party six months in
advance. We may, however, immediately terminate the employment of Mr. Amit in
various circumstances, including a breach of fiduciary duty.

32

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Effective
January 1, 1998, we entered into an employment agreement with Mr. Yotam Stern,
our Executive Vice President, Business & Strategy. The agreement has a two
year term which is automatically renewed at the end of every two years
thereafter. The agreement contains confidentiality and non-compete provisions
for the term of Mr. Sterns employment and for a two-year period after the termination
of his employment. Pursuant to his employment agreement, Mr. Stern may dedicate
up to 25% of his time to work for Priortech or any of the Priortech entities.
In May 2005, our shareholders approved an amendment to this agreement under
which Mr. Stern may dedicate up to 40% of his time to work for Priortech or any
of the Priortech entities. The employment agreement may be terminated by either
party at any time, or not renewed at the end of any successive two-year
extension of its term, by written notice of termination or non-renewal
delivered to the other party six months in advance. We may, however, terminate
Mr. Sterns employment immediately upon the occurrence of various
circumstances, including a breach of fiduciary duty.

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

Composition of the Board of Directors

Our
Articles provide that our Board of Directors shall consist of not less than
five nor more than ten directors, including the outside directors. Currently,
our board consists of five directors.

Directors,
other than outside directors, are elected by a resolution of the shareholders
at the annual general meeting and serve until the conclusion of the next annual
general meeting of the shareholders. Directors may be removed at any time by a resolution
of the shareholders. Since directors may be elected and removed by a majority
vote, Priortech Ltd., which holds a majority of our voting shares, has the
power to elect all of our directors, subject to the restrictions placed on the
election of outside directors as described below. The Chief Executive Officer
is appointed by our Board of Directors. Each of the other officers is appointed
by the Chief Executive Officer.

The
Chairman of our Board of Directors and Chief Executive Officer is Mr. Rafi
Amit, who also serves as our general manager. Under the Israeli Companies Law,
the general manager of a public company may not hold the position of Chairman
of the Board unless that designation is approved at the general meeting of
shareholders, by a vote of at least two-thirds of the non-controlling
shareholders attending the meeting and voting on the resolution. This approval
requirement need not be met if the total number of shares not held by
controlling shareholders of the company which are voted against the resolution
represents 1% or less of all of the voting rights. The designation may be
approved for a term of up to three years and may be re-approved by the same
majority for an additional three-year term each time. At our annual general
shareholders meeting held in July 2003, our shareholders authorized Mr. Rafi
Amit to continue to hold the position of general manager for an additional
period of up to three years.

Our
Articles provide that any director may appoint as an alternate director, by
written notice to us or to the Chairman of the Board, any individual who is
qualified to serve as director and who is not then serving as a director or
alternate director for any other director. An alternate director has all of the
rights and obligations of a director, excluding the right to appoint an
alternate for himself. Currently no alternate directors serve on our board.

Messrs.
Rafi Amit, Yotam Stern and Eran Bendoly are each serving a one year term which
expires at our 2006 annual general meeting of shareholders. Each of our outside
directors, Messrs. Haim Horowitz and Meir Ben-Shoshan, is serving a three-year
term in accordance with the Israeli Companies Law, which will expire at our
annual general meeting of shareholders to be held in 2006.

None
of the members of our Board of Directors, except Messrs. Rafi Amit and Yotam
Stern, is a party to a service contract with us, which would provide them
benefits upon termination of employment.

Outside Directors; Independent Directors

Under
the Israeli Companies Law, public Israeli companies are required to appoint at
least two directors who qualify as outside directors under Israeli law.

33

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The
outside directors must not have any relationship with us. For this purpose,
relationship means any employment, business or professional relations, either
in the present or in the preceding two years. An individual whose relatives,
business partners, employers or controlled companies have a relationship with
us may not serve as an outside director. In addition, an individual whose other
business affairs may cause a conflict of interest with the performance of his
duties as an outside director or interfere with his ability to serve as such,
may not serve as an outside director. Also, at least one of the outside
directors must have financial and accounting expertise and the other must have
professional qualifications, as defined in regulations promulgated under the
Israeli Companies Law.

Outside
directors are elected by a majority of the shares present and voting at the
shareholders meeting. In addition, the shares voted in favor of their election
must include at least one third of the shareholdings present and voting at the
meeting, not counting abstentions, which are not held by controlling
shareholders of the company. This minority approval requirement need not be met
if the total number of shares not held by controlling shareholders of the
company which are voted against the election of an outside director represents
1% or less of all of the voting rights.

Each
of our outside directors serves a three-year term, and may be re-elected to
serve in this capacity for one additional term of up to three years. An outside
director can be removed from office only by either the same percentage of
shareholders that may elect him, or by a court order. In either case, an
outside director may be removed only if the outside director ceases to meet the
statutory qualifications for serving as an outside director or breaches his
fiduciary duty. The court may also remove an outside director from office if he
or she is unable to perform his or her duties on a regular basis. If at the
time an outside director is appointed by the shareholders, all other directors
are of the same gender, the outside director to be appointed shall be of the
other gender.

Neither
we nor our subsidiaries may, prior to the lapse of two years after the
termination of membership on our board of any of our outside directors, employ such
former outside director, engage him or her to serve as an executive officer or
director for us or retain his or her professional services.

Messrs.
Haim Horowitz and Meir Ben-Shoshan currently serve as our outside directors.

The
Sarbanes-Oxley Act of 2002, as well as related new rules subsequently
implemented by the Securities and Exchange Commission, require foreign private
issuers, such as us, to comply with various corporate governance practices. In
addition, the Nasdaq Stock Market, or Nasdaq, has adopted amendments to its
requirements for companies that are listed on Nasdaq. We believe that we are
currently in compliance with, and we intend to take all actions necessary for
us to maintain compliance with, the applicable corporate governance
requirements of the Sarbanes-Oxley Act, the rules adopted by the Securities and
Exchange Commission and the listing standards of Nasdaq.

Under
the Nasdaq listing requirements, we are required to have a majority of
independent directors on our Board of Directors. Messrs. Haim Horowitz, Meir
Ben-Shoshan and Eran Bendoly all qualify as our independent directors under
Nasdaq rules.

Internal Auditor

The
board of directors of an Israeli public company must appoint an internal auditor
proposed by the audit committee. The role of the internal auditor is to
examine, among other things, the compliance of the companys conduct with
applicable law and orderly business procedures. An internal auditor may not
hold any other position in the company, have any business affairs outside of
the company which may create a conflict of interest with his or her duties as
internal auditor or be an interested party. For this purpose, an interested
party is a person who holds 5% or more of the companys shares, serves as or
has the power to appoint a director to or the chief executive officer of the
company, is otherwise personally employed by the company or serves on its board
or is a relative of any of these parties. The only exception to the rule
against an internal auditor being employed by the company is that the internal
auditor may serve as an ombudsman, provided that this does not interfere with
the performance of the duties of the internal auditor. In addition, the
internal auditor may not be a member of the companys independent accounting
firm. We currently have an internal auditor who meets the independence
requirements of Israeli law.

34

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Committees of the Board of Directors

The
Israeli Companies Law provides that a public company must appoint an audit
committee and  may also
appoint other committees to the board of directors, unless otherwise specified
in the Companys Articles. The board of directors may delegate its powers to
such committees of the board of directors as it deems appropriate, subject to
the provisions of the Israeli Companies Law. Powers that may not be delegated
include, among others, the power to distribute dividends, the determination of
general company policy, the issuance of securities, the issuance of shares
(unless such issuance is under an employee share option plan) and the approval
of financial reports. However, those matters can be delegated to committees for
the purpose of making recommendations to the full board of directors. According
to the Companies Law, a committee to which powers have been delegated shall be
composed only of directors. However, a committee whose purpose is only to make
a recommendation can be composed of non-directors unless otherwise specified in
the Companys Articles. According to the Companies Law, at least one outside
director must be appointed to serve on each committee of the board, excluding
the audit committee, which must be comprised of at least three directors,
including all of the outside directors of the Company. However, the
Sarbanes-Oxley Act and the Nasdaq listing requirements require that all members
of the audit committee be independent. The audit committee may not include the
chairman of the board, any director who is employed by the company or regularly
provides service to it, a controlling shareholder, or a relative of any such
individual. Our Board of Directors has an audit committee and a compensation
committee.

Audit Committee. The
Audit Committee oversees and approves the retention, performance and compensation
of our independent auditors and establishes and oversees the implementation of
procedures concerning our systems of internal accounting and auditing control.
The Audit Committee is also responsible for identifying deficiencies in the
management of our business and proposing solutions for any such deficiencies,
and, in accordance with the Israeli Companies Law and the Sarbanes-Oxley Act,
approving certain acts and transactions that involve conflicts of interest or
that involve interested parties. The members of our Audit Committee are Messrs.
Meir Ben-Shoshan, Eran Bendoly and Haim Horowitz, all of whom are independent
directors in accordance with Nasdaq listing requirements. Messrs. Bendoly and
Horovitz qualify as financial experts for purposes of the Sarbanes-Oxley Act
and the Nasdaq listing requirements, and Messrs. Ben-Shoshan and Horowitz
qualify as outside directors under Israeli Companies Law.

Compensation Committee.
The Compensation Committee reviews and makes recommendations to our board concerning
the terms of the compensation packages provided to our employees, including our
executive officers, and the terms of any bonus, share options or other awards
to be provided to our employees, including our executive officers. Under
Israeli law, all compensation arrangements with a general manager who is not a
director require the approval of the board of directors. Arrangements regarding
the compensation of directors require approval of the audit committee, the
board of directors and the shareholders, in that order, and if the director
holds a controlling interest in the company, special shareholder approvals are
required. See Duties of Office Holders and Approval of Transactions under
Israeli Law. The members of our Compensation Committee are Messrs. Horowitz,
Ben-Shoshan and Bendoly.

Duties of Office Holders and Controlling
Shareholders and Approval of Transactions under Israeli Law

Office Holders

The
Israeli Companies Law codifies the duty of care and the fiduciary duties that
office holders have towards the company. An office holders duty of care
includes the duty to act as a reasonable office holder would have acted in
the same position and under the same circumstances. An office holders
fiduciary duty requires the office holder to act in good faith and for the good
of the company, which includes:

| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | avoiding
  conflicts of interest between the office holders position with the company
  and his personal affairs;                                   
| |   |                                                                                                                                                      
| |  | avoiding any
  competition with the company;                                                                                                         
| |   |                                                                                                                                                      
| |  | avoiding the
  exploitation of the companys business opportunities for personal gain; and                                                           
| |   |                                                                                                                                                      
| |  | revealing to
  the company any information or documents relating to the companys affairs
  which the office holder has received due to his position.

35

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An office
holder, under the Israeli Companies Law, is anyone serving, regardless of
formal title, as a director, general manager, chief executive officer,
executive vice president, vice president, or any other executive reporting
directly to the general manager. Each person listed in the table under
Directors, Executive Officers and Key Employees is one of our office holders,
with the exception of our controller. All arrangements as to compensation of
office holders who are neither directors nor controlling shareholders are
approved by our compensation committee. The compensation of office holders who
are directors or controlling shareholders, and any other employee who is a
controlling shareholder or a close relative of such controlling shareholder as
defined in the Companies Law), must be approved also by our Audit Committee,
our Board of Directors and our shareholders, in that order. Special shareholder
voting procedures are required for the approval of compensation of office
holders or employees who are also controlling shareholders or any relative
thereof.

Disclosure of Personal Interest

The
Israeli Companies Law requires an office holder or controlling shareholder of a
company to disclose any personal interest in an existing or proposed transaction
with the company, no later than at the first board meeting in which the
transaction is discussed. A personal interest also includes an interest in any
company in which the person, his or her close relative or any entity in which
such person or close relative has a personal interest, is a direct or indirect
5% or greater shareholder, is a director or the general manager or has the
right to appoint at least one director or the general manager. Board approval
is required to approve the transaction, and no transaction that is adverse to
the companys interest may be approved. Approval by the companys audit
committee and board of directors is required for an extraordinary transaction,
meaning any transaction that is not in the ordinary course of business, is not
on market terms or is likely to have a substantial effect on the companys
profitability, assets or liabilities. A director who has a personal interest in
a matter may not be present at a board of directors or audit committee meeting
during discussions or vote on the matter. However, a director with a personal
interest may be present if the transaction to be discussed is not an
extraordinary transaction, or if a majority of the audit committee members or
the directors, as the case may be, has a personal interest in the matter. If a
majority of the board of directors or the audit committee has a personal
interest in the transaction, shareholder approval is also required.

Transactions with Controlling Shareholders

A
controlling shareholder is a shareholder who has the ability to direct the
activities of a company, including a shareholder who holds 25% or more of the
voting rights if no other shareholder holds more than 50% of the voting rights.
Under Israeli law, the disclosure requirements regarding personal interests
that apply to directors and office holders also apply to a controlling
shareholder of a public company.

Required
Approval. Extraordinary transactions with a controlling shareholder
and a controlling shareholders close relative or in which a controlling
shareholder (or its relative) has a personal interest, and the terms of
compensation of a controlling shareholder or a relative of a controlling
shareholder who is a director, executive officer or employee, require the
approval of the audit committee, the board of directors and the shareholders of
the company. This shareholder approval must include the majority of shares
voted at the meeting. In addition, either:

| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the majority
  must include at least one-third of the shares of disinterested shareholders
  voted at the meeting; or                                                
| |   |                                                                                                                                                                      
| |  | the total
  number of shares of disinterested shareholders voted against the transaction
  must not exceed one percent of the aggregate voting rights in the company.

A shareholder
who participates in this vote must provide notice to the company prior to
voting, stating whether such shareholder has a personal interest in the
transaction. In the absence of this notice, the shareholder may not vote on the
matter, and his or her vote shall not be counted.

Approval of Certain Specific Extraordinary
Transactions. According to regulations promulgated
under the Israeli Companies Law, the following specific kinds of extraordinary
transactions with a controlling shareholder do not require shareholder
approval, provided that the audit committee and the board of directors have
approved the transaction and determined that it is one of the following:

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| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
  extension of an existing transaction which was previously approved in
  accordance with the Israeli Companies Law, provided no material change has
  been made to the terms of the extended transaction;                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a
  transaction that benefits only the company;                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a
  transaction made in accordance with the terms of a framework transaction
  previously approved in accordance with the requirements of the Israeli
  Companies Law;                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a
  transaction constituting part of a transaction with a third party or a joint
  offer to contract with a third party, provided that the benefit to the
  company does not materially differ than that to the controlling shareholder,
  taking into account the proportional interest of each of the parties; or
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a
  transaction between companies controlled by a common controlling shareholder
  or between a public company and its controlling shareholder, provided that
  the transaction is on market terms, is in the ordinary course of business and
  does not adversely affect the interests of the company.            

Insurance, Indemnification and Exemption

Our
Articles provide that, subject to the provisions of the Israeli Companies Law,
we may:

|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Obtain
  insurance for our office holders covering their liability for any act
  performed in their respective capacities as an office holder with respect to:

| |  |   |                                                                                                                                                                   
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a violation
  of the duty of care to us or to another person;                                                                                                     
| |  |   |                                                                                                                                                                   
| |  |  | a breach of
  fiduciary duty, provided that the office holder acted in good faith and had
  reasonable grounds to assume that the act would not cause us harm; and
| |  |   |                                                                                                                                                                   
| |  |  | a monetary
  liability imposed on an office holder for the benefit of another person.                                                                             

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Undertake to
  indemnify our office holders or to indemnify an office holder retroactively
  for a liability imposed or approved by a court, and for reasonable legal fees
  incurred by the office holder in his or her capacity as an office holder, in
  proceedings instituted against the office holder by the company, on its
  behalf or by a third party, in connection with criminal proceedings in which
  the office holder was acquitted, or in connection with criminal proceedings
  or other proceedings in which the office holder was investigated or but not
  indicted, or as a result of a conviction for a crime that does not require
  proof of criminal intent or as result of proceeding in which a monetary
  liability was imposed regarding a crime that does not require proof of
  criminal intent. An advance undertaking to indemnify an office holder must be
  limited to categories of events that can be reasonably foreseen in light of
  the Companys activities, and to an amount which is reasonable under the
  circumstances, as determined by the board of directors.

We may exempt,
in advance, an office holder from all or part of his or her responsibility for
damages occurring as a result of a breach of his or her duty of care. However,
we may not exempt, in advance, an office holder for breach of his or her duty
of care in respect distribution of dividends. We may also approve an action
taken by the office holder, even if performed in breach of his or her fiduciary
duty, if the office holder was acting in good faith, the action does not
adversely affect us and the office holder has revealed to the board his or her
personal interest in the action.

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Notwithstanding
the foregoing, we may not insure, indemnify or exempt an office holder for any
breach of his or her fiduciary duty, or for a violation of his or her duty of
care (1) if the act was committed recklessly or with intent, (2) if the act was
committed with the intent to realize improper personal gain, or (3) for any
fine imposed on the office holder, except as provided above.

As
required under Israeli law, our Audit Committee, Board of Directors and
shareholders have approved the indemnification and insurance of our office
holders, as well as the resolutions necessary both to exempt our office holders
in advance from any liability for damages arising from a breach of their duty
of care to us, and to provide them with the indemnification undertakings and
insurance coverage they have received from us in accordance with our Articles.

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

Employees

The
following table sets forth for the last three years, the number of our
employees engaged in the specified activities at the end of each year:

|                         |  |                    |  |      |  |     
|------------------------ |  | ------------------ |  | ---- |  | ----
|                         |  | As of December 31,
|                         |  |                   
|                         |  | 2003               |  | 2004 |  | 2005
|                         |  |                    |  |      |  |     
|                        
|Executive management     |  | 7                  |  | 7    |  | 8   
|Research and development |  | 72                 |  | 74   |  | 85  
|Sales support            |  | 58                 |  | 94   |  | 122 
|Sales and marketing      |  | 50                 |  | 59   |  | 65  
|Administration           |  | 32                 |  | 37   |  | 59  
|Operations               |  | 46                 |  | 67   |  | 46  
|Total                    |  | 265                |  | 338  |  | 385 

The
following table sets forth for the last three years, the number of our
employees located in the following geographic regions at the end of each year:

|                            |  |                    |  |      |  |     
|--------------------------- |  | ------------------ |  | ---- |  | ----
|                            |  | As of December 31,
|                            |  |                   
|                            |  | 2003               |  | 2004 |  | 2005
|                            |  |                    |  |      |  |     
|China (including Hong Kong) |  | 51                 |  | 78   |  | 97  
|Taiwan                      |  | 28                 |  | 32   |  | 39  
|Japan                       |  | 5                  |  | 6    |  | 8   
|Other Asia                  |  | 7                  |  | 17   |  | 18  
|Europe                      |  | 8                  |  | 10   |  | 11  
|North America               |  | 17                 |  | 18   |  | 18  
|Israel                      |  | 149                |  | 177  |  | 194 
|Total                       |  | 265                |  | 338  |  | 385 

In
light of the progress and the demand in the Semiconductor Manufacturing and
Packaging industry, we have started to recruit personnel in order to meet the
demand. The increase in demand, mainly for the Falcon, has also driven the need
to recruit employees who are engaged in other activities like research and
development and sales support. The number of employees increased during 2005 by
14% from 338 to 385 employees, from which 194 employees are working in Israel
and the rest are working in our subsidiaries worldwide. The main increase in
our employees in Israel is in the research and development department whereas
the main increase abroad is in customer support for the Chinese market.

With
respect to our Israeli employees, we have no collective bargaining agreements
with our employees. However, by administrative order, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordination Bureau of Economic Organizations,
relating primarily to the length of the work day, minimum wages, pension
contributions, insurance for work-related accidents, procedures for dismissing
employees, determination of severance pay and other conditions of employment,
are applicable to our employees. In accordance with these provisions, the
salaries of our Israeli employees are partially indexed to the Consumer Price
Index in Israel, depending on the rate of increase of the Consumer Price Index.

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We
consider our relationship with our employees to be good, and we have never
experienced a labor dispute, strike or work stoppage.

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

The
following table sets forth certain information with respect to the beneficial
ownership of our outstanding ordinary shares by our directors and executive
officers.

Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally means sole or shared power to vote or direct
the voting or to dispose or direct the disposition of any ordinary shares.
Except as indicated by footnote, the persons named in the table below have sole
voting and investment power with respect to all ordinary shares shown as
beneficially owned by them. The percentage of beneficial ownership is based
upon 29,856,672 ordinary shares outstanding as of June 29, 2006.

|                                                              |  |                                |            |            |  |      |  
|------------------------------------------------------------- |  | ------------------------------ | ---------- | ---------- |  | ---- | -
|                                                              |  | Beneficial Ownership           |           
|                                                              |  |                                |           
|                                                              |  | Number of Ordinary
  Shares(1) |            | Percentage | 
|                                                              |  |                                |            |            | 
|                                                              |  |                                |            |            |  |      |  
|Rafi Amit(2)                                                  |  |                                | 18,665,647 |            |  | 62.5 | %
|Yotam Stern(3)                                                |  |                                | 18,712,303 |            |  | 62.7 | %
|                                                              |  |                                |            |            |  |      |  
|Directors
  and executive officers as a group (13 persons)(4) |  |                                | 19,292,787 |            |  | 64.4 | %

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Ordinary shares relating
  to options currently exercisable or exercisable within 60 days of the date of
  this annual report are deemed outstanding for computing the percentage of the
  person holding such securities but are not deemed outstanding for computing
  the percentage of any other person. As of the date of this annual report, no
  options held by the persons included in the above table are currently
  exercisable or exercisable within 60 days of the date hereof.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | As a result of a voting
  agreement relating to a majority of Priortechs voting equity, Mr. Amit may
  be deemed to control Priortech. Includes Mr. Amits interest in ordinary
  shares beneficially owned by Priortech. Mr. Amit does not directly own any of
  our ordinary shares.                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | As a result of a voting
  agreement relating to a majority of Priortech voting equity, Mr. Stern may be
  deemed to control Priortech. Includes Mr. Sterns interest in ordinary shares
  beneficially owned by Priortech. Mr. Stern directly owns 63,000 of our
  ordinary shares.                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Includes Messrs. Amits and
  Sterns interest in ordinary shares beneficially owned by Priortech. Our
  directors and executive officers as a group directly own 687,584 of our
  ordinary shares. Our Director of Finance is not one of our executive officers.                                                                                                                                                                                                                            

Share Option Plans

General.
We currently maintain five share option plans. The purpose of our option plans
is to afford an incentive to our officers, directors, employees and consultants
and those of our subsidiaries, to acquire a proprietary interest in us, to
increase their efforts on our behalf and to promote the success of our
business.

As
of December 31, 2005, there were 1,315,650 outstanding options to acquire our
ordinary shares pursuant to our share option plans at a weighted average
exercise price of $1.95, exercisable at various dates through July 2013. Future
options to be granted by us to our employees, officers, directors and
consultants or those of our affiliates will only be made pursuant to the 2003
Share Option Plan.

39

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Administration
of Our Share Option Plans. Our option plans are
administered by our Board of Directors. Under these option plans, options to
purchase our ordinary shares may also be granted to our officers, directors,
employees or consultants and those of our subsidiaries. The exercise price of
options is determined, under our option plans, by our Board of Directors, and
is generally set as the fair market value (although some options are
exercisable for no additional consideration and are the equivalent of
restricted stock grants). The vesting schedule of the options is also
determined by the Board of Directors; generally the options vest over a
four-year period. Each option granted under the option plans is exercisable
between four to ten years from the date of the grant of the option, according
to the plan under which they were granted and subject to certain early
expiration provisions, such as in the event of termination.

The
Share Option Plans. In September 1997, we adopted
a share option plan (the 1997 Share Option Plan) under which options to
purchase our ordinary shares were granted to employees, as determined by the
board from time to time. This plan was amended in 2000 and in 2003, each time
in order to comply with new Israeli tax legislation.

In
November 2000, we adopted three share option plans: the Executive Share
Option Plan, the US Incentive Stock Option Plan and the European Employee Share
Option Plan. Under these plans, options were granted to employees, directors,
executive officers and consultants of our company and our affiliates around the
world.

In
October 2003, we adopted our 2003 Share Option Plan and its corresponding
Sub-Plan for Grantees Subject to United States Taxation and Sub-Plan for Grantees
Subject to Israeli Taxation. The total number of options that may be granted
under the 2003 Share Option Plan is 998,800 options.

Options Granted During 2004.
No options were granted by us during the year ended December 31, 2004.

Options Granted During 2005.During
2005 we have granted 144,000 options to employees at an exercise price of
$3.00, a price that reflects the price of the share in the market at the grant
date. These options are subject to the terms of the 2003 Share Option Plan.

We
have filed registration statements on Form S-8 under the Securities Act of
1933, as amended, to register the ordinary shares issuable under all of our
option plans. Ordinary shares issued pursuant to these share option plans are
eligible for resale in the public market.

As
of December 31, 2005, there were options exercisable and vested for 702,990
ordinary shares (out of the total outstanding options of 1,315,650) at an
average weighted exercise price of $1.95 per share, and unvested options exercisable
for 612,660 ordinary shares at an average weighted exercise price of $ 2.19.

Item 7. Major Shareholders and Related Party Transactions.

|   |                    
|-- | -------------------
|A. | Major Shareholders.

The
following table provides information regarding the beneficial ownership of our
ordinary shares as of June 29, 2006, as to each person or entity who
beneficially owns more than 5.0% of our outstanding ordinary shares. None of
these shareholders has different voting rights than any of the Companys other
shareholders.

Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally means sole or shared power to vote or direct
the voting or to dispose or direct the disposition of any ordinary shares. Except
as indicated by footnote, the person named in the table below has sole voting
and investment power with respect to all ordinary shares shown as beneficially
owned by it. The percentage of beneficial ownership is based upon 29,856,672
ordinary shares outstanding as of June 29, 2006

40

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|               |  |                              |  |            | 
|-------------- |  | ---------------------------- |  | ---------- | 
|               |  | Beneficial Ownership         | 
|               |  |                              | 
|               |  | Number of Ordinary
  Shares* |  | Percentage | 
|               |  |                              |  |            | 
|Priortech Ltd. |  | 18,605,203                   |  | 62.3%      | 

* A majority of the voting equity in
Priortech Ltd. is subject to a voting agreement. As a result of this agreement,
Messrs. Rafi Amit, Yotam Stern and Itzhak Krell may be deemed to control
Priortech Ltd. The voting agreement does
not provide for different voting rights for our major shareholder than the
voting rights of other holders of our ordinary shares. Priortechs principal
executive offices are located at Industrial Zone, Migdal HaEmek 23150, Israel.
As of 29 June, 2006, there were a
total of 10 holders of record of our issued and outstanding ordinary shares, of
which 8 were registered with addresses in the United States. Such United States
holders were, as of such date, the holders of record of approximately 32.3% of
our issued and outstanding ordinary shares. The number of record holders in the
United States is not representative of where such beneficial holders are
resident because many of these ordinary shares were held of record by brokers
or other nominees.

** On April 30,
2006, we completed a private placement in which we issued to Israeli
institutional investors 2,525,252 ordinary shares. The private placement also
included warrants which are exercisable into additional 1,262,626 ordinary
shares. In addition, on June 21, 2006, Priortech Ltd., sold 2,440,000 of our
ordinary shares to a number of Israeli institutional investors and also granted
these investors options exercisable for four years, for an additional 1,220,000
ordinary shares. The sale has decreased Priortechs holdings in us to 62.3% of
the issued share capital. On a fully diluted basis, assuming the full exercise
of all convertible securities, including bonds and options convertible to
Camtek shares issued by Priortech in January 2005, Priortechs holdings
decreased to 47% of our share capital.

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

Ordinary Course Transactions and Activities
with Priortech and its Affiliates

From
time to time we have entered into transactions in the ordinary course of
business with Priortech and its affiliates. Our purchases of materials, such as
PCBs and assembled PCBs from Priortech and its affiliates, totaled $733,000,
$1,122,000 and $597,000 in 2003, 2004 and 2005, respectively. In addition, we
purchase bare PCBs and assembled PCBs from a Priortech subsidiary for the
development and manufacture of our systems so long as the price charged and
other payment terms is comparable to the best offer we could obtain from a
third party. Our total revenues from sales to affiliates of Priortech, totaled
$190,000, 230,000$ and $1,000 in 2003, 2004 and 2005, respectively. We act
jointly with Priortech with regard to various governmental, administrative and
commercial matters, which we believe is to the mutual advantage of both
parties. Unpaid balances between Priortech and us bear interest at Libor + 1%.
As of December 31, 2005, the remaining balance owed to us by Priortech and its
affiliates under transactions made in the ordinary course of business with them
was $290,000 and as of March 31, 2006 this balance stood at $115,000.We believe
that these transactions and activities were conducted on terms and conditions as
favorable to us as those which we could have entered into with unaffiliated
third parties.

Registration Rights Agreement with Priortech

On
March 1, 2004, we entered into a registration rights agreement providing for us
to register with the SEC certain of our ordinary shares held by Priortech. This
registration rights agreement may be used in connection with future offerings
of our ordinary shares, includes, among others, the following terms:
(a) Priortech is entitled to make up to three demands that we register our
ordinary shares held by Priortech, subject to delay due to market conditions;
(b) Priortech will be entitled to participate and sell our ordinary shares
in any future registration statements initiated by us, subject to delay due to
market conditions; (c) we will indemnify Priortech in connection with any
liabilities incurred in connection with such registration statements due to any
misstatements or omissions other than information provided by Priortech, and
Priortech will indemnify us in connection with any liabilities incurred in
connection with such registration statements due to any misstatements or
omissions in written statements by Priortech made for the purpose of their
inclusion in such registration statements; and (d) we will pay all
expenses related to registrations which we have initiated, except for certain
underwriting discounts or commissions or legal fees, and Priortech will pay all
expenses related to a registration initiated at its demand in which we are not
participating.

41

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On
December 30, 2004, the Registration Rights Agreement with Priortech was
amended. The amendment concerns
primarily the grant of unlimited shelf registration rights thereunder to
Priortech with respect to its holdings in us, and the assignability of those
shelf registration rights to its transferees.

Employment Agreements with Messrs. Rafi
Amit and Yotam Stern

Effective
January 1, 1998, we entered into an employment agreement with
Mr. Rafi Amit, our Chief Executive Officer. Pursuant to his employment
agreement, Mr. Amit may dedicate up to 20% of his time to work for
Priortech or any of the Priortech entities (for further details see Employment
Agreements).

Also
effective January 1, 1998, we entered into an employment agreement with
Mr. Yotam Stern, our Executive Vice President, Business &
Strategy. Pursuant to his employment agreement, Mr. Stern may dedicate up
to 40% of his time to work for Priortech or any of the Priortech entities (for
further details see Employment Agreements).

Mr. Rafi
Amit works on a full time basis for us and therefore receives a full time
salary, while Mr. Yotam Stern receives 60% of a full time salary, from us.
Mr. Stern is compensated directly by each of the Priortech entities for which
he works. Mr. Rafi Amit also serves as the Chairman of Priortech, and
Mr. Yotam Stern also serves as the Chief Executive Officer and as a
director of Priortech.

Messrs. Amit
and Stern do not receive any additional compensation for their service as our
directors.

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

Not
Applicable.

Item 8. Financial Information.

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

Please
see the consolidated financial statements listed in Item 18 for audited
consolidated financial statements prepared in accordance with this Item.

Legal Proceedings

On
May 10, 2004, a lawsuit was filed against us in the District Court in Nazareth,
Israel, by our competitor, Orbotech Ltd., alleging that the Dragon and Falcon
systems infringe upon a patent held by Orbotech Ltd. and requesting an
injunctive relief and damages. We believe that we have substantial defenses
against Orbotechs claims.

On
February 23, 2005, a lawsuit was filed against us in the District Court in
Jerusalem by Orbotech Ltd., alleging infringement of patent held by Orbotech
Ltd. regarding an illumination block, (an apparatus for illuminating and
controlling the illumination of scanned objects), seeking injunctive relief and
damages. The court ruled, based on a courts expert opinion, that Camtek
allegedly infringed the patent, and granted a provisional remedy which prevents
Camtek from manufacturing the illumination block. The Supreme Court rejected
our request to appeal from the Districts Court decision. We believe that it
has substantial defenses against Orbotechs claims.

On
July 14, 2005, a lawsuit was filed against us in the United States District
Court for the District of Minnesota by the Companys competitor in the field of
semiconductor manufacturing and packaging, August Technology Corporation,
alleging infringement of a patent and seeking injunctive relief and damages. We
have filed an answer and counterclaims alleging, inter-alia, non-infringement of the patent. We believe
that
we have substantial defenses to Augusts allegations.

42

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We
believe that we have good defenses against the aforementioned claims. However,
we cannot assure you that we will be successful in our defense against the
claims.

On July 2005, the
Company, together with our parent company, Priortech Ltd., filed a lawsuit in
Israel against our competitor, Orbotech, in the sum of 4.1 million US dollars, in
respect of damages incurred by it due to a claim and a motion for injunction filed against the
Company by Orbotech on May 2004, in the District Court in Nazareth, and the courts
decision in the motion thereof. The Company believes that Orbotechs claim and
motion against it were not filed in good faith, but in order to thwart Camteks
secondary public offering that was scheduled few days after the submission of
Orbotechs claim and motion and was supposed to infuse the Company and
Priortech Ltd approximately 40 million dollars.

We are not a
party to any other material legal proceedings.

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

There
have been no significant changes since the date of the financial statements
included in this annual report.

Item 9. The Offer and Listing.

|   |                           
|-- | --------------------------
|A. | Offer and Listing Details.

Price History of Ordinary Shares

Since
April 22, 2004, the primary trading market for our ordinary shares has
been the Nasdaq National Market, where our ordinary shares are listed and
traded under the symbol CAMT. From February 5, 2003 through
April 21, 2004, our ordinary shares were listed and traded on the Nasdaq
SmallCap Market, and from July 28, 2000 through February 4, 2003, our
ordinary shares were listed and traded on the Nasdaq National Market. The
following table sets forth, for the periods indicated, the high and low
reported sales prices of the ordinary shares:

|                                                       |  |      |      |     |  |      | 
|------------------------------------------------------ |  | ---- | ---- | --- |  | ---- | 
|                                                       |  | High |      | Low | 
|                                                       |  |      |      |     | 
|Annual and Quarterly Market
  Prices                   |  |      |      |     |  |      | 
|Fiscal Year Ended December
  31, 2001:                 |  |      | 8.75 |     |  | 1.59 | 
|Fiscal Year Ended December
  31, 2002:                 |  |      | 3.90 |     |  | 0.31 | 
|Fiscal Year Ended December
  31, 2003:                 |  |      | 3.64 |     |  | 0.29 | 
|2004:                                                  |  |      |      |     |  |      | 
|First Quarter                                          |  |      | 7.80 |     |  | 3.18 | 
|Second Quarter                                         |  |      | 6.03 |     |  | 3.77 | 
|Third Quarter                                          |  |      | 5.63 |     |  | 3.31 | 
|Fourth Quarter                                         |  |      | 4.86 |     |  | 3.10 | 
|Fiscal Year Ended December
  31, 2004:                 |  |      | 7.80 |     |  | 3.10 | 
|2005:                                                  |  |      |      |     |  |      | 
|First Quarter                                          |  |      | 4.7  |     |  | 3.2  | 
|Second Quarter                                         |  |      | 3.6  |     |  | 2.75 | 
|Third Quarter                                          |  |      | 3.95 |     |  | 2.56 | 
|Fourth Quarter                                         |  |      | 4.48 |     |  | 2.6  | 
|Fiscal year ended December
  31, 2005:                 |  |      | 4.7  |     |  | 2.56 | 
|First Quarter 2006                                     |  |      | 5.49 |     |  | 4.34 | 
|Monthly Market Prices for
  the Most Recent Six Months |  |      |      |     |  |      | 
|December 2005                                          |  |      | 4.48 |     |  | 3.64 | 
|January 2006                                           |  |      | 5.5  |     |  | 4.34 | 
|February 2006                                          |  |      | 5.46 |     |  | 4.77 | 
|March 2006                                             |  |      | 5.49 |     |  | 4.75 | 
|April 2006                                             |  |      | 6.44 |     |  | 4.75 | 
|May 2006                                               |  |      | 8.4  |     |  | 6.01 | 
|June 2006 until 27 June,
2006                          |  |      | 6.9  |     |  | 5.55 | 

43

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For
the period between November 26, 2001 and October 21, 2003, our
ordinary shares were also listed on the Tel Aviv Stock Exchange, or TASE.
During such period, the trading activity on the TASE in our ordinary shares was
insignificant. At our request, our ordinary shares were de-listed from the
TASE. In December 2005, we re-listed our ordinary shares in the TASE.

|   |                      
|-- | ---------------------
|B. | Plan of distribution.

Not
applicable.

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

As
noted above, the Companys ordinary shares are traded on the Nasdaq National
Market under the symbol CAMT. Since December 2005, our ordinary shares are
traded also on the Tel-Aviv Stock Exchange and we are subject to the Israeli
legislation which applies to companies that are traded in dual listing.

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

Following
is a summary of material information concerning our share capital and a brief
description of the material provisions contained in our Memorandum of
Association and our Articles.

General

Our
authorized share capital consists of one class of shares, which are our
ordinary shares. Out of our authorized share capital of 100,000,000 ordinary
shares, par value NIS 0.01 per ordinary share, 29,856,672 ordinary shares are
outstanding and fully-paid. Under the Agreement with FIMI as described in Item
4.A., we undertook to issue to FIMI ordinary shares in the event of conversion
of the $5 million debentures or any part thereof in accordance with the terms
of this agreement. Conversion price is $5.00 per share, however, in the event
that the average closing price of the companys shares as reported on Nasdaq
for the sixty consecutive trading days immediately preceding the first and
second anniversary of the loan agreement closing is lower than the conversion
price in effect on such date, the conversion price in effect on such date shall
be reduced to equal the higher of the average closing price and $2.00.

44

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The
ordinary shares do not have preemptive rights. The ownership and voting of our
ordinary shares of Israel are not restricted in any way by our Articles, or by
the laws of the State of Israel, except for shareholders who are citizens of
countries in a state of war with Israel. Under the Israeli Companies Law,
Israeli companies may purchase and hold their own shares, subject to the same
conditions that apply to distribution of dividends (see Dividend and
Liquidation Rights). These shares do not confer any rights whatsoever for as
long as they are held by us. Additionally, a subsidiary may purchase or hold
shares of its parent company to the same extent that the parent company is entitled
to purchase its own shares, and these shares do not confer any voting rights
for as long as they are held by the subsidiary.

Transfer of Shares and Notices

Ordinary
shares are issued in registered form. Ordinary shares registered on the books
of the transfer agent in the United States may be freely transferred on the
transfer agents books. Each shareholder of record is entitled to receive at
least 21 days prior notice for a general meeting of the shareholders.

Dividend and Liquidation Rights

Our
Board of Directors may, without seeking shareholder approval, declare a
dividend to be paid to the holders of ordinary shares out of our retained
earnings or our earnings derived over the two most recent years, whichever is
higher, as reflected in the last audited or reviewed financial report prepared
less than six months prior to distribution, provided that there is no
reasonable concern that a payment of a dividend will prevent us from satisfying
our existing and foreseeable obligations as they become due. Dividends are
distributed to shareholders in proportion to the nominal value of their
respective holdings. In the event of our liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the holders of
ordinary shares in proportion to the nominal value of their respective
holdings. This right may be affected by the grant of preferential dividend or
distribution rights to the holders of any class of shares with preferential
rights that may be authorized in the future. Our shareholders would need to
approve any class of shares with preferential rights.

Modification of Class Rights

The
Israeli Companies Law provides that the articles of a company may not be
modified in such a manner that would have a detrimental effect on the rights of
a particular class of shares without the vote of a majority of the affected
class.

Voting, Shareholders Meetings and
Resolutions

Holders
of ordinary shares have one vote for each ordinary share held on all matters
submitted to a vote of the shareholders. These voting rights may be affected by
the grant of special voting rights to the holders of any class of shares with
preferential rights that may be authorized in the future; however, currently no
holders of our securities have any special voting rights.

An
annual meeting of the shareholders must be held every year, and not later than
15 months following the last annual meeting. A special meeting of the
shareholders may be convened by the board of directors at its decision to do so
or upon the demand of any of: (1) two of the directors or 25% of the then
serving directors, whichever is fewer; (2) shareholders owning at least 5%
of the issued share capital and at least 1% of the voting rights in the
company; or (3) shareholders owning at least 5% of the voting rights in
the company. If the board does not convene a meeting upon a valid demand of any
of the above, then whoever made the demand, and in the case of shareholders,
those shareholders holding more than half of the voting rights of the persons
making the demand, may convene a meeting of the shareholders to be held within
three months of the demand. Alternatively, upon petition by the individuals
making the demand, a court may order that a meeting be convened.

The
quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy within one half hour of the time
scheduled for the beginning of the meeting, who hold or represent together at
least 33 1/3% of the voting power in our company. A meeting adjourned due to
lack of a quorum is generally adjourned to the same day in the following week
at the same time and place or any time and place as the directors designate in
a notice to the shareholders. If a quorum is not present at the reconvened
meeting, the meeting may be held with any number of participants. However, if
the meeting was convened following a demand by the shareholders, the quorum
will be that minimum number of shareholders authorized to make the demand.

45

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In
any shareholders meeting, a shareholder can vote either in person or by proxy.
General meetings of shareholders will be held in Israel, unless decided
otherwise by our board.

Most
resolutions at a shareholders meeting may be passed by a majority of the
voting power of the company represented at the shareholders meeting and voting
on the matter. Resolutions requiring special voting procedures include the
appointment and removal of outside directors, approval of transactions with
controlling shareholders and the approval for the chairman of the board to also
serve as chief executive officer. See Management -Duties of Office Holders and
Approval of Transactions under the Israeli Law.

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith and in
a customary manner in exercising his rights and duties towards the company and
other shareholders, to refrain from prejudicing the rights of other
shareholders and to refrain from abusing his power in the company. The rights
and duties apply, among other things, to voting at the general meeting of the
shareholders on any of the following matters: (1) amendments to the
articles; (2) an increase in the companys authorized share capital;
(3) a merger; or (4) an approval of those related party transactions
that require shareholder approval.

In
addition, any shareholder who: (1) is a controlling shareholder;
(2) knows that its vote will determine the outcome of a shareholder vote;
or (3) under the provisions of the articles, has the power to appoint or
to prevent the appointment of an office holder in the company, is under a duty
to act in fairness towards the company. Israeli law does not define the
substance of this duty of fairness, however the laws of contracts, regarding
breach of contract, shall apply to violations of the duty to act in fairness.

Anti-Takeover Effects of Israeli Laws;
Mergers and Acquisitions Under Israeli Law

The
Israeli Companies Law allows a merger to be effected without the need for court
approval if the merger receives the approval of the boards of directors of each
of the merging companies and a majority of the shareholders present and voting
at the general shareholders meeting of each of the merging companies. However,
such approval by the general shareholders meeting is not required if the
merging company is the full owner of the other party to the merger, or if the
merger does not require the change of the merging companys articles of
association and the merging company is not issuing more than 25% of its share
capital as part of the merger and a person will not become a controlling
shareholder as result of the merger. Israeli law also provides that in addition
to the approval of the merger by the requisite majority at the shareholders
general meeting, if either party to the merger or its interested parties hold
over 25% of the shares of the other party to the merger, then the majority must
also include a majority of the shares held by those shareholders present and
voting (excluding abstainees) who do not have an interest in the other party.

Israeli
law does not require court approval of a merger other than in specified
situations. However, upon petition by objecting shareholders or a creditor of a
merging company, the court may delay or prevent the consummation of the merger,
if it deems there to be a reasonable concern that as a result of the merger,
the surviving company will not be able to meet the obligation to creditors of
either of the merging companies.

A
merger may not be completed until 50 days have passed from the time that
the merger proposal was filed with the Israeli Registrar of Companies and until
all required approvals have been obtained and submitted to the Registrar of
Companies.

In
addition, the Israeli Companies Law contains provisions dealing with
arrangements between a company and its shareholders. These arrangements may be
used to effect squeeze-out transactions in which the target company becomes a
wholly-owned subsidiary of the acquirer. These provisions generally require
that the merger be approved by at least 75% of the shares of participating
shareholders and a majority of the shareholders voting at a shareholders meeting.
In addition to shareholder approval, court approval of the transaction is
required, which entails further delay.

46

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The
Israeli Companies Law also provides that an acquisition of shares in a public
company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would become a holder of 25% or more of the
companys voting power. This rule does not apply if there is already another
holder of 25% or more of the voting power of the company. Similarly, the Israeli
Companies Law provides that an acquisition of shares of a public company must
be made by means of a tender offer if, as a result of the acquisition, the
purchaser would become a holder of more than 45% of the voting power of the
company. This rule does not apply if someone else already holds 45% of the
voting power of the company or if such acquisition of shares is made in a
private offering, following the consent of the Companys general meeting of
shareholders or if the acquisition of shares is from a controlling shareholder
following which the purchaser will become a controlling shareholder.

An
acquisition of shares following which the purchaser would become a holder of
more than 90% of a public companys shares must be made by a tender offer for
the purchase of all the remaining shares; if a tender offer is not accepted by
holders of less than 5% of the companys issued shares, then the holders of the
remaining shares must sell their shares to the acquirer on the terms of the
tender offer, although they may petition the court to raise the offered price
on the basis that it is an unfair price. However, the acquirer will not be
permitted to acquire tendered shares, to the extent that the acquisition of
those shares would bring the acquirers holdings to 95% or less and more than
90% of the target companys shares, in which case the acquirer may only
purchase the balance which will bring the acquirers holdings to 90%. In
addition, a shareholder who holds more than 90% of the shares of a public company
may not purchase additional shares as long as the shareholder holds more than
90%. Shares acquired in violation of these provisions become dormant and cease
to confer any rights upon their holder; and all rights are suspended as long as
the shares are held by the acquirer.

In
addition, our technology developed pursuant to the terms of the Law for the
Encouragement of Industrial Research and Development, 1984, may not be sold or
transferred to third parties without the prior approval of a governmental
committee. Approval for the sale or transfer of technology may be granted only
if the recipient undertakes to abide by all of the provisions of the Law for
the Encouragement of Industrial and Research Development and its associated
regulations, including the restrictions on the transfer of know-how, the
obligation to manufacture in Israel and the obligation to pay royalties in an
amount that might be increased. These requirements could inhibit the
acquisition of us by others. However, a recent amendment to the Law for the
Encouragement of Industrial Research and Development enables the transfer of
know-how outside of Israel, and the manufacture outside of Israel, under very
limited and specific conditions, including additional payment of certain
amounts.

Finally,
Israeli tax law treatment of certain acquisitions, such as stock-for-stock swap
between an Israeli company and a foreign company, may be less favorable than
the treatment that may be applicable under U.S. tax law. For example, Israeli
tax law may subject a shareholder who exchanges his ordinary shares for shares
in a foreign corporation to immediate taxation. However, a stock-for-stock swap
of listed securities will not be subject to taxation until the earlier of:
(1) the time at which the shares will be sold; or (2) for 50% of the
stock, the lapse of two years from the date of the transaction, and for the
remaining 50%, the lapse of four years from the date of the transaction.

Transfer Agent

The
transfer agent and registrar for the ordinary shares is the American Stock
Transfer & Trust Company, New York, New York.

47

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

On
August 23, 2005 we raised $5 million as a convertible loan from FIMI
Opportunity Fund L.P and FIMI Israel Opportunity Fund, Limited Partnership
(FIMI). The loan is payable in three equal annual payments starting at the
third anniversary of the closing date. The lenders have the right to postpone
the repayments to the end of the fifth anniversary from the closing date. The
loan bears annual interest of Libor + 2.1%. The interest is payable every three
months. Conversion of the loan in whole or in part, is optional at a conversion
price per share of $5.50. If the average closing price of the Companys shares
as reported on Nasdaq for the 60 consecutive trading days immediately preceding
the first and second anniversary of the loan agreement closing, is lower than
the conversion price in effect on such date, the conversion price in effect on
such date shall be reduced to equal the higher of the average closing price and
$2.00. We covenanted that our shareholders equity would not decrease to $45
million, or $40 million as a result of dividend distributions while such
shareholders equity may not decrease by more than 10%, unless such deviation
is cured within three consecutive financial quarters immediately following the
financial quarter in which such decrease has occurred. We also covenanted that
our shareholders equity shall represent at least 55% of the total assets of
the Company. Other covenants were that the net loss shall not exceed an
aggregate of $10 million in any single financial quarter or any year and that
the Company would not to take any further loans which exceed the aggregate
amount of $15 million (other than the loans and credit lines which were in
effect at the closing date) and not to enter into new transactions with our
affiliates. We also entered into a registration rights agreement whereby the
Company may register with the SEC ordinary shares held by FIMI. This
registration rights agreement may be used in connection with the ordinary
shares underlying the debentures which we provided to FIMI with in return for
the loan, and includes, among other things, the following terms: (a) FIMI
is entitled to make up to one demand from the Company to register its ordinary
shares held by FIMI, subject to delay due to market conditions; (b) FIMI
will be entitled to participate and sell the Companys ordinary shares in any
future registration statements initiated by it, subject to certain conditions;
(c) The Company will indemnify FIMI in connection with any liabilities
incurred by it in respect of such registration statements due to any
misstatements or omissions except for information provided by FIMI, and FIMI
will indemnify the Company in connection with any liabilities incurred by it in
respect of such registration statements due to any misstatements or omissions
in written statements by FIMI made for the purpose of their inclusion in such
registration statements; and (d) The Company will pay all expenses related
to registrations which it has initiated, except for certain underwriting
discounts or commissions or legal fees, and all the expenses related to one
registration initiated by FIMI.

|   |                  
|-- | -----------------
|D. | Exchange Controls

Nonresidents
of Israel who purchase our shares may exchange any NIS received as dividends,
if any, thereon, and any amounts payable upon the dissolution, liquidation or
winding up of our affairs, as well as the proceeds of any sale in Israel of the
ordinary shares to an Israeli resident, into freely repatriable dollars, at the
rate of exchange prevailing at the time of exchange, pursuant to regulations
issued under the Currency Control Law, 1978, provided that Israeli income tax
has been withheld with respect to amounts that are being repatriated to the
extent applicable or an exemption has been obtained. Israeli residents are
eligible, subject to reporting requirements, to purchase securities in foreign
currencies.

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

U.S. Federal Income Tax Considerations

Subject
to the limitations described herein, this discussion summarizes the material
U.S. federal income tax consequences of the purchase, ownership and disposition
of our ordinary shares to a U.S. holder. A U.S. holder is a holder of our
ordinary shares who is:

| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an
  individual citizen or resident of the United States for U.S. federal income
  tax purposes;                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                      
| |  | a
  corporation or partnership (or another entity taxable as a corporation or
  partnership for U.S. federal income tax purposes) created or organized under
  the laws of the United States or any political subdivision thereof;                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                      
| |  | an estate,
  the income of which may be included in gross income for U.S. federal income
  tax purposes regardless of its source; or                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                      
| |  | a trust
  (i) if, in general, a U.S. court 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.

Unless
otherwise specifically indicated, this discussion does not consider the U.S.
tax consequences to a person that is not a U.S. holder and considers only U.S.
holders that will own the ordinary shares as capital assets.

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This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the Code), current and proposed Treasury regulations promulgated
under the Code and administrative and judicial interpretations of the Code, all
as currently in effect and all of which are subject to change, possibly with a
retroactive effect. This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to any particular U.S. holder
based on the U.S. holders particular circumstances. In particular, this
discussion does not address the U.S. federal income tax consequences to U.S.
holders who are broker-dealers or who own, directly, indirectly or
constructively, 10% or more of our outstanding voting shares, U.S. holders
holding the ordinary shares as part of a hedging, straddle or conversion
transaction, U.S. holders whose functional currency is not the U.S. dollar,
insurance companies, tax-exempt organizations, financial institutions and
persons subject to the alternative minimum tax, who may be subject to special
rules not discussed below. Additionally, the tax treatment of holders of
ordinary shares that are partnerships or other pass-through entities or persons
who hold the ordinary shares through a partnership or other pass-through entity
is not considered, nor is the possible application of U.S. federal estate or
gift taxes or any aspect of state, local or non-U.S. tax laws.

You
are advised to consult your tax advisor with respect to the specific U.S. federal,
state, local and foreign income tax consequences to you of purchasing, holding
or disposing of our ordinary shares.

Taxation of Distributions on the Ordinary
Shares

Subject
to the discussion below under Tax Consequences if we are a Passive Foreign
Investment Company, the amount of a distribution with respect to the ordinary
shares will equal the amount of cash and the fair market value of any property
distributed and will also include the amount of any Israeli taxes withheld as
described below under Israeli Taxation -Taxation of Non-Residents on Receipt
of Dividends. A distribution paid by us with respect to the ordinary shares to
a U.S. holder will be treated as dividend income to the extent that the
distribution does not exceed our current and accumulated earnings and profits,
as determined for U.S. federal income tax purposes. Dividends that are received
by U.S. holders that are individuals, estates or trusts will be taxed at the
rate applicable to long-term capital gains (a maximum rate of 15%), provided
that such dividends meet the requirements of qualified dividend income.
Dividends that fail to meet such requirements, and dividends received by
corporate U.S. holders are taxed at ordinary income rates. No dividend received
by a U.S. holder will be a qualified dividend (1) if the U.S. holder held
the ordinary share with respect to which the dividend was paid for less than
61 days during the 121-day period beginning on the date that is
60 days before the ex-dividend date with respect to such dividend,
excluding for this purpose, under the rules of Code section 246(c), any
period during which the U.S. holder has an option to sell, is under a
contractual obligation to sell, has made and not closed a short sale of, is the
grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect
to, such ordinary share (or substantially identical securities); or (2) to
the extent that the U.S. holder is under an obligation (pursuant to a short
sale or otherwise) to make related payments with respect to positions in
property substantially similar or related to the ordinary share with respect to
which the dividend is paid. If we were to be a passive foreign investment
company (as such term is defined in the Code) for any year, dividends paid on
our ordinary shares in such year or in the following year would not be
qualified dividends. In addition, a non-corporate U.S. holder will be able to
take a qualified dividend into account in determining its deductible investment
interest (which is generally limited to its net investment income) only if it
elects to do so; in such case the dividend will be taxed at ordinary income
rates.

The
amount of any distribution which exceeds the amount treated as a dividend will
be treated first as a non-taxable return of capital, reducing the U.S. holders
tax basis in its ordinary shares to the extent thereof, and then as capital
gain from the deemed disposition of the ordinary shares. Corporate holders will
not be allowed a deduction for dividends received in respect of the ordinary
shares.

Dividends
paid by us in NIS will be included in the income of U.S. holders at the dollar
amount of the dividend (including any Israeli taxes withheld therefrom), based
upon the spot rate of exchange in effect on the date the distribution is
included in income. U.S. holders will have a tax basis in the NIS for U.S.
federal income tax purposes equal to that dollar value. Any subsequent gain or
loss in respect of the NIS arising from exchange rate fluctuations will
generally be taxable as U.S. source ordinary income or loss.

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Subject
to the limitations set forth in the Code and the Treasury regulations thereunder,
U.S. holders may elect to claim as a foreign tax credit against their U.S.
federal income tax liability the Israeli income tax withheld from dividends
received in respect of the ordinary shares. The limitations on claiming a
foreign tax credit include, among others, computation rules under which foreign
tax credits allowable with respect to specific classes of income cannot exceed
the U.S. federal income taxes otherwise payable with respect to each such class
of income. In this regard, dividends paid by us will be foreign source passive
income for U.S. foreign tax credit purposes or, in the case of a financial
services entity, financial services income (and, for tax years beginning
after December 31, 2006, as general category income). U.S. holders that do
not elect to claim a foreign tax credit may instead claim a deduction for the
Israeli income tax withheld. The rules relating to foreign tax credits are
complex, and you should consult your tax advisor to determine whether and to
what extent you would be entitled to this credit. A U.S. holder will be denied
a foreign tax credit for Israeli income tax withheld from a dividend received
on the ordinary shares (i) if the 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 (ii) to the extent the U.S. holder is under an obligation to make
related payments with respect to positions in 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. The discussion above is subject to Tax Consequences if
we are a Passive Foreign Investment Company,

Taxation of the Disposition of Ordinary
Shares

Subject
to the discussion below under Tax Consequences if We are a Passive Foreign
Investment Company, 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 the amount realized on the disposition and the
U.S. holders tax basis in the ordinary shares. The gain or loss recognized on
the disposition of the ordinary shares will be long-term capital gain or loss
if the U.S. holder held the ordinary shares for more than one year at the time
of the disposition. Gain or loss recognized by a U.S. holder on a sale,
exchange or other disposition of ordinary shares will be treated as U.S. source
income or loss for U.S. foreign tax credit purposes.

A
U.S. holder that uses the cash method of accounting calculates the dollar value
of the proceeds received on the sale as of the date that the sale settles.
However, 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 and may
therefore realize foreign currency gain or loss. A U.S. holder may avoid
realizing foreign currency gain or loss by electing to use the settlement date
to determine the proceeds of sale for purposes of calculating the foreign
currency gain or loss. In addition, a U.S. holder that receives foreign
currency upon disposition of ordinary shares and converts the foreign currency
into dollars after the settlement date or trade date (whichever date the U.S.
holder is 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 dollar, which will generally be
U.S. source ordinary income or loss.

Tax Consequences if we are a Passive Foreign
Investment Company

We
will be a passive foreign investment company, or PFIC, if either (1) 75%
or more of our gross income in a taxable year is passive income; or
(2) 50% or more of the value, determined on the basis of a quarterly
average, of our assets in a taxable year produce or are held for the production
of passive income. If we own (directly or indirectly) at least 25% by value of
the stock of another corporation, we will be treated for purposes of the
foregoing tests as owning our proportionate share of the other corporations
assets and as directly earning our proportionate share of the other corporations
income. If we are a PFIC, a U.S. holder must determine under which of three
alternative taxing regimes it wishes to be taxed:

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|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The QEF
  regime applies if the U.S. holder elects to treat us as a qualified electing
  fund (QEF) for the first taxable year in which the U.S. holder owns our
  ordinary shares or in which we are a PFIC, whichever is later, and if we
  comply with certain reporting requirements. If the QEF regime applies, then
  each year that we are a PFIC such U.S. holder will include in its gross
  income a proportionate share of our ordinary earnings (which is taxed as
  ordinary income) and net capital gain (which is taxed as long-term capital
  gain), subject to a separate election to defer payment of taxes, which
  deferral is subject to an interest charge. These amounts would be included in
  income by an electing U.S. holder for its taxable year in which our taxable
  year ends, whether or not such amounts are actually distributed to the U.S.
  holder. A U.S. holders basis in our ordinary shares for which a QEF election
  has been made would be increased to reflect the amount of any taxed but
  undistributed income. Generally, a QEF election allows an electing U.S.
  holder to treat any gain realized on the disposition of his ordinary shares as
  capital gain.

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Once made, the
QEF election applies to all subsequent taxable years of the U.S. holder in
which it holds our ordinary shares and for which we are a PFIC and can be
revoked only with the consent of the Internal Revenue Service. A shareholder makes
a QEF election by attaching a completed Internal Revenue Service
Form 8621, including the information provided in the PFIC annual
information statement, to a timely filed United States federal income tax
return. Even if a QEF election is not made, a U.S. person who is a shareholder
in a PFIC must file a completed Internal Revenue Service Form 8621
every year.

If a QEF
election is made after the first taxable year in which a U.S. holder holds our
ordinary shares and we are a PFIC, then special rules would apply.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A second
  regime, the mark-to-market regime, may be elected so long as our ordinary
  shares are marketable. Pursuant to this regime, an electing U.S. holders
  ordinary shares are marked-to-market each year and the U.S. holder recognizes
  as ordinary income or loss an amount equal to the difference as of the close
  of the taxable year between the fair market value of our ordinary shares and
  the U.S. holders adjusted tax basis in our ordinary shares. Losses are
  allowed only to the extent of net mark-to-market gain previously included by
  the U.S. holder under the election for prior taxable years. An electing U.S.
  holders adjusted basis in our ordinary shares is increased by income
  recognized under the mark-to-market election and decreased by the deductions
  allowed under the election.

Under the
mark-to-market election, gain on the sale of our ordinary shares is treated as
ordinary income, and loss on the sale of our ordinary shares, to the extent the
amount of loss does not exceed the net mark-to-market gain previously included,
is treated as ordinary loss. The mark-to-market election applies to the tax
year for which the election is made and all later tax years, unless the
ordinary shares cease to be marketable or the Internal Revenue Service consents
to the revocation of the election.

If the
mark-to-market election is made after the first taxable year in which a U.S.
holder holds our ordinary shares and we are a PFIC, then special rules would
apply.

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|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A U.S.
  holder making neither the QEF election nor the mark-to-market election is
  subject to the excess distribution regime. Under this regime, excess
  distributions are subject to special tax rules. An excess distribution is
  either (1) a distribution with respect to our ordinary shares that is
  greater than 125% of the average distributions received by the U.S. holder
  from us over the shorter of either the preceding three years or such U.S.
  holders holding period for our ordinary shares, or (2) 100% of the gain
  from the disposition of our ordinary shares.

Excess
distributions must be allocated ratably to each day that a U.S. holder has held
our ordinary shares. A U.S. holder must include amounts allocated to the
current taxable year in its gross income as ordinary income for that year. All
amounts allocated to prior years of the U.S. holder would be taxed at the
highest tax rate for each such prior year applicable to ordinary income. The
U.S. holder also would be liable for interest on the deferred tax liability for
each such prior year calculated as if such liability had been due with respect
to each such prior year. The portions of gains and distributions that are not
characterized as excess distributions are subject to tax in the current year
under the normal tax rules of the Code.

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A U.S. person
who inherits shares in a foreign corporation that was a PFIC in the hands of
the decedent (who did not make a QEF election as described above), is denied
the otherwise available step-up in the tax basis of such shares to fair market
value at the date of death. The U.S. person steps into the shoes of the
decedent and will be subject to the rules described above.

Based
on an analysis of our assets and income, we believe that we were not a PFIC for
our tax year ended December 31, 2005. We currently expect that we will not
be a PFIC in 2006. However, PFIC status is determined as of the end of the
taxable year and is dependent on a number of factors, including the relative
value of our passive assets and our non-passive assets, our market capitalization
and the amount and type of our gross income. There can be no assurance that we
will not become a PFIC for the current year ending December 31, 2006 or in
a future year. We will notify U.S. holders in the event we conclude that we
will be treated as a PFIC for any taxable year to enable U.S. holders to
consider whether or not to elect to treat us as a QEF for U.S. federal income
tax purposes to mark-to-market the ordinary shares or to become subject to
the excess distribution regime, and we expect that in such event we will
provide U.S. holders with the information needed to make a QEF election.

Although
a U.S. holder normally is not permitted to make a retroactive QEF election, a
retroactive election may be made for a taxable year of the U.S. holder (the
retroactive election year) if the U.S. holder (i) reasonably believed
that, as of the date the QEF election was due, the foreign corporation was not
a PFIC for its taxable year that ended during the retroactive election year and
(ii) filed a protective statement with respect to the foreign corporation,
applicable to the retroactive election year, in which the U.S. holder described
the basis for its reasonable belief and extended the period of limitation on
the assessment of taxes determined under Sections 1291 through 1298 of the Code
with respect to the foreign corporation (PFIC-related taxes) for all taxable
years of the shareholder to which the protective statement applies. U.S.
holders should consult their tax advisors regarding the advisability of filing
a protective statement.

U.S.
holders are urged to consult their tax advisors regarding the application of
the PFIC rules, including eligibility for and the manner and advisability of
making, the QEF election or the mark-to-market election.

Information Reporting and Backup Withholding

A
U.S. holder generally is subject to information reporting and may be subject to
backup withholding at rate of up to 28% with respect to dividends paid in the
United States on, and the receipt of the proceeds from the disposition of, the
ordinary shares. Backup withholding will not apply with respect to payments
made to exempt recipients, including corporations and tax-exempt organizations,
or if a U.S. holder provides a correct taxpayer identification number (or
certifies that he has applied for a taxpayer identification number), certifies
that such holder is not subject to backup withholding or otherwise establishes
an exemption. Backup withholding is not an additional tax and may be claimed as
a credit against the U.S. federal income tax liability of a U.S. holder, or
alternatively, the U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue Service.

Non-U.S. Holders of Ordinary Shares

Except
as described below, a non-U.S. holder of ordinary shares (except certain former
U.S. citizens and long-term residents of the United States) will not be subject
to U.S. federal income or withholding tax on the receipt of dividends on, and
the proceeds from the disposition of, an ordinary share, unless that 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 an
income tax treaty with the United States, that item is attributable to a
permanent establishment in the United States or, in the case of an individual,
a fixed place of business in the United States. In addition, gain recognized by
an individual non-U.S. holder will be subject to tax in the United States if
the non-U.S. holder is present in the United States for 183 days or more
in the taxable year of the sale and other conditions are met.

Non-U.S.
holders will not be subject to information reporting or backup withholding with
respect to the payment of dividends on ordinary shares unless the payment is
made through a paying agent, or an office of a paying agent, in the United
States. Non-U.S. holders will be subject to information reporting and backup withholding at a rate of up to 28% with
respect to the payment within the United States of dividends on the ordinary
shares unless the holder provides its taxpayer identification number, certifies
to its foreign status or otherwise establishes an exemption.

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Non-U.S.
holders will be subject to information reporting and backup withholding at a
rate of up to 28% on the receipt of the proceeds from the disposition of the
ordinary shares to, or through, the United States office of a broker, whether
domestic or foreign, unless the holder provides a taxpayer identification
number, certifies to its foreign status or otherwise establishes an exemption.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the receipt of proceeds from the disposition of the
ordinary shares by a foreign office of a broker; provided, however, that if the
broker is a U.S. person or a U.S. related person, information reporting (but
not backup withholding) will apply unless the broker has documentary evidence
in its records of the non-U.S. holders foreign status or the non-U.S. holder
certifies to its foreign status under penalties of perjury or otherwise
establishes an exemption. For this purpose, a U.S. related person is a broker
or other intermediary that maintains one or more enumerated U.S. relationships.
Backup withholding is not an additional tax and may be claimed as a credit against
the U.S. federal income tax liability of a non-U.S. holder, or alternatively,
the non-U.S. holder may be eligible for a refund of any excess amounts withheld
under the backup withholding rules, in either case, provided that the required
information is furnished to the Internal Revenue Service.

ISRAELI TAXATION

The
following summary describes the current tax structure applicable to companies
in Israel, with special reference to its effect on us. It also discusses
Israeli tax consequences material to persons purchasing our ordinary shares. We
recommend that you consult your tax advisor as to the particular tax
consequences of an investment in our ordinary shares.

General Corporate Tax Structure

Most
Israeli companies are subject to corporate tax at the rate of 34% of their
taxable income. However, pursuant to an amendment to the law
passed on July 25, 2005 the corporate tax rate is to be reduced to 31% for the
2006 tax year, 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for
the 2009 tax year and 25% thereafter.

Taxation Under Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary
Adjustments Law, is intended to neutralize the erosion of capital investments
and to prevent tax benefits resulting from deduction of inflationary expenses.
This law applies a supplementary set of inflationary adjustments to the normal
taxable profits and losses computed under the regular cost principles. We are
subject to tax under this law.

Under
the Inflationary Adjustments Law, income and loss for tax purposes are adjusted
for inflation on the basis of changes in the Israeli consumer price index. In
addition, subject to limitations regarding depreciation of fixed assets and
losses carried forward are adjusted for inflation on the basis of changes in
the Israeli consumer price index. Under a recent amendment to the Inflationary
Adjustment Law, the Minister of Finance is authorized, with the approval of the
Finance Committee of the Israeli parliament, to suspend the application of the
Inflationary Adjustment Law for any particular year if the rate of inflation
for that year was not higher than 3%. The Inflationary Adjustment Law was not
suspended in 2003, 2004 or in 2005.

Law for the Encouragement of Capital
Investments, 1959

General.

The
Law for Encouragement of Capital Investments, 1959, or the Investment Law, sets
a number of alternative courses for receiving benefits which encourage
investments in companies that meet the criterions set forth in the Investment
Law. An Approved Enterprise may be entitled to benefits, including Israeli
Government cash grants, which are made available if it is located in a
government designated development area, and tax benefits. As discussed below,
our production facilities have been granted Approved Enterprise status.

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A company
could forgo entitlement to grants otherwise available under the Investment Law,
and in lieu thereof participate in the Alternative Benefits course, under which
the undistributed income from the Approved Enterprise is fully exempt from
corporate tax for a certain period, depending on the geographical region of
Israel in which the Approved Enterprise is located. We chose and received
approvals within the Alternative Benefit course. The Investment Law was amended
in April 1st, 2005, and the Alternative Benefit program was
cancelled. Nonetheless, Alternative Benefit programs, which were approved by
the end of 2004 shall continue to be in full force and effect.

Each
certificate of approval for an Approved Enterprise relates to a specific
investment program, delineated both by the financial scope of the investment
and by the physical characteristics of the facility or the asset. The tax
benefits from any such certificate of approval relate only to taxable profits
attributable to the specific Approved Enterprise.

Tax Benefits.

Taxable income
derived from an Approved Enterprise is subject to a reduced corporate tax rate
of up to 25%, until the earlier of

|  |                                                                                                                                                                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the
end of the seven year period or ten in case of a Foreign Investment Company as
defined below or 10 year period in the case of an enterprise located in
geographical Zone A, commencing in the year in which the
Approved Enterprise first generates taxable income;
| 
| | the
end of the 12-year period from commencement of production; or                                                                                                                                                                                                        
| 
| | the
end of the 14-year period from the date of approval of the Approved Enterprise
status.                                                                                                                                                                               

That
income is eligible for further reductions in tax rates if the company qualifies
as a Foreign Investors Company, depending on the percentage of the foreign
ownership of its equity. A Foreign Investors Company is a company more than
25% of whose share capital (in terms of shares, rights to profits, voting and
appointment of directors) and loan capital is owned by non-Israeli residents.

The
tax rate is reduced to 20% if the foreign ownership of the foreign investment
company is 49% or more but less than 74%; 15% if the foreign ownership of the
Foreign Investors Company is 74% or more but less than 90%; and 10% if the
foreign ownership of the Foreign Investors Company is 90% or more. The
determination of foreign ownership is made on the basis of the lowest level of
foreign ownership during the tax year.

In
the event that a company is operating under more than one approval, or that not
all of its capital investments are approved, its effective corporate tax rate
is the result of a weighted combination of the various applicable rates.

As
we participate in the Alternative Benefits course, and, as our facilities are
located in geographical Zone A, the most preferred region in Israel for
Approved Enterprise purposes, we are exempt from corporate tax for a period of
ten years from the date the first taxable income has been derived from each
Approved Enterprise but not later than the earlier of the 12
year period from commencement of production or 14 year period from the date of
approval of the Approved Enterprise status. We have received five Approved
Enterprise approvals for the establishment and expansions of our facilities,
the first of which expired in 1999 and the others will expire between the end
of 2007 and the end of year 2014.

The
benefits available to an Approved Enterprise are conditioned upon terms
stipulated in the Investment Law and the regulations thereunder and the
criteria set forth in the applicable certificate of approval. These conditions
include the filing of periodic reports and a requirement that minimum
proportions of our paid-up capital be 30% of our fixed assets. In the event
that we do not fulfill these conditions in whole or in part, the benefits can
be canceled and we may be required to refund the amount of the benefits, with
the addition of the Israeli consumer price index linkage differences and
interest. We believe that our Approved Enterprises currently operate in
compliance with all applicable conditions and criteria, but there can be no
assurance that they will continue to do so. These programs and tax benefits may
not be continued in the future at their current levels or at any level or our
requests for future participation in these programs may not be approved.

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Tax Rates imposed on dividends

Dividends
paid by a company that owns an Approved Enterprise and that are attributable to
income derived from that Approved Enterprise during the applicable benefits
period, are taxed at a reduced rate of 15%, if the dividends are paid during
the benefit period or no more than twelve years thereafter; or, if the company
qualifies as a Foreign Investors Company without any time limitations. This
tax must be withheld at source by the company paying the dividend. A dividend
paid from income derived from an enterprise owned by a company that has elected
the Alternative Benefits Program during the period in which it is exempt from
tax is also subject to tax at a 15% rate but causes the company to be liable
for additional corporate tax on the amount distributed, at the rate that would have
been applicable had the company not elected the Alternative Benefits Program
(which is up to 25%).

The amendment to the Investment Law

On
April 1, 2005, an amendment to the Investments Law came into force. In order to
be recognized as owning a Approved Enterprise, a company is required to meet a
number of conditions set forth in the amendment, including making a minimal
investment in manufacturing assets for the Approved Enterprise and receiving a
minimal rate of 25% of the gross revenues from certain market which has a
population of at least 12 million people. Pursuant to the amendment, a company
with a Approved Enterprise is entitled, in to accelerated depreciation for the
manufacturing assets used by the Approved Enterprise and to certain tax
benefits. As we are located in geographical Zone A, if we will invest the
minimal investment abovementioned and we shall still meet the other criteria
set forth in the Investment Law, we will be exempt from income tax from the
Approved Enterprise for a period of up to 10 years.

Income from
sources other than the Approved Enterprise during the period of benefits
will be taxable at regular corporate tax rates.

Another
special tax course enabling companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the
Approved Enterprise. The benefits period is ten years. Upon payment of
dividends, the company is required to withhold tax at source at a rate of 15%
for Israeli residents and at a rate of 4% for foreign residents. The amendment
changes the definition of foreign investment in the Investments Law so that
instead of an investment of foreign currency in the company, the definition now
requires a minimal investment of NIS 5 million by foreign investors.
Furthermore, such definition now also includes the purchase of shares of a
company from another shareholder, provided that the companys outstanding and
paid-up share capital exceeds NIS 5 million.

Law for the Encouragement of Industry
(Taxes), 1969

We
believe that we currently qualify as an Industrial Company within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry
Encouragement Law. According to the Industry Encouragement Law, an Industrial
Company is a company resident in Israel, 90% or more of the income of which in
any tax year, other than of income from defense loans, capital gains, interest
and dividends, is derived from an Industrial Enterprise owned by it. An Industrial
Enterprise is defined as an enterprise whose major activity in a given tax
year is industrial production.

The
following corporate tax benefits are available to Industrial Companies:

|  |                                                                                                       
|- | ------------------------------------------------------------------------------------------------------
| | amortization
of the cost of purchased know-how and patents over an eight-year period for tax
purposes;

55

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---



|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
| | amortization
of expenses incurred in some cases in connection with a public issuance of
publicly traded securities over a three-year period;
| 
| | accelerated
depreciation rates on equipment and buildings.                                                                                  

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. No assurance can be given
that we qualify or will continue to qualify as an Industrial Company or that
the benefits described above will be available in the future.

Law for the Encouragement of Industrial
Research and Development, 1984

Under
the Law for the Encouragement of Industrial Research and Development, 1984, research
and development programs approved by a governmental committee of the Office of
the Chief Scientist are eligible for grants, in exchange for payment of
royalties from revenues generated by the products developed in accordance with
the program. Once a project is approved, the Office of the Chief Scientist will
award grants between 20-50% of the projects approved budget, in exchange for
royalties at a rate of 2% to 6%, depending on the date of approval of the
project, of the proceeds from the sales of the products that are developed from
projects funded by the Office of the Chief Scientist. These royalties must be
paid beginning with the commencement of sales of those products and ending when
100% of the dollar value of the grant was repaid or, for projects approved
after January 1, 1999, the dollar amount of the grant plus interest at the
rate LIBOR for dollar deposits in a twelve-month period.

The
terms of this Israeli governmental participation also require that the products
developed with government grants be manufactured in Israel, unless a special
governmental committee, in its discretion consents to manufacturing abroad. In
addition, in the event that any of the manufacturing rights are sold or
transferred to parties or performed outside of Israel, if approved by the
special governmental committee, a company may be required to pay royalties at a
higher rate and be liable to an increased aggregate pay back amount depending
on the portion of manufacturing performed outside of Israel, up to a maximum of
300% of the dollar amount of the grant unless the amount of production outside
Israel is less than 10% of the original rate of production of the products
developed with these grants. In this particular case, although the OCS may
resist to the transfer of production within 30 days from the receipt of an
announcement to that effect, the law does not impose obligation to pay enlarged
royalties to the OCS. Prior to the recent amendment of the law, the technology
developed pursuant to the terms of these grants could not have been sold or
transferred outside of Israel under any circumstances, and could not have been
sold or transferred to third parties within Israel without the prior approval
of the governmental committee. However, pursuant to an amendment of the law,
which entered into force on March 30th, 2005, the special
governmental committee may, in special cases, approve the transfer or sale of
the technology outside of Israel. Such sale or transfer, even if approved, may
impose on a company a substantial payment, which generally may be as high as
the amount of the grants received by a company, increased in proportion to the
increase of the value of the technology or the company less any royalty
payments already paid to the government. This approval is not required for the
export of any products resulting from that research development. Approval of
the sale or transfer of technology within Israel may be granted only if the
recipient abides by all of the provisions of this law and the regulations promulgated
thereunder, including the restrictions on the sale or transfer of know-how and
the obligation to pay royalties in an amount that may be increased. There can
be no assurance that this consent, if requested, will be granted.

Each
application to the Office of the Chief Scientist is reviewed separately, and
grants are based on the program approved by the research committee of the
Office of the Chief Scientist. Expenditures supported under other incentive
programs of the State of Israel are not eligible for Office of the Chief
Scientist grants.

In
March 2001, we reached an arrangement with the Chief Scientist whereby
were to repay the outstanding balance of the grants we received, not including
grants received by Inspectech prior to its merger into us, at a quarterly rate
equal to 4.5% of the revenues derived in connection with products we develop as
a result of research and development funded by Chief Scientist participations,
up to a maximum amount of $250,000 per quarter. We have not received any
additional grants from the Office of the Chief Scientist since 2000, and As of
June 1, 2005 we had no additional payment obligations in connection with
these grants.

56

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Net
Operating Loss Carryover

As
of December 31, 2005, we had net operating loss, or NOL, carryovers for
Israeli tax purposes of approximately $2.9 million, which may be used to
offset taxable income, subject to annual limitations. This NOL carryover has no
expiration date.

Taxation of Shareholders Capital Gains

Israeli
law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between the Real Gain and the Inflationary Surplus. The Real
Gain is the difference between the total capital gain and the Inflationary
Surplus. The Inflationary Surplus is computed on the basis of the difference
between the Israeli consumer price index in the month of sale and the month of
purchase. The Inflationary Surplus accumulated after January 1, 1994 is
exempt from capital gains tax. A foreign resident may reduce the tax rate used
for the Inflationary Surplus to zero if calculated according to the exchange
rate of the foreign currency lawfully invested in shares of the Israeli
resident company, instead of the Israeli consumer price index. Real Gains
accrued after January 1, 2003 are subject to capital gains tax of 25%,
whereas assets acquired before January 1, 2003 are subject to a blended
tax rate based on the relative periods of time that the assets were held before
and after January 1, 2003. Real Gains derived on or after January 1,
2003 from the sale of ordinary shares traded on the Tel Aviv Stock Exchange or
on a foreign stock exchange recognized by the Israeli Ministry of Finance are
subject to capital gains tax of 15%. According to the 2006 Tax Reform, an
individual will subject to a 20% tax on real capital gains on the sales of
securities, including debentures, warrants and shares, so long the individual
is not a controlling shareholder (generally a shareholder with 10% or more in
the right to profits, right to nominate a director and voting rights) in the
company issuing the securities. This implies an increase in the tax rate on the
gains from publicly traded securities from 15%, which was applicable to sales
before January1, 2006 to 20%. Non-residents are generally exempt from tax on
gains from the sale of such shares, provided that the Real Gains are not
derived by a non-residents permanent establishment in Israel. We note that
Nasdaq was recognized by the Israeli Ministry of Finance as a foreign stock
exchange.

Application of the U.S.-Israel Tax Treaty to
Capital Gains Tax

Subject
to the U.S.-Israel Tax Treaty, the sale, exchange or disposition of the
ordinary shares by a person who qualifies as a resident of the United States
and who is entitled to claim the benefits afforded to that resident, which is
called a Treaty U.S. Resident, will not be subject to Israeli capital gains tax
unless that Treaty U.S. Resident held, directly or indirectly, shares representing
10% or more of our voting power during any part of the 12-month period
preceding the sale, exchange or disposition. A sale, exchange or disposition of
the ordinary shares by a Treaty U.S. Resident who held, directly or indirectly,
shares representing 10% or more of our voting power at any time during the
12-month period preceding the sale, exchange or disposition will be subject to
Israeli capital gains tax, to the extent applicable. However, under the
U.S.-Israel Tax Treaty, this Treaty U.S. Resident would be permitted to claim
credit for these taxes against U.S. income tax imposed with respect to such
sale, exchange or disposition, subject to the limitations set in U.S. laws
applicable to foreign tax credits.

Taxation of Non-Residents on Receipt of Dividends

Nonresidents
of Israel are subject to Israeli income tax on the receipt of dividends paid on
the ordinary shares at the rate of 25%, which tax will be withheld at source,
unless the dividends are paid from income derived from an Approved Enterprise
during the applicable benefit period, or 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 the
ordinary shares who is a Treaty U.S. Resident will be 25%. However, when
dividends are paid from income derived during any period for which the Israeli
company is not entitled to the reduced tax rate applicable to an Approved
Enterprise under Israels Law for the Encouragement of Capital
Investments-1959, the maximum tax will be 12.5% if the holder is a company
holding shares representing 10% or more of the voting power during the part of
the taxable year preceding the date of payment of dividends and during the
whole of its prior taxable year, if any, and, if the company has not derived
more then 25% of its revenues from passive income. When dividends are paid from
income derived during any period for which the Israeli company is entitled to
the reduced tax rate applicable to an Approved Enterprise, then the tax will be
15%.

57

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|   |                             
|-- | ----------------------------
|F. | Dividends and Paying Agents.
|   |                             
|   | Not
  applicable.           
|   |                             
|G. | Statement by Experts.       
|   |                             
|   | Not
  applicable.           
|   |                             
|H. | Documents on Display.       

We
file annual and special reports and other information with the Securities and
Exchange Commission, or SEC. You may inspect and copy such material at the
public reference facilities maintained by the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of such material from the SEC
at prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room.

The
SEC maintains an Internet Web site at http://www.sec.gov that contains reports
and other material that are filed through the SECs Electronic Data Gathering,
Analysis and Retrieval, or EDGAR, system.

Our
ordinary shares are quoted on the NASDAQ National Market. You may inspect
reports and other information concerning us at the offices of the National
Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville,
Maryland 20850. Information about us is also available on our Web site at
http://www.camtek.co.il. Such information on our Web site is not part of this
annual report.

As
a foreign private issuer, we are exempt from the rules under the Securities
Exchange Act of 1934, as amended, or 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 SEC 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

Interest
Rate Risk

We
currently do not hold or invest in derivative financial instruments for trading
or other purposes and, as of December 31, 2005, we had no outstanding
derivative financial instruments of any kind. We have no material market risk
exposure of the type contemplated by Item 11, and, therefore, no quantitative
tabular disclosures are required.

Our
non-NIS denominated loans bear interest based on the LIBOR, and our NIS
denominated loans are based on the Israeli prime interest rate. From time to
time, we use short-term loans. As of December 31, 2005, our short-term loans
were US Dollar denominated.

Most
of our investments are compromised of short-term bank deposits which bear fixed
interest rates.

58

---

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Foreign Currency
Rate Fluctuations

The
currency of the primary economic environment in which our operations are
conducted is the dollar. Most of our revenues are derived in dollars, and the
prices of most of our materials and components are purchased in dollars or are
linked to changes in the dollar/NIS exchange rate effective on the date of
delivery of the goods to our factory. Most of our marketing expenses are also
denominated in dollars or are dollar linked. Our product prices in most
countries outside of Europe and Japan are denominated in dollars. However, most
of our service income is denominated in local currency. In Europe or Japan, if
there is a significant devaluation in the local currency as compared to the
dollar, which is the case in 2005, the prices of our products will increase
relative to that local currency and may be less competitive. The opposite
effect occurs when the dollar decreases in value in comparison to these
currencies, which was the case in 2004. As the majority of our revenues are
denominated in dollars, we believe that inflation and fluctuations in the
NIS/dollar exchange rate have no material effect on our revenues. However, a
portion of the costs of our Israeli operations, mainly personnel and
facility-related, are incurred in NIS. As a result, we bear the risk that the
rate of inflation in Israel will exceed the rate of devaluation of the NIS in
relation to the dollar, which will increase our costs expressed in dollars and
have an effect on our net income. Our NIS costs, as expressed in dollars,
increase to the extent by which any increase in the rate of inflation in Israel
is not offset, or is offset on a lagging basis, by a devaluation of the NIS in
relation to the dollar or to the extent that the NIS appreciates in relation to
the dollar.

An
increasing portion of our expenses is incurred in the Peoples Republic of
China. The Chinese currency is currently linked to the dollar. The Chinese
government has been under increasing international pressure to permit the Yuan
to enter a full or limited free float. Should this linkage be discontinued by
the Chinese government, and if the Chinese currency rises in value in relation
to the dollar, our results of operations, in dollar terms, would be adversely
affected.

In
our consolidated financial statements, transactions and balances originally
denominated in dollars are presented at their original amounts. Gains and
losses arising from non-dollar transactions and balances are included in the
determination of net income as part of financial expenses, net.

Currently,
we do not engage in hedging or other transactions intended to manage risks
relating to foreign currency exchange rate or interest rate fluctuations.

Our
balance sheet exposure to fluctuations in the exchange rate between the U.S.
dollar and other currencies are primarily from NIS denominated balances. As of
December 31, 2005, we had net liabilities of approximately $8.7 million,
denominated in NIS. Any fluctuation in the exchange rate between the NIS and
the U.S. dollar of 1% will cause us expenses of $87,000 or income for the same
amount in case of evaluation or devaluation, respectively.

Item 12. Description of Securities Other than Equity Securities.

| |                  
| | -----------------
| | Not
  applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

| |      
| | -----
| | None.

Item 14. Material Modifications to the Rights of Security Holders and Use of
  Proceeds.

| |                  
| | -----------------
| | Not
  Applicable.

Item 15. Controls and Procedures

We
have established disclosure controls and procedures to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to the officers who certify our financial reports and to other members of
senior management and the Board of Directors.

59

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Our
chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended) as of
December 31, 2005, have concluded that, as of such date, our disclosure controls
and procedures were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure and is recorded, processed, summarized and reported within
the periods specified by the SECs rules and forms.

There
have been no changes in our internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of 1934,
as amended) during the period covered by this report that materially affected,
or are reasonably likely to materially affect, our internal control over financial
reporting.

Item 16A. Audit Committee Financial Expert

Our
board of directors has determined that each of Messrs. Eran Bendoly and Haim
Horovitz is qualified as an audit committee financial expert as defined in
Item 401(h) of Regulation S-K.

Item 16B. Code of Ethics

On
May 3, 2004, we adopted a Code of Ethics which is applicable
to all of our directors, officers and employees, including our principal
executive, financial and accounting officers and persons performing similar functions.
A copy of the Code of Conduct is available on our website,
www.camtek.co.il. We will also provide a copy of the Code of Ethics to any
person, without charge, upon written request addressed to our Chief Financial
Officer at our corporate headquarters in Israel.

Item 16C. Principal Accounting Fees and Services

Our
Audit Committee maintains a policy of approving and recommending only those
services to be performed by our external auditors which are permitted under the
Sarbanes-Oxley Act of 2002 and the applicable rules of the Securities and
Exchange Commission relating to auditors independence, and which are otherwise
consistent with and will encourage, and are remunerated at levels that accord
with, the basic principles of auditor independence.

The following
table presents the aggregate amount of fees paid by the Company to Goldstein
Sabo Tevet and Brightman Almagor & Co., a member firm of Deloitte Touche
Tohmatsu, for their services to the Company for the years ended December 31,
2004 and 2005:

|                   |  |                         |         |                         |  
|------------------ |  | ----------------------- | ------- | ----------------------- | -
|Fee Category       |  | Fees Paid
  during 2004 |         | Fees Paid
  during 2005 |  
|                   |  |                         |         |                         |  
|Audit Fees         |  | $                       | 80,000  |                         | $
|Audit-Related Fees |  | $                       | 77,000  |                         | $
|Tax Fees           |  | $                       | 10,000  |                         | $
|All Other Fees     |  | $                       | 8,000   |                         | $
|Total Fees         |  | $                       | 175,000 |                         | $

Audit Fees: Consists
of the aggregate fees billed for professional services rendered for the audit
of the our annual financial statements and services that are normally provide
by independent auditors in connection with statutory and regulatory filings or
engagements.

60

---

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Audit RelatedFees:
Consists of the aggregate fees billed for assurance and related services that
are reasonably related to the performance of the audit or review of our
financial statements and are not reported under Audit Fees. These services
include the review of interim financial statements.

Tax Fees: Consists
of the aggregate fees billed for professional services rendered for tax
compliance, tax advice and tax planning. These services include assistance
regarding income tax and international tax compliance.

All Other Fees:
Consists of the aggregate fees billed for products and services other than the
services reported above. These services include consultations concerning
financial accounting and reporting standards in view of the accounting policies
required by the various governmental agencies.

Our Audit
Committee has adopted a policy for pre-approval of audit and permitted
non-audit services. Under the policy, The Audit Committee will pre-approve all
auditing services and permitted non-audit services (including the fees and
other terms) to be performed for the Company by its independent auditor to the
extent required by law. In addition, the Audit Committee may adopt policies and
procedures to permit delegation of authority to subcommittees consisting of one
or more members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services. Decisions of the
subcommittee to grant pre-approvals will be presented to the full Audit
Committee at its next scheduled meeting.

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

| |                                    
| | -----------------------------------
| | Not yet
  applicable to registrant.

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

| |                                    
| | -----------------------------------
| | Not yet
  applicable to registrant.

PART III

Item 17. Consolidated Financial Statements.

The
Company has elected to furnish financial statements and related information
specified in Item 18.

Item 18. Consolidated Financial Statements.

Our consolidated financial
statements and report of independent registered public accounting firm in
connection therewith, as listed below, are hereby incorporated into this annual
report by reference to our Report in Form 6-k furnished to the SEC on April 6,
2006.

61

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|                   |  |                                                                                                                                                                                                                                                                                                                                        
|------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 19. Exhibits.
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|Exhibit No.        |  | Exhibit                                                                                                                                                                                                                                                                                                                                
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|1.1                |  | Memorandum of Association
  of Registrant (incorporated herein by reference to Exhibit 3.1 to Amendment
  No. 1 to the Registrants Registration Statement on Form F-1, File No.
  333-12292, filed with the Securities and Exchange Commission on July 21,
  2000).                                                                  
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|1.2                |  | Articles of Registrant
  (incorporated herein by reference to Exhibit 3.2 to Amendment No. 1 to the
  Registrants Registration Statement on Form F-1, File No. 333-113208, filed
  with the Securities and Exchange Commission on April 5, 2004).                                                                                     
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.1                |  | Amended and Restated
  Employee Share Option Plan (incorporated herein by reference to Exhibit 10.1
  to the Registrants Registration Statement on Form S-8, File No. 333-84476,
  filed with the Securities and Exchange Commission on March 18, 2002).                                                                              
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.2                |  | Amended and Restated
  Subsidiary Employee Option Plan (incorporated herein by reference to Exhibit
  10.2 to the Registrants Registration Statement on Form S-8, File No.
  333-84476, filed with the Securities and Exchange Commission on March 18,
  2002).                                                                       
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.3                |  | Employee Share Option Plan
  - Europe (incorporated herein by reference to Exhibit 10.3 to the
  Registrants Registration Statement on Form S-8, File No. 333-49982, filed
  with the Securities and Exchange Commission on November 15, 2000).                                                                                       
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.4                |  | Executive Share Option
  Plan (incorporated herein by reference to Exhibit 10.4 to the Registrants
  Registration Statement on Form S-8, File No. 333-60704, filed with the
  Securities and Exchange Commission on May 11, 2001).                                                                                                    
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.5                |  | 2003 Share Option Plan
  (incorporated herein by reference to Exhibit 10.1 to the Registrants
  Registration Statement on Form S-8, File No. 333- 113139, filed with the
  Securities and Exchange Commission on February 27, 2004).                                                                                                  
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.6                |  | Sub-Plan for Grantees
  Subject to United States Taxation (incorporated herein by reference to
  Exhibit 10.2 to the Registrants Registration Statement on Form S-8, File No.
  333-113139, filed with the Securities and Exchange Commission on February 27,
  2004).                                                                
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.7                |  | Sub-Plan for Grantees
  Subject to Israeli Taxation (incorporated herein by reference to Exhibit 10.3
  to the Registrants Registration Statement on Form S- 8, File No. 333-113139,
  filed with the Securities and Exchange Commission on February 27, 2004).                                                                       
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.8                |  | Form of Indemnification
  Agreement (incorporated herein by reference to Exhibit 10.10 to Amendment No.
  1 to the Registrants Registration Statement on Form F-1, File No. 333-12292,
  filed with the Securities and Exchange Commission on July 21, 2000).                                                                         
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.9                |  | Registration Rights
  Agreement, by and between the Registrant and Priortech Ltd., dated March 1,
  2004 (incorporated herein by reference to Exhibit 10.9 to Amendment No. 1 to
  the Registrants Registration Statement on Form F-1, File No. 333-113208,
  filed with the Securities and Exchange Commission on April 5, 2004).    
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.10               |  | Registration Rights
  Amended and Restated Agreement by and between the Registrant and Priortech
  Ltd., dated December 30, 2004. (incorporated herein by reference to Exhibit
  4.10 to the Registrants Registration Statement on Form F-20 File
  No.000-30664 filed with the Securities and Exchange Commission on June 30,
  2005.
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.11               |  | Convertible Loan
  Agreement, by and between the Registrant and FIMI Opportunity Fund, L.P., and
  FIMI Israel Opportunity Fund, dated August 8, 2005.                                                                                                                                                                                 
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|4.12               |  | Press Release announcing
  the Companys completion of $15,000,000 Private Placement dated April 28,
  2006; Press Release announcing Priortech Ltd. Sale of Camtek shares to
  Israeli Institutional Investors dated June 21, 2006.                                                                                                   
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|8.1                |  | Subsidiaries of the
  Registrant (incorporated herein by reference to Exhibit 21.1 to Amendment No.
  1 to the Registrants Registration Statement on Form F- 1, File No.
  333-12292, filed with the Securities and Exchange Commission on July 21, 2000                                                                              
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|12.1               |  | Certification of Chief
  Executive Officer required by Rules 13a-14(a) and Rule 15d-14(a) under the
  Securities Exchange Act of 1934, as amended.*                                                                                                                                                                                    
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|12.2               |  | Certification of Chief
  Financial Officer required by Rules 13a-14(a) and Rule 15d-14(a) under the
  Securities Exchange Act of 1934, as amended.*                                                                                                                                                                                    
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|13.1               |  | Certification of the Chief
  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section
  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                 
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|15                 |  | Consent of Brightman
  Almagor & Co., a member firm of Deloitte Touche Tohmatsu, and Goldstein
  Sabo Tevet.*                                                                                                                                                                                                                          
|                   |  |                                                                                                                                                                                                                                                                                                                                        
|                  

|  |                                             
|- | --------------------------------------------
| | English translations from
  Hebrew original.
|  |                                             
|* | Filed herewith.                             

62

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SIGNATURES

The
Company 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.

|                     |                                  | 
|-------------------- | -------------------------------- | 
|                     | CAMTEK
  LTD.                   
|                     |                                 
|                     | By:  /s/ Rafi Amit               | 
|                     |                                  | 
|                     | Name:  Rafi Amit                
|                     | Title: Chief Executive
  Officer
|Date:  June 29, 2006 |                                  | 

63

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