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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 20-F

(Mark One)

oRegistration
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, 2006

or

oTransition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For 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:
Ordinary Shares, nominal value 0.01 New Israeli Shekel per share
(Title of Class)

Nasdaq Global Market
(Name of Exchange)

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

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

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

30,040,855 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                                                                                                                        | xNo

1

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|                                                                                                                                                                                                                                                                                                                                                                   |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------
|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                                                                                                                                                                                                                                                                                                                                                               | xNo      
|                                                                                                                                                                                                                                                                                                                                                                   |          
|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.
|                                                                                                                                                                                                                                                                                                                                                                  
|xYes                                                                                                                                                                                                                                                                                                                                                               | oNo      
|                                                                                                                                                                                                                                                                                                                                                                   |          
|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           o Accelerated Filer


xNon-Accelerated Filer                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                   |          
|Indicate by check mark
  which financial statements the registrant has elected to follow.                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                  
|Item 17 o                                                                                                                                                                                                                                                                                                                                                          | Item 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).                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                  
|oYes                                                                                                                                                                                                                                                                                                                                                               | xNo      

2

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TABLE OF CONTENTS

|          |                                                                                |     
|--------- | ------------------------------------------------------------------------------ | ----
|          |                                                                                | PAGE
|          |                                                                                |     
|PART I    |                                                                                | 5   
|         
|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                                                     | 16  
|         
|Item 4A.  | Unresolved Staff Comments                                                      | 23  
|         
|Item 5.   | Operating and Financial Review and Prospects                                   | 23  
|         
|Item 6.   | Directors, Senior Management and Employees                                     | 34  
|         
|Item 7.   | Major Shareholders and Related Party Transactions                              | 44  
|         
|Item 8.   | Financial Information                                                          | 46  
|         
|Item 9.   | The Offer and Listing                                                          | 47  
|         
|Item 10.  | Additional Information                                                         | 48  
|         
|Item 11.  | Quantitative and Qualitative Disclosures About Market Risk                     | 62  
|         
|Item 12.  | Description of Securities Other than Equity Securities                         | 63  
|         
|PART II   |                                                                                | 63  
|         
|Item  13. | Defaults, Dividend Arrearages and Delinquencies                                | 63  
|         
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of
  Proceeds | 63  
|         
|Item 15.  | Controls and Procedures                                                        | 63  
|         
|Item 16A. | Audit Committee Financial Expert                                               | 63  
|         
|Item 16B. | Code of Ethics                                                                 | 64  
|         
|Item 16C. | Principal Accounting Fees and Services                                         | 64  
|         
|Item 16D. | Exemptions from the Listing Standards for Audit Committees                     | 65  
|         
|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers         | 65  
|         
|PART III  |                                                                                | 65  
|         
|Item 17.  | Financial Statements                                                           | 65  
|         
|Item 18.  | Financial Statements                                                           | 65  
|         
|Item 19.  | Exhibits                                                                       | 66  

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 selected data under the captions Selected Statement of
  Operations Data and Selected Balance Sheet Data for the years ended
  December 31, 2004, 2005 and 2006, and balance sheet data as of
  December 31, 2005 and 2006 from the audited consolidated financial
  statements included elsewhere in this annual report. The consolidated
  financial statements as of December 31, 2005 and for each of the years in the
  two-year period ended December 31, 2005, have been jointly audited by
  Goldstein Sabo Tevet and Brightman Almagor & Co., a member firm of
  Deloitte Touche Tohmatsu, both independent registered public accounting
  firms. Further, the consolidated financial statements as of and for the year
  ended December 31, 2006, have been audited by Somekh Chaikin, a member
  firm of KPMG International, independent registered public accounting firm. We
  derived the selected data under the caption Selected Statement of Operations
  Data for the years ended December 31, 2002 and 2003 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 consolidated financial statements are prepared in accordance with
  accounting principles generally accepted in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

5

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|                                                          |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  
|--------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------- | -
|                                                          |  | Year Ended December 31,               |        
|                                                          |  |                                       |        
|                                                          |  | 2002                                  |         | 2003 |   | 2004   |   | 2005 |        | 2006 |  
|                                                          |  |                                       |         |      |   |        |   |      |        |      |  
|                                                          |  | (in thousands, except per share data) |        
|Selected
  Statement of Operations Data:                  |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  
|Revenues:                                                 |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  
|Sales of products                                         |  | $                                     | 19,103  |      | $ | 26,567 |   | $    | 63,353 |      | $ | 56,987 |   | $ | 92,470  |  
|Service fees                                              |  |                                       | 3,490   |      |   | 4,574  |   |      | 4,066  |      |   | 6,045  |   |   | 7,585   |  
|Total revenues                                            |  |                                       | 22,593  |      |   | 31,141 |   |      | 67,419 |      |   | 63,032 |   |   | 100,055 |  
|Cost of revenues:                                         |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  
|Cost of products sold                                     |  |                                       | 10,421  |      |   | 13,214 |   |      | 28,193 |      |   | 28,262 |   |   | 42,600  |  
|Cost of services                                          |  |                                       | 3,220   |      |   | 3,460  |   |      | 3,168  |      |   | 4,519  |   |   | 5,842   |  
|Royalties to the Government
  of Israel                   |  |                                       | 1,000   |      |   | 150    |   |      | -      |      |   | -      |   |   | -       |  
|Write-off of inventory                                    |  |                                       | 1,805   |      |   | -      |   |      | -      |      |   | -      |   |   | -       |  
|Total cost of revenues                                    |  |                                       | 16,446  |      |   | 16,824 |   |      | 31,361 |      |   | 32,781 |   |   | 48,442  |  
|Gross profit                                              |  |                                       | 6,147   |      |   | 14,317 |   |      | 36,058 |      |   | 30,251 |   |   | 51,613  |  
|Research and development costs                            |  |                                       | 7,194   |      |   | 5,855  |   |      | 7,328  |      |   | 8,469  |   |   | 11,831  |  
|Selling, general and administrative
  expenses            |  |                                       | 10,057  |      |   | 10,041 |   |      | 15,953 |      |   | 18,760 |   |   | 27,850  |  
|Aborted share issuance
  expenses                         |  |                                       | -       |      |   | -      |   |      | 1,122  |      |   | -      |   |   | -       |  
|Operating income (loss)                                   |  |                                       | (11,104 | )    |   | (1,579 | ) |      | 11,655 |      |   | 3,022  |   |   | 11,932  |  
|Financial and other income
  (expenses), net              |  |                                       | 331     |      |   | 235    |   |      | (359   | )    |   | (320   | ) |   | (288    | )
|Income (loss) before income
  taxes                       |  |                                       | (10,773 | )    |   | (1,344 | ) |      | 11,296 |      |   | 2,702  |   |   | 11,644  |  
|Income taxes                                              |  |                                       | 519     |      |   | 225    |   |      | 499    |      |   | -      |   |   | (41     | )
|Net income (loss)                                         |  | $                                     | (11,292 | )    | $ | (1,569 | ) | $    | 10,797 |      | $ | 2,702  |   | $ | 11,603  |  
|                                                         
|Earnings (loss) per
  ordinary shares outstanding:        |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  
|Basic                                                     |  | $                                     | (0.47   | )    | $ | (0.06  | ) | $    | (0.40  | )    | $ | 0.10   |   | $ | 0.40    |  
|Diluted                                                   |  | $                                     | (0.47   | )    | $ | (0.06  | ) | $    | (0.39  | )    | $ | 0.10   |   | $ | 0.39    |  
|                                                         
|Weighted average number of
  ordinary shares outstanding: |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  
|Basic                                                     |  |                                       | 24,166  |      |   | 27,053 |   |      | 27,114 |      |   | 27,253 |   |   | 29,176  |  
|Diluted                                                   |  |                                       | 24,166  |      |   | 27,053 |   |      | 27,800 |      |   | 27,586 |   |   | 29,553  |  
|                                                          |  |                                       |         |      |   |        |   |      |        |      |   |        |   |   |         |  

|                               |  |                |        |      |   |        |  |      |        |      |   |        |  |   |         | 
|------------------------------ |  | -------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------- | 
|                               |  | December 31,   |       
|                               |  |                |       
|                               |  | 2002           |        | 2003 |   | 2004   |  | 2005 |        | 2006 |  
|                               |  |                |        |      |   |        |  |      |        |      |  
|                               |  | (in thousands) |       
|Selected
  Balance Sheet Data: |  |                |        |      |   |        |  |      |        |      |   |        |  |   |         | 
|Cash and cash equivalents      |  | $              | 2,898  |      | $ | 12,837 |  | $    | 9,141  |      | $ | 8,714  |  | $ | 23,358  | 
|Total assets                   |  |                | 48,948 |      |   | 54,186 |  |      | 68,643 |      |   | 75,239 |  |   | 110,806 | 
|Bank credit                    |  |                | 51     |      |   | 2,300  |  |      | 2,335  |      |   | -      |  |   | -       | 
|Shareholders equity           |  |                | 40,316 |      |   | 38,851 |  |      | 49,776 |      |   | 52,618 |  |   | 80,138  | 

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

6

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
| | 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, integrated circuit
  (IC) substrate and semiconductor manufacturing and packaging industries.
  These markets are highly cyclical and the Company does not have any
  information that enables it to predict the downturns in these markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
  printed circuit board, IC substrate and semiconductor manufacturing and
  packaging industries are highly cyclical; The printed circuit board and the
  IC substrate experienced a prolonged and severe downturn in 2002 and 2003,
  during which the overall rate of capital spending by printed circuit board
  and IC 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 and the first half of 2006. In the second half of
  2006 and first quarter of 2007 our results were affected by a downturn in the
  semiconductor manufacturing and packaging industry. As a result of this
  cyclicality we saw during 2004 an increase in capital spending in the printed
  circuit board and IC substrate industries, and sales of our automated optical
  inspection, or AOI, systems to these manufacturers 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, second and third quarter of 2006 the demand from our clients in the
  printed circuit board market increased again. In the first quarter of 2007 we
  experienced a decline in customer demand for our products in the printed
  circuit board industry. Also, the semiconductor manufacturing and packaging
  industry is characterized by cyclicality, which is amplified in the back-end
  sector, where we operate. In the first half of 2006 we won new customers from
  the semiconductor industry, while in the second half of 2006 and the first
  quarter of 2007, we, like other equipment suppliers in this industry, were
  affected by its relative weakness. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

7

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---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 six months. 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 totaled $18.4 million
  at December 31, 2006, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | We operate an international sales organization. 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 2006, our sales in the Asia
  Pacific region accounted for approximately 74% of our total revenues,
  including approximately 34% of our total revenues from sales in China and
  Hong Kong and 13% from sales in Taiwan. We further increased our presence in
  the region during 2006. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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, IC 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

8

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2002, early 2003, first half of
  2005 and during the first half of 2007, competition intensified due to the
  low demand for the type of products that we manufacture to the printed
  circuit board and the IC 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, Lloyd-Doyle 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 IC substrate industry include Dainippon
  Screen and Utechzone. In the semiconductor manufacturing and packaging
  industry, our principal competitor and the dominant market participant is
  Rudolph Technologies Inc., with additional competitors including Robotic
  Vision Systems, Topcon, Torray and Hitachi.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 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 an optional
  component in the Dragon and Falcon systems infringe upon a patent held by
  Orbotech Ltd. and requesting an injunctive relief and damages. Currently, the
  issue dealt with by the court is the validity of the asserted patent. We
  believe that we have substantial defenses against the validity of Orbotechs
  patent and 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 a specific 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 Orbotech a provisional
  remedy, i.e. interim relief, which prevents Camtek from manufacturing the
  allegedly infringing illumination block in suit. Following the grant of the
  provisional remedy by the District Court, the Company filed a motion for
  leave to appeal (permission from the Israel Supreme Court to appeal the
  District Courts decision to grant a provisional remedy). The Supreme Court
  rejected our request. The claim is currently in the preliminary stage of
  discovery and only after evidence is presented and cross examinations are
  conducted will a final judgment be rendered by the District Court, subject to
  the right to appeal. In February 2007 the patent referring to the specific
  illumination block expired. The Company has filed two requests for the lawsuit
  to be dismissed. We believe that we have good defenses in the infringement
  aspect of the claim. We further believe that we have claims with respect to
  the validity of the asserted patent, as well as other defenses such as
  estoppel and lack of good faith on the part of Orbotech.

9

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On
  July 14, 2005, a lawsuit was filed against us in the United States District
  Court for the District of Minnesota by one of the Companys competitors in
  the field of semiconductor manufacturing and packaging, August Technology
  Corporation (today Rudolph Technologies Inc. together with 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, invalidity
  and unenforceability of the patent. The case is currently approaching the end
  of the discovery phase and is expected to be trial ready by October 2007. We
  believe that we have substantial defenses to Augusts allegations.                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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. Even if we will be successful
  in our defense against these claims, we may still incur significant legal
  expenses while resolving these matters.                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | We
  incurred net losses of $11.3 million and $1.6 million for the years
  ended December 31, 2002 and 2003, respectively. Despite having had net
  income of $10.8 million, $2.7 million and $11.6 million in 2004, 2005
  and 2006 respectively, we incurred a net loss of $4.3 million in the first
  quarter of 2007. 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.

10

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------
| | 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 of 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 major manufacturing facility magnifies the
  risk of an interruption in our production capabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  
| | We
  have one major 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 (loss), in any particular period may be lower than
  revenues and net income (loss), 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.                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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;

11

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | interest and
  exchange rates; and                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | the timing
  of issuing required import permits in certain countries into where we sell.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                         
| | We depend on a limited number of key personnel who would be difficult
  to replace.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Our
  continued growth and success largely depend 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 Ltd., 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. Despite Israeli law 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 the Companys and 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, after applying certain look-through rules, 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. 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. Rules similar to those applicable to
  dispositions generally will apply to certain excess distributions with
  respect to our ordinary shares. 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.                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Based
  on an analysis of our assets and income, we believe that in 2006 we were not
  a PFIC. We currently expect that we will not be a PFIC in 2007. 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, 2007 or in a future taxable 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.                                                                                                                                                                                                                                     

12

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                           
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2006 through
  June 28, 2007, the price of our ordinary shares ranged from $3.02 to $8.40.
  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.                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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 61.9% 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.

13

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                                  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------
| | 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. In 2005, Israel executed its plan of unilateral
  disengagement from the Gaza Strip and some parts of the West Bank and Hamas
  gained majority of the Palestinian Parliament in the elections held in the
  Palestinian Authority. Recently, a civil war has erupted in the Gaza Strip
  between Hamas and Fatah supporters, which was followed by the establishment
  of two different Palestinian governments  one by Hamas in the Gaza Strip and
  one by Fatah in the West Bank. These events affect Israels security, foreign
  relations and the stability of the region. Furthermore, in the summer of 2006
  Israel and Lebanon entered into war, which lasted for a month and a half and
  affected the Northern part of Israel, where we are located. Any further
  escalation in the hostilities referred to above 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

14

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 (the 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 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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.

15

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|        |                            
|------- | ---------------------------
|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 integrated circuits (IC) substrates. 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 $40 million in 2006 or 40% of the total 2006
  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, raising $14.5 million. 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, North America 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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 substrates for
  interconnection of integrated circuit devices, or IC substrate 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 1,800 AOI systems in countries
  around the world. Our PCB customer base includes the majority of the largest
  100 PCB manufacturers worldwide. Since the introduction of our Falcon line
  for the semiconductor industry, we have sold over 100 Falcon systems to more
  than 30 semiconductor manufacturers, test and assembly houses and bumping
  service providers, including 8 out of the top 10 Integrated Device
  Manufacturers (IDM). Our global, direct customer support organization
  provides responsive, localized pre and post sales support for our customers
  through our wholly-owned subsidiaries.

16

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 IC substrate 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 the basic platform that mount and interconnects a broad range of
  electronic components, such as IC devices, resistors, capacitors, coils and
  the like, and enables them to operate as an electronic system. PCBs consist
  of traces, or lines, of conductive material, such as copper, laminated on
  either a rigid or a flexible insulating base. These conductive lines provide
  electrical interconnections between the components. The trace integrity and
  conformance to exact dimensions are essential to the functioning of the
  electronic product. 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 towards 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
  producing multi-layer PCBs with increasingly 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 50 to
  120 microns (0.002 to 0.005 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 4 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 IC Substrate Industry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The
  pursuit of electronic products that deliver more functionality, and at the
  same time are smaller, lighter and less power-consuming, drives the
  semiconductor industry to produce ICs (dice) requiring more input/output
  connections. These dice must fit into smaller packages. The IC substrate
  industry, in turn, supports these trends with high-density interconnect
  substrates that serve as carriers for the IC die, providing it mechanical and
  electrical connection to the printed circuit board. These substrate feature
  conductive lines that are 12 to 50 μm (microns) in width. Although IC substrates
  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.                                                                                                     

17

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  IC is connected to the upper side of the substrate, either by wire bonding by
  means of thin metal wires, or by flipping the IC and directly connecting
  its face to the substrate through an array of matching bumps, in what is
  known as flip chip die attach (Flip-Chip). The IC substrate is connected to
  the PCB via an array of conductive solder balls, known as a ball grid array,
  or BGA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                   
| | The
  complexity of IC substrates requires advanced inspection systems with high
  magnification power for detecting minuscule defects that hinder production
  yields. Optical inspection of IC substrates is implemented along the
  manufacturing process, where the substrates are still in panel form, similar
  to PCB, and at the end of the production process, where the substrates are
  cut to strips or packed in trays. Due to the high integration level of
  todays electronic products, defective substrate that pass undetected may
  render the entire product unusable. Or, if assembled in a mission-critical
  system, they may cause a catastrophic 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
  Flip-Chip 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. Wafers
  designed for Flip-Chip assembly interconnect go through a process in which
  solder bumps raging from 30 to 150 microns in height, or gold bumps about 15
  microns tall, are plated or stenciled on pads on the face of the IC. A
  similar technology termed Chip-Scale Wafer Level Packaging (CS-WLP), larger
  bumps up to 500 micron tall are placed on the die and the entire wafer is
  coated with a thick layer of polymer  usually epoxy. After dicing, the
  individual die is actually a finished device, ready to be mounted directly on
  the PCB. AOI with 3-D measurement capabilities is used to detect any missing,
  misplaced or deformed bump and to determine bumps 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.                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                   
| | Products                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                   
| | Our AOI
  systems consist of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 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
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | A precise,
  movable table, that holds 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.                             

18

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | 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 automated optical inspection of
  semiconductor wafers, IC substrates and 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 IC 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
  final inspection (AFI) of IC substrate; the Planet for inspection of
  ultra-fine-line IC substrate; and Large Area Masks (LAM) 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, real-time data collection for process control 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 designed to operate in Inspectify mode of operation. Inspectify is
  a unique mode of operation enabling the operator to perform verification
  immediately after inspection on the same system, thus saving time and
  eliminating handling-related defects. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Pegasus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The
  Pegasus line includes systems for automated inspection of finished IC
  substrates that are subsequently used in packaging of BGA and Chip Scale
  Package (CSP) devices. The Pegasus inspects both sides of the substrate,
  detecting process and mechanical defects in particular in the gold-plated
  areas where the substrate will interconnect with the silicon die or the PCB
  and in the solder-mask areas. Pegasus models handle substrates in strip
  format in magazines or singular substrates in trays. In December 2006 we
  introduced the Pegasus 200S, an enhanced product for inspecting IC substrates
  in strip format.                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Planet                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Planet
  is designed for the inspection of ultra-fine-line IC substrate, down to 10μm
  line/space technologies. Introduced in June 2007, the Planet addresses
  the inspection needs of the very high end of the IC substrate industry -
  ultra-fine line. The Planet integrates our experience from both the
  semiconductor and PCB markets into a totally new hardware architecture to
  deliver the robustness and high resolution required for high speed detection
  of micron-scale defects.                                                                                                                                                                                                                                                                         

19

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integrated AOI System                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Verification Systems                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Camtek
  offers various stand-alone verification systems that enable verification of
  panels after Inspection. Camtek designed the verification stations to meet
  operators comfort during work while delivering high image quality.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | CVR-100 is
  designed for verification of panels after inspection on the Dragon or Orion
  AOI;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | CVR-200 is
  designed for verification when working in AIC configuration; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | PVS-200 is
  designed for the verification of IC Substrates (strips or units) after they
  were inspected by the Pegasus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 the majority of the largest 100 PCB manufacturers
  worldwide and 8 out of the top 10 semiconductor IDM. 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 2004 or 2005. However, in 2006 we had
  one customer that accounted for about 10% of our total revenues. In the IC
  substrate industry, our customers are typically dedicated substrate
  manufacturers, but also include large PCB manufacturers who have separate
  substrate manufacturing facilities. Our IC substrate customers are located
  predominantly 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 semiconductor devices.                                                                              

20

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

|                      |  |                            |        |      |  |        |  |  |         | 
|--------------------- |  | -------------------------- | ------ | ---- |  | ------ |  |  | ------- | 
|                      |  | Year Ended December 31,    |       
|                      |  |                            |       
|                      |  | 2004                       |        | 2005 |  | 2006   | 
|                      |  |                            |        |      |  |        | 
|                      |  | U.S. Dollars(In thousands) |       
|                      |  |                            |       
|China and
  Hong Kong |  |                            | 29,576 |      |  | 24,665 |  |  | 33,713  | 
|Other Asia            |  |                            | 5,341  |      |  | 5,036  |  |  | 20,413  | 
|United
  States       |  |                            | 8,116  |      |  | 11,484 |  |  | 15,622  | 
|Taiwan                |  |                            | 14,574 |      |  | 12,258 |  |  | 12,895  | 
|Western
  Europe      |  |                            | 4,780  |      |  | 6,597  |  |  | 9,170   | 
|Japan                 |  |                            | 3,533  |      |  | 2,065  |  |  | 6,716   | 
|Rest of the
  world   |  |                            | 1,499  |      |  | 927    |  |  | 1,526   | 
|                      |  |                            |        |      |  |        |  |  |         | 
|                      |  |                            | 67,419 |      |  | 63,032 |  |  | 100,055 | 
|                      |  |                            |        |      |  |        |  |  |         | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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,
  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, 2006, 94 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 three
  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.                                                                                                                                                                    

21

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                  |                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 IC
  Substrate industry include Dainippon Screen and Utechzone. In the
  semiconductor manufacturing and packaging industry, our primary competitor is
  Rudolph Technologies Inc., with additional competitors including Robotic
  Vision Systems (RVSI), ICOS Vision Systems and Solvision. There are also
  several Japanese competitors whom we face mostly in Japan. These include
  Topcon, Torray, Hitachi and Tosok.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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;                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                  |                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                 | 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
  compatibility with customer automation environment;                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                  |                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                 | Strong pre
  and post-sale support (applications, service and training) deployed in
  immediate proximity to customer sites; and                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                  |                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                 | 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 capital expenditures in fixed assets for the last
  three years:

|                                 |  |                |     |      |   |      |  |   |       | 
|-------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ----- | 
|                                 |  | December 31,   |    
|                                 |  |                |    
|                                 |  | 2004           |     | 2005 |   | 2006 | 
|                                 |  |                |     |      |   |      | 
|                                 |  | (in thousands) |    
|Real Estate                      |  | $              | 191 |      | $ | 20   |  |   | -     | 
|Building                         |  |                | 30  |      |   | 147  |  |   | 409   | 
|Machinery and equipment          |  |                | 315 |      |   | 114  |  |   | 938   | 
|Office furniture and
  equipment |  |                | 293 |      |   | 362  |  |   | 162   | 
|Automobiles                      |  |                | -   |      |   | 30   |  |   | 73    | 
|Total                            |  | $              | 829 |      | $ | 673  |  | $ | 1,582 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Material Effects of Governmental Regulations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
  following EU directives, which represent the European standard required in
  order to sell in Europe, apply: Low Voltage Directive (LVD) 73/23/EEC and
  Directive 98/37/EC on the approximation of the laws of the Member States
  relating to machinery). The following SEMI Standards, which define uniform
  standards for manufacturers in the semiconductor manufacturing and packaging
  industry and production equipment producers, apply: SEMI S-2 (safety
  requirements for sale of equipment in the semiconductor manufacturing and
  packaging industry) and SEMI S-8 (ergonomic requirements for sale of
  equipment in the semiconductor manufacturing and packaging industry).

22

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                               
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
| | 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 IC substrates. Based on
  sales, PCB Technologies, a subsidiary of Priortech, is one of the largest PCB
  manufacturers in Israel. Priortech currently holds 61.9% of our outstanding
  ordinary shares. Our revenues from sales to affiliated and subsidiaries of
  Priortech, totaled  $230,000, $1,000
  and $240,000 in 2004, 2005 and 2006, 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. At the end of 2006, we decided to prepare
  construction programs and to apply for the necessary construction permits for
  the purpose of expanding our current facilities. The expansion is planned to
  occupy a further 71,500 square feet, which will enable us to double our
  manufacturing and development capabilities. Between January and March 2007 we
  invested a sum of $200,000 in the expansion and improvement of our current
  facilities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                               
| | Also,
  at the end of 2006, we entered into a lease for a new manufacturing facility
  in China, in which we manufacture products that do not require the
  geographical proximity to the development facilities and that are designated
  to be sold to customers in Asia. The Chinese facility occupies 23,000 square
  feet. Since September 2006 and until June 28, 2007, we invested approximately
  $360,000 in start-up costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Our
  sales offices and demonstration centers, which we lease in various locations
  around the world, occupy, an aggregate, of approximately 29,000 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 integrated circuit substrate, or IC substrate,
  industry and the semiconductor manufacturing and packaging industry.

23

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We
  sell our AOI systems internationally. The majority of sales of our AOI
  systems in 2006 was to PCB manufacturers in the Asia Pacific region,
  particularly in China, South East Asia, Korea 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 2006, our sales
  to customers in the Asia Pacific region accounted for approximately 74% of
  our total revenues, including approximately 34% of our total revenues from
  sales in China and Hong Kong and 13% 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 increased in 2006 since more systems were sold
  during the industry upturn during 2004, therefore more warranties expired. We
  expect service revenues to moderately grow in 2007 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 time frame 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 as well as 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, and as a result of
  the actual weakness and low demand that we experienced in the past two
  quarters - our finished goods inventory has increased. A significant portion
  of our finished goods inventory consists of systems under evaluation and
  demonstration systems.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 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.  We recognize revenue from sales in accordance
  with Securities and Exchange Comission Staff Accounting Bulletin No. 104 SAB
  104 and Financial Accounting Standard Boards Emerging Issues Task Force
  (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
  We recognize revenue 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 collectibility is reasonably assured. Service revenues
  consist mainly of revenues from maintenance contracts and are recognized
  ratably over the contract period. Non-standard warranty is deferred as unearned
  revenue and is recognized ratably as revenue when the applicable warranty
  term period commences.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

24

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our
  revenue recognition policy requires that we make a judgment as to whether
  collectibility 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 information at hand
  regarding specific customers, including aging of the receivable balance,
  evaluation of the security received from customers, 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, 2004, 2005 and 2006:

|                                 |  |                    |        |      |   |        |   |   |        |  
|-------------------------------- |  | ------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                 |  | As of December 31, |       
|                                 |  |                    |       
|                                 |  | 2004               |        | 2005 |   | 2006   |  
|                                 |  |                    |        |      |   |        |  
|                                 |  | (in
thousands)     |       
|Balance at beginning of
  period |  | $                  | (2,090 | )    | $ | (2,236 | ) | $ | (2,206 | )
|Provisions                       |  |                    | (1,229 | )    |   | (680   | ) |   | (778   | )
|Deductions                       |  |                    | 1,083  |      |   | 710    |   |   | 131    |  
|Balance at end of period         |  | $                  | (2,236 | )    | $ | (2,206 | ) | $ | (2,853 | )

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Valuation of Inventory.  Inventories consist of completed AOI
  systems, AOI systems partially completed and components, and are recorded at
  the lower of cost, determined by the moving  average basis, or market. 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.                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Income Taxes.  We account for income taxes under SFAS No. 109, Accounting for
  Income Taxes, or SFAS 109. Under SFAS 109 deferred tax assets or
  liabilities are recognized in respect of temporary differences between the
  tax bases of assets and liabilities and their financial reporting amounts as
  well as in respect of tax losses and other deductions which may be deductible
  for tax purposes in future years, based on tax rates applicable to the
  periods in which such deferred taxes will be realized. In assessing the
  realizability of deferred tax assets, we consider whether it is more likely
  than not that some portion or all of the deferred tax assets will not be
  realized. The ultimate realization of deferred tax assets is dependent upon
  the generation of future taxable income during the periods in which those
  temporary differences become deductible and during which the carry-forwards
  are available. Valuation allowances are established when necessary to reduce
  deferred tax assets to the amount considered more likely than not to be
  realized.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Our
  financial statements include deferred tax assets, net, which are calculated
  according to the above methodology. If there is an unexpected critical
  deterioration in our operating results and forecasts, we would have to
  increase the valuation allowance with respect to those assets. We believe
  that it is more likely than not that those net deferred tax assets included
  in our financial statements will be realized in subsequent years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Stock Option and Restricted Share Plans On
  January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based
  Payment, or SFAS 123(R), which requires the measurement and recognition of
  compensation expense for all share-based payment awards made to employees and
  directors, including employee stock options, based on estimated fair values.
  SFAS 123(R) supersedes our previous accounting under APB Opinion No. 25,
  Accounting for Stock Issued to Employees, or APB 25, for periods beginning
  in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin, or
  SAB, No. 107 (SAB 107) relating to SFAS 123(R). We have applied the
  guidance in SAB 107 in its adoption of SFAS 123(R). The application of SFAS
  123(R) and SAB 107 require the exercise of certain judgment, estimates and
  assumptions.                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | We adopted
  SFAS 123(R) using the modified prospective transition method, which requires
  the application of the accounting standard effective January 1, 2006, for
  calendar year companies. In accordance with the modified prospective
  transition method, our consolidated financial statements for prior periods
  have not been restated to reflect, and do not include, the impact of the
  adoption of the recognition principles of SFAS 123(R). SFAS 123(R) requires
  companies to estimate the fair value of share-based payment awards on the
  date of grant using an option-pricing model. The value of the portion of the
  award that is ultimately expected to vest is recognized as expense over the
  requisite service periods. Prior to the adoption of SFAS 123(R), we accounted
  for stock-based awards to employees and directors using the intrinsic value
  method in accordance with APB 25 as was allowed under SFAS No. 123,
  Accounting for Stock-Based Compensation, or SFAS 123.                                                                                                

25

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock-based
  compensation expense recognized during the period is based on the value of
  the portion of share-based payment awards that is ultimately expected to vest
  during the period. Stock-based compensation expense recognized for the year
  ended December 31, 2006 includes compensation expense for share-based payment
  awards granted prior to, but not yet vested as of December 31, 2005 based on
  the grant date fair value, estimated in accordance with the pro forma
  disclosure provisions of SFAS 123, and compensation expense for the
  share-based payment awards granted subsequent to December 31, 2005 based on
  the grant date fair value estimated in accordance with the provisions of SFAS
  123(R). As stock-based compensation expense recognized for the year ended
  December 31, 2006 is based on awards ultimately expected to vest, it has been
  reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
  estimated at the time of grant and revised, if necessary, in subsequent
  periods if actual forfeitures differ from those estimates. In our pro forma
  information required under SFAS 123 for the periods prior to fiscal 2006, we
  accounted for forfeitures as they occurred.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | We used
  Black-Scholes option-pricing model, or Black-Scholes, method of valuation
  for share-based awards for purposes of complying with the pro forma
  disclosure requirements of SFAS 123, and have used the Black-Scholes
  option-pricing model for purposes of both the measurement and recognition of
  compensation expense for share-based award commencing January 1, 2006
  coinciding with the effective date of adoption of SFAS 123(R). Our
  determination of fair value of share-based payment awards on the date of
  grant using an option-pricing model is affected by our stock price as well as
  assumptions regarding a number of highly complex and subjective variables.
  Although the fair value of employee stock options is determined in accordance
  with SFAS 123(R) and SAB107 using an option-pricing model, that value may not
  be indicative of the fair value observed in a willing buyer/willing seller
  market transaction.                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Amortization of Intangible Assets Our parent
  company, Priortech, is required to implement, as of January 1, 2007, a new
  accounting standard (Accounting Standard No. 30 of the Israel Accounting
  Standard Board which was published in March 2007 (the Standard)). The
  Standard is based on the International Accounting Standard No. 38, which
  determines the accounting treatment, realization, measurement and disclosure
  demands regarding intangible assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Until the
  Standard became effective, the practice in Israel had been to write off
  research and development expenses in the profit and loss statement.  According to the Standard, development
  expenses for research or minor adaptation of existing products and
  applications will continue to be written-off in the profit and loss statement.
  Development of new products and new implementations will be capitalized as an
  asset as long as they comply with the conditions set forth in the
  Standard.  These conditions include,
  among other things, technological feasibility evidence; intention and ability
  to complete development of the intangible assets and to use or sell them;
  expectation of future economic benefits from the intangible asset; existence
  of technical resources, financial resources and the ability to measure the
  expenses which can be attributed to the asset during its development.                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Intangible
  assets with finite useful lives are amortized.  Intangible assets with indefinite useful lives are not
  amortized.  The Standard requires that
  the amortization period and the amortization method for an intangible asset
  with a finite useful life shall be reviewed at least at each financial
  year-end, or at any time there is an indicator that the asset may be
  impaired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The amount
  of our capitalized development expenses, reflected on Priotechs consolidated
  statements for March 31, 2007, was NIS 9 million or approximately US$2.5
  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

26

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| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Another item
  of disclosure in Priortechs financial reports reflects the fact that on
  March 31, 2007, we had open forward positions in US dollars on the NIS
  exchange rate, as reflected in the following table:

|       |           |                |          |                  |          |                         |        |            |           
|------ | --------- | -------------- | -------- | ---------------- | -------- | ----------------------- | ------ | ---------- | ----------
|Amount |           | Repayment date |          | Transaction date |          | Exchange Rate
  NIS/US$ |        | Fair Value
|       |           |                |          |                  |          |                         |        |           
|$      | 600,000   |                | 05.25.07 |                  | 02.27.07 |                         | 4.2025 |            | NIS 30,240
|       |           |                |          |                  |          |                         |        |            |           
|$      | 600,000   |                | 05.25.07 |                  | 03.02.07 |                         | 4.204  |            | NIS 31,140
|       |           |                |          |                  |          |                         |        |            |           
|$      | 1,200,000 |                | 05.25.07 |                  | 03.09.07 |                         | 4.1875 |            | NIS 47,974
|       |           |                |          |                  |          |                         |        |            |           
|$      | 600,000   |                | 05.25.07 |                  | 03.15.07 |                         | 4.1988 |            | NIS 29,760
|       |           |                |          |                  |          |                         |        |            |           
|$      | 600,000   |                | 05.25.07 |                  | 03.22.07 |                         | 4.1826 |            | NIS 20,040
|       |           |                |          |                  |          |                         |        |            |           
|$      | 600,000   |                | 05.25.07 |                  | 03.29.07 |                         | 4.1636 |            | NIS 8,640 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Recently Issued Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In
  June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
  in Income Taxes-an Interpretation of FASB Statement No. 109 (FIN 48). FIN
  48 clarifies the accounting for uncertainty in income taxes recognized in an
  enterprises financial statements in accordance with SFAS No. 109,
  Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
  measurement attribute for the financial statement recognition and measurement
  of a tax position taken or expected to be taken in a tax return. FIN 48 is
  effective for fiscal years beginning after December 15, 2006. We are
  currently reviewing this new standard to determine its effects, if any, on
  its results of operations or financial position.                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In
  September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No.
  108). SAB No.108 addresses the process and diversity in practice of
  quantifying financial statement misstatements resulting in the potential
  build up of improper amounts on the balance sheet. We will be required to
  adopt the provisions of SAB No.108 in fiscal year 2007. The adoption of SAB
  No. 108 did not have an impact on our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In
  September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
  (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
  for measuring fair value and expands disclosures about fair value
  measurements. The changes to current practice resulting from the application
  of this Statement relate to the definition of fair value, the methods used to
  measure fair value, and the expanded disclosures about fair value
  measurements. The Statement is effective for fiscal years beginning after November
  15, 2007 and interim periods within those fiscal years. We do not anticipate
  that the adoption of the provisions of SFAS No. 157 will materially impact
  our financial position and results of operations.                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In
  February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
  for Financial Assets and Financial Liabilities  Including an amendment of
  FASB Statement No. 115, which permits entities to choose to measure many
  financial instruments at fair value. The Statement allows entities to achieve
  an offset accounting effect for certain changes in fair value of certain
  related assets and liabilities without having to apply complex hedge
  accounting provisions, and is expected to expand the use of fair value
  measurement consistent with the Boards long-term objectives for financial
  instruments. This Statement is effective as of the beginning of an entitys
  first fiscal year that begins after November 15, 2007. We are currently
  reviewing this new standard to determine its effects, if any, on our results
  of operations or financial position.

27

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Year Ended December 31, 2006 compared to Year Ended December 31,
  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Revenues.  Revenues increased
  59% to $100.1 million in the year ended December 31, 2006 from $63.0 million
  in the year ended December 31, 2005. Sales to the PCB and MEP industries
  increased 60% and 100% respectively, while sales to the IC substrates
  industry decreased 47%. Sales of all products increased 62% to $92.5 million
  in the year ended December 31, 2006, from $56.9 million in the year ended
  December 31, 2005. The mixture of products sold and their configuration and
  throughput varieties make it very difficult to estimate average selling
  prices and pricing trends.                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In
  2006, our total sales increased on an absolute basis as a result of the
  successful penetration of the Falcon systems to the semiconductor industry,
  despite the weakness felt in this industry during the second half of 2006,
  and high demands in the PCB and IC substrate industries, except in the fourth
  quarter of 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Service
  fees increased by 25.5% to $7.6 million in the year ended December 31, 2006,
  from $6.0 million for the year ended December 31, 2005, primarily due to
  increased revenue from continuing service costs as our installed base
  increased.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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 2006, we
  experienced an increase in gross profit and gross margins, primarily due to
  increased sales to the PCB and MEP industries. Our gross profit on product
  sales increased by $21.2 million to $49.9 million in 2006, compared to $28.7
  million in 2005. Our gross profit on service revenue increased by $0.2
  million in 2006 to $1.7 million, compared to $1.5 million in 2005. Our total
  gross profit increased by $21.3 million to $51.6 million in 2006 from $30.3
  million in 2005, representing an increase of 70.6%. Our gross margin
  increased to 51.6% in 2006, compared to a gross margin of 48.0% in 2005.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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 2006 were $11.8 million, compared to $8.5 million in
  2005. Research and development expenses increased in 2006 by $3.4 million,
  primarily due to increased headcount and salaries and bonuses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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 by 48.4% to $27.8 million in 2006 from $18.8 million in
  2005. Selling, general and administrative expenses as a percentage of
  revenues decreased in 2006 to 27.8% from 29.8% in 2005. Moreover, in 2006 we
  continued the restructuring and strengthening of our overall sales
  infrastructure especially in the Asian territory. We increased our sales
  employee headcount raising expenses by $1.8 million, and agent commissions
  increased by $2.0 million. Our expenses for professional services, including
  legal costs, increased in 2006 by $1.77 million.                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Financial and Other (Expenses) Income, Net.
  We had net financial expense of $288,000 in 2006, as compared to net
  financial expense of $320,000 in 2005. These changes related primarily to
  exchange rate influence and interest received and paid. Changes in currency
  rates resulted in expenses of $435,000 in 2006 and expenses of $238,000 in
  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Provision for Income Taxes.  We
  made a provision for current income tax of $414,000 and previous years tax
  expenses of $61,000 against a deferred tax asset of $434,000 in 2006,
  compared to no provision for income tax nor deferred tax asset in 2005, due
  to our increased profitability and as we believe that it is more likely than
  not that those net deferred tax assets included in our financial statements
  will be realized in subsequent years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Net Income.  Our net income
  increased to $11.6 million in 2006 compared to a net income of $2.7 million
  in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

28

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 off
  capital equipment spending. Sales to the PCB industry decreased 34%, and
  sales to IC substrate industry 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 industry, which was not
  compensated by the moderate increase of Falcon sales to the semiconductor
  industry in Asia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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 systems in 2004, which resulted in higher
  service fees in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Gross Profit.  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 was reduced to
  48.0% in 2005, compared to a gross margin of 53.5% in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Research and Development Costs.  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 by
  $0.3 million, primarily due to increased research and development projects
  and use of subcontractors and also, by another $0.3 million, due to increased
  headcount, salaries and bonuses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Selling, General and Administrative Expenses.
  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 thereby 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
  lawsuits 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Liquidity and Capital Resources
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                
| | Our
  cash and cash equivalent balances totaled approximately $23.3 million at
  December 31, 2006 and $8.7 million at December 31, 2005. Our investments in
  marketable securities totaled approximately $2.1 million at December 31, 2006
  as well as at December 31, 2005. Our cash and marketable securities consisted
  mainly of money raised through equity offerings in 2000 and 2002, money
  raised through a convertible loan in 2005 and money raised through a private
  placement in 2006. 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, $5.0 million as a
  convertible loan from FIMI Opportunity Fund L.P. and FIMI Israel Opportunity
  Fund, Limited Partnership, and $14.5 million from a private placement to
  Israeli institutional investors. 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. Our working capital was
  approximately $73.5 million at December 31, 2006 and $47.8 million at
  December 31, 2005.

29

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash
  flow from operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | For
  the year ended December 31, 2006, we had positive cash flow from operations
  of $0.8 million, primarily due to an increase in our net income and payables,
  partially offset by increase in receivables and particularly by a $16.5
  million increase in inventories. For the year ended December 31, 2005, we had
  negative cash flow from operations of $0.2 million, primarily due to an
  increase in our receivables of $4.9 million, partially offset by an increase
  in our payables and other liabilities of
  $1.1 million.                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash
  flow from investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash
  flow used in investing activities in 2006 was $1.7 million, primarily due to
  capital expenditures of $1.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash
  flow used in investing activities in 2005 was $2.8 million, primarily due to
  investment in marketable securities of $2.1 million and capital expenditures
  of $0.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Most
  of the capital expenditures in 2006 were for the purpose of replacing
  obsolete equipment and machinery and renewing office furnishings and
  equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash
  flow from financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash
  flow provided by financing activity in 2006 was $15.1 million, due to
  issuance of ordinary shares of $14.4 million and exercise of share options of
  $0.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Cash
  flow provided by financing activity in 2005 was $2.7 million, primarily due
  to the issuance of $5.0 million of convertible loan, partially offset by a
  decrease in short-term bank credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Effective Corporate Tax Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Our
  production facilities have been granted Approved Enterprise status under
  the Investment Law. We participate in the Alternative Benefits Program and,
  accordingly, income from our approved enterprises will be tax exempt for a
  period of 10 years, commencing in the first year in which the approved
  enterprise first generates taxable income due to the fact that we operate in
  Zone A in Israel.                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On
  April 1, 2005, an amendment to the Investment Law came into effect (the
  Amendment) and has significantly changed the provisions of the Investment
  Law. The Amendment limits the scope of enterprises which may be approved by
  the Investment Center by setting criteria for the approval of a facility as a
  Beneficiating Enterprise, such as provisions generally requiring that at least
  25% of the Beneficiating Enterprises income will be derived from export.
  Additionally, the Amendment enacted major changes in the manner in which tax
  benefits are awarded under the Investment Law so that companies no longer
  require Investment Center approval in order to qualify for tax benefits.

30

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
  addition, the Investment Law provides that terms and benefits included in any
  certificate of approval already granted will remain subject to the provisions
  of the law as they were on the date of such approval. Therefore our existing
  Approved Enterprise will generally not be subject to the provisions of the
  Amendment. As a result of the amendment, tax-exempt income generated under
  the provisions of the new law, as part of a new Beneficiating Enterprise,
  will subject us to taxes upon distribution or liquidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | We
  have been granted the status of Approved Enterprises, under the Law, for an
  investments program for the periods ending in 2007 and 2010, and the status
  of Beneficiating Enterprise according to the Amendment, for the period ending
  in 2015  (Programs).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Out
  of our retained earnings as of December 31, 2006 approximately $17 million
  were tax-exempt earnings attributable to our Approved Enterprise programs and
  approximately $2 million are tax-exempt earnings attributable to our
  Beneficiating Enterprise program. The tax-exempt income attributable to the
  Approved and Beneficiating Enterprise cannot be distributed to shareholders
  without subjecting us to taxes. If these retained tax-exempt profits are
  distributed, we would be taxed at the reduced corporate tax rate applicable
  to such profits. According to the Amendment, tax-exempt income generated
  under the Beneficiating Enterprise status will be taxed upon dividend
  distribution or complete liquidation, whereas tax exempt income generated
  under the Approved Enterprise status will be taxed only upon dividend
  distribution. As of December 31, 2006, if the income attributed to the
  Approved Enterprise were distributed as dividend, we would incur a tax
  liability of approximately $4 million. If income attributed to the
  Beneficiating Enterprise were distributed as dividend, including upon
  liquidation, we would incur a tax liability in the amount of approximately $0.5
  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | These amounts will be
  recorded as an income tax expense in the period in which we declare the
  dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | We
  intend to reinvest the amount of our tax-exempt income and not distribute any
  amounts of our undistributed tax exempt income as dividend. Accordingly, no
  deferred income taxes have been provided on income attributable to our
  Approved and Beneficiating Enterprise programs as the undistributed tax
  exempt income is essentially permanent in duration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The
  entitlement to the above benefits is conditional upon our fulfilling the
  conditions stipulated by the Law, regulations published there under and the
  certificates of approval for the specific investments in Approved
  Enterprises.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Should
  we fail to meet such requirements in the future, income attributable to our
  programs could be subject to the statutory Israeli corporate tax rate and we
  could be required to refund a portion of the tax benefits already received,
  with respect to such program. Our management believes that we are meeting the
  aforementioned conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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 revaluation 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 Europe
  in 2006. The opposite effect occurs when the dollar increases 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.

31

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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 are engaged in hedging, intended to manage risks relating to foreign
  currency exchange rate.                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                  
| | 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 three years have resulted in the
  introduction of several new AOI systems, including the new models in the
  Dragon, Orion, Pegasus and Falcon product lines.                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                  
| | 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, while                                                                       
| |   |                                                                                                                    
| |  | simplifying
  operation and reducing the level of user expertise required to realize the
  benefits of our systems.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2006, we had 119 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 $7.3 million, $8.5
  million and $11.8 million for the years ended December 31, 2004, 2005 and
  2006 respectively, representing 10.8%, 13.5% and 11.8% 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 2007 we expect to
  introduce new products and capabilities for all of our target markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 nineteen (19) patents pending in Israel and worldwide (Patent
  Cooperation Treaty organization or PCT, China, Japan, Taiwan, Europe),
  fourteen (14) US Provisional patent applications and five (5) grated patents
   one (1) in Taiwan, three (3) in the United States - one of them was also
  registered in 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.                                                                                                                                                                                                                                                             

32

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                            
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------
| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Trend Information.                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                            
| | During 2001,
  2002 and early 2003, competition in the PCB and IC substrate 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 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 in the Chinese market, but in the next quarters of 2005 the
  trend changed again, and the demand for AOI systems increased. In the first
  three quarters of 2006 we continued to experience steady demand for our AOI
  systems in the PCB industry, in which we maintained our position. In the
  fourth quarter of 2006 and first quarter of 2007 we experienced a decline in
  customer demand for our systems in this industry.
|
| | In 2005 and
  2006, 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 of increase.                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                            
| | The trend of
  our revenues from the Falcon systems from the semiconductors industries was
  very positive in 2005 and 2006. 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 $40 million in 2006
  or 40% of the total 2006 revenues. In 2006 we doubled our sales of products
  to the semiconductor manufacturing and packaging industry. We established a
  strong co-leadership position in this industry, having developed a
  substantial customer base. The weakness we are currently facing in this
  industry may result in a decrease in Falcon sales during 2007.                                                                                                                                                                                                
|
| | The weakness
  and competition we are currently facing across the industries we operate in
  is continuing to cause pricing pressure with regard to our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                            
| | 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, 2006, 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) |      
|Operating lease obligations
  (1) |  |                | 1,367 |                    |   | 913       |  |           | 454   |                     |   | -  |  |   | -- | 
|Other long-term obligations
  (2) |  |                | 1,438 |                    |   | 611       |  |           | 765   |                     |   | 62 |  |   | -  | 
|                                  |  |                |       |                    |   |           |  |           |       |                     |   |    |  |   |    | 
|Total                             |  | $              | 2,805 |                    | $ | 1,524     |  | $         | 1,219 |                     | $ | 62 |  | $ | -  | 

| |     |                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | In May 2004, we entered
  into an operating lease for vehicles for a period of 36 months. As of
  December 31, 2006, the minimum future rental payments were approximately
  $1,367.                     
| |     |                                                                                                                                                                                                          
| | (2) | Our subsidiaries have
  entered into various operating lease agreements, principally for office
  space. As of December 31, 2006, minimum future rental payments under these
  leases amounted to $1,438.

33

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|        |                                                 |                                 
|------- | ----------------------------------------------- | --------------------------------
|Item 6. | Directors, Senior Management and Key Employees.
|        |                                                 |                                 
|        | A.                                              | Directors and Senior Management.

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

|                   |     |  |                                                                  
|------------------ | --- |  | -----------------------------------------------------------------
|Name               | Age |  | Title                                                            
|                   |     |  |                                                                  
|Rafi Amit          | 58  |  | Chairman of
  the Board of Directors and Chief Executive Officer 
|Yotam Stern        | 54  |  | Executive
  Vice President, Business & Strategy and Director     
|Gabriela
  Heller  | 42  |  | Director                                                         
|Raphael
  Koriat   | 60  |  | Director                                                         
|Eran Bendoly       | 42  |  | Director                                                         
|Moshe Amit         | 62  |  | Executive
  Vice President                                       
|Ronit
  Dulberg    | 42  |  | Vice
  President - Chief Financial Officer                       
|Miri Saar          | 49  |  | Vice
  President  Human Resources                               
|Amir Gilead        | 56  |  | Vice President,
  Semiconductor and Packaging Division           
|Moshe
  Grencel    | 53  |  | Vice
  President, Operations                                     
|Jacob Yavor        | 48  |  | Vice
  President, Printed Circuit Board and IC substrate Division
|Michael Lev        | 53  |  | Vice
  President, Intellectual Property                          
|Roni
  Flieswasser | 46  |  | Chief Technology
  Officer and President of Camtek Europe        
|Roy Porat          | 40  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Gabriela Heller has served on our Board
  of Directors since September 2006. Ms. Heller has an extensive financial
  experience as an accountant, Chief Financial Officer and internal controller.
  Currently Ms. Heller serves as Chief Financial Officer of Walden Israel Ltd.,
  which is the management company of Walden Israel Ventures, various venture
  capital funds operating in Israel. From 1989 to 1994 Ms. Heller served as
  Manager with Kost Forer & Gabbay - Ernst & Young Israel, one of the
  leading accounting firms in Israel. In addition, from 1998 to 2000 Ms. Heller
  served as Internal Controller to Vilar International Ltd., traded on
  TASE.  Ms. Heller is currently serving
  also on the Board of Directors of Electra Consumer Products Ltd, traded on
  TASE. From 1999 to 2003 Ms. Heller served on the Board of Directors of
  Priortech Ltd., and from 2000 to 2003 served on the Board of Directors of
  One1 Products Ltd. Ms. Heller is a CPA (Israel), holds a B.A. in accounting
  and Economics from the Hebrew University of Jerusalem, School of Business
  Administration, and an LL.M from Bar Ilan University, Faculty of Law.

34

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Raphael Koriat has served on our Board of
  Directors since September 2006. Mr. Koriat has extensive experience as Chief
  Executive Officer (CEO) and Board member in the fields of semiconductor
  assembly and processing equipment, optical network components and other
  emerging fields. Prior to his present position as founder and CEO of Korel
  Business Ltd., which specializes in strategic positioning and guiding high
  tech companies and management, Mr. Koriat was CEO of Lambda Crossing engaged
  in optical components for networks (2001-2006) and Founder and CEO of Steag
  CVD Systems (1992-2001). Previously, he worked for 20 years (1972 -1992) at
  Kulicke and Soffa Industries Inc. in the United States and Israel as
  Corporate Vice President for Engineering and Technology, Corporate Director
  for Business and Marketing and Division Manager. Mr. Koriat is also the
  founder and chairman of the Sub Micron Semiconductor Consortium and OptiPac
  Consortium (optical communication networks), under the Israel Chief Scientist
  Magnet program. Mr. Koriat holds a B.Sc. from the Technion Israel Institute
  of Technology, an M.Sc. from Drexel University in Philadelphia, Pennsylvania
  and completed an Executive Management Program at Stanford University.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Eran Bendoly has served on our Board of
  Directors since November 2000. Currently Mr. Bendoly serves as the Chief
  Financial Officer of Personeta Inc., a leading developer of converged service
  creation and application solutions. From 2003 to 2006 Mr. Bendoly served as
  the Chief Executive Officer of Xenia Management Ltd., which is the managing
  partner of Xenia Ventures LP, a limited partnership that operates a
  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 Dulberg has been employed by us
  since March 2006 as our 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 Saar has 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Moshe Grencel has been employed by us
  since January 2007, as Vice President Operations.  Between 2004 and 2006 Mr. Grencel served as the Executive Vice
  President of Supply Chain of Delta Galil, a leading company in the underwear
  textile industry. From 2001 until 2004, Mr. Grencel served as Senior Vice
  President Operations of Lumenis, a medical lasers manufacturer.  From 1983 until 2000, Mr. Grencel held
  various executive positions with Elscint Ltd., a diagnostic medical equipment
  manufacturer. Mr. Grencel has a B.Sc. in Industrial Management from the
  Technion  Israel Institute of Technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

35

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |              
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
| | Jacob Yavor has been employed by us since
  1987 and has served as our Vice President, Printed Circuit Board and IC
  substrate Division since May 2002. Mr. Yavor has a B.Sc. in Computer
  Engineering from Technion - Israel
  Institute of Technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |              
| | Michael Lev has been employed by us since
  1994 and serves as our Vice President, Intellectual Property, since April
  2007.  From 1994 until April 2007 Mr.
  Lev held various positions with the Company, in the printed circuit board and
  semiconductor manufacturing and packing. Mr. Lev has a M.Sc. in Electrical
  Communication from Azerbaijan Polytechnic Institute.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |              
| | Roni Flieswasser established our European
  branch 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, 2006 to all
  the persons listed in Section A above (Directors and Senior Management), was
  approximately $2,432,000, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |              
| | 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.                        

36

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------
| | 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 September 2006, 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 2007 annual general meeting of shareholders. Each of our
  outside directors, Messrs. Gabriela Heller and Raphael Koriat, 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 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                 
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                 
| | 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.                                                                                                                                                                                                                                

37

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Ms. Gabriela
  Heller and Mr. Raphael Koriat currently serve as our outside directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The
  Sarbanes-Oxley Act of 2002, as well as related 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. Ms. Gabriela Heller and
  Messrs. Raphael Koriat 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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.

38

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                      
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
  Ms. Gabriela Heller and Messrs. Eran Bendoly and Raphael Koriat, all of
  whom are independent directors in accordance with Nasdaq listing
  requirements. Mr. Bendoly and Ms. Heller qualify as financial experts
  for purposes of the Sarbanes-Oxley Act and the Nasdaq listing requirements,
  and Ms. Heller and Mr. Koriat 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 Ms. Heller
  and Messrs. Koriat 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                      
| | 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 and Senior
  Management is one of our office holders. 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 also be approved 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.

39

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 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;                                          

40

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 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 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 of 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                   
| | 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, or
  (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.                                                                                                                                     

41

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| |                                                                                                                                                       |           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
| | 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, |    
|                           |  |                    |    
|                           |  | 2004               |     | 2005 |  | 2006 | 
|                           |  |                    |     |      |  |      | 
|                           |  |                    |     |      |  |      |  |  |     | 
|Executive
  management     |  |                    | 7   |      |  | 8    |  |  | 11  | 
|Research
  and development |  |                    | 74  |      |  | 99   |  |  | 119 | 
|Sales
  support            |  |                    | 94  |      |  | 117  |  |  | 143 | 
|Sales
  and marketing      |  |                    | 59  |      |  | 69   |  |  | 94  | 
|Administration             |  |                    | 37  |      |  | 46   |  |  | 62  | 
|Operations                 |  |                    | 67  |      |  | 65   |  |  | 105 | 
|Total                      |  |                    | 338 |      |  | 404  |  |  | 534 | 

| | 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, |    
|                              |  |                    |    
|                              |  | 2004               |     | 2005 |  | 2006 | 
|                              |  |                    |     |      |  |      | 
|China
  (including Hong Kong) |  |                    | 78  |      |  | 97   |  |  | 125 | 
|Taiwan                        |  |                    | 32  |      |  | 39   |  |  | 44  | 
|Japan                         |  |                    | 6   |      |  | 8    |  |  | 18  | 
|Other
  Asia                  |  |                    | 17  |      |  | 18   |  |  | 30  | 
|Europe                        |  |                    | 10  |      |  | 11   |  |  | 12  | 
|North
  America               |  |                    | 18  |      |  | 19   |  |  | 25  | 
|Israel                        |  |                    | 177 |      |  | 210  |  |  | 280 | 
|                              |  |                    |     |      |  |      |  |  |     | 
|Total                         |  |                    | 338 |      |  | 404  |  |  | 534 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
  light of the penetration and increase of our installed base in the
  semiconductor manufacturing and packaging industry, we have recruited
  personnel in order to meet the demand and support needs of our customers. The
  number of employees increased during 2006 by 32% from 404 to 534 employees,
  from which 280 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 operations department whereas the main increase abroad is in customer
  support for the Chinese market; by the end of 2007 we expect to employ
  further 35 employees in our new manufacturing facility in China.                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | We
  consider our relationship with our employees to be good, and we have never
  experienced a labor dispute, strike or work stoppage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

42

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------
| | 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 30,048,855 ordinary shares outstanding as of June 28, 2007.

|                                                              |  |                                |            |            |  |        | 
|------------------------------------------------------------- |  | ------------------------------ | ---------- | ---------- |  | ------ | 
|                                                              |  | Beneficial Ownership           |           
|                                                              |  | Number of Ordinary
  Shares(1) |            | Percentage | 
|                                                              |  |                                |            |            | 
|                                                             
|Rafi
  Amit(2)                                                |  |                                | 18,655,240 |            |  | 62.08% | 
|Yotam
  Stern(3)                                              |  |                                | 18,715,930 |            |  | 62.28% | 
|                                                              |  |                                |            |            |  |        | 
|Directors
  and executive officers as a group (13 persons)(4) |  |                                | 19,105,980 |            |  | 63.58% | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (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, the
  total number of options held by the persons included in the above table, that
  are currently exercisable or exercisable within 60 days of the date hereof,
  is 196,050.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (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s 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 304,700 of our
  ordinary shares.                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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, 2006, there were 929,964 outstanding options to acquire
  our ordinary shares pursuant to our share option plans at a weighted average
  exercise price of $2.46, exercisable at various dates through July 2015.
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

43

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| |                                                                                                                                                                                                                                                                                                                                  | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | 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 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.                                                 
| |                                                                                                                                                                                                                                                                                                                                  | 
| | Options
  Granted During 2006.During 2006 we have granted 60,000 options to employees at a weighted
  average exercise price of  $5.19, 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, 2006, there were options exercisable and vested for 665,729
  ordinary shares (out of the total outstanding options of 929,964) at a
  weighted average exercise price of $2.22 per share, and unvested options
  exercisable for 264,235 ordinary shares at a weighted average exercise price
  of $ 2.87.

|        |                                                     
|------- | ----------------------------------------------------
|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 28, 2007, 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 30,048,855 ordinary shares outstanding as of June 28, 2007.

|                 |  |                              |            |            |  |       | 
|---------------- |  | ---------------------------- | ---------- | ---------- |  | ----- | 
|                 |  | Beneficial Ownership         |           
|                 |  |                              |           
|                 |  | Number of Ordinary
  Shares* |            | Percentage | 
|                 |  |                              |            |            | 
|Priortech
  Ltd. |  |                              | 18,605,230 |            |  | 61.9% | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *       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
  June 28, 2007, there were a total of 9 holders of record of our issued and
  outstanding ordinary shares, of which 7 were registered with addresses in the
  United States. Such United States holders were, as of such date, the holders
  of record of approximately 40.7% 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.

44

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
| | 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  $1,122,000, $597,000 and $3,244,000 in
  2004, 2005 and 2006, respectively. In addition, we purchase bare PCBs and
  assembled PCBs from a Priortech subsidiary for the development and
  manufacture of our systems so long as the price charged and other payment
  terms is comparable to the best offer we could obtain from a third party.  Our total revenues from sales to affiliates
  of Priortech, totaled  230,000$,
  $1,000 and $240,000 in  2004, 2005 and
  2006, 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 5.5%. As
  of December 31, 2006, the remaining balance we owed to Priortech and its
  affiliates under transactions made in the ordinary course of business with
  them was $634,000 and as of March 31, 2007 this balance stood at $926,000.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, and 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | 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.                  

45

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|        |                         
|------- | ------------------------
|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 an optional
  component in the Dragon and Falcon systems infringe upon a patent held by
  Orbotech Ltd. and requesting an injunctive relief and damages. Currently, the
  issue dealt with by the court is the validity of the asserted patent. We
  believe that we have substantial defenses against the validity of Orbotechs
  patent and 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 a specific 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 Orbotech a provisional
  remedy, i.e. interim relief, which prevents Camtek from manufacturing the
  allegedly infringing illumination block in suit. Following the grant of the
  provisional remedy by the District Court, the Company filed a motion for
  leave to appeal (permission from the Israel Supreme Court to appeal the
  District Courts decision to grant a provisional remedy). The Supreme Court
  rejected our request since the provisional remedy was granted on the basis of
  prime facie evidence only. The
  claim is currently in the preliminary stage of discovery and only after
  evidence is presented and cross examinations are conducted will a final
  judgment be rendered by the District Court, subject to the right to appeal.
  The particular illumination block was at the time of the preliminary ruling
  still in a development stage. The Companys temporary inability to
  manufacture and sell the specific illumination block, does not affect its
  ability to manufacture and sell products incorporating other illumination
  blocks; the Company manufactures its products with several other illumination
  blocks. In February 2007 the patent referring to the specific illumination
  block expired. The Company has filed two requests for the lawsuit to be
  dismissed. . We believe that we have good defenses in the infringement aspect
  of the claim. We further believe that we have claims with respect to the
  validity of the asserted patent, as well as other defenses such as estoppel
  and lack of good faith on the part of Orbotech. As noted above, this
  litigation is still in an early stage and the Companys defenses will be
  presented before the court within the next couple of months.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                         
| | On
  July 14, 2005, a lawsuit was filed against us in the United States District
  Court for the District of Minnesota by one of the Companys competitors in
  the field of semiconductor manufacturing and packaging, August Technology
  Corporation (today Rudolph Technologies Inc. together with 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, invalidity and unenforceability of the patent. The case is
  currently approaching the end of the discovery phase and is expected to be
  trial ready by October 2007. We believe that we have substantial defenses to
  Augusts allegations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                         
| | 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., fileda
  lawsuit in Israel against our competitor, Orbotech, in the sum of $4.1
  million, in respect of damages incurred by it due to a claim and a motion for
  injunction filed against the Company by Orbotech in
  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. The case is currently in the discovery phase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                         
| | We
  are not a party to any other material legal proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

46

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| |                                                                                                                       |                     
| | --------------------------------------------------------------------------------------------------------------------- | --------------------
| | 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 Global 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                           
| | 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 in our ordinary shares on the TASE
  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.                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                           
| | The
  following table sets forth, for the periods indicated, the high and low
  reported sales prices of our ordinary shares:                                                                                                                                                                                                                                                                                                                      

| |                                                        |  |  |          |      |        |     |  |      |  |     |      |  | 
| | ------------------------------------------------------ |  |  | -------- | ---- | ------ | --- |  | ---- |  | --- | ---- |  | 
| |                                                        |  |  | TASE (1) |      | Nasdaq |    
| |                                                        |  |  |          |      |        |    
| |                                                        |  |  | High     |      |        | Low |  | High |  | Low |     
| |                                                        |  |  |          |      |        |     |  |      |  |     |     
| | Annual
  and Quarterly Market Prices                   |  |  |          |      |        |     |  |      |  |     |      |  | 
| | Fiscal
  Year Ended December 31, 2002:                 |  |  |          |      |        |     |  |      |  |     | 3.90 |  | 
| | Fiscal
  Year Ended December 31, 2003:                 |  |  |          |      |        |     |  |      |  |     | 3.64 |  | 
| | Fiscal
  Year Ended December 31, 2004:                 |  |  |          |      |        |     |  |      |  |     | 7.80 |  | 
| | 2005:                                                  |  |  |          |      |        |     |  |      |  |     |      |  | 
| | First Quarter                                          |  |  |          |      |        |     |  |      |  |     | 4.70 |  | 
| | Second Quarter                                         |  |  |          |      |        |     |  |      |  |     | 3.60 |  | 
| | Third Quarter                                          |  |  |          |      |        |     |  |      |  |     | 3.95 |  | 
| | Fourth Quarter                                         |  |  |          | 4.42 |        |     |  | 4.21 |  |     | 4.48 |  | 
| | Fiscal
  year ended December 31, 2005:                 |  |  |          | 4.42 |        |     |  | 4.21 |  |     | 4.70 |  | 
| | 2006:                                                  |  |  |          |      |        |     |  |      |  |     |      |  | 
| | First Quarter                                          |  |  |          | 5.57 |        |     |  | 4.32 |  |     | 5.49 |  | 
| | Second Quarter                                         |  |  |          | 7.96 |        |     |  | 4.57 |  |     | 8.40 |  | 
| | Third Quarter                                          |  |  |          | 6.90 |        |     |  | 5.79 |  |     | 6.82 |  | 
| | Fourth Quarter                                         |  |  |          | 6.86 |        |     |  | 4.07 |  |     | 6.95 |  | 
| | Fiscal
  Year Ended December 31, 2006:                 |  |  |          | 7.96 |        |     |  | 4.07 |  |     | 8.40 |  | 
| | First
  Quarter 2007:                                  |  |  |          | 4.53 |        |     |  | 3.84 |  |     | 4.65 |  | 
| | Second
  Quarter 2007 through June 28, 2007            |  |  |          | 4.02 |        |     |  | 3.02 |  |     | 4.09 |  | 
| | Monthly
  Market Prices for the Most Recent Six Months |  |  |          |      |        |     |  |      |  |     |      |  | 
| | December 2006                                          |  |  |          | 5.98 |        |     |  | 4.07 |  |     | 6.09 |  | 
| | January 2007                                           |  |  |          | 4.53 |        |     |  | 4.15 |  |     | 4.65 |  | 
| | February 2007                                          |  |  |          | 4.53 |        |     |  | 4.27 |  |     | 4.58 |  | 
| | March 2007                                             |  |  |          | 4.31 |        |     |  | 3.84 |  |     | 4.37 |  | 
| | April 2007                                             |  |  |          | 4.02 |        |     |  | 3.71 |  |     | 4.09 |  | 
| | May 2007                                               |  |  |          | 4.00 |        |     |  | 3.32 |  |     | 4.00 |  | 
| | June
  2007 until June 28, 2007                        |  |  |          | 3.34 |        |     |  | 3.02 |  |     | 3.36 |  | 

| |    |                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | The closing prices of our
  ordinary shares on the TASE have been translated into U.S. dollars, using the
  daily representative rate of exchange of the NIS to the U.S. dollar, as
  published by the Bank of Israel for the applicable day of the high/low amount
  in the specified period.

47

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|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                        
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------
|         | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Plan of distribution.  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Not
  applicable.      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                        
|         | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Markets.               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                        
|         | As
  noted above, the Companys ordinary shares are traded on the Nasdaq Global
  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, 30,040,855 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 $5.50 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. As of December 31, 2006, the conversion price per
  one ordinary share is $5.50.

48

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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.                                                                                                                                                                                                                                                                                                                                                                 

49

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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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                                                                                                                                            

50

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                    
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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. As of December 31, 2006, the
  conversion price per one ordinary share is $5.50. 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.

51

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                  
| | 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 another entity taxable as a corporation for U.S. federal income
  tax purposes) created or organized under the laws of the United States, any
  political subdivision thereof or the District of Columbia;                                                                                                       
| |  |   |                                                                                                                                                                                                                                                                                                                                      
| |  |  | 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 (a non-U.S. holder)
  and considers only U.S. holders that will own the ordinary shares as capital
  assets (generally, for investment).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 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 that received ordinary shares as a
  result of exercising employee stock options or otherwise as compensation,
  U.S. holders whose functional currency is not the U.S. dollar, insurance
  companies, tax-exempt organizations, financial institutions, grantor trusts,
  real estate investment trusts, regulated investment companies, certain former
  citizens or former long-term residents of the United States 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.

52

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 currently (a maximum rate of 15%), provided that such dividends meet
  the requirements of qualified dividend income. For this purpose, qualified
  dividend income generally includes dividends paid by a foreign corporation if
  certain holding period and other requirements are met and either (a) the
  stock of the foreign corporation with respect to which the dividends are paid
  is readily tradable on an established securities market in the U.S. (e.g.,
  the NASDAQ Global Market) or (b) the foreign corporation is eligible for
  benefits of a comprehensive income tax treaty with the U.S. which includes an
  information exchange program and is determined to be satisfactory by the U.S.
  Secretary of the Treasury. The United States Internal Revenue Service (IRS)
  has determined that the U.S.-Israel income tax treaty is satisfactory for
  this purpose. 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 taxable year, dividends paid on our ordinary shares
  in such year or in the following taxable year would not be qualified
  dividends. See discussion below regarding our PFIC status at Tax
  Consequences If We Are a Passive Foreign Investment Company. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

53

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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 conditions and 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
  generally 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 if
  such U.S. holders itemize their deductions for U.S. federal income tax
  purposes. 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 31-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. Long-term capital gains of
  certain non-corporate shareholders are subject to a maximum rate of 15% for
  taxable years beginning on or before December 31, 2010. Gain or loss
  recognized by a U.S. holder on a sale, exchange or other disposition of
  ordinary shares generally 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 that other
  corporations assets and as directly earning our proportionate share of that
  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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 taxable 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.

54

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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 IRS. A shareholder makes a QEF election
  by attaching a completed IRS 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 IRS
  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 stock (e.g. regulatory traded on the NASDAQ Global
  Market). Pursuant to this regime, an electing U.S. holders ordinary shares
  are marked-to-market each taxable 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 taxable year for which the election is made and all later
  taxable years, unless the ordinary shares cease to be marketable stock or the
  IRS 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 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 taxable years or such
  U.S. holders holding period for our ordinary shares prior to the
  distribution year 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 and any taxable year prior to the first taxable year in
  which we were a PFIC, its gross income as ordinary income for that year. All
  amounts allocated to other taxable years of the U.S. holder would be taxed at
  the highest tax rate for each such year applicable to ordinary income and the
  U.S. holder also would be liable for interest on the deferred tax liability
  for each such year calculated as if such liability had been due with respect
  to each such year. The portions of gains and distributions that are not
  characterized as excess distributions are subject to tax in the current
  taxable year under the normal tax rules of the Code.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | A U.S.
  person who inherits shares in a foreign corporation that was a PFIC in the
  hands of the decedent, is generally denied the otherwise available step-up in
  the tax basis of such shares to fair market value at the date of death.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

55

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| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based
  on an analysis of our assets and income, we believe that we were not a PFIC
  for our taxable year ended December 31, 2006. We currently expect that
  we will not be a PFIC in 2007. 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 taxable year ending
  December 31, 2007 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.                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Non-U.S. Holders of Ordinary Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Except
  as described below, a non-U.S. holder of ordinary shares 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
  certain conditions are met.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 certifies that such holder is not subject to backup withholding or
  otherwise establishes an exemption. Non-U.S. holders generally will not be
  subject to information reporting or backup withholding with respect to the
  payment of dividends on, or proceeds from the distribution of, our ordinary
  shares provided the non-U.S. holder provides its taxpayer identification
  number, certifies to its foreign status 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 holder, or
  alternatively, the 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 IRS.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  regular corporate tax rate in Israel was 31% in 2006. This rate is currently
  scheduled to decrease as follows: in 29% for the 2007 tax year, 27% for the
  2008 tax year, 26% for the 2009 tax year and 25% thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

56

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 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
  2004, 2005 or in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Tax benefits under the Law for Encouragement of Capital Investments,
  1959 (the Investment Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
  Companys production facility has been granted Approved Enterprise status
  under the Investment Law. The Company participates in the Alternative
  Benefits Program and, accordingly, income from its approved enterprises will
  be tax exempt for a period of 10 years, commencing in the first year in which
  the approved enterprise first generates taxable income; this is due to the
  fact that the Company operates in Zone A in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On
  April 1, 2005, an amendment to the Investment Law came into effect (the
  Amendment) and has significantly changed the provisions of the Investment
  Law. The Amendment limits the scope of enterprises which may be approved by
  the Investment Center by setting criteria for the approval of a facility as a
  Beneficiating Enterprise, such as provisions generally requiring that at
  least 25% of the Beneficiating Enterprises income will be derived from
  export. Additionally, the Amendment enacted major changes in the manner in
  which tax benefits are awarded under the Investment Law so that companies no
  longer require Investment Center approval in order to qualify for tax
  benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In
  addition, the Investment Law provides that terms and benefits included in any
  certificate of approval already granted will remain subject to the provisions
  of the law as they were on the date of such approval. Therefore, the
  Companys existing Approved Enterprise will generally not be subject to the
  provisions of the Amendment. As a result of the Amendment, tax-exempt income
  generated under the provisions of the Amendment, as part of a new
  Beneficiating Enterprise, will subject the Company to taxes upon distribution
  or liquidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
  Company has been granted the status of Approved Enterprise, under the
  Investment Law, for investment programs for the periods ending in 2007 and
  2010, and the status of Beneficiating Enterprise according to the Amendment,
  for the period ending in 2015 (Programs).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Out
  of the Companys retained earnings as of December 31, 2006, approximately $17
  million are tax-exempt earnings attributable to its Approved Enterprise
  programs and approximately $2 million are tax-exempt earnings attributable to
  its Beneficiating Enterprise program. The tax-exempt income attributable to
  the Approved and Beneficiating Enterprise cannot be distributed to
  shareholders without subjecting the Company to taxes. If these retained
  tax-exempt profits are distributed, the Company will be taxed at the reduced
  corporate tax rate applicable to such profits (currently - 25% according to
  the implementation of the Investment Law; effectively 33%). According to the
  Amendment, tax-exempt income generated under the Beneficiating Enterprise status
  will be taxed upon dividend distribution or complete liquidation, whereas tax
  exempt income generated under the Approved Enterprise status will be taxed
  only upon dividend distribution .As of December 31, 2006, if the income
  attributed to the Approved Enterprise was distributed as dividend, the
  Company would incur a tax liability of approximately $4 million. If income
  attributed to the Beneficiating Enterprise was distributed as dividend,
  including upon liquidation, the Company would incur a tax liability in the
  amount of approximately $0.5 million.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | These
  amounts will be recorded as an income tax expense for the period in which the
  Company declares the dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

57

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  Company intends to reinvest the amount of its tax-exempt income and not
  distribute any amounts of its undistributed tax exempt income as dividend.
  Accordingly, no deferred income taxes have been provided on income
  attributable to the Companys Approved and Beneficiating Enterprise programs,
  as the undistributed tax exempt income is essentially permanent in duration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  entitlement to the above benefits is conditional upon the Companys
  fulfilling the conditions stipulated by the Investment Law, regulations
  published there under and the certificates of approval for the specific
  investments in approved enterprises.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Should
  the Company fail to meet such requirements in the future, income attributable
  to its Programs could be subject to the statutory Israeli corporate tax rate
  and the Company could be required to refund a portion of the tax benefits
  already received, with respect to such program. The Companys management
  believes that the Company is meeting the aforementioned conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 (OCS) are eligible for grants, in exchange
  for payment of royalties from revenues generated by the products developed in
  accordance with the programs. Once a project is approved, the OCS 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 OCS. These royalties must be paid starting from 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, this law does not
  impose obligation to pay enlarged royalties to the OCS. Prior to the recent
  amendment of this 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 this 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
  there under, 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 OCS is reviewed separately, and grants are based on the
  programs approval by the research committee of the OCS. Expenditures
  supported under other incentive programs of the State of Israel are not
  eligible for OCS grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In
  March 2001, we reached an arrangement with the OCS whereby we 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 OCS participations, up to a
  maximum amount of $250,000 per quarter. We have not received any additional
  grants from the OCS since 2000, and As of June 1, 2005 we had no
  additional payment obligations in connection with these grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

58

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net Operating Loss Carryover                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | As
  of December 31, 2006, we had no net operating loss, or NOL, carryovers
  for Israeli tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 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;                                      
| |   |                                                                                                                                                 
| |  | 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.

59

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
  there under, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Net
  Operating Loss Carryover                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | As
  of December 31, 2006, we had no net operating loss, or NOL, carryovers
  for Israeli tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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.                                                                                                                                                                                                                                                                                                                                      

60

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, generally 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 should 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 complex 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%.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------
| | 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 Global 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 site at
  http://www.camtek.co.il. Such information on our site is not part of this
  annual report.                                                                                                                                                 

61

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Currently,
  we are engaged in hedging, in order to manage risks relating to foreign
  currency exchange rate or interest rate fluctuations. As of December 31,
  2006, we had no outstanding derivative financial instruments of any kind. 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, 2006, we had no short-term
  loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Most
  of our investments are compromised of short-term bank deposits, which bear
  fixed interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 revaluation in the local currency as
  compared to the dollar, which is the case in Europe in 2006, the prices of
  our products will decrease relative to that local currency and may be more
  competitive. The opposite effect occurs when the dollar increases in value in
  comparison to these currencies, which was the case in 2005. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

62

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2006, we had net liabilities of approximately $13.5 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 $135,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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, 2006, 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 Mr. Eran Bendoly and Ms. Gabriela
  Heller is qualified as an audit committee financial expert as defined in
  Item 401(h) of Regulation S-K.

63

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|          |               
|--------- | --------------
|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 Ethics 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, Brightman Almagor & Co., a member firm of Deloitte
  Touche Tohmatsu, and Somekh Chaikin, a member firm of KPMG International, for
  their services to the Company for the years ended December 31, 2005 and 2006:                                                                                                                                          

|                   |  |                            |         |                           |   |         | 
|------------------ |  | -------------------------- | ------- | ------------------------- | - | ------- | 
|Fee Category       |  | Fees Paid
  during 
  2005 |         | Fees Paid
  during
  2006 |  
|                   |  |                            |         |                           |  
|Audit Fees         |  | $                          | 90,000  |                           | $ | 123,000 | 
|Audit-Related Fees |  | $                          | 55,500  |                           | $ | 94,000  | 
|Tax Fees           |  | $                          | 5,200   |                           | $ | 15,500  | 
|                   |  |                            |         |                           |   |         | 
|All Other Fees     |  | $                          | 4,300   |                           | $ | 7,500   | 
|                   |  |                            |         |                           |   |         | 
|Total Fees         |  | $                          | 155,000 |                           | $ | 240,050 | 
|                   |  |                            |         |                           |   |         | 

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

64

---

---



|          |                                                                          
|--------- | -------------------------------------------------------------------------
|Item 16D. | Exemptions from the Listing Standards for Audit Committees.              
|          |                                                                          
|          | Not
  applicable to registrant.                                          
|          |                                                                          
|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated
  Purchasers.
|          |                                                                          
|          | Not
  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.

65

---

---



CAMTEK LTD.

Consolidated Financial Statements
December 31, 2006 and 2005

---

---



CAMTEK LTD.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                  |                
|--------------------------------------------------------------------------------- | ---------------
|                                                                                  | Page           
|                                                                                  |                
|                                                                                 
|Report of Independent Registered Public
  Accounting Firm                         | F  2          
|                                                                                  |                
|Consolidated Balance Sheets                                                       | F  3          
|                                                                                  |                
|Consolidated Statements of Operations                                             | F  4          
|                                                                                  |                
|Consolidated
  Statements of Comprehensive Income                                 | F  5          
|                                                                                  |                
|Consolidated Statements of Shareholders
  Equity And Comprehensive Income (Loss) | F  6          
|                                                                                  |                
|Consolidated Statements of Cash Flows                                             | F  7          
|                                                                                  |                
|Notes to Consolidated Financial Statements
  as of December 31, 2006              | F  8 to F  29

---

---



Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Camtek Ltd.

We have
audited the accompanying consolidated balance sheet of Camtek Ltd. and
subsidiaries (the Company) as of December 31, 2006 and the related
consolidated statements of operations, comprehensive income, shareholders
equity and comprehensive income and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our
opinion, the 2006 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Camtek Ltd. and
subsidiaries as of December 31, 2006 and the results of their operations and
their cash flows for the year then ended in conformity with U.S. generally
accepted accounting principles.

As discussed
in Note 2Q to the consolidated financial statements, effective January 1, 2006,
the Company adopted the fair value method of accounting for stock-based
compensation as required by Statement of Financial Accounting Standard No. 123R
 Share Based Payment.

Somekh Chaikin
Certified Public Accountants (Israel)
Member firm of KPMG International

Tel Aviv, June
28, 2007

---

---



|                           
|---------------------------
|CAMTEK LTD.                
|                           
|Consolidated Balance Sheets
|                           
|                           
|(In thousands)             

|                                                                                                                                                                               |  |              |         |      |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- |  | ------ | -
|                                                                                                                                                                               |  | December 31, |        
|                                                                                                                                                                               |  |              |        
|                                                                                                                                                                               |  | 2006         |         | 2005 | 
|                                                                                                                                                                               |  |              |         |      | 
|                                                                                                                                                                               |  | U.S. Dollars |        
|                                                                                                                                                                               |  |              |        
|ASSETS                                                                                                                                                                         |  |              |         |      |  |        |  
|CURRENT ASSETS                                                                                                                                                                 |  |              |         |      |  |        |  
|Cash and cash equivalents                                                                                                                                                      |  |              | 23,358  |      |  | 8,714  |  
|Marketable securities (Note 3)                                                                                                                                                 |  |              | 2,099   |      |  | 2,101  |  
|Accounts receivable, net (Note 11b,c)                                                                                                                                          |  |              | 29,434  |      |  | 26,412 |  
|Inventories (Note 4)                                                                                                                                                           |  |              | 41,414  |      |  | 24,942 |  
|Due from affiliates                                                                                                                                                            |  |              | 180     |      |  | 290    |  
|Other current assets (Note 5)                                                                                                                                                  |  |              | 2,372   |      |  | 2,817  |  
|Deferred tax (Note 17)                                                                                                                                                         |  |              | 65      |      |  | -      |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Total current assets                                                                                                                                                           |  |              | 98,922  |      |  | 65,276 |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|FIXED ASSETS (Note 6)                                                                                                                                                          |  |              |         |      |  |        |  
|Cost                                                                                                                                                                           |  |              | 15,927  |      |  | 14,405 |  
|Less - Accumulated depreciation                                                                                                                                                |  |              | 5,198   |      |  | 4,442  |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Fixed assets, net                                                                                                                                                              |  |              | 10,729  |      |  | 9,963  |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Deferred tax (Note 17)                                                                                                                                                         |  |              | 369     |      |  | -      |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Other assets, net (Note 7)                                                                                                                                                     |  |              | 786     |      |  | -      |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Total assets                                                                                                                                                                   |  |              | 110,806 |      |  | 75,239 |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|LIABILITIES                                                                                                                                                                    |  |              |         |      |  |        |  
|CURRENT LIABILITIES                                                                                                                                                            |  |              |         |      |  |        |  
|Accounts payable trade                                                                                                                                                        |  |              | 11,801  |      |  | 8,678  |  
|Due to affiliates                                                                                                                                                              |  |              | 814     |      |  | -      |  
|Other current liabilities (Note 8)                                                                                                                                             |  |              | 12,831  |      |  | 8,721  |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Total current liabilities                                                                                                                                                      |  |              | 25,446  |      |  | 17,399 |  
|Convertible loan (Note 9)                                                                                                                                                      |  |              | 5,000   |      |  | 5,000  |  
|Liability for employee severance benefits
  (Note 10)                                                                                                                          |  |              | 222     |      |  | 222    |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Total liabilities                                                                                                                                                              |  |              | 30,668  |      |  | 22,621 |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|SHAREHOLDERS EQUITY (Note 13)                                                                                                                                                 |  |              |         |      |  |        |  
|Ordinary shares NIS 0.01 par value,
  authorized 100,000,000 shares, issued 31,052,474 in 2006 and 28,095,516 in
  2005, outstanding 30,040,855 in 2006 and 27,083,897 in 2005 |  |              | 132     |      |  | 125    |  
|Additional paid-in capital                                                                                                                                                     |  |              | 59,420  |      |  | 43,732 |  
|Deferred stock-based compensation                                                                                                                                              |  |              | -       |      |  | (221   | )
|Accumulated other comprehensive loss
  Unrealized loss on marketable securities                                                                                                |  |              | (1      | )    |  | (2     | )
|Retained earnings                                                                                                                                                              |  |              | 21,580  |      |  | 9,977  |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|                                                                                                                                                                               |  |              | 81,131  |      |  | 53,611 |  
|Treasury stock, at cost (1,011,619 shares
  in 2006 and 2005)                                                                                                                  |  |              | (993    | )    |  | (993   | )
|                                                                                                                                                                               |  |              |         |      |  |        |  
|Total shareholders equity                                                                                                                                                     |  |              | 80,138  |      |  | 52,618 |  
|                                                                                                                                                                               |  |              |         |      |  |        |  
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)                                                                                                                               |  |              |         |      |  |        |  
|Total liabilities and
  shareholders equity                                                                                                                                   |  |              | 110,806 |      |  | 75,239 |  
|                                                                                                                                                                               |  |              |         |      |  |        |  

See
accompanying notes to consolidated financial statements

F  3

---

---



|                                     
|-------------------------------------
|CAMTEK LTD.                          
|                                     
|Consolidated Statements of Operations
|                                     
|                                     
|(In
  thousands)                     

|                                                          |  |                         |         |      |  |        |   |  |        |  
|--------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ------ | - |  | ------ | -
|                                                          |  | Year Ended December 31, |        
|                                                          |  |                         |        
|                                                          |  | 2006                    |         | 2005 |  | 2004   |  
|                                                          |  |                         |         |      |  |        |  
|                                                          |  | U.S. Dollars            |        
|                                                          |  |                         |        
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Revenues:                                                 |  |                         |         |      |  |        |   |  |        |  
|Sales of
  products                                       |  |                         | 92,470  |      |  | 56,987 |   |  | 63,353 |  
|Service fees                                              |  |                         | 7,585   |      |  | 6,045  |   |  | 4,066  |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Total
  revenues (Note 15)                                |  |                         | 100,055 |      |  | 63,032 |   |  | 67,419 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Cost of
  revenues:                                       |  |                         |         |      |  |        |   |  |        |  
|Cost of
  products sold                                   |  |                         | 42,600  |      |  | 28,262 |   |  | 28,193 |  
|Cost of
  services                                        |  |                         | 5,842   |      |  | 4,519  |   |  | 3,168  |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Total cost
  of revenues                                  |  |                         | 48,442  |      |  | 32,781 |   |  | 31,361 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Gross profit                                              |  |                         | 51,613  |      |  | 30,251 |   |  | 36,058 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Research and
  development costs                          |  |                         | 11,831  |      |  | 8,469  |   |  | 7,328  |  
|Selling,
  general and administrative expenses (Note 16a) |  |                         | 27,850  |      |  | 18,760 |   |  | 15,953 |  
|Aborted
  share issuance expenses (Note 16c)              |  |                         | -       |      |  | -      |   |  | 1,122  |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Total
  operating expenses                                |  |                         | 39,681  |      |  | 27,229 |   |  | 24,403 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Operating
  income                                        |  |                         | 11,932  |      |  | 3,022  |   |  | 11,655 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Financial
  expenses, net (Note 16b)                      |  |                         | (288    | )    |  | (320   | ) |  | (359   | )
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Income
  before income taxes                              |  |                         | 11,644  |      |  | 2,702  |   |  | 11,296 |  
|Income taxes
  (Note 17)                                  |  |                         | (41     | )    |  | -      |   |  | (499   | )
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Net income                                                |  |                         | 11,603  |      |  | 2,702  |   |  | 10,797 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Net income
  per ordinary share:                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Basic                                                     |  |                         | 0.40    |      |  | 0.10   |   |  | 0.40   |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Diluted                                                   |  |                         | 0.39    |      |  | 0.10   |   |  | 0.39   |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Weighted
  average number of ordinary shares outstanding: |  |                         |         |      |  |        |   |  |        |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Basic                                                     |  |                         | 29,176  |      |  | 27,253 |   |  | 27,114 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  
|Diluted                                                   |  |                         | 29,553  |      |  | 27,586 |   |  | 27,800 |  
|                                                          |  |                         |         |      |  |        |   |  |        |  

See
accompanying notes to consolidated financial statements

F  4

---

---



|                                                 
|-------------------------------------------------
|CAMTEK LTD.                                      
|                                                 
|Consolidated
  Statements of Comprehensive Income
|                                                 
|                                                 
|(In thousands)                                   

|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ----- | - |  | ------ | 
|                                                                                                       |  | Year Ended December 31, |       
|                                                                                                       |  |                         |       
|                                                                                                       |  | 2006                    |        | 2005 |  | 2004  |  
|                                                                                                       |  |                         |        |      |  |       |  
|                                                                                                       |  | U.S. Dollars            |       
|                                                                                                       |  |                         |       
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|Net income                                                                                             |  |                         | 11,603 |      |  | 2,702 |   |  | 10,797 | 
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|Other comprehensive income:                                                                            |  |                         |        |      |  |       |   |  |        | 
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|Realization of loss on available for sale securities, net of taxes
  (nil)                             |  |                         | 2      |      |  | -     |   |  | -      | 
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|Unrealized holding loss on available for sale securities arising
  during the year, net of taxes (nil) |  |                         | (1     | )    |  | (2    | ) |  | -      | 
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 
|Comprehensive income                                                                                   |  |                         | 11,604 |      |  | 2,700 |   |  | 10,797 | 
|                                                                                                       |  |                         |        |      |  |       |   |  |        | 

See
accompanying notes to consolidated financial statements

F  5

---

---



|                                                                                 
|---------------------------------------------------------------------------------
|CAMTEK LTD.                                                                      
|                                                                                 
|Consolidated Statements of Shareholders Equity And Comprehensive
  Income (Loss)
|                                                                                 
|                                                                                 
|(In
  thousands, except share data)                                              

|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                |  |    |   |  |        |   |  |      |   |  |        |  
|-------------------------------------------- |  | ------------------------------------- | ---------- | ----------------------------- |  | ------------------------------ |  | --------------------------------------- | ---------- | --------------------------------------------------- |  | --------------------------------------------- | - | ---------------- | ---- | ------------------------------ |  | -- | - |  | ------ | - |  | ---- | - |  | ------ | -
|                                             |  | Ordinary Shares 
  NIS 0.01 par value |            | Number of
  treasury
  shares |  | Additional
  paid-in
  capital |  | Deferred
  stock
  based
  compensation |            | Accumulated
  other
  comprehensive
  income (loss) |  | Retained
  earnings
  (accumulated
  deficit) |   | Treasury
  stock |      | Total
  shareholders
  equity | 
|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                | 
|                                             |  | Shares                                |            | U.S. Dollars                  |  | Shares                         |  | U.S. Dollars                            |           
|                                             |  |                                       |            |                               |  |                                |  |                                         |           
|Balances at January 1, 2004                  |  |                                       | 28,065,038 |                               |  | 125                            |  |                                         | (1,011,619 | )                                                   |  | 43,801                                        |   |                  | (560 | )                              |  | -  |   |  | (3,522 | ) |  | (993 | ) |  | 38,851 |  
|Exercise of share options                    |  |                                       | 20,728     |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | -  |   |  | -      |   |  | -    |   |  | -      |  
|Cancellation of share options                |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | (69                                           | ) |                  | 69   |                                |  | -  |   |  | -      |   |  | -    |   |  | -      |  
|Amortization of share options                |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | 128  |                                |  | -  |   |  | -      |   |  | -    |   |  | 128    |  
|Net income                                   |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | -  |   |  | 10,797 |   |  | -    |   |  | 10,797 |  
|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                |  |    |   |  |        |   |  |      |   |  |        |  
|Balances at December 31, 2004                |  |                                       | 28,085,766 |                               |  | 125                            |  |                                         | (1,011,619 | )                                                   |  | 43,732                                        |   |                  | (363 | )                              |  | -  |   |  | 7,275  |   |  | (993 | ) |  | 49,776 |  
|Exercise of share options                    |  |                                       | 9,750      |                               |  | -                              |  |                                         | -          |                                                     |  | 15                                            |   |                  | -    |                                |  | -  |   |  | -      |   |  | -    |   |  | 15     |  
|Cancellation of share options                |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | (15                                           | ) |                  | 15   |                                |  | -  |   |  | -      |   |  | -    |   |  | -      |  
|Amortization of share options                |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | 127  |                                |  | -  |   |  | -      |   |  | -    |   |  | 127    |  
|Unrealized loss on marketable Securities     |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | (2 | ) |  | -      |   |  | -    |   |  | (2     | )
|Net income                                   |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | -  |   |  | 2,702  |   |  | -    |   |  | 2,702  |  
|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                |  |    |   |  |        |   |  |      |   |  |        |  
|Balances at December 31, 2005                |  |                                       | 28,095,516 |                               |  | 125                            |  |                                         | (1,011,619 | )                                                   |  | 43,732                                        |   |                  | (221 | )                              |  | (2 | ) |  | 9,977  |   |  | (993 | ) |  | 52,618 |  
|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                |  |    |   |  |        |   |  |      |   |  |        |  
|Application of new accounting Standard 123R  |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | (221                                          | ) |                  | 221  |                                |  | -  |   |  | -      |   |  | -    |   |  | -      |  
|Share issuance, net of issuance expenses*    |  |                                       | 2,525,252  |                               |  | 6                              |  |                                         | -          |                                                     |  | 14,442                                        |   |                  | -    |                                |  | -  |   |  | -      |   |  | -    |   |  | 14,448 |  
|Exercise of share options                    |  |                                       | 431,706    |                               |  | 1                              |  |                                         | -          |                                                     |  | 701                                           |   |                  | -    |                                |  | -  |   |  | -      |   |  | -    |   |  | 702    |  
|Share based compensation expense             |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | 766                                           |   |                  | -    |                                |  | -  |   |  | -      |   |  | -    |   |  | 766    |  
|Realization of loss on marketable securities |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | 2  |   |  | -      |   |  | -    |   |  | 2      |  
|Unrealized loss on marketable securities     |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | (1 | ) |  | -      |   |  | -    |   |  | (1     | )
|Net income                                   |  |                                       | -          |                               |  | -                              |  |                                         | -          |                                                     |  | -                                             |   |                  | -    |                                |  | -  |   |  | 11,603 |   |  | -    |   |  | 11,603 |  
|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                |  |    |   |  |        |   |  |      |   |  |        |  
|Balances at December 31, 2006                |  |                                       | 31,052,474 |                               |  | 132                            |  |                                         | (1,011,619 | )                                                   |  | 59,420                                        |   |                  | -    |                                |  | (1 | ) |  | 21,580 |   |  | (993 | ) |  | 80,138 |  
|                                             |  |                                       |            |                               |  |                                |  |                                         |            |                                                     |  |                                               |   |                  |      |                                |  |    |   |  |        |   |  |      |   |  |        |  

|  |                                                           
|- | ----------------------------------------------------------
|* | Net of
  issuance expenses at the amount of $560 thousand.

See
accompanying notes to consolidated financial statements

F  6

---

---



|                                     
|-------------------------------------
|CAMTEK LTD.                          
|                                     
|Consolidated Statements of Cash Flows
|                                     
|                                     
|(In
  thousands)                     

|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ------ | - |  | ------- | -
|                                                                                              |  | Year Ended December 31, |        
|                                                                                              |  |                         |        
|                                                                                              |  | 2006                    |         | 2005 |  | 2004   |  
|                                                                                              |  |                         |         |      |  |        |  
|                                                                                              |  | U.S. Dollars            |        
|                                                                                              |  |                         |        
|                                                                                             
|Cash flows from operating activities:                                                         |  |                         |         |      |  |        |   |  |         |  
|Net income                                                                                    |  |                         | 11,603  |      |  | 2,702  |   |  | 10,797  |  
|Adjustments to reconcile net income to net
  cash provided by (used in) operating activities: |  |                         |         |      |  |        |   |  |         |  
|Depreciation and amortization                                                                 |  |                         | 794     |      |  | 658    |   |  | 747     |  
|Loss (gain) on disposal of fixed assets                                                       |  |                         | 24      |      |  | (6     | ) |  | (4      | )
|Gain from marketable securities, net                                                          |  |                         | (6      | )    |  | -      |   |  | -       |  
|Amortization of unearned compensation                                                         |  |                         | 766     |      |  | 127    |   |  | 128     |  
|Provision for bad debts, net                                                                  |  |                         | 647     |      |  | (30    | ) |  | 146     |  
|Accrued severance pay                                                                         |  |                         | -       |      |  | -      |   |  | (190    | )
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Changes in operating assets and
  liabilities:                                                |  |                         |         |      |  |        |   |  |         |  
|Accounts receivable                                                                           |  |                         | (4,099  | )    |  | (4,154 | ) |  | (8,958  | )
|Inventories                                                                                   |  |                         | (16,472 | )    |  | (50    | ) |  | (11,205 | )
|Deferred tax                                                                                  |  |                         | (434    | )    |  | -      |   |  | -       |  
|Due to affiliates, net                                                                        |  |                         | 924     |      |  | 189    |   |  | 2,173   |  
|Other current assets and deferred expenses                                                    |  |                         | (229    | )    |  | (724   | ) |  | 823     |  
|Accounts payable - trade                                                                      |  |                         | 3,123   |      |  | 463    |   |  | 1,230   |  
|Other current liabilities                                                                     |  |                         | 4,110   |      |  | 626    |   |  | 2,457   |  
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Net cash provided by (used in) operating
  activities                                         |  |                         | 751     |      |  | (199   | ) |  | (1,856  | )
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Cash flows from investing activities:                                                         |  |                         |         |      |  |        |   |  |         |  
|Purchase of marketable securities                                                             |  |                         | (3,891  | )    |  | (2,103 | ) |  | -       |  
|Proceeds from sale of marketable securities
  available for sale                              |  |                         | 3,900   |      |  | -      |   |  | -       |  
|Purchase of fixed assets                                                                      |  |                         | (1,582  | )    |  | (673   | ) |  | (829    | )
|Purchase of intangible assets                                                                 |  |                         | (114    | )    |  | -      |   |  | -       |  
|Proceeds from disposal of fixed assets                                                        |  |                         | -       |      |  | 18     |   |  | 25      |  
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Net cash used in investing activities                                                         |  |                         | (1,687  | )    |  | (2,758 | ) |  | (804    | )
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Cash flows from financing activities:                                                         |  |                         |         |      |  |        |   |  |         |  
|(Decrease) increase in short-term bank
  credit                                               |  |                         | -       |      |  | (2,335 | ) |  | 35      |  
|Net proceeds from issuance of ordinary
  shares                                               |  |                         | 14,448  |      |  | -      |   |  | -       |  
|Exercise of share options                                                                     |  |                         | 702     |      |  | 15     |   |  | -       |  
|Long-term convertible loan                                                                    |  |                         | -       |      |  | 5,000  |   |  | -       |  
|Aborted share issuance expenses                                                               |  |                         | -       |      |  | -      |   |  | (1,122  | )
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Net cash provided by (used in) financing
  activities                                         |  |                         | 15,150  |      |  | 2,680  |   |  | (1,087  | )
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Effect of exchange rate changes on cash                                                       |  |                         | 430     |      |  | (150   | ) |  | 51      |  
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Net increase (decrease) in cash and cash
  equivalents                                        |  |                         | 14,644  |      |  | (427   | ) |  | (3,696  | )
|Cash and cash equivalents at beginning of
  the year                                          |  |                         | 8,714   |      |  | 9,141  |   |  | 12,837  |  
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Cash and cash equivalents at end of the
  year                                                |  |                         | 23,358  |      |  | 8,714  |   |  | 9,141   |  
|                                                                                              |  |                         |         |      |  |        |   |  |         |  
|Supplemental disclosure of cash flow
  information:                                           |  |                         |         |      |  |        |   |  |         |  
|Cash paid during the year for:                                                                |  |                         |         |      |  |        |   |  |         |  
|Interest                                                                                      |  |                         | 422     |      |  | 405    |   |  | 450     |  
|Income taxes                                                                                  |  |                         | 27      |      |  | 216    |   |  | 479     |  

See
accompanying notes to consolidated financial statements

F  7

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 1  BUSINESS

Camtek Ltd.
(Camtek), an Israeli corporation, is a majority owned (61.9%) subsidiary of
Priortech Ltd., an Israeli corporation listed on the Tel-Aviv Stock Exchange.
Camtek designs, develops manufactures and markets automatic optical inspection
systems (AOI systems) and related products. Camteks AOI systems are used for
yield enhancement for various applications in the electronic supply chain
industry. The main applications along this supply chain are the production of
Microelectronics, Printed Circuit Boards (PCB) and Electronic packaging. Camteks activities are conducted in one
reportable business segment.

NOTE 2
 SIGNIFICANT ACCOUNTING POLICIES

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The accompanying consolidated financial statements, which include the
  accounts of Camtek and its subsidiaries (collectively the Company), are
  prepared in accordance with U.S. generally accepted accounting principles.
  All material intercompany balances and transactions have been eliminated in
  consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|B. | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
  preparation of the consolidated financial statements in conformity with U.S.
  generally accepted accounting principles requires management to make
  estimates and assumptions that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses
  during the reporting period. Actual results may differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|C. | Foreign currency transactions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
  functional currency of the Company is the U.S. Dollar. Most of the revenue
  generated by the Company is from outside of Israel and a majority thereof are
  received in U.S. Dollars. In addition, materials and components purchased and
  marketing expenses incurred are either paid for in U.S. Dollars or in New
  Israeli Shekels (NIS) linked to changes in the U.S. Dollar/NIS exchange
  rate. A significant portion of the Companys expenses are incurred in Israel
  and paid for in NIS. Transactions not denominated in U.S. Dollar are
  recorded upon their initial recognition according to the exchange rate in
  effect on the date of the transaction. Exchange rate differences arising upon
  the settlement of monetary items or upon reporting the Companys monetary
  items at exchange rates different from that by which they were initially
  recorded during the period, or reported in previous financial statements, are
  charged to financial income or expense. Foreign currency income
  (expenses) included in financial income (expenses), net, resulting from
  transactions not denominated in U.S. Dollars amounted to $(435), $(238) and
  $89 thousand in 2006, 2005 and 2004, respectively.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|D. | Cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | All highly
  liquid investments purchased with maturity of three months or less are
  considered to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|E. | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company
  accounts for its investments in marketable securities in accordance with
  Statement of Financial Accounting Standard (SFAS) No. 115 Accounting for
  Certain Investments in Debt and Equity Securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | As of
  December 31, 2006 all marketable securities are designated as
  available-for-sale and accordingly are recorded at fair value. Unrealized
  holding gains and losses, net of the related tax effect, on
  available-for-sale securities are excluded from earnings and are reported as
  a separate component of other comprehensive income until realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F  8

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 2
  SIGNIFICANT ACCOUNTING POLICIES
(Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|F. | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The allowance for doubtful accounts is Managements best estimate of
  the probable loss inherent to existing accounts receivable. In the
  appropriate allowance, Management bases its estimate on information at hand
  about specific debtors, including aging of the balance, assessment of the
  underlying security received, the history of write-offs, relationships with
  the customers and the overall credit worthiness of the customers.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|G. | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Inventories consist of completed AOI systems, AOI systems partially
  completed and components, and are recorded at the lower of cost, determined
  by the moving - average basis, or market.                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|H. | Fixed assets                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Fixed assets
  are stated at cost less accumulated depreciation, and are depreciated over
  their estimated useful lives on a straight-line basis.                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Annual rates
  of depreciation are as follows:                                                                                                                                                                                                                                                                                                                                                                                                       

|                               |  |  |            | 
|------------------------------ |  |  | ---------- | 
|Building                       |  |  | 2%         | 
|Machinery and equipment        |  |  | 10
  - 33% | 
|Office furniture and equipment |  |  | 6
  - 20%  | 
|Automobiles                    |  |  | 15%        | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Leasehold
  improvements are amortized by the straight-line method over the lower of the
  lease term or the estimated useful economic life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|I. | Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Other
  assets, comprised of intellectual property, are capitalized at cost and
  amortized, beginning with the first year of utilization, over its expected
  life of ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|J. | Long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company
  applies SFAS No. 144, Accounting for the Impairment or Disposal of
  Long-Lived Assets. This Statement requires that long-lived assets be
  reviewed for impairment whenever events or changes in circumstances indicate
  that the carrying amount of an asset may not be recoverable. Recoverability
  of assets to be held and used is measured by a comparison of the carrying
  amount of an asset to undiscounted future cash flows expected to be generated
  by the asset or used in its disposal. If the carrying amount of the long
  lived asset exceeds its estimated undiscounted future cash flows, an
  impairment charge is recognized as computed by subtracting the fair market
  value of the asset from its carrying value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|K. | Fair values of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The carrying
  amounts for cash and cash equivalents, accounts receivable, accounts payable,
  accrued expenses and amounts due from affiliates approximate fair value
  because of the short-term duration of those items. Marketable securities are
  carried at quoted market prices, which represent fair value. The carrying
  amounts of short-term bank credit, convertible loan and amounts due to or
  from Priortech Ltd. approximate fair value because the interest rates on such
  debt approximate the market rate.                                                                                                                                                                                                                              

F  9

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 2
 SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|L. | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  recognizes revenue from sales in accordance with Securities and Exchange
  Commission Staff Accounting Bulletin No. 104 SAB 104 and Financial
  Accounting Standard Boards Emerging Issues Task Force (EITF) Issue No.
  00-21, Revenue Arrangements with Multiple Deliverables. Accordingly, the
  Company recognizes revenue from sales of its products when the products are
  installed at the customers premises and are operating in accordance with its
  specifications, signed documentation of the arrangement, such as a signed
  contract or purchase order, has been received, the price is fixed or
  determinable, and collectibility is reasonably assured.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Service
  revenues consist mainly of revenues from maintenance contracts and are
  recognized ratably over the contract period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Non-standard
  warranty is deferred as unearned revenue and is recognized ratably as revenue
  when the applicable warranty term period commences.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|M. | Warranty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  records a liability for product warranty obligations at the time of sale
  based upon historical warranty experience. The term of the warranty is
  generally twelve months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Changes in
  the product warranty obligations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                    |  |                             |        |      |  |        |  
|------------------- |  | --------------------------- | ------ | ---- |  | ------ | -
|                    |  | December 31,                |       
|                    |  |                             |       
|                    |  | 2006                        |        | 2005 | 
|                    |  |                             |        |      | 
|                    |  | U.S. Dollars (In thousands) |       
|                    |  |                             |       
|                    |  |                             |       
|Beginning of year   |  |                             | 1,162  |      |  | 1,703  |  
|Change in estimates |  |                             | (442   | )    |  | -      |  
|New warranties      |  |                             | 2,020  |      |  | 2,003  |  
|Reductions          |  |                             | (1,683 | )    |  | (2,544 | )
|                    |  |                             |        |      |  |        |  
|End of year         |  |                             | 1,057  |      |  | 1,162  |  
|                    |  |                             |        |      |  |        |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|N. | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company
  accounts for income taxes in accordance with SFAS No. 109, Accounting for
  Income Taxes (SFAS No. 109). This Statement prescribes the use of the
  liability method whereby deferred tax asset and liability account balances
  are determined based on differences between financial reporting and tax bases
  of assets and liabilities and are measured using the enacted tax rates and
  laws that will be in effect when the differences are expected to reverse. The
  Company provides a valuation allowance, if necessary, to reduce deferred tax
  assets to their estimated realizable value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|O. | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Research and
  development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|P. | Earnings
  per ordinary share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Basic earnings per
  ordinary share is calculated using only weighted average ordinary shares
  outstanding. Diluted earnings per share, if relevant, gives effect to
  dilutive potential ordinary shares outstanding during the year. Such dilutive
  shares consist of incremental shares, using the treasury stock method, from
  the assumed exercise of share options.                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In the years ended
  December 31, 2006 ,2005 and 2004, the effect of the exercise of
  outstanding share options is dilutive, and was included in computing diluted
  earning per ordinary share.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In
  the year ended December 31, 2006 and 2005, the effect of warrants and
  conversion of convertible loan is anti-dilutive, and has not been included in
  computing dilutive earning per ordinary share.                                                                                                                                                                                                                                                                                                                                                                                                               

F  10

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 2
 SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Q. | Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Prior to fiscal 2006, the Company applied the intrinsic value method
  as prescribed in Accounting Principles Board Opinion No. 25, Accounting
  for Stock Issued to Employees (APB No. 25), and related
  interpretations, in accounting for stock options granted under the stock
  option plan. Under the intrinsic value method, compensation cost is
  recognized if the exercise price of the Companys employee stock options was
  less than the market price of the underlying stock on the date of the grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Effective January 1, 2006, the Company adopted
  FASB Statement No. 123(R), Share-Based Payment (Statement
  123(R)). This statement replaces FASB Statement No. 123, Accounting for
  Stock-Based Compensation (Statement 123) and supersedes APB No. 25.
  Statement 123(R) requires that all stock-based compensation be recognized as
  an expense in the financial statements and that such cost be measured at the
  fair value of the award. This statement was adopted using the modified prospective
  method of application, which requires the Company to recognize compensation
  cost on a prospective basis. Therefore, prior years financial statements
  have not been restated. Under this method, the Company recorded stock-based
  compensation expense for awards granted prior to, but not yet vested as of
  January 1, 2006, using the fair value amounts determined for pro forma
  disclosures under Statement 123. For stock-based awards granted after
  January 1, 2006, the Company recognizes compensation expense based on
  estimated grant date fair value using the Black-Scholes option-pricing model.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The following table illustrates the effect on net income for the
  years ended December 31, 2005 and 2004 as if the Company had applied the
  fair value recognition provisions of Statement 123(R) to options granted
  under the Companys stock plans prior to adoption of Statement 123(R) on
  January 1, 2006. No pro forma disclosure has been made for periods
  subsequent to January 1, 2006 as all stock-based compensation has been
  recognized in net income. For purposes of this pro forma disclosure, the
  value of the options is estimated using a Black-Scholes option-pricing model
  and amortized to expense over the options service periods with forfeitures
  recognized as they occurred.                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                                                 |  |                             |       |      |  |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- |  | ------ | -
|                                                                                 |  | 2005                        |       | 2004 | 
|                                                                                 |  |                             |       |      | 
|                                                                                 |  | U.S. Dollars (In thousands) |      
|                                                                                 |  |                             |      
|                                                                                 |  |                             |       |      |  |        |  
|Net income, as reported                                                          |  |                             | 2,702 |      |  | 10,797 |  
|                                                                                 |  |                             |       |      |  |        |  
|Stock-based employee compensation expense included in reported net
  income      |  |                             | 127   |      |  | 128    |  
|Stock-based employee compensation determined under the fair value
  based method |  |                             | (560  | )    |  | (688   | )
|                                                                                 |  |                             |       |      |  |        |  
|Pro forma net income                                                             |  |                             | 2,269 |      |  | 10,237 |  
|                                                                                 |  |                             |       |      |  |        |  
|                                                                                 |  |                             |       |      |  |        |  
|Income per share:                                                                |  |                             |       |      |  |        |  
|Basic - as reported                                                              |  |                             | 0.10  |      |  | 0.40   |  
|                                                                                 |  |                             |       |      |  |        |  
|Basic - pro forma                                                                |  |                             | 0.08  |      |  | 0.38   |  
|                                                                                 |  |                             |       |      |  |        |  
|Diluted - as reported                                                            |  |                             | 0.10  |      |  | 0.39   |  
|                                                                                 |  |                             |       |      |  |        |  
|Diluted - pro forma                                                              |  |                             | 0.08  |      |  | 0.37   |  
|                                                                                 |  |                             |       |      |  |        |  

F  11

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006 and
  2005
|                                                                             

NOTE 2
 SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|R. | Reclassification                                                                                                               
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Certain
  prior years amounts have been reclassified in conformity with the current
  years financial statements presentation.
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|S. | Recently Issued Accounting Standards                                                                                           
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 1.                                                                                                                              | In June
  2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
  Income Taxes-an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
  clarifies the accounting for uncertainty in income taxes recognized in an
  enterprises financial statements in accordance with SFAS No. 109,
  Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
  measurement attribute for the financial statement recognition and measurement
  of a tax position taken or expected to be taken in a tax return. FIN 48 is
  effective for fiscal years beginning after December 15, 2006. The Company is
  currently reviewing this new standard to determine its effects, if any, on
  its results of operations or financial position.                                                                                                                                       
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 2.                                                                                                                              | In September
  2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108). SAB
  No. 108 addresses the process and diversity in practice of quantifying
  financial statement misstatements resulting in the potential build up of
  improper amounts on the balance sheet. The Company will be required to adopt
  the provisions of SAB No.108 in fiscal year 2007. The adoption of SAB No. 108
  did not have an impact on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 3.                                                                                                                              | In September 2006, the FASB issued SFAS No. 157, Fair Value
  Measurements, (SFAS No. 157). SFAS No. 157 defines fair value, establishes
  a framework for measuring fair value and expands disclosures about fair value
  measurements. The changes to current practice resulting from the application
  of this Statement relate to the definition of fair value, the methods used to
  measure fair value, and the expanded disclosures about fair value
  measurements. The Statement is effective for fiscal years beginning after
  November 15, 2007 and interim periods within those fiscal years. The Company
  does not anticipate that the adoption of the provisions of SFAS No. 157 will
  materially impact its financial position and results of operations.                                                                                                                                        
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 4.                                                                                                                              | In February
  2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
  Financial Assets and Financial Liabilities  Including an amendment of FASB
  Statement No. 115, which permits entities to choose to measure many financial
  instruments at fair value. The Statement allows entities to achieve an offset
  accounting effect for certain changes in fair value of certain related assets
  and liabilities without having to apply complex hedge accounting provisions,
  and is expected to expand the use of fair value measurement consistent with
  the Boards long-term objectives for financial instruments. This Statement is
  effective as of the beginning of an entitys first fiscal year that begins
  after November 15, 2007. The Company is currently reviewing this new standard
  to determine its effects, if any, on its results of operations or financial
  position.
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|T. | Recently Adopted Accounting Standards                                                                                          
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 1.                                                                                                                              | Effective
  January 1, 2006, the Company adopted the fair value recognition provisions of
  Statement 123(R) using the modified-prospective-transition method (refer to
  note 2Q).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 2.                                                                                                                              | Effective
  January 1, 2006, the Company adopted FASB Statement No. 151, Inventory Costs
   an Amendment of ARB No. 43, Chapter 4 (Statement 151). Statement 151
  clarifies the accounting for abnormal amounts of idle facility expense,
  freight, handling costs, and wasted material (spoilage) requiring that those
  items be recognized as current-period charges. In addition, Statement 151
  requires that allocation of fixed production overheads be based on the normal
  capacity of the production facilities. The Companys current procedures
  follow these guidelines and therefore the adoption of Statement 151 had no
  impact on the valuation of inventory or charges to cost of sales.                                                                                                                                                                                                    

F  12

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006 and
  2005
|                                                                             

NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
(Contd)

|   |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|T. | Recently Adopted Accounting Standards (contd)
|   |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 3.                                             | Effective
  January 1, 2006, the Company adopted the disclosure requirements of EITF
  Issue No. 06-3, How Taxes Collected from Customers and Remitted to
  Governmental Authorities Should be Presented in the Income Statement (that
  is, gross versus net presentation) for tax receipts on the face of their
  income statements. The scope of this guidance includes any tax assessed by a
  governmental authority that is directly imposed on a revenue-producing
  transaction between a seller and a customer and may include, but is not
  limited to, sales, use, value added, and some excise taxes (gross receipts
  taxes are excluded). The Company has historically presented such taxes on a
  net basis.                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 4.                                             | In September
  2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
  Pension and Other Postretirement Plans  an amendment of FASB Statements
  No.87, 88, 106, and 132(R), (SFAS No. 158). SFAS No. 158 requires an
  employer to recognize the over-funded or under-funded status of a defined
  benefit postretirement plan (other than a multiemployer plan) as an asset or
  liability in its statement of financial position. To recognize changes in
  that funded status in the year in which the changes occur through
  comprehensive income of a business entity or changes in unrestricted net
  assets of a not-for-profit organization. The provisions of this Statement are
  effective for an employer with publicly traded equity securities are required
  to recognize the funded status of a defined benefit postretirement plan and
  to provide the required disclosures as of the end of the fiscal year ending
  after December 15, 2006. The adoption of Statement 158 had no impact on the
  valuation of inventory or charges to cost of sales.

NOTE 3  MARKETABLE SECURITIES

|                          |  |                             |       |      |  |       | 
|------------------------- |  | --------------------------- | ----- | ---- |  | ----- | 
|                          |  | 2006                        |       | 2005 | 
|                          |  |                             |       |      | 
|                          |  | U.S. Dollars (In thousands) |      
|                          |  |                             |      
|Available for sale:       |  |                             |       |      |  |       | 
|Corporate debt securities |  |                             | 599   |      |  | 601   | 
|Auction rate securities   |  |                             | 1,500 |      |  | 1,500 | 
|                          |  |                             |       |      |  |       | 
|                         
|                          |  |                             | 2,099 |      |  | 2,101 | 
|                          |  |                             |       |      |  |       | 

The carrying
amount, gross unrealized holding losses, and fair value of available-for-sale
debt securities by major security type and class of security at December 31,
2006 and 2005 were as follows:

|                          |  |                             |       |                                     |  |            |   |  |       | 
|------------------------- |  | --------------------------- | ----- | ----------------------------------- |  | ---------- | - |  | ----- | 
|                          |  | Carrying
  amount           |       | Gross unrealized
  Holding (losses) |  | Fair value |  
|                          |  |                             |       |                                     |  |            |  
|                          |  | U.S. Dollars (In thousands) |      
|                          |  |                             |      
|                         
|At
  December 31, 2006:   |  |                             |       |                                     |  |            |   |  |       | 
|Available
  for sale:     |  |                             |       |                                     |  |            |   |  |       | 
|Corporate debt securities |  |                             | 600   |                                     |  | (1         | ) |  | 599   | 
|Auction rate securities   |  |                             | 1,500 |                                     |  | -          |   |  | 1,500 | 
|                          |  |                             |       |                                     |  |            |   |  |       | 
|                          |  |                             | 2,100 |                                     |  | (1         | ) |  | 2,099 | 
|                          |  |                             |       |                                     |  |            |   |  |       | 
|At
  December 31, 2005:   |  |                             |       |                                     |  |            |   |  |       | 
|Available
  for sale:     |  |                             |       |                                     |  |            |   |  |       | 
|Corporate debt securities |  |                             | 603   |                                     |  | (2         | ) |  | 601   | 
|Auction rate securities   |  |                             | 1,500 |                                     |  | -          |   |  | 1,500 | 
|                          |  |                             |       |                                     |  |            |   |  |       | 
|                          |  |                             | 2,103 |                                     |  | (2         | ) |  | 2,101 | 
|                          |  |                             |       |                                     |  |            |   |  |       | 

F  13

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006 and
  2005
|                                                                             

NOTE 3  MARKETABLE SECURITIES (Contd)

Maturities of
debt securities classified as available-for-sale were as follows at December
31, 2006:

|                                         |  |                             |       |            |  |       | 
|---------------------------------------- |  | --------------------------- | ----- | ---------- |  | ----- | 
|                                         |  | Carrying amount             |       | Fair value | 
|                                         |  |                             |       |            | 
|                                         |  | U.S. Dollars (In thousands) |      
|                                         |  |                             |      
|Available
  for sale:                    |  |                             |       |            |  |       | 
|First year                               |  |                             | 600   |            |  | 599   | 
|Due after five years
  through ten years |  |                             | 1,500 |            |  | 1,500 | 
|                                         |  |                             |       |            |  |       | 
|                                         |  |                             | 2,100 |            |  | 2,099 | 
|                                         |  |                             |       |            |  |       | 

Proceeds from
the sale of investment securities available for sale were $3,900 and nil in
2006 and 2005, respectively; gross realized gains included in other finance
income in 2006 and 2005 were $6 and nil, respectively.

Gross
unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category have been in a continuous
unrealized loss position for less than 12 months, at December 31, 2006 were as
follow:

|                            |  |                             |    |            |  |       | 
|--------------------------- |  | --------------------------- | -- | ---------- |  | ----- | 
|                            |  | Unrealized losses           |    | Fair value | 
|                            |  |                             |    |            | 
|                            |  | U.S. Dollars (In thousands) |   
|                            |  |                             |   
|Corporate
  debt securities |  |                             | (1 | )          |  | 599   | 
|Action
  rate securities    |  |                             | -  |            |  | 1,500 | 
|                            |  |                             |    |            |  |       | 
|                            |  |                             | (1 | )          |  | 2,099 | 
|                            |  |                             |    |            |  |       | 

NOTE 4  INVENTORIES

|                                                                                |  |                             |        |      |  |        | 
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | 
|                                                                                |  | December 31,                |       
|                                                                                |  |                             |       
|                                                                                |  | 2006                        |        | 2005 | 
|                                                                                |  |                             |        |      | 
|                                                                                |  | U.S. Dollars (In thousands) |       
|                                                                                |  |                             |       
|                                                                               
|Components                                                                      |  |                             | 17,702 |      |  | 9,020  | 
|Systems partially
  completed                                                   |  |                             | 5,340  |      |  | 4,392  | 
|Completed systems, including
  systems not yet purchased, at customer locations |  |                             | 18,372 |      |  | 11,530 | 
|                                                                                |  |                             |        |      |  |        | 
|                                                                                |  |                             |        |      |  |        | 
|                                                                                |  |                             | 41,414 |      |  | 24,942 | 
|                                                                                |  |                             |        |      |  |        | 

F  14

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006 and
  2005
|                                                                             

NOTE 5  OTHER CURRENT ASSETS

|                                  |  |                             |       |      |  |       | 
|--------------------------------- |  | --------------------------- | ----- | ---- |  | ----- | 
|                                  |  | December 31,                |      
|                                  |  |                             |      
|                                  |  | 2006                        |       | 2005 | 
|                                  |  |                             |       |      | 
|                                  |  | U.S. Dollars (In thousands) |      
|                                  |  |                             |      
|                                 
|Due from Government
  institution |  |                             | 743   |      |  | 846   | 
|Due from employees                |  |                             | 196   |      |  | 184   | 
|Prepaid expenses                  |  |                             | 480   |      |  | 482   | 
|Advances to suppliers             |  |                             | 519   |      |  | 461   | 
|Deposits to leaseholders          |  |                             | 110   |      |  | 562   | 
|Other                             |  |                             | 324   |      |  | 282   | 
|                                  |  |                             |       |      |  |       | 
|                                  |  |                             |       |      |  |       | 
|                                  |  |                             | 2,372 |      |  | 2,817 | 
|                                  |  |                             |       |      |  |       | 

NOTE 6  FIXED ASSETS

|                                 |  |                             |        |      |  |        | 
|-------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | 
|                                 |  | December 31,                |       
|                                 |  |                             |       
|                                 |  | 2006                        |        | 2005 | 
|                                 |  |                             |        |      | 
|                                 |  | U.S. Dollars (In thousands) |       
|                                 |  |                             |       
|                                
|Land                             |  |                             | 815    |      |  | 815    | 
|Building                         |  |                             | 7,998  |      |  | 7,636  | 
|Machinery and equipment          |  |                             | 4,048  |      |  | 3,170  | 
|Office furniture and
  equipment |  |                             | 2,385  |      |  | 2,223  | 
|Automobiles                      |  |                             | 295    |      |  | 222    | 
|Leasehold improvements           |  |                             | 386    |      |  | 339    | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             | 15,927 |      |  | 14,405 | 
|Less accumulated
  depreciation  |  |                             | 5,198  |      |  | 4,442  | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             | 10,729 |      |  | 9,963  | 
|                                 |  |                             |        |      |  |        | 

Depreciation
expenses for the years ended December 31, 2006, 2005 and 2004 are summarized to
$792, $658 and $747 thousand, respectively.

NOTE 7  OTHER ASSETS

|                          |  |                             |     |      |  |   | 
|------------------------- |  | --------------------------- | --- | ---- |  | - | 
|                          |  | December 31,                |    
|                          |  |                             |    
|                          |  | 2006                        |     | 2005 | 
|                          |  |                             |     |      | 
|                          |  | U.S. Dollars (In thousands) |    
|                          |  |                             |    
|                         
|Deferred expenses         |  |                             | 215 |      |  | - | 
|Deposits to lease holders |  |                             | 459 |      |  | - | 
|Intangible assets (A)     |  |                             | 112 |      |  | - | 
|                          |  |                             |     |      |  |   | 
|                          |  |                             |     |      |  |   | 
|                          |  |                             | 786 |      |  | - | 
|                          |  |                             |     |      |  |   | 

F  15

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 7  OTHER ASSETS (Contd)

|   |                           
|-- | --------------------------
|A. | Patents registration costs

|                             |  |                             |     |                             |  |                          |  |                       |     |  |  |    | 
|---------------------------- |  | --------------------------- | --- | --------------------------- |  | ------------------------ |  | --------------------- | --- |  |  | -- | 
|                             |  | December 31, 2006           |    
|                             |  |                             |    
|                             |  | Gross carrying
  amount     |     | Accumulated 
  amortization |  | Intangible
  Assets, net |  | Amortization
  period |    
|                             |  |                             |     |                             |  |                          |  |                       |    
|                             |  | U.S. Dollars (In thousands) |     | Years                       | 
|                             |  |                             |     |                             | 
|Patents
  registration costs |  |                             | 114 |                             |  | 2                        |  |                       | 112 |  |  | 10 | 
|                             |  |                             |     |                             |  |                          |  |                       |     |  |  |    | 

Amortization
expense for the years ended December 31, 2006, 2005 and 2004 are summarized to
$2, nil and nil thousand, respectively.

NOTE 8  OTHER CURRENT LIABILITIES

|                                                |  |                             |        |      |  |       | 
|----------------------------------------------- |  | --------------------------- | ------ | ---- |  | ----- | 
|                                                |  | December 31,                |       
|                                                |  |                             |       
|                                                |  | 2006                        |        | 2005 | 
|                                                |  |                             |        |      | 
|                                                |  | U.S. Dollars (In thousands) |       
|                                                |  |                             |       
|Accrued
  compensation and related benefits     |  |                             | 4,825  |      |  | 3,786 | 
|Government
  institutions                       |  |                             | 843    |      |  | 156   | 
|Accrued
  warranty costs                        |  |                             | 1,057  |      |  | 1,162 | 
|Commissions                                     |  |                             | 2,077  |      |  | 794   | 
|Advances
  from customers and deferred revenues |  |                             | 3,125  |      |  | 2,195 | 
|Other                                           |  |                             | 904    |      |  | 628   | 
|                                                |  |                             |        |      |  |       | 
|                                                |  |                             |        |      |  |       | 
|                                                |  |                             | 12,831 |      |  | 8,721 | 
|                                                |  |                             |        |      |  |       | 

NOTE 9  CONVERTIBLE LOAN

|                                                                    |  |                             |       |      |  |       | 
|------------------------------------------------------------------- |  | --------------------------- | ----- | ---- |  | ----- | 
|                                                                    |  | December 31,                |      
|                                                                    |  |                             |      
|                                                                    |  | 2006                        |       | 2005 | 
|                                                                    |  |                             |       |      | 
|                                                                    |  | U.S. Dollars (In thousands) |      
|                                                                    |  |                             |      
|                                                                    |  |                             |      
|U.S. Dollar denominated loan, bearing annual interest of Libor+2.1% |  |                             | 5,000 |      |  | 5,000 | 
|                                                                    |  |                             |       |      |  |       | 

On August 23,
2005 (the closing date) the Company 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 a whole or in part, is optional
at any given business day after the closing date. Conversion price per one
ordinary share is $5.50, 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 date, 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. As of December 31, 2006 the
conversion price per one ordinary share is $5.50.

F  16

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 9  CONVERTIBLE
LOAN (Contd)

The Company is
subject to the main following covenants in connection to the loan:

|   |                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | The
  shareholders equity should not decrease to below $45 million, or, $40
  million as a result of dividend distributions. Shareholders equity may not
  decrease by more then 10%, unless such deviation is cured within three
  consecutive financial quarters immediately following the financial quarter in
  which such decrease had occurred.
|   |                                                                                                                                                                                                                                                                                                                                                        
|2. | The
  shareholders equity shall represent at least 55% of the total assets of the
  Company.                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                        
|3. | The net loss shall not exceed an aggregate of $10 million in any
  single financial quarter or any year.                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                        
|4. | Not to take
  any further loans which exceeds 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 its affiliates.                                                                                                                     

As of December
31, 2006 the Company was in compliance with the aforementioned terms.

NOTE 10  SEVERANCE PAY

Under Israeli
law and labor agreements, the Israeli companies are required to make severance
and pension payments to their retired or dismissed employees and to employees
leaving employment in certain other circumstances.

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | The
  liability in respect of most of its employees is discharged by participating
  in a defined contribution pension plan and making regular deposits with a
  pension fund. The liability deposited with the pension fund is based on
  salary components as prescribed in the existing labor agreement. The custody
  and management of the amounts so deposited are independent of the companies
  and accordingly such amounts funded (included in expenses on an accrual
  basis) and related liabilities are not reflected in the balance sheet.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2. | In respect
  of the liability to other employees, individual insurance policies are
  purchased and deposits are made with recognized severance pay funds.                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The
  liability for severance pay is calculated on the basis of the latest salary
  paid to each employee multiplied by the number of years of employment. The
  liability is covered by the amounts deposited including accumulated income
  thereon as well as by the unfunded provision, which amounted to $222 thousand
  as of December 31, 2006 and 2005.                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3. | Severance pay expenses were $750, $544 and $529 thousand in 2006,
  2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F  17

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 11  COMMITMENTS AND
CONTINGENT LIABILITIES

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Operating leases                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
  Companys subsidiaries have entered into various nonconancelable operating
  lease agreements, principally for office space. As of December 31, 2006,
  minimum future rental payments under these leases amounted to $1,438
  thousand. In May 2004, the Company entered into a noncancelable operating
  lease for vehicles for a period of 36 months. As of December 31, 2006,
  the minimum future rental payments were approximately $1,367 thousand.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | As of
  December 31, 2006, minimum future rental payments under such
  noncancelable operating leases are as follows:                                                                                                                                                                                                                                                                                                                                           

|                              |  |                            |       | 
|----------------------------- |  | -------------------------- | ----- | 
|Year
  Ending 
  December 31, |  | U.S. Dollars(In thousands) |      
|                              |  |                            |      
|2007                          |  |                            | 1,524 | 
|2008                          |  |                            | 792   | 
|2009                          |  |                            | 364   | 
|2010                          |  |                            | 63    | 
|Thereafter                    |  |                            | 62    | 
|                              |  |                            |       | 
|                              |  |                            | 2,805 | 
|                              |  |                            |       | 

|   |                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------
|   | Aggregate
  office rent expenses amounted to $572, $546 and $529 thousand in 2006, 2005
  and 2004, respectively.                    
|   |                                                                                                                                      
|B. | Valuation and qualifying accounts                                                                                                    
|   |                                                                                                                                      
|   | The
  following is a summary of the allowance for doubtful accounts related to
  accounts receivable for the years ended December 31:

|     |  |                                     |       |           |  |          |  |                              |        |   |  |       | 
|---- |  | ----------------------------------- | ----- | --------- |  | -------- |  | ---------------------------- | ------ | - |  | ----- | 
|     |  | Balance at
  beginning 
  of period |       | Provision |  | Recovery |  | Balance at
  end of
  period |       
|     |  |                                     |       |           |  |          |  |                              |       
|     |  | U.S. Dollars (In thousands)         |      
|     |  |                                     |      
|2004 |  |                                     | 2,090 |           |  | 1,229    |  |                              | (1,083 | ) |  | 2,236 | 
|2005 |  |                                     | 2,236 |           |  | 680      |  |                              | (710   | ) |  | 2,206 | 
|2006 |  |                                     | 2,206 |           |  | 778      |  |                              | (131   | ) |  | 2,853 | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | Factoring of financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company
  entered into accounts receivable factoring agreements with two financial
  institutions (the banks). Under the terms of the agreements, the Company
  has the option to factor receivables, with the banks on a non-recourse basis,
  provided that the banks approve the receivables in advance. In some cases,
  the Company continues to be obligated in the event of commercial disputes,
  (such as product defects) which are not covered under the credit insurance
  policy, unrelated to the credit worthiness of the customer. The Company
  accounts for the factoring of its financial assets in accordance with the
  provisions of SFAS 140. The Company does not expect any
  reimbursements to take place in the foreseeable future.
|   | The
  factoring fees of the above mentioned agreements sums to $ 51 thousands in
  2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | As of
  December 31, 2006 trade receivables amounting to approximately $2.5 million,
  were factored.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F  18

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             
|                                                                             
|NOTE 11  COMMITMENTS AND CONTINGENT LIABILITIES (Contd)                    

|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | Litigations
|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 1.          | On May 10,
  2004, a lawsuit was filed against the Company in the District Court in
  Nazareth, Israel, by a competitor, Orbotech Ltd., alleging that an optional
  component in the Dragon and Falcon systems infringe upon a patent held by
  Orbotech Ltd. and requesting an injunctive relief and damages. Currently, the
  issue dealt with by the court is the validity of the asserted patent. The
  Company believes that it has substantial defenses against the validity of
  Orbotechs patent and substantial defenses against Orbotechs claims.
  Therefore no provision was recorded by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 2.          | On February
  23, 2005, a lawsuit was filed against the Company in the District Court in
  Jerusalem by Orbotech Ltd., alleging infringement of patent held by Orbotech
  Ltd. regarding a specific illumination block, seeking injunctive relief and
  damages. The court ruled, based on a courts expert opinion, that the Company
  allegedly infringed the patent, and granted Orbotech a provisional remedy.
  Following the grant of the provisional remedy by the District Court, the
  Company filed a motion for leave to appeal. The Supreme Court rejected the
  Companys request since the provisional remedy was granted on the basis of
  prime facie evidence only. The claim is currently in the preliminary stage of
  discovery and only after evidence is presented and cross examinations are
  conducted will a final judgment be rendered by the District Court, subject to
  the right to appeal. The particular illumination block was at the time of the
  preliminary ruling still in a development stage. The Companys temporary
  inability to manufacture and sell the specific illumination block, does not
  affect its ability to manufacture and sell products incorporating other
  illumination blocks; the Company manufactures its products with several other
  illumination blocks. In February 2007 the patent referring to the specific
  illumination block expired. The Company has filed two requests for the
  lawsuit to be dismissed. . The Company believes that it has good defenses in
  the infringement aspect of the claim. The Company further believes that it
  has claims with respect to the validity of the asserted patent, as well as
  other defenses such as estoppel and lack of good faith on the part of
  Orbotech. Therefore no provision was recorded by the Company.
|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 3.          | On July 14,
  2005, a lawsuit was filed against the Company in the United States District
  Court for the District of Minnesota by one of the Companys competitors in
  the field of semiconductor manufacturing and packaging, August Technology
  Corporation (today Rudolph Technologies Inc. together with August Technology
  Corporation), alleging infringement of a patent and seeking injunctive relief
  and damages. The Company has filed an answer and counterclaims alleging,
  inter-alia, non-infringement, invalidity and unenforceability of the patent.
  The case is currently approaching the end of the discovery phase and is
  expected to be trial ready by October 2007. The Company believes that it has
  substantial defenses to Augusts allegations. Therefore no provision was
  recorded by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F  19

---

---



|                                                                           
|---------------------------------------------------------------------------
|CAMTEK LTD.                                                                
|                                                                           
|Notes to Consolidated Financial Statements as of December 31, 2006 and 2005
|                                                                           

NOTE 12  CONCENTRATION OF
RISK

Financial
instruments that potentially subject the Company to concentrations of credit
risk consist of cash equivalents, short-term bank deposits, marketable
securities and trade receivables. The Companys cash equivalents and marketable
securities are maintained with high-quality institutions and the composition
and maturities of investments are regularly monitored by management. Generally,
these securities and deposits are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk.

The Companys
marketable securities include auction rate securities and highly rated
corporate bonds. The trade receivables of the Company are derived from sales to
a large number of customers, mainly large industrial corporations located
mainly in Asia, the United States and Europe. The Company generally does not
require collateral: however, in certain circumstances, the Company may require
letter of credit, other collateral or additional guarantees. An allowance for
doubtful accounts is determined with respect to those amounts that the Company
has determined to be doubtful of collection. The Company performs ongoing
credit evaluations of its customers.

NOTE 13  SHAREHOLDERS
EQUITY

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Initial Public Offering                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  shares are traded on the NASDAQ National Market under the symbol of CAMT.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In December
  2005 the Company registered its shares to be listed and traded in the Tel-Aviv
  stock exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|B. | Private Placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In April 2006, the Company raised $14.5 million, net of issuance
  expenses, by issuing 2,525,252 ordinary shares at a price of $5.94 per share
  in a private placement to Israeli institutional investors. The private
  placement also included warrants that are exercisable into 1,262,626 ordinary
  shares at a price of $6.83 per share during a period of four years. The
  warrants issued in April 2006 have been classified in equity.                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|C. | Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | As of
  December 31, 2006, the Company has five share option plans for employees and
  directors. Future options will be granted only pursuant to the 2003 Share
  Option Plan described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In October
  2003, the Company adopted a stock option plan (the Plan) pursuant to
  which the Companys board of directors may grant stock options to officers
  and key employees. The total number of options, which may be granted to directors,
  officers, employees and consultants under this plan, is limited to 998,800
  options. Stock options can be granted with an exercise price equal to
  or less than the stocks fair market value at the date of grant. All stock
  options have 10-year terms and vest and become fully exercisable after
  4 years from the date of grant with 30% to vest at the end of each of
  the first three years and remaining 10% to vest at the end of the fourth year
  following the grant day.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | As of
  December 31, 2006, there were 38,000 additional shares available for the
  Company grant under the Plan. The fair value of each option award is
  estimated on the date of grant using the Black-Scholes option-pricing model
  that used the weighted average assumptions in the following table. The
  risk-free rate for the expected term of the option is based on the
  U.S. Treasury yield curve in effect at the time of grant.                                                                                                                                                                                                                                                                                                  

F  20

---

---



|                                                                           
|---------------------------------------------------------------------------
|CAMTEK LTD.                                                                
|                                                                           
|Notes to Consolidated Financial Statements as of December 31, 2006 and 2005
|                                                                           

NOTE 13  SHAREHOLDERS
EQUITY (Contd)

|   |                           
|-- | --------------------------
|C. | Stock Option Plan (Contd)

|                           |  |  |            |  |  |            | 
|-------------------------- |  |  | ---------- |  |  | ---------- | 
|                           |  |  | 2006 Grant |  |  | 2005 Grant | 
|                           |  |  |            |  |  |            | 
|Dividend
  yield           |  |  | 0          |  |  | 0          | 
|Expected
  volatility *    |  |  | 86%-87%    |  |  | 90%        | 
|Risk-free
  interest rate  |  |  | 5%         |  |  | 4.2%       | 
|Expected
  life (years) ** |  |  | 6          |  |  | 6          | 

| |    |                                                                      
| | -- | ---------------------------------------------------------------------
| | *  | Historical volatility                                                
| |    |                                                                      
| | ** | The company used the simplified method to estimate the expected life.

The weighted average grant date fair value of options granted during
the years ended 2006 and 2005 was $5.38 and $2.30 respectively. The total
intrinsic value of options exercised during the years ended December 31,
2006, 2005 and 2004 was $246,756, $5,859 and $23,058 respectively. The total
intrinsic value of options vested at December 31, 2006 is $236,589.

As of December
31, 2006, there was $679,354 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements. That cost is expected to be
recognized over a weighted-average period of 1.6 years.

Share option
activity during the past three years is as follows:

|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           |  |  |           |   |  |      |  | 
|------------------------ |  | ----------------------- | --------- | ----------------------------------------- |  | -------------------- |  | ----------------------------------------- | --------- | -------------------- |  | ----------------------------------------- |  |  | --------- | - |  | ---- |  | 
|                         |  | Year Ended December 31, |          
|                         |  |                         |          
|                         |  | 2006                    |           | 2005                                      |  | 2004                 | 
|                         |  |                         |           |                                           |  |                      | 
|                         |  | Number
  of
  shares    |           | Weighted
  average
  exercise
  price US$ |  | Number
  of
  shares |  | Weighted
  average
  exercise
  price US$ |           | Number
  of
  shares |  | Weighted
  average
  exercise
  price US$ | 
|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           | 
|Outstanding at January 1 |  |                         | 1,315,650 |                                           |  | 2.06                 |  |                                           | 1,250,000 |                      |  | 1.98                                      |  |  | 1,353,056 |   |  | 1.90 |  | 
|Granted                  |  |                         | 60,000    |                                           |  | 5.19                 |  |                                           | 144,000   |                      |  | 3.00                                      |  |  | -         |   |  | -    |  | 
|Forfeited                |  |                         | (13,980   | )                                         |  | 2.37                 |  |                                           | (68,600   | )                    |  | 2.59                                      |  |  | (82,328   | ) |  | 1.16 |  | 
|Exercised                |  |                         | (431,706  | )                                         |  | 1.63                 |  |                                           | (9,750    | )                    |  | 1.56                                      |  |  | (20,728   | ) |  | 0.00 |  | 
|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           |  |  |           |   |  |      |  | 
|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           |  |  |           |   |  |      |  | 
|Outstanding at year end  |  |                         | 929,964   |                                           |  | 2.46                 |  |                                           | 1,315,650 |                      |  | 2.06                                      |  |  | 1,250,000 |   |  | 1.98 |  | 
|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           |  |  |           |   |  |      |  | 
|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           |  |  |           |   |  |      |  | 
|Vested at year end       |  |                         | 665,729   |                                           |  | 2.22                 |  |                                           | 702,990   |                      |  | 1.95                                      |  |  | 375,300   |   |  | 1.98 |  | 
|                         |  |                         |           |                                           |  |                      |  |                                           |           |                      |  |                                           |  |  |           |   |  |      |  | 

F  21

---

---



|                                                                           
|---------------------------------------------------------------------------
|CAMTEK LTD.                                                                
|                                                                           
|Notes to Consolidated Financial Statements as of December 31, 2006 and 2005
|                                                                           

NOTE 13  SHAREHOLDERS
EQUITY (Contd)

| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | The
  following table summarizes information about share options at
  December 31, 2006:

|                              |  |                      |         |                                                              |  |                                           |  |                      |      |                                           |  |         |  |  |      | 
|----------------------------- |  | -------------------- | ------- | ------------------------------------------------------------ |  | ----------------------------------------- |  | -------------------- | ---- | ----------------------------------------- |  | ------- |  |  | ---- | 
|Range of
  exercise price US$ |  | Number
  outstanding |         | Weighted
  average
  remaining
  contractual
  life in years |  | Weighted
  average
  exercise
  price US$ |  | Number
  exercisable |      | Weighted
  average
  exercise
  price US$ | 
|                              |  |                      |         |                                                              |  |                                           |  |                      |      |                                           | 
|                             
|0.00                          |  |                      | 208,632 |                                                              |  | 6.56                                      |  |                      | 0.00 |                                           |  | 169,877 |  |  | 0.00 | 
|2.98-3.29                     |  |                      | 520,832 |                                                              |  | 6.98                                      |  |                      | 2.98 |                                           |  | 453,952 |  |  | 2.98 | 
|3.00                          |  |                      | 140,500 |                                                              |  | 8.74                                      |  |                      | 3.00 |                                           |  | 41,900  |  |  | 3.00 | 
|5.00                          |  |                      | 50,000  |                                                              |  | 9.38                                      |  |                      | 5.00 |                                           |  | -       |  |  | 5.00 | 
|6.15                          |  |                      | 10,000  |                                                              |  | 9.58                                      |  |                      | 6.15 |                                           |  | -       |  |  | 6.15 | 
|                              |  |                      |         |                                                              |  |                                           |  |                      |      |                                           |  |         |  |  |      | 
|                              |  |                      | 929,964 |                                                              |  | 7.31                                      |  |                      | 2.46 |                                           |  | 665,729 |  |  | 2.22 | 
|                              |  |                      |         |                                                              |  |                                           |  |                      |      |                                           |  |         |  |  |      | 

| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | The following
  table summarizes information about nonvested options at December 31,
  2006:

|                               |  |         |          |   |                                           |      | 
|------------------------------ |  | ------- | -------- | - | ----------------------------------------- | ---- | 
|                               |  | Options |          |   | Weighted average
  grant- date fair value |     
|                               |  |         |          |   |                                           |     
|                              
|Balance at
  January 1, 2006   |  |         | 612,660  |   |                                           | 2.07 | 
|Granted                        |  |         | 60,000   |   |                                           | 5.38 | 
|Vested                         |  |         | (394,445 | ) |                                           | 2.04 | 
|Forfeited                      |  |         | (13,980  | ) |                                           | 2.16 | 
|                               |  |         |          |   |                                           |      | 
|Balance at
  December 31, 2006 |  |         | 264,235  |   |                                           | 2.87 | 
|                               |  |         |          |   |                                           |      | 

NOTE 14  EARNINGS PER
ORDINARY SHARE

The following table
summarizes information related to the computation of basic and diluted profit
per Ordinary Share for the years indicated:

|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                                                                                 |  | Year ended December 31, |       
|                                                                                                                 |  |                         |       
|                                                                                                                 |  | 2006                    |        | 2005 |   | 2004   | 
|                                                                                                                 |  |                         |        |      |   |        | 
|                                                                                                                 |  | (In thousands)          |       
|                                                                                                                 |  |                         |       
|Net income attributable to Ordinary
Shares                                                                       |  | $                       | 11,603 |      | $ | 2,702  |  | $ | 10,797 | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|Weighted average number of
  Ordinary Shares outstanding used
  in basic profit per Ordinary Share calculation   |  |                         | 29,176 |      |   | 27,253 |  |   | 27,114 | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|Add assumed exercise of outstanding
  dilutive potential Ordinary Shares                                         |  |                         | 377    |      |   | 333    |  |   | 686    | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|Weighted average number of
  Ordinary Shares outstanding
  used in diluted profit per Ordinary Share calculation |  |                         | 29,553 |      |   | 27,586 |  |   | 27,800 | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|Basic earnings per Ordinary Share                                                                                |  | $                       | 0.40   |      | $ | 0.10   |  | $ | 0.40   | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 
|Diluted earnings per Ordinary Share                                                                              |  | $                       | 0.39   |      | $ | 0.10   |  | $ | 0.39   | 
|                                                                                                                 |  |                         |        |      |   |        |  |   |        | 

F  22

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 15  GEOGRAPHIC INFORMATION

Substantially
all fixed assets are located in Israel and substantially all revenues are
derived from shipments to other countries. Revenues are attributable to
geographic areas/countries based upon the destination of shipment of products
and related services as follows:

|                    |  |                            |         |      |  |        |  |  |        | 
|------------------- |  | -------------------------- | ------- | ---- |  | ------ |  |  | ------ | 
|                    |  | Year Ended December 31,    |        
|                    |  |                            |        
|                    |  | 2006                       |         | 2005 |  | 2004   | 
|                    |  |                            |         |      |  |        | 
|                    |  | U.S. Dollars(In thousands) |        
|                    |  |                            |        
|China and Hong Kong |  |                            | 33,713  |      |  | 24,665 |  |  | 29,576 | 
|Other Asia          |  |                            | 20,413  |      |  | 5,036  |  |  | 5,341  | 
|United States       |  |                            | 15,622  |      |  | 11,484 |  |  | 8,116  | 
|Taiwan              |  |                            | 12,895  |      |  | 12,258 |  |  | 14,574 | 
|Western Europe      |  |                            | 9,170   |      |  | 6,597  |  |  | 4,780  | 
|Japan               |  |                            | 6,716   |      |  | 2,065  |  |  | 3,533  | 
|Rest of the world   |  |                            | 1,526   |      |  | 927    |  |  | 1,499  | 
|                    |  |                            |         |      |  |        |  |  |        | 
|                    |  |                            | 100,055 |      |  | 63,032 |  |  | 67,419 | 
|                    |  |                            |         |      |  |        |  |  |        | 

NOTE 16  SELECTED INCOME STATEMENT DATA

|   |                                             
|-- | --------------------------------------------
|A. | Selling, general and administrative expenses

|                                             |  |                            |        |      |  |        |  |  |        | 
|-------------------------------------------- |  | -------------------------- | ------ | ---- |  | ------ |  |  | ------ | 
|                                             |  | Year Ended December 31,    |       
|                                             |  |                            |       
|                                             |  | 2006                       |        | 2005 |  | 2004   | 
|                                             |  |                            |        |      |  |        | 
|                                             |  | U.S. Dollars(In thousands) |       
|                                             |  |                            |       
|                                            
|Selling (a1)                                 |  |                            | 21,000 |      |  | 14,559 |  |  | 12,819 | 
|General and administrative                   |  |                            | 6,850  |      |  | 4,201  |  |  | 3,134  | 
|                                             |  |                            |        |      |  |        |  |  |        | 
|                                             |  |                            | 27,850 |      |  | 18,760 |  |  | 15,953 | 
|                                             |  |                            |        |      |  |        |  |  |        | 
|(a1) Including shipping
  and handling costs |  |                            | 2,626  |      |  | 1,890  |  |  | 2,066  | 
|                                             |  |                            |        |      |  |        |  |  |        | 

|   |                        
|-- | -----------------------
|B. | Financial expenses, net

|                 |  |                            |      |      |  |      |   |  |      |  
|---------------- |  | -------------------------- | ---- | ---- |  | ---- | - |  | ---- | -
|                 |  | Year Ended December 31,    |     
|                 |  |                            |     
|                 |  | 2006                       |      | 2005 |  | 2004 |  
|                 |  |                            |      |      |  |      |  
|                 |  | U.S. Dollars(In thousands) |     
|                 |  |                            |     
|                
|Interest expense |  |                            | 422  |      |  | 405  |   |  | 450  |  
|Interest income  |  |                            | (795 | )    |  | (336 | ) |  | (142 | )
|Other, net       |  |                            | 661  |      |  | 251  |   |  | 51   |  
|                 |  |                            |      |      |  |      |   |  |      |  
|                 |  |                            | 288  |      |  | 320  |   |  | 359  |  
|                 |  |                            |      |      |  |      |   |  |      |  

|   |                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | Aborted share issuance expenses                                                                                                                                                                               
|   |                                                                                                                                                                                                               
|   | During 2004,
  the Company decided to abandon its plan for a secondary share offering to the
  public. The total accrued expenses related to this offering were $1,122
  thousand which were expensed in 2004.

F  23

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 17  INCOME TAXES

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Tax under various laws                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  and its subsidiaries are assessed for tax purposes on an unconsolidated
  basis. The Company is assessed under the provisions of the Income Tax Law
  (Inflationary Adjustments), 1985, pursuant to which the results for tax
  purposes are measured in Israeli currency in real terms in accordance with
  changes in the Israeli Consumer Price Index (CPI). Each of the subsidiaries
  is subject to the tax rules prevailing in the country of incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|B. | Tax benefits under the Law for Encouragement of Capital Investments,
  1959 (the Investment Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The
  Companys production facilities have been granted Approved Enterprise
  status under the Investment Law. The Company participates in the Alternative
  Benefits Program and, accordingly, income from its approved enterprises will
  be tax exempt for a period of 10 years, commencing in the first year in which
  the approved enterprise first generates taxable income due to the fact that
  the Company operates in Zone A in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | On April 1, 2005, an amendment
  to the Investment Law came into effect (the Amendment) and has
  significantly changed the provisions of the Investment Law. The Amendment
  limits the scope of enterprises which may be approved by the Investment
  Center by setting criteria for the approval of a facility as a Beneficiating
  Enterprise, such as provisions generally requiring that at least 25% of the
  Beneficiating Enterprises income will be derived from export. Additionally,
  the Amendment enacted major changes in the manner in which tax benefits are
  awarded under the Investment Law so that companies no longer require
  Investment Center approval in order to qualify for tax benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In addition, the
  Investment Law provides that terms and benefits included in any certificate
  of approval already granted will remain subject to the provisions of the law
  as they were on the date of such approval. Therefore, the Companys existing
  Approved Enterprise will generally not be subject to the provisions of the
  Amendment. As a result of the amendment, tax-exempt income generated under
  the provisions of the new law, as part of a new Beneficiating enterprise,
  will subject the Company to taxes upon distribution or liquidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The
  Company has been granted the status of Approved Enterprises, under the Law,
  for an investments programs for the periods ending in 2007 and 2010, and the
  status of Beneficiating Enterprise according to the Amendment to the Law, for
  the period ending in 2015 (Programs).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Out of the
  Companys retained earnings as of December 31, 2006 approximately $17 million
  are tax-exempt earnings attributable to its Approved Enterprise programs and
  approximately $2 million are tax-exempt earnings attributable to its
  Beneficiating Enterprise program. The tax-exempt income attributable to the
  Approved and Beneficiating Enterprise cannot be distributed to shareholders
  without subjecting the Company to taxes. If these retained tax-exempt profits
  are distributed, the Company would be taxed at the reduced corporate tax rate
  applicable to such profits (currently - 25% According to the implementation
  of the Law; effectively 33%). According to the Amendment, tax-exempt income
  generated under the Beneficiating Enterprise status will be taxed upon
  dividend distribution or complete liquidation, whereas tax exempt income
  generated under the Approved Enterprise status will be taxed only upon
  dividend distribution (and not upon complete liquidation, where the tax
  liability will be incurred by the shareholders). As of December 31, 2006, if
  the income attributed to the Approved Enterprise were distributed as
  dividend, the Company would incur a tax liability of approximately $4
  million. If income attributed to the Beneficiating Enterprise were
  distributed as dividend, including upon liquidation, the Company would incur
  a tax liability in the amount of approximately $ 0.5 million.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | These
  amounts will be recorded as an income tax expense in the period in which the
  Company declares the dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F  24

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 17  INCOME TAXES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Tax benefits under the Law for Encouragement of Capital Investments,
  1959 (the Investments Law) (contd)                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company intends to
  reinvest the amount of its tax-exempt income and not distribute any amounts
  of its undistributed tax exempt income as dividend. Accordingly, no deferred
  income taxes have been provided on income attributable to the Companys
  Approved and Beneficiating Enterprise programs as the undistributed tax
  exempt income is essentially permanent in duration.     
|   |                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The entitlement to the
  above benefits is conditional upon the Companys fulfilling the conditions
  stipulated by the Law, regulations published there under and the certificates
  of approval for the specific investments in approved enterprises.                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Should the Company fail to
  meet such requirements in the future, income attributable to its programs
  could be subject to the statutory Israeli corporate tax rate and the Company
  could be required to refund a portion of the tax benefits already received,
  with respect to such program. The Companys management believes that the
  Company is meeting the aforementioned conditions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                   
|C. | Tax benefits under the Law for the Encouragement of Industry (Taxes),
  1969                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company
  is an industrial company as defined by this law and as such is entitled to
  certain tax benefits, mainly accelerated depreciation as prescribed by
  regulations published under the Inflationary Adjustments Law and the right to
  deduct issuance costs as an expense for tax purposes.                                                                                       

F  25

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 17  INCOME TAXES (Contd)

|   |                                    
|-- | -----------------------------------
|D. | Composition of income tax provision

|                                     |  |                             |        |      |  |       |  |  |        |  
|------------------------------------ |  | --------------------------- | ------ | ---- |  | ----- |  |  | ------ | -
|                                     |  | Year Ended December 31,     |       
|                                     |  |                             |       
|                                     |  | 2006                        |        | 2005 |  | 2004  | 
|                                     |  |                             |        |      |  |       | 
|                                     |  | U.S. Dollars (In thousands) |       
|                                     |  |                             |       
|Income
  (loss) before income taxes: |  |                             |        |      |  |       |  |  |        |  
|Israel                               |  |                             | 10,256 |      |  | 2,399 |  |  | 12,710 |  
|Non-Israeli                          |  |                             | 1,388  |      |  | 303   |  |  | (1,414 | )
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             | 11,644 |      |  | 2,702 |  |  | 11,296 |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|Income tax
  (benefit) provision:    |  |                             |        |      |  |       |  |  |        |  
|Current:                             |  |                             |        |      |  |       |  |  |        |  
|Israel                               |  |                             | -      |      |  | -     |  |  | -      |  
|Non-Israeli                          |  |                             | 414    |      |  | -     |  |  | -      |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             | 414    |      |  | -     |  |  | -      |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|Deferred:                            |  |                             |        |      |  |       |  |  |        |  
|Israel                               |  |                             | (160   | )    |  | -     |  |  | -      |  
|Non-Israeli                          |  |                             | (274   | )    |  | -     |  |  | -      |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             | (434   | )    |  | -     |  |  | -      |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|Previous
  years:                    |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|Israel (d1)                          |  |                             | -      |      |  | -     |  |  | 533    |  
|Non 
  Israeli                      |  |                             | 61     |      |  | -     |  |  | (34    | )
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             | 61     |      |  | -     |  |  | 499    |  
|                                     |  |                             |        |      |  |       |  |  |        |  
|                                     |  |                             | 41     |      |  | -     |  |  | 499    |  
|                                     |  |                             |        |      |  |       |  |  |        |  

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d1) | On March 31,
  2004, a settlement was reached between the Company and the Israeli tax
  authorities over disputed assessments for the 1999, 2000 and 2001 tax years.
  Under the settlement reached, the Company paid a total of $695 thousand to
  settle approximately $6.7 million in assessments previously demanded by the
  Israeli tax authorities with respect to the 1999-2001 tax years. In addition,
  the Company will continue to calculate its applicable tax benefits for the
  subsequent years of the Israeli tax benefits program in which it currently participates
  (2002-2007) at the rates previously disputed by the Israeli tax authorities.
  The settlement amount resulted in a one-time provision for income taxes of
  $460 thousand in the first quarter of 2004, in addition to the $225 thousand
  that was reserved for this purpose in the fourth quarter of 2003.

F  26

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 17  INCOME TAXES (Contd)

|   |                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E. | Income taxes included in the income statements:                                                                                                                                                           
|   |                                                                                                                                                                                                           
|   | The
  following is a reconciliation of the theoretical tax expense (benefit),
  assuming all income is taxed at the regular tax rate applicable to Israeli
  companies, and the actual income tax expense:

|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                                                                                                                     |  | Year Ended December 31,     |       
|                                                                                                                                                                                     |  |                             |       
|                                                                                                                                                                                     |  | 2006                        |        | 2005 |   | 2004   |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |  
|                                                                                                                                                                                     |  | U.S. Dollars (In thousands) |       
|                                                                                                                                                                                     |  |                             |       
|                                                                                                                                                                                    
|Income before income taxes                                                                                                                                                           |  |                             | 11,644 |      |   | 2,702  |   |   | 11,296 |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                    
|Statutory tax rate                                                                                                                                                                   |  |                             | 31     | %    |   | 34     | % |   | 35     | %
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                    
|Theoretical tax on the above amount                                                                                                                                                  |  |                             | 3,610  |      |   | 918    |   |   | 3,954  |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Increase (decrease) in taxes resulting
  from:                                                                                                                                       |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Tax benefits arising from Approved and
  Beneficiating Enterprises                                                                                                                 |  |                             | (1,641 | )    |   | (281   | ) |   | (238   | )
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Decrease in taxes resulting from
  utilization of carryforward tax losses and deductible temporary differences
  for which deferred tax benefits were not provided in previous years |  |                             | (1,337 | )    |   | (2,066 | ) |   | (4,790 | )
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Tax losses and deductible temporary
  differences for which no tax benefit has been recorded                                                                                         |  |                             | 351    |      |   | 371    |   |   | 1,029  |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Permanent differences and nondeductible
  expenses, including difference between Israeli CPI-adjusted tax returns and
  dollar-adjusted financial statements-net                     |  |                             | (1,318 | )    |   | 970    |   |   | (34    | )
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Nondeductible stock based compensation                                                                                                                                               |  |                             | 237    |      |   | 43     |   |   | 45     |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Tax expenses due to previous years                                                                                                                                                   |  |                             | 61     |      |   | -      |   |   | 499    |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Other                                                                                                                                                                                |  |                             | 78     |      |   | 45     |   |   | 34     |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                    
|Actual income tax expense                                                                                                                                                            |  |                             | 41     |      |   | -      |   |   | 499    |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                    
|Per share effect of the benefits arising
  from Approved and Beneficiating Enterprise:                                                                                             |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|Basic                                                                                                                                                                                |  | $                           | 0.06   |      | $ | 0.01   |   | $ | 0.01   |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  
|                                                                                                                                                                                    
|Diluted                                                                                                                                                                              |  | $                           | 0.06   |      | $ | 0.01   |   | $ | 0.01   |  
|                                                                                                                                                                                     |  |                             |        |      |   |        |   |   |        |  

F  27

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 17
 INCOME TAXES (Contd)

|   |                                                               
|-- | --------------------------------------------------------------
|F. | Income taxes included in the balance sheet                    
|   |                                                               
|   | Deferred tax
  assets consist of the following at December 31:

|                                                 |  |                             |        |      |  |        |  
|------------------------------------------------ |  | --------------------------- | ------ | ---- |  | ------ | -
|                                                 |  | December 31                 |       
|                                                 |  |                             |       
|                                                 |  | 2006                        |        | 2005 | 
|                                                 |  |                             |        |      | 
|                                                 |  | U.S. Dollars (In thousands) |       
|                                                 |  |                             |       
|Current:                                         |  |                             |        |      |  |        |  
|Provision
  for doubtful accounts                |  |                             | 194    |      |  | 198    |  
|Accrued
  warranty                               |  |                             | 97     |      |  | 80     |  
|Unearned
  revenue                               |  |                             | 185    |      |  | -      |  
|Net
  operating losses carryforwards             |  |                             | 91     |      |  | -      |  
|Accrued
  expenses                               |  |                             | 134    |      |  | 50     |  
|Other                                            |  |                             | -      |      |  | 24     |  
|                                                 |  |                             |        |      |  |        |  
|                                                 |  |                             | 701    |      |  | 352    |  
|Valuation
  allowance                            |  |                             | (636   | )    |  | (352   | )
|                                                 |  |                             |        |      |  |        |  
|Current
  deferred tax asset, net of allowance   |  |                             | 65     |      |  | -      |  
|                                                 |  |                             |        |      |  |        |  
|Long-term:                                       |  |                             |        |      |  |        |  
|Net
  operating losses carryforwards             |  |                             | 1,759  |      |  | 2,334  |  
|Severance
  pay                                  |  |                             | 14     |      |  | -      |  
|Fixed assets                                     |  |                             | (53    | )    |  | -      |  
|Other                                            |  |                             | 198    |      |  | -      |  
|                                                 |  |                             |        |      |  |        |  
|                                                 |  |                             | 1,918  |      |  | 2,334  |  
|Valuation
  allowance                            |  |                             | (1,549 | )    |  | (2,334 | )
|                                                 |  |                             |        |      |  |        |  
|Long-term
  deferred tax asset, net of allowance |  |                             | 369    |      |  | -      |  
|                                                 |  |                             |        |      |  |        |  
|Net deferred
  tax assets                        |  |                             | 434    |      |  | -      |  
|                                                 |  |                             |        |      |  |        |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Under SFAS
  No. 109, deferred tax assets are to be recognized for the anticipated tax
  benefits associated with net operating loss carryforwards and deductible
  temporary differences, unless it is more likely than not that some or all of
  the deferred tax assets will not be realized. The adjustment is made by a
  valuation allowance.                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Since the
  realization of the net operating loss carryforwards and deductible temporary
  differences is uncertain and not considered more likely than not, a valuation
  allowance has been established to reduce deferred tax assets to their
  estimated realizable value. The net change in the total valuation allowance
  was a decrease of $ 501 thousand, $ 1,548 thousand and $ 2,232 thousand for the
  years ended December 31, 2006, 2005 and 2004, respectively.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | As of
  December 31, 2006, major foreign subsidiaries have NOL carryforwards
  aggregating approximately $5,863 thousand, of which approximately $3,049
  thousand expires from 2009 to 2023 and approximately $2,814 thousand has no
  expiration date.                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|G. | Reduction in corporate income tax rate in Israel                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | On July 25,
  2005 an amendment to the Israeli tax law was approved by the Israeli
  parliament, which reduces the tax rates imposed on Israeli companies to 31%
  for 2006, This amendment states that the corporate tax rate will be further
  reduced in subsequent tax years as follows: in 2007 29%, in 2008 27%, in 2009
  26% and thereafter 25%. This change does not have a material effect on the
  Companys financial statements.                                 

F  28

---

---



|                                                                             
|-----------------------------------------------------------------------------
|CAMTEK LTD.                                                                  
|                                                                             
|Notes to Consolidated Financial Statements as of December 31, 2006
  and 2005
|                                                                             

NOTE 18  TRANSACTIONS WITH RELATED PARTIES

|                                                       |  |                             |       |      |  |      |  |  |       | 
|------------------------------------------------------ |  | --------------------------- | ----- | ---- |  | ---- |  |  | ----- | 
|                                                       |  | Year Ended December 31,     |      
|                                                       |  |                             |      
|                                                       |  | 2006                        |       | 2005 |  | 2004 | 
|                                                       |  |                             |       |      |  |      | 
|                                                       |  | U.S. Dollars (In thousands) |      
|                                                       |  |                             |      
|Purchases
  from Priortech Ltd. (including affiliates) |  |                             | 3,244 |      |  | 597  |  |  | 1,122 | 
|Interest
  income from Priortech Ltd.                  |  |                             | 16    |      |  | 19   |  |  | 30    | 
|Sales to
  Priortech Ltd. (including affiliates)       |  |                             | 240   |      |  | 1    |  |  | 230   | 

NOTE 19  SUBSEQUENT EVENTS

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Subsequent
  to balance sheet date, the Companys liabilities to banks were secured by
  negative pledge. Pursuant to the terms of the negative pledge the Company
  committed to comply with certain financial and other covenants which include,
  inter alia, a minimum amount of shareholders equity, a minimum ratio of
  shareholders equity to total balance sheet, as such are defined in the
  agreement, a minimum amount of sales and annual earnings. In addition,
  certain restrictions have been imposed on the Company regarding creating
  floating liens, execute a change in control over the Company and execute a
  merger.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | If the Company will not comply with all or part of the financial
  covenants, or if certain events specified in the agreement should occur, the
  bank will have the right to demand the immediate repayment of the credit. In
  Managements opinion, the Company will comply with those covenants over the
  credit period.                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|B. | Subsequent
  to balance sheet date the
  company granted 45,000 share options at an exercise price of $4.50 per share and 8,000 share options were
  exercised at a weighted average exercise price of $2.86.                                                                                                                                                                                                                                                                                                                                                                                                                                     

F  29

---

---



|         |          
|-------- | ---------
|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 (incorporated
  herein by reference to Exhibit 4.11 to the Registrants Registration
  Statement on Form 20-F File No.000-30664 filed with the Securities and
  Exchange Commission on June 29, 2006).                                                                              
| |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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 (incorporated
  herein by reference to Exhibit 4.12 to the Registrants Registration
  Statement on Form 20-F File No.000-30664 filed with the Securities and
  Exchange Commission on June 29, 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.*                                                                                                                                                                                                                                                                                       

66

---

---



| |      |  |                                                                                                                                                                                         
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |  |                                                                                                                                                                                         
| | 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.*
| |      |  |                                                                                                                                                                                         
| | 15.1 |  | Consent of
  Somekh Chaikin, a member firm of KPMG International..*                                                                                                                     
| |      |  |                                                                                                                                                                                         
| | 15.2 |  | Consent of
  Brightman Almagor & Co., a member firm of Deliotte, Touche Tohmatsu, and
  GoldsteinSabo Tevet *                                                                           

---

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

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 28, 2007

67

---

---