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# UNITED STATES 
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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# Form 20-F

# (Mark One)

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

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

| | For the
fiscal year ended December 31, 2004
| | -------------------------------------------

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

| | For the
transition period from __________ to _____________
| | ----------------------------------------------------------

# Commission File Number
0-26498

NUR MACROPRINTERS LTD. (Exact
Name of Registrant as specified in its charter)

ISRAEL (Jurisdiction
of incorporation or organization)

12 Abba Hillel Silver
Street 
P.O. Box 1281, Lod 71111, Israel 
(Address
of principal executive offices)

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

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

|Ordinary
Shares,  
NIS
1.0 par value per share
|----------------------------------------------
|                                              
|Title
of Class                                

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

|None          
|--------------
|              
|Title
of Class

Indicate
the number of outstanding shares of each of the issuers classes of capital or common
stock as of December 31, 2004: 26,165,215 Ordinary Shares, NIS 1.0 par value per share

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

Yes x No o

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

Item 17 o Item 18 x



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Table of Contents

|                           |                                                         | Page          
|-------------------------- | ------------------------------------------------------- | --------------
|
|
|
|
|Explanatory Note           | 4                                                      
|                          
|Forward-Looking Statements | 4                                                      
|                          
|Part I                    
|                          
|Item 1:                    | Identity of Directors, Senior Management and Advisers   | Not applicable
|                          
|Item 2:                    | Offer Statistics and Expected Timetable                 | Not applicable
|                          
|Item 3:                    | Key Information                                         | 5             
|                           | Selected Financial Data                                 | 5             
|                           | Risk Factors                                            | 8             
|                          
|Item 4:                    | Information on NUR                                      | 14            
|                           | History and Development of NUR                          | 14            
|                           | Business Overview                                       | 17            
|                           | Organizational Structure                                | 29            
|                           | Property, Plants and Equipment                          | 30            
|                          
|Item 5:                    | Operating and Financial Review and Prospects            | 31            
|                           | Operating Results                                       | 31            
|                           | Liquidity and Capital Resources                         | 45            
|                           | Research and Development, Patents and Licenses          | 48            
|                           | Trend Information                                       | 49            
|                           | Off-Balance Sheet Arrangements                          | 50            
|                           | Contractual Obligations                                 | 51            
|                          
|Item 6:                    | Directors, Senior Management and Employees              | 51            
|                           | Directors and Senior Management                         | 51            
|                           | Compensation of Officers and Directors                  | 54            
|                           | Board Practices                                         | 56            
|                           | Employees                                               | 61            
|                           | Share Ownership                                         | 61            
|                          
|Item 7:                    | Major Shareholders and Related Party Transactions       | 65            
|                           | Major Shareholders                                      | 65            
|                           | Related Party Transactions                              | 66            
|                          
|Item 8:                    | Financial Information                                   | 68            
|                           | Consolidated Statements and Other Financial Information | 68            
|                           | Significant Changes                                     | 71            
|                          



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|          |                                                                              |               
|--------- | ---------------------------------------------------------------------------- | --------------
|
|
|
|
|Item 9:   | The Offer and Listing                                                        | 71            
|          | Stock Price History                                                          | 71            
|          | Markets                                                                      | 72            
|         
|Item 10:  | Additional Information                                                       | 72            
|          | Memorandum of Association and Amended and Restated Articles of Association   | 73            
|          | Material Contracts                                                           | 78            
|          | Exchange Controls                                                            | 82            
|          | Taxation                                                                     | 82            
|          | Documents on Display                                                         | 95            
|Item 11:  | Quantitative and Qualitative Disclosures about Market Risk                   | 96            
|         
|Item 12:  | Description of Securities Other than Equity Securities                       | Not applicable
|         
|Part II  
|         
|Item 13:  | Defaults, Dividend Arrearages and Delinquencies                              | 96            
|         
|Item 14:  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 96            
|         
|Item 15:  | Controls and Procedures                                                      | 97            
|         
|Item 16:  | [Reserved]                                                                   | 97            
|         
|Item 16A: | Audit Committee Financial Expert                                             | 98            
|         
|Item 16B: | Code of Ethics                                                               | 98            
|         
|Item 16C: | Principal Accountant Fees and Services                                       | 98            
|         
|Item 16D: | Exemptions from the Listing Standards for Audit Committees                   | 99            
|         
|Item 16E: | Purchases of Equity Securities by the Company and Affiliated Purchasers      | 99            
|         
|Part III 
|Item 17:  | Financial Statements                                                         | Not applicable
|         
|Item 18:  | Financial Statements                                                         | 100           
|         
|Item 19:  | Exhibits                                                                     | 101           

3

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EXPLANATORY NOTE

The
U.S. GAAP consolidated balance sheets, consolidated statements of operations, changes in
shareholders equity (deficiency), consolidated statements of cash flows for the
years ended December 31, 2003 and 2002 and the consolidated balance sheet as of December
31, 2003, including the applicable notes thereto, contained in Item 18: Financial
Statements of this annual report on Form 20-F have been restated from those
financial statements previously presented as a result of the implementation of a new
revenue recognition policy and a deferred tax valuation with respect to 2003. The
financial information for the years ended December 31, 2001 and 2000 have not been
restated due to the fact that the restatement of these financial statements on an audited
or unaudited restated basis cannot be accomplished without unreasonable effort or expense.
NUR has not amended, and does not intend to amend, its previously filed annual reports on
Form 20-F for the years affected by the restatements that ended prior to December 31,
2004. For this reason, those prior annual reports and consolidated financial statements,
auditors reports and related financial information for the affected years contained
in such reports should no longer be relied upon. For a description of the restatements,
see Item 5.A: Certain Critical Accounting Policies and Note 1(g)
Restatement of financial statements contained in the notes to the audited U.S.
GAAP consolidated financial statements included herein.

FORWARD-LOOKING STATEMENTS

In
addition to historical information, this annual report on Form 20-F contains
forward-looking statements. Some of the statements under Item 3.D: Risk
Factors, Item 5: Operating and Financial Review and Prospects,
Item 4: Information on NUR and elsewhere in this report, constitute
forward-looking statements. These statements relate to future events or other future
financial performance, and are identified by terminology such as may,
will, should, expect, scheduled,
plan, intend, anticipate, believe,
estimate, aim, potential, or continue or the
negative of those terms or other comparable terminology. These forward-looking statements
are subject to certain risks, uncertainties and assumptions about us that could cause
actual results to differ materially from those reflected in the forward-looking
statements. These forward-looking statements are based, among other things, on assumptions
in connection with:

| | the
price and market liquidity of our ordinary shares;
|- | ------------------------------------------------------

| | our
ability to attain necessary working capital;
|- | ------------------------------------------------

| | the
growth of the market for wide format and super wide format digital printing systems;
|- | ----------------------------------------------------------------------------------------

| | the
market demand for our products;
|- | -----------------------------------

| | our
ability to retain key technical and management personnel;
|- | -------------------------------------------------------------

| | our
ability to retain our current suppliers and subcontractors;
|- | ---------------------------------------------------------------

| | the
possibility of future litigation; and
|- | -----------------------------------------

| | our
future performance, sales, gross margins, expenses (including stock-based compensation
expenses) andcost of sales.
|- | ----------------------------------------------------------------------------------------------------------------------

4

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Assumptions
relating to the foregoing involve judgment with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond our
control. In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives or plans will be achieved.
Factors that could cause actual results to differ from our expectations or projections
include the risks and uncertainties relating to our business described in this annual
report under Item 3.D: Risk Factors and Item 5: Operating and Financial
Review and Prospects. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements analysis as of the date
hereof. We undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof, except as required by
applicable law. In addition to the disclosure contained herein, readers should carefully
review any disclosure of risks and uncertainties contained in other documents that we file
from time to time with the Securities and Exchange Commission.

# PART I

# ITEM 1: Identity of
Directors, Senior Management and Advisors

Not
Applicable.

# ITEM 2: Offer Statistics
and Expected Timetable

Not
Applicable.

# ITEM 3: Key Information

Not
Applicable except for Items 3.A and 3.D, which are detailed below.

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

The
U.S. GAAP consolidated balance sheets, consolidated statements of operations, changes in
shareholders equity (deficiency), consolidated statements of cash flows for the
years ended December 31, 2003 and 2002 and the consolidated balance sheet as of December
31, 2003, including the applicable notes thereto, contained in Item 18 
Financial Statements of this annual report on Form 20-F have been restated from
those financial statements previously presented as a result of the implementation of a new
revenue recognition policy and deferred tax valuation with respect to 2003. The financial
information for the years ended December 31, 2001 and 2000 have not been restated due to
the fact that the restatement of these financial statements on an audited or unaudited
restated basis cannot be accomplished without unreasonable effort or expense.

The
following selected consolidated statement of income data for the years ended December 31,
2002, 2003 and 2004, and the selected consolidated balance sheet data as of December 31,
2003 and 2004, have been derived from the audited consolidated financial statements of NUR
Macroprinters Ltd., together with its subsidiaries, as restated. These financial
statements have been prepared in accordance with generally accepted accounting principles
in the United States. The selected consolidated balance sheet data as of December 31, 2002
has been derived from the NURs audited consolidated financial statements not
included in this Form 20-F and have also been prepared in accordance with generally
accepted accounting principles in the United States.

5

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The
following tables present the financial data for NUR together with our subsidiaries NUR
Media Solutions, NUR America, NUR Europe, NUR Shanghai, NUR Asia Pacific, Salsa Digital
Printers, NUR Hungary Trading and Software Licensing Limited Liability Company, NUR DO
Brazil Ltda., Encre Consumables B.V. and NUR Japan. Financial date for Stillachem is
incorporated only with respect to 2002 and the first three months of 2003, and financial
data for NUR Pro Engineering is incorporated only with respect to 2004.

As
indicated in the explanatory note above, the financial data for the years 2002 and 2003
have been restated as a result of the implementation of a new revenue recognition policy
and a deferred tax valuation for 2003. Pursuant to Item 3.A.1 of Form 20-F, selected
financial data as of and for the years ended December 31, 2000 and 2001 have been omitted
because such information cannot be provided on an audited or unaudited restated basis
without unreasonable effort or expense. We believe that preparation of such information
would involve unreasonable effort or expense because (1) certain of NURs offices
have been moved, resulting in significant personnel turnover and (2) certain subsidiaries
that were relevant to the results of operations for those periods are no longer active,
making securing certain financial records extremely difficult.

In
their report regarding our consolidated financial statements for the year ended December
31, 2004, included elsewhere in this report, our independent registered public accounting
firm indicates that there is substantial doubt as to our ability to continue as a going
concern.

The
selected consolidated financial statements set forth below should be read in conjunction
with and are qualified by reference to NURs consolidated financial statements and
the related notes as well as Item 5: Operating and Financial Review and
Prospects included elsewhere in this Form 20-F.

6

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# Consolidated
Statements of Operations 
(in thousands of U.S. Dollars except per share and share data)

|                                                   | Year ended December 31,
|-------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                          |                        
|Sales of printers, related products and services   |                        
|                                                   |                        
|Total revenues                                     |                        
|                                                   |                        
|Cost of revenues:                                  |                        
|Cost of sales of printers and related products     |                        
|Inventory write-off                                |                        
|                                                   |                        
|Total cost of revenues                             |                        
|                                                   |                        
|Gross profit                                       |                        
|                                                   |                        
|Operating expenses:                                |                        
|Research and development                           |                        
|Less royalty-bearing grants                        |                        
|                                                   |                        
|Research and development expenses, net             |                        
|                                                   |                        
|Selling and marketing, net                         |                        
|General and administrative:                        |                        
|Ongoing expenses                                   |                        
|Doubtful debt expenses  resulting from  relocation |                        
|of operations                                      |                        
|Amortization and impairment of goodwill            |                        
|Amortization  and  impairment  of  technology  and |                        
|other intangible assets                            |                        
|Restructuring charges                              |                        
|                                                   |                        
|Total operating expenses                           |                        
|                                                   |                        
|Operating loss                                     |                        
|Financial expenses, net                            |                        
|Other expenses, net                                |                        
|                                                   |                        
|loss before taxes on income                        |                        
|Taxes on income (tax benefit)                      |                        
|                                                   |                        
|Income (loss) after taxes on income                |                        
|Net loss                                           |                        
|                                                   |                        
|Basic net loss per share                           |                        
|                                                   |                        
|Diluted net loss per share                         |                        
|                                                   |                        
|Weighted average number of shares used in          |                        
|computing basic net loss per share                 |                        
|                                                   |                        
|Weighted average number of shares used in          |                        
|computing diluted net loss per share               |                        
|                                                   |                        

|                                        | Consolidated Balance Sheet Data
(in thousands of U.S. Dollars)
At December 31,
|--------------------------------------- | ------------------------------------------------------------------------------
|
|
|
|
|Working capital                         |                                                                               
|Total assets                            |                                                                               
|Total liabilities                       |                                                                               
|Total shareholders' equity (deficiency) |                                                                               

7

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|D. | Risk
Factors
|-- | ------------

Investing
in our securities is very risky. Currently, there is no liquid trading market for our
securities and we cannot guarantee you that a market will develop. You should be able to
bear a complete loss of your investment. To understand the level of risk, you should
carefully consider the following risk factors, as well as the other information in this
annual report.

We
may not have sufficient funds to continue operations after July 2006. We may not be able
to obtain further financing on acceptable terms or at all, in which case we may be
required to significantly curtail one or more of our research or development programs or
to cease operations altogether. As of December 31, 2004 NUR had working capital
deficit of $27.7 million. NURs cash resources may be insufficient to fund its
current level of operations for the next twelve months. We currently have no commitments
for additional public or private financing of debt or equity and cannot assure you that
additional financing will be available on commercially reasonable terms or at all. If we
are unable to raise funds or to generate enough revenues, we will be unable to fund
expenditures on research and development or on production and marketing of our products
that could ultimately improve our financial results. As stated in the independent
registered public accounting firms report regarding our consolidated financial
statements included elsewhere in this annual report, these factors raise substantial doubt
as to our ability to continue as a going concern. NUR believes that the steps it has
recently taken to reduce its operating costs together with the backlog orders and active
sales prospects it is pursuing, will enable NUR to return to profitability and positive
cash-flow. However, there can be no assurance that we will succeed in our efforts to
reduce our operating costs or to increase our revenues, or that we will obtain additional
financing.

Because
our ordinary shares are quoted on the pink sheets and their trading is subject to the
Securities and Exchange Commissions penny stock regulations, the market
liquidity of our ordinary shares is very limited. On May 19, 2005, our ordinary shares
were delisted from the Nasdaq SmallCap Market. The basis of the delisting was our failure
to comply with the minimum stockholders equity requirement for continued listing on
the Nasdaq SmallCap Market. Our ordinary shares are currently quoted on the
over-the-counter market in the Pink Sheets under the symbol
NURM.PK.

As
a result of the removal of our ordinary shares from quotation on the Nasdaq SmallCap
Market, the liquidity of our ordinary shares and the coverage of our ordinary shares by
securities analysts and the media likely will be reduced, which could result in lower
prices for the ordinary shares than might otherwise prevail and larger spreads between the
bid and asked prices for our ordinary shares. Additionally, certain investors will not
purchase securities that are quoted on the pink sheets or the OTC Bulletin Board, which
could materially impair our ability to raise funds through the issuance of our ordinary
shares.

Because
our ordinary shares are removed from quotation on Nasdaq and the trading price of our
ordinary shares is less than $5.00 per share, trading in our ordinary shares is subject to
the requirements of Rule 15g-9 under the Securities Exchange Act of 1934, as amended.
Pursuant to Rule 15g-9, brokers and dealers who recommend such low-priced securities to
persons other than established customers and accredited investors must satisfy special
sales practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchasers
written consent prior to the transaction.

8

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The
Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires
additional disclosure in connection with any trades involving a stock defined as a penny
stock (generally, according to regulations adopted by the Securities and Exchange
Commission, any equity security not traded on an exchange or quoted on Nasdaq or the OTC
Bulletin Board that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of our ordinary shares.

We may face adverse consequences
as a result of the restatement of our financial statements As discussed under Item 5: Operating
and Financial Review and Prospects, we have restated our financial statements for
2002 and 2003 to reflect our revised revenue recognition policy and deferred tax valuation
in 2003. Our previous revenue recognition policy constituted a material weakness in our
internal control over financial reporting. In addition, in our financial statements for
2003 and 2004, our independent registered public accounting firm relied on the auditors of
one of our subsidiaries whose assets constituted 7% and 5% of total consolidated assets in
2003 and 2004, respectively, and whose revenues constituted 15% and 9% of total
consolidated revenues in 2003 and 2004, respectively. That subsidiarys auditors
report for 2003 included a qualification, under the local generally accepted accounting
principles, relating to the opening balance of inventories for the fiscal year 2003. This
inventory value as of December 31, 2002 was at corporate historical prices less then 10%
of the consolidated inventory value of NUR. This inventory value was audited on a
consolidated basis by our independent registered public accounting firm, Kost Forer Gabbay
& Kasierer, a member of Ernst & Young Global, and it was determined that it fairly
stated under the generally accepted accounting principles in the United States. As a
result of the restatement, we may face certain risks and potential adverse consequences
associated with: shareholder litigation, government investigation, increased difficulty or
an inability to secure additional financing; costs associated with addressing any
potential actions or inquiries; and the diversion of our managements attention and
resources. Each of these could have a material adverse effect on our business, prospects
and results of operations.

We
depend on a few key products in a business subject to rapid technological change and any
decline in demand for these products could severely harm our ability to generate
revenues. We depend upon the sale of our principal products  the NUR Fresco
printers, the NUR Tempo printers and the NUR Expedio printers and upon the sale of ink
products. The markets for our products are characterized by rapid changes in technology,
customer preferences and evolving industry standards. Our future financial performance
will depend upon our ability to update our current products and develop and market new
products to keep pace with technological advances in the industry. During 2002, 2003 and
2004, we invested approximately $7.7 million, $6.5 million and $8.6 million, respectively,
in research and development projects. Although we plan to continue to invest in research
and development, our business could seriously suffer if we fail to anticipate or respond
adequately to changes in technology and customer preferences, or if our products are
delayed in their development or introduction. We cannot assure you that we will
successfully develop any new products. If our competitors introduce new products, the
sales of our existing products and our financial results could be negatively affected.

If
we are unable to comply with covenants concerning our bank loans, our lender banks may
demand immediate repayment of the loans and we may not be able to continue our operations.If we do not meet certain covenants provided for in our loan agreements with our
lender banks, we may be required by the banks to immediately repay our debt. In the event
we were to violate our agreements with our lender banks, they will be able to enforce a
lien against all of our assets and we may not be able to continue our operations.

In
June 2005, we amended the financial covenants governing the loan agreements with our lender
banks for the second, third and fourth quarters of 2005. In addition, the banks agreed in
writing to waive the non-performance by NUR of certain financial covenants for all periods
prior to March 31, 2005. However, there can be no assurance that will be able to comply
with the financial or other covenants of the agreements with our lender banks in the
future.

Our
reliance on sole source suppliers for the inkjet printheads for our printers could harm
our ability to meet demand for our products in a timely manner or within budgets. We
currently purchase all of the inkjet printheads used in our NUR Fresco, NUR Ultima, NUR
Tempo and NUR Expedio printers from sole suppliers. If any of these sole suppliers
experience problems that result in production delays, our sales to new customers and
existing customers that rely on our inkjet components to operate their printers could be
delayed. Production delays could result from fire, flood or other casualty, work
stoppages, production problems or other unforeseen circumstances. Although we have not
experienced any major production delays to date, we cannot assure you that such delays
will not occur in the future. Because the success of our business depends on the sale of
our printers, supply problems could have a material adverse effect on our financial
results. In addition, if any of our sole suppliers reduce or change the credit or payment
terms they extend to us, our business and results of operations could also be harmed.

9

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We
rely on subcontractors to help us manufacture our products and if they are unable to
adequately supply us with components and products, we may be unable to deliver our
products to customers on time or without defects.We employ a limited number of
unaffiliated subcontractors to manufacture components for our printers. Because we rely on
subcontractors, however, we cannot be sure that we will be able to maintain an adequate
supply of components or products. Moreover, we cannot be sure that any of the components
we purchase will satisfy our quality standards and be delivered on time. Our business
could suffer if we fail to maintain our relationships with our subcontractors or fail to
develop alternative sources for our printer components. We cannot assure you that we will
be able to develop alternative sources of production for our products.

The
market for our printers is very competitive and if we do not compete effectively, our
operating results could be harmed. The printing equipment industry is extremely
competitive and many of our competitors may have greater management, financial, technical,
manufacturing, marketing, sales, distribution and other resources than we do. We compete
against several companies that market digital printing systems based on electrostatic,
drop-on-demand and continuous drop-on-demand inkjet, and other technologies. Three of our
principal competitors in the wide format digital printing arena are Vutek, Scitex Vision
Ltd. and Gandi Innovations. These companies have introduced products that compete with the
NUR Fresco and NUR Ultima printers, and in certain cases with the NUR Tempo and the NUR
Expedio. In the market for flatbed printers our main competitors are Durst Phototechnik,
Inca Digital Printers, Scitex Vision, Vutek and Gandi. These companies have introduced
products that compete with the NUR Tempo printer. We have also witnessed continued growth
of a local Chinese market where approximately 15 local competitors are developing,
manufacturing and selling inexpensive printers, mainly to the local Chinese market, but
these Chinese manufacturers have also begun penetrating the international market. Our
ability to compete depends on factors both within and outside of our control, including
the performance and acceptance of our current printers and any products we develop in the
future. We also face competition from existing conventional wide format and super wide
format printing methods, including hand painting, screen printing and offset printing. Our
competitors could develop new products, with existing or new technology, that could be
more competitive in our market than our printers. We cannot assure you that we will be
able to compete effectively with any such products.

We
face strong competition in the market for printing supplies. If we do not compete
successfully, our revenues will decline. We compete with independent manufacturers in
the market for printer supplies. In 2002, 2003 and 2004, ink sales accounted for 25.8%,
25.7% and 23.9% of our total revenues, respectively. During 2003, we ceased to sell
substrates, as a result of a highly competitive market and characterized by a large number
of suppliers worldwide. In 2002 and 2003 substrate revenues accounted for 12.3% and 3.4%
of our total sales, respectively. We cannot assure you that we will be able to remain the
exclusive or even principal ink manufacturer for our printers. We also cannot assure you
that we will be able to compete effectively or achieve significant revenues in the ink
business.

10

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Our
products could contain defects, which would reduce sales of those products or result in
claims against us.We develop complex and evolving products. Despite testing by us and
our customers, undetected errors or defects may be found in existing or new products. The
introduction of products with reliability, quality or compatibility problems could result
in reduced revenues, additional costs, increased product returns and difficulty or delays
in collecting accounts receivable. The risk is higher with products still in the
development stage, where full testing or certification is not yet completed. This could
result in, among other things, a delay in recognition or loss of revenues, loss of market
share or failure to achieve market acceptance. We could be subject to material claims by
customers that are not covered by our insurance.

We
are subject to significant legal action and may incur substantial costs related to
pursuing or settling such litigation.We participate in an industry that is subject to
significant product liability and other litigation. Many of these actions involve large
claims and significant defense costs. For a further description of this matter, please see
Item 8.A: Legal Proceedings.

We
depend on our executive officers and other key employees and the loss of their services
could adversely affect our business and results of operations. Our senior management
has undergone significant changes. Our success depends to a significant extent upon the
contributions of key personnel, and especially our executive officers. On April 1, 2003,
Erez Shachar, our former President and chief executive officer resigned his position and
was replaced by David Amir. On October 1, 2003, David Seligman joined NUR as chief
financial officer succeeding Hilel Kremer. During the second and third quarters of 2003,
new managing directors were appointed for NUR Asia Pacific and NUR Europe and the former
managing director of NUR Europe relocated to New Jersey to serve as the President of NUR
America. On December 25, 2003, Roni Zomber joined NUR as vice president of operations
succeeding Michael Dayan. Our business could seriously suffer if one or more of our key
personnel were to leave our company. In addition, we do not have, and do not plan to apply
for, key-man life insurance for any of our key employees. Our future success
will also depend in part on our continuing ability to attract highly qualified employees.
We cannot assure our continued success in attracting or retaining highly qualified
personnel.

If
we are unsuccessful in protecting our proprietary technology through trade secrets,
licenses and patents, our ability to compete effectively may be impaired. We rely on a
combination of trade secrets, licenses, patents and non-disclosure and confidentiality
agreements to establish and protect our proprietary rights in our products and our
intellectual property. We cannot provide any assurance that our existing patents or any
future patents will not be challenged, invalidated, or circumvented, or that our
competitors will not independently develop or patent technologies that are substantially
equivalent or superior to our technology. We cannot be sure that we will receive further
patent protection in Israel, the United States, or elsewhere, for existing or new products
or applications. Even if we do secure further patent protection, we cannot provide any
assurance it will be effective. Also, although we take precautionary measures to protect
our trade secrets, we cannot guarantee that others will not acquire equivalent trade
secrets or steal or replicate our exclusive technology. For example, in some countries,
meaningful patent protection is not available. Third parties may assert infringement
claims against us in the future, however, and the cost of responding to such assertions,
regardless of their validity, could be significant. In addition, such claims could be
found to be valid and result in large judgments against us. Even if such claims are not
valid, the cost to protect our patent rights could be substantial.

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We
may be subject to environmental related liabilities due to our use of hazardous materials
such as methyl ethyl-ketone solvent.We mix the solvent ink used in some of our
printers with a methyl ethyl-ketone solvent. Methyl ethyl-ketone solvent is a hazardous
substance and is subject to various government regulations relating to its transfer,
handling, packaging, use and disposal. We store the ink at warehouses in Europe, the
United States, South East Asia and Israel, and a shipping company ships it at our
direction. We face potential responsibility for problems that may arise when we ship the
ink to customers. We believe that we are in material compliance with all applicable
environmental laws and regulations. If we fail to comply with these laws or an accident
involving our ink waste or methyl ethyl-ketone solvent occurs, however, then our business
and financial results could be harmed.

We
benefit from government grants, tax benefits and other funding from third parties. In the
event these grants and benefits are reduced or if we are required to refund any grants, it
will adversely affect our results of operations and our growth prospects. We benefit
from certain Israeli and Belgian Government programs and tax legislation principally
related to research and development grants and capital investment incentives. Our
operations could be adversely affected if these funding programs and tax benefits are
reduced or eliminated and not replaced with equivalent benefits, or if our ability to meet
the conditions to benefit from such funding programs and tax benefits were significantly
reduced. We cannot assure you that favorable tax legislation will continue in the future
or that the available benefits will not be reduced. In addition, to receive such grants
and tax benefits, we must comply with a number of conditions. If we fail to comply with
these conditions, the grants and tax benefits that we receive could be partially or fully
canceled and we would be forced to refund the amount of the canceled benefits received, in
whole or in part, adjusted for inflation and interest. For example, in February 2005 the
Israeli Office of the Chief Scientist (OCS), which provided us with research
and development grants in the past, initiated administrative proceedings for the
confiscation of certain assets of NUR due to an alleged liability for royalties related to
the sale of equipment aggregating to approximately $0.81 million. Although we believe that
the OCS claim for royalties is without merit, litigating this claim caused us significant
expenses and is time-consuming. For a description of our dispute with the OCS, please see
Item 8.A: Legal Proceedings. During 2004 we completed the transfer of the
research and development activities formerly conducted by NUR Media Solutions, from
Belgium to Israel. In addition, until 2003, NUR supplied substrates for use with our
printers and ink through our wholly owned subsidiary in Belgium, NUR Media Solutions. In
2003 we ceased to sell substrates.

Political
instability in Israel may disrupt important operations and our business. Our
headquarters and research facilities, operations and some of our subcontractors are
located in the State of Israel. Although most of our sales are currently made to customers
outside of Israel, we are nonetheless directly influenced by the political, economic and
military conditions affecting Israel. Our business could be harmed by any major
hostilities involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, or a significant downturn in the economic condition of Israel. The
prospect of peace in the Middle East is uncertain and has deteriorated due to the
continued violent conflicts between Israelis and Palestinians. Furthermore, several
countries restrict business with Israeli companies. We could be adversely affected by
further setbacks to the peace process or by restrictive laws or policies directed toward
Israel or Israeli businesses. In addition, all nonexempt male adult citizens of Israel,
including some of our officers and employees, are obligated to perform military reserve
duty and are subject to being called for active duty under emergency circumstances. While
we have operated effectively under these requirements since our formation, we cannot
predict the full impact of such conditions on us in the future, particularly if emergency
circumstances occur. If many of our employees are called for active duty, our operations
in Israel may be slowed and our business may be harmed.

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You
may have difficulty enforcing U.S. judgments against us in Israel. We are organized
under the laws of Israel and our headquarters are in Israel. Most of our officers and
directors reside outside of the United States. Therefore, you may not be able to enforce
any judgment obtained in the U.S. against us or any of such persons. You may not be able
to enforce civil actions under U.S. securities laws if you file a lawsuit in Israel. In
addition, if a foreign judgment is enforced by an Israeli court, it will be payable in
Israeli currency.

Our
operating results are subject to significant fluctuations from period-to-period. The
results of our operations for any quarter are not necessarily indicative of results to be
expected in future periods. Our operating results have in the past been, and will continue
to be, subject to quarterly fluctuations as a result of factors such as increased
competition in the printing equipment and ink industry, the introduction and market
acceptance of new technologies and standards, changes in general economic conditions and
changes in economic conditions specific to our industry. Further, our revenues may vary
significantly from quarter to quarter as a result of, among other factors, the timing of
new product announcements and releases by our competitors and us. We do not typically have
a material backlog of orders at the beginning of each quarter. We may not learn of shortfalls in sales until
late in, or shortly after the end of, such fiscal period. As a result, our quarterly
earnings may be subject to significant variations.

Our
business is subject to risks from international operations that could increase our
expenses and require increased time and attention of our management. A significant
portion of our business is conducted internationally. Accordingly, our future results
could be materially adversely affected by a variety of uncontrollable and changing factors
including, among others, foreign currency exchange rates, regulatory, political, or
economic conditions in a specific country or region, trade protection measures and other
regulatory requirements, business and government spending patterns, and natural disasters.
Any or all of these factors could have a material adverse impact on our business and
results of operations.

Currency
fluctuations may decrease our earnings. Because we generate revenues and expenses in
various currencies, including the U.S. dollar, the NIS and the Euro, our financial results
are subject to the effects of fluctuations of currency exchange rates. We cannot predict,
however, when exchange or price controls or other restrictions on the conversion of
foreign currencies could impact our business. Currency fluctuations could decrease our
profitability.

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Our
stock price has decreased significantly and may continue to be volatile, which
could adversely affect the market liquidity of our ordinary shares and our ability to
raise additional funds. Our ordinary shares have experienced substantial price
volatility, particularly as a result of variations between our anticipated and actual
financial results, the published expectations of analysts, and announcements by our
competitors and us. The market price for our ordinary shares has had a historical downward
trend from 2000 until 2005. On May 19, 2005, our ordinary shares were delisted from
the Nasdaq SmallCap Market. The basis of the delisting was our failure to comply with the
minimum stockholders equity requirement for continued listing on the Nasdaq SmallCap
Market. Our ordinary shares are currently quoted on the over-the-counter market in the
Pink Sheets under the symbol NURM.PK. In addition, the stock
market has experienced extreme price and volume fluctuations that have negatively affected
the market price of many technology and manufacturing companies, in particular, and that
have often been unrelated to the operating performance of these companies. These factors,
as well as general economic and political conditions, may materially adversely affect the
market price of our ordinary shares in the future. Additionally, volatility or a lack of
positive performance in our stock price may adversely affect our ability to retain key
employees, all of whom have been granted stock options, and negatively affect our ability
to raise funds through both debt and equity, discourage potential customers and partners
from doing business with us, and could result in a material adverse effect on our
business, financial condition, and results of operations.

Provisions
of Israeli law may delay, prevent or make difficult an acquisition of NUR, which could
prevent a change of control and, therefore, depress the price of our shares.Israeli
corporate law regulates mergers, requires tender offers for acquisitions of shares above
specified thresholds, requires special approvals for transactions involving directors,
officers or significant shareholders and regulates other matters that may be relevant to
these types of transactions. Furthermore, Israeli tax considerations may make potential
transactions unappealing to us or to some of our shareholders. These provisions of Israeli
law may delay, prevent or make difficult an acquisition of NUR, which could prevent a
change of control and therefore depress the price of our shares.

# ITEM 4: Information on
NUR

|A. | History
and Development of NUR
|-- | ------------------------------

Our
legal and commercial name is NUR Macroprinters Ltd. The main office is located at 12 Abba
Hillel Silver Street, P.O. Box 1281, Lod 71111, Israel. The telephone number is (011)
972-8-914-5555. NURs registered agent in the United States is CT Corporation System,
1633 Broadway, New York, New York 10019.

NUR
is a leading supplier of wide format and super wide format digital printing systems
worldwide.

NUR
was incorporated as an Israeli corporation on July 29, 1987. On August 1, 1993, the
company changed its name from NUR Advertising Industry 1987 Ltd. to NUR Advanced
Technologies Ltd. and, on November 16, 1997, it again changed its name from NUR Advanced
Technologies Ltd. to NUR Macroprinters Ltd. Our corporate governance is controlled by the
Israeli Companies Law, 1999.

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Our
ordinary shares were traded on the Nasdaq National Market between October 1995 and July
2003. During 2002, our ordinary shares closed for a period of 30 consecutive trading days
below the minimum bid price of $1.00 per share as required for continued listing on the
Nasdaq National Market. Accordingly, in July 2003, we transferred our securities to the
Nasdaq SmallCap Market, whereby we were granted an extension of 180 days to meet the
minimum requirement of $1.00 per share. NUR regained compliance with this requirement in
October 2003. Our ordinary shares were traded on the Nasdaq SmallCap Market between July
2003 and May 2005. On March 24, 2004, we received a compliance notice from the Nasdaq
Stock Market, Inc., stating that we were not in compliance with the continued listing
requirements of the Nasdaq SmallCap Market. In previous years we complied with the listing
requirements since we had stockholders equity of more than $2.5 million. However, as
of December 31, 2003, we had negative stockholders equity of $1.5 million. NUR
provided Nasdaq with a plan to achieve and sustain compliance with the continued listing
requirements and regained compliance during the second quarter of 2004.

On
December 21, 2004, we received a notice from the Nasdaq Listing Qualifications indicating
that our securities will be delisted from the Nasdaq SmallCap Market at the opening of
business on December 31, 2004 due to failure to comply with the minimum $2.5 million
stockholders equity requirement for continued listing set forth in Marketplace Rule
4320(e)(2)(B). NUR requested a hearing to appeal that determination before a Nasdaq
Listing Qualification Panel (the Panel). NUR presented to the Panel its plan
to improve its financial stability and regain compliance with the Nasdaq listing standard.
On April 5, 2005 we received a notice from Nasdaq Listing Qualifications indicating that
pursuant to the hearing before the Panel, the Panel has determined to postpone the
delisting of NURs ordinary shares from trade on the Nasdaq SmallCap Market, and
maintain NURs listing, subject to satisfaction of certain conditions. However, as a
result of our failure to meet the conditions set by the Panel, our ordinary shares were
delisted on May 19, 2005 from the Nasdaq SmallCap Market and are currently quoted in the
over-the-counter market in the Pink Sheets under the symbol
NURM.PK.

Recent
Developments

On
December 29, 2004 we reached an agreement with Inspire Investments Ltd. for the investment
by Inspire of $10 million in NUR. This agreement further contemplated a debt restructuring
agreement with our Israeli lender banks. The consummation of the Inspire investment was
conditioned, among other things, upon Inspires completion of its due diligence
review. In June 2005, Inspire notified us that it had terminated the investment agreement.
As a result, the debt restructuring agreement with our lender banks, dated March 21, 2005,
was terminated.

However,
on June 29, 2005, we entered into agreements with our lender banks that are not related to
the Inspire or any other investment in NUR. These agreements amend the financial covenants
governing the loan agreements with our lender banks for the second, third and fourth
quarters of 2005. In addition, under theses agreements the banks waived the
non-performance by NUR of certain financial covenants for all periods prior to March 31,
2005.

On
January 23, 2005, NUR entered into a Voting Agreement coupled with an irrevocable proxy,
with Dan Purjes. In accordance with conversations between representatives of NUR and
Nasdaq, NUR and Mr. Purjes entered into a Voting Trust Agreement, dated as of March 7,
2005, that amended, superseded and suspended the Voting Agreement. Pursuant to the terms
of the Voting Trust Agreement, NUR granted Dan Purjes a five-year warrant to purchase
3,000,000 ordinary shares at an exercise price of $0.75 per share. As a result of the
delisting of our ordinary shares from the Nasdaq SmallCap Market the Voting Trust
Agreement was automatically terminated and converted into the Voting Agreement.

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In
view of our financial condition, we are currently implementing initiatives to lower
operating expenses in order to focus on preserving the current level of operations and to
slow down growth efforts. These initiatives include elimination of approximately 40
positions, lowering research and development and marketing activities that were aimed at
growth and further monitoring cost and expenditure controls.

Some
of NURs previous significant developments are set forth below.

In
May 2003, we signed an agreement to acquire the remaining 50% of the shares of NUR Pro
Engineering, our subcontractor for the assembly and manufacturing of our printers, from
Ogen Dialogix Ltd., for the price of $0.85 million. The transfer of the shares became
effective during 2004 and NUR Pro Engineering became a wholly owned subsidiary of NUR. For
more information see Item 10.C: Material Contracts. During the third quarter
of 2003, we completed a consolidation process of our global machinery manufacturing
operations into a single large manufacturing facility in Rosh HaAyin, Israel.

On
July 30, 2003, NUR secured a convertible loan commitment from several investors according
to which the investors undertook to provide NUR with a convertible loan in the aggregate
amount of $3.5 million. NURs former chairman and the largest shareholder, Dan
Purjes, provided $1.2 million of the loan. Under the terms of the loan agreement, the loan
was convertible into ordinary shares of NUR at a conversion rate of $0.62 per share. In
consideration for the loan undertaking, NUR paid a cash commitment fee and issued to the
investors warrants to purchase ordinary shares of NUR equal to 15% of the loan at an
exercise price of $0.52 per share exercisable over a five-year period. On December 31,
2003, the investors elected to convert $2 million of the loan into 3,225,805 ordinary
shares of NUR at the conversion price of $0.62 per ordinary share. On March 31, 2004, the
investors elected to convert the remaining $1.5 million of the loan into 2,419,355
ordinary shares at the conversion price of $0.62 per share. NURs former chairman,
former director and the largest shareholder, Dan Purjes, received an aggregate of
1,854,839 ordinary shares and warrants to purchase up to 331,731 ordinary shares. Mr.
Purjes is also a chairman of one of the other investors, Y Securities Management, Ltd.,
which provided $50,000 of the loan and received an aggregate of 80,645 ordinary shares and
warrants to purchase up to 14,423 ordinary shares. Mr. Purjes is also the chairman of X
Securities Ltd., which received placement agent warrants to purchase 111,799 ordinary
shares. David Amir, NURs president and chief executive office, provided $50,000 of
the loan and received an aggregate of 80,645 ordinary shares and warrants to purchase up
to 14,423 ordinary shares.

In
April 2004, we completed a private placement of $2.99 million through the issuance of
2,586,140 of our ordinary shares to several investors at a price of $1.16 per share. The
investors also received warrants to purchase an additional 646,545 ordinary shares at an
exercise price of $1.54 per warrant share, exercisable until March 2009. We also issued
warrants to the placement agent to purchase an aggregate of up to 129,310 ordinary shares
at an exercise price of $1.16 per share, exercisable until March 2009 and paid the
placement agent, Duncan Capital Group, LLC, a cash fee of $142,798. Dan Purjes is the
chairman of one of the investors, X Securities Ltd. that purchased 81,897 ordinary shares
for $95,000 and received warrants to purchase 20,474 ordinary shares.

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During
2004 NUR did not have material capital expenditures or divestitures.

For
a historical view of our financing activities please refer to Item 5: Operating and
Financial Review and Prospects.

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

NUR
Macroprinters Ltd. is a leading supplier of wide format and super wide format digital
printing systems worldwide. We develop, manufacture, sell and service digital color
printers for the printing of large images such as billboards, posters and banners, point
of purchase displays, exhibition and trade show displays as well as decorations and
backdrops for construction scaffolding covers, showrooms, television and film studios,
museums and exhibits. We also supply our customers with inks and solvents for use with our
printers.

NUR
conducts the research and development activities related to printing equipment and ink at
its facility in Lod, Israel. We completed the transfer of the research and development
activities from Belgium to Israel. We have worldwide marketing, sales and service
subsidiaries in Europe, North America, South America and the Asia Pacific region.

We
offer several lines of printers in the wide and super wide format categories.

Our
wide format printers are headed by the NUR Fresco family and the NUR Tempo. In
the super wide category we offer the NUR Expedio. During 2004 we ceased to sell the NUR
Ultima printers. These four families of printers are
sometimes referred to collectively herein as the NUR printers or our
printers.

We
also sell specialized inks for use with our printers. The inks sold by NUR to our
customers for use with the NUR Fresco, the NUR Ultima, the NUR Tempo and the NUR Expedio
printers are resistant to water and ultraviolet rays and are well suited for indoor and
outdoor use without lamination.

We
sell our printers and related products primarily to commercial digital printers, design
and service firms, screen printers, commercial photo labs, outdoor media companies and
trade shops. The NUR printers are installed in more than 700 sites throughout Europe,
North and South America, Africa and Asia.

# Industry Background

The
market for printed applications requiring wide format and super wide format printing has
expanded during the last few years. Wide format and super wide format printing
applications include billboards, flags, posters and banners, special event and trade show
displays, point of purchase displays, fleet graphics, decorations and backdrops. For
example, the retail, automotive, restaurant, travel and gasoline industries use outdoor
advertising to promote their products in numerous locations including roadside billboards
and posters displayed on streets and buildings, as well as the outside of buses, vans,
trucks and trains, so-called vehicular graphics. Wide format and super wide format prints
can also be found in theaters as stage decorations, in museums and exhibitions as
backdrops or displays and on construction sites as building site coverings. Prior to the
introduction of digital printing systems, wide format and super wide format short-run
prints were produced either by hand painting, which is relatively slow and expensive, and
produces lesser quality images, or by screen or offset printing, both of which are
relatively expensive and time consuming processes.

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With
the cost of digital printing expected to decrease and the ability of digital technology
expected to produce shorter runs more economically, we believe that the use of wide format
and super wide format prints, such as those produced by NUR printers, should grow over
time, and that the portion of the market serviced by digital printing will continue to
increase. The ability to produce wide format and super wide format images digitally has
also opened new media opportunities for advertisers, such as mural printing, carpet
printing and new forms of fleet graphics printing. The growth in demand for wide format
and super wide format digital printers is fueled by both the replacement of conventional
print methods and by the development of new printing applications.

Traditional Wide Format
and Super Wide Format Printing Methods

Conventional
methods of wide format and super wide format printing have included hand painting, screen
printing and offset printing. Generally, producing wide format and super wide format color
prints by traditional methods in relatively short runs (i.e., a few copies to a few
hundred copies), depending on the application, has either been relatively slow and
expensive or of limited quality. Because of the inherent limitations of the traditional
wide format and super wide format printing methods, quality wide format and super wide
format prints produced by these methods are generally limited to long runs of identical
prints, designed and prepared well in advance or, in the case of hand painting, to single
print applications. As a result, traditional methods of producing wide format and super
wide format prints have not provided timely and economic solutions for the needs of the
short run printing market.

Hand
Painting. Hand painting involves either the projection of an image onto a substrate,
which is then drawn onto the substrate and subsequently painted by hand, or the spraying
of paint onto material covered by a template that has been cut to the desired shape. The
process of hand painting is an alternative mainly in developing countries where labor
costs are significantly lower and where the significantly lower image quality is tolerated
by the local market.

Screen
Printing. The screen-printing process is distinguished by its ability to print finely
detailed images on practically any surface, including paper, plastics, metals and
three-dimensional surfaces. However, the process requires significant set-up time and
investment in materials before the image can be sent to press. This cost constrains the
minimum number of copies the screen printer can produce economically. As screen-printing
is a highly labor-intensive process, it is best suited for run lengths between 50 to 400
copies. Hence, this market is a clear target in which we believe our digital printers can
be highly competitive.

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Offset
Printing. Offset color printing generally produces very high quality images compared
to hand painting or screen-printing. However, because of the complex steps involved in
offset color printing, each printing job, whether small or large, involves substantial
set-up time and costs. In addition, much like hand painting and screen-printing,
alterations and customizations are not economically feasible unless the entire offset
color printing process is repeated. Another drawback is that the variety of substrate
materials and widths suitable for use with offset printing machinery is limited. In
general, offset color printing is best suited for long print runs.

Wide Format and Super
Wide Format Digital Printing

The
introduction of digital printing is aiding in the transformation of the wide format and
super wide format printing industry by lowering set-up costs, shortening turnaround time
and reducing labor requirements. We believe that the availability of wide format and super
wide format digital printing should lead to an increase in demand for limited runs of
customized and localized advertising campaigns. In addition, we believe that single use
applications, such as the use of banners, displays and backdrops for trade shows, theme
parks, entertainment and special events, should become more popular. We believe that the
market for wide format and super wide format printing should increase as current
applications gain market acceptance and as new applications are developed.

Digital
printing involves the production of hard-copy images and text from digital data that is
either generated on a computer at the printing site or originated by a customer on the
customers computer system. The digital data is then transferred directly from an
electronic pre-press or desktop publishing system to the digital printer. There are
currently several digital printing technologies available, including electrostatic,
drop-on-demand, thermal transfer and continuous inkjet printing.

Electrostatic
Printing. Electrostatic printing is a non-impact printing technique that employs an
array of metal styli, selectively pulsed to a high potential to generate a charged latent
image on dielectric-coated paper, which is then toned to develop the latent image into a
visible image. The achievable printing resolution is up to 400 dots per square inch. The
main drawback of the technology is the need for special and expensive substrates and
toners. This requirement increases the cost of consumables considerably.

Thermal
Transfer Printing. Thermal transfer printing is a contact printing technology that
employs arrays of heated needles and pressure to melt and transfer wax based inks from a
carrier roll onto a restricted variety of substrates. Like electrostatic printing, thermal
transfer printing requires relatively expensive consumables.

Piezo
Continuous Inkjet Printing. Continuous inkjet printing technology involves the
continuous flow of electrically conductive ink within a closed loop that is deflected onto
a specific location on a sheet of paper or other medium. The ink is separated into uniform
micro-drops and the micro-drops are electronically directed to be printed onto a selected
area of the medium. Continuous inkjet printing technology allows for high-speed printing
and produces images with good resolutions sufficient for viewing from distances of beyond
five feet. Continuous inkjet printers also produce multiple copies with consistent color
quality. The cost of equipment using continuous inkjet printing technology is relatively
high in comparison to printers using electrostatic technology. However, the cost of the
output produced with continuous inkjet printers is lower than that of electrostatic
printers.

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Piezo
Drop-On-Demand Inkjet Printing. Drop-on-demand technology involves the intermittent
firing of ink drops when needed on the substrate. It provides high resolution and enables
use of a variety of inks for home, office and industrial use. To address the needs of the
wide format market for higher resolution images for use with shorter viewing distances, we
utilize continuous drop-on-demand technology in the NUR Fresco printers and drop-on-demand
inkjet technology in the NUR Ultima, NUR Tempo and NUR Expedio printers.

Drop-on-demand
technology was primarily developed for office use and is characterized by a relatively
higher resolution and a selected range of substrates. In comparison, continuous inkjet
printing technology was developed mainly for use in industrial applications, and,
therefore, shows a more uniform and stable color output, and the ability to print on a
wide selection of substrates.

We
believe that although the NUR Fresco is not the only continuous drop-on-demand printer
available in the wide format market, its productivity makes it particularly attractive to
screen printers. The NUR Tempo was designed as a digital alternative to screen printing
presses to handle diverse applications, especially short to medium, on-demand print runs
that are not cost effective using traditional screen printing methods. In operation, it is
designed to eliminate the extra steps and costs of finishing  laminating and
cutting/trimming processes  common to other traditional methods of printing graphics
on rigid surfaces. The NUR Expedio is the first of its kind  the first roll-fed
wide-format inkjet production press equipped with UV-curable inks. The UV-curable inks
used by the NUR Expedio presses allow them to print on virtually any media available,
including standard less expensive uncoated substrates that ensure low operating costs and
higher profit margins. With NUR Expedio users can also explore new premium priced printing
applications on specialty media. We believe that the NUR printers have been designed and
engineered to fit the overall needs of their respective wide format and super wide format
printing markets.

NURs
strategy is to:

| |  | strengthen
our position as a world leader in the wide format and super wide format digital printing
markets by supplying the most productive and cost-effective wide format and super wide
format digital printers and totally digitally-based printing solutions for the
out-of-home advertising market;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | enable
the printers to produce digitally a large portion of the graphics currently produced with
screen printing processes;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | be
our customers' vendor of choice for their ink needs;
| | - | -------------------------------------------------------

| |  | enable
our customers to develop new ways to profit from our printing systems; and
| | - | ---------------------------------------------------------------------------------

| |  | provide
our customers with highly responsive and capable support, service and supplies.
| | - | ---------------------------------------------------------------------------------------

# Products

NURs
revenues are derived primarily from the sale and service of the NUR printers and the sale
of inks used with the NUR printers. See Item 5.A: Geographic Breakdown of
Revenues for more information on the breakdown of revenues by category of activity
and into geographic markets.

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Printers

Super Wide Format Digital
Printers

In
July 2002, we commercially released the latest version of the NUR Salsa product line, the
NUR Ultima HiQ. The NUR Ultima printers use piezo drop-on-demand inkjet technology. The
NUR Ultima medium volume production printing printers are designed to provide high levels
of productivity while offering simplified maintenance procedures and improved ease-of-use.
They are also designed to reduce ink consumption, which ensures low operating expenses in
high speed printing modes. The NUR Ultima features apparent print resolution up to 600 dpi
for high quality and are capable of speeds up to up to 76 square meters (or approximately
810 square feet) per hour. They also include productivity enhancing features like true
white-skip, which enables the printer to skip white areas of the printed image, thus
minimizing the net printed area. The NUR Ultima 5000 prints on a variety of substrates 5
meters wide (or approximately 16 feet wide). The NUR Ultima 5000 printers were available
both as an upgrade to existing NUR Salsa series and as a new product delivered from the
manufacturer. During 2004 we ceased to sell the NUR Ultima printers.

In
April 2004 we introduced the NUR Expedio 5000, a 5-meter/16-feet super wide inkjet
production printer that uses UV-curable inks. The machine is the first roll-fed
wide-format inkjet production press equipped with UV-curable inks to reach the market. Its
speed, quality, environmental friendliness, and ability to print on virtually any media
available give this new super wide printer the potential to revolutionize the wide-format
inkjet production printing marketplace. NUR Expedio prints on a variety of media,
including standard less expensive uncoated substrates that ensure low operating costs and
higher profit margins.

NUR
Expedio can print 8-color, 720 dpi, high quality indoor signage for close-up viewing, as
well as billboards and other super wide applications at super-fast speeds up to 150 square
meters (1600 square feet) per hour  making it both productive and exceptionally
versatile. Its multi-roll printing capability even further increases productivity. The
machines use of UV-curable inks eliminates the need for costly solvent disposal
equipment and addresses the requirements of environmental regulations imposed in some
areas. The UV-curable inks also mean the machine will not require expensive, specially
coated substrates for good ink adhesion.

Wide Format Digital
Printers

Our
wide format printers are headed by the NUR Fresco family of wide format printers. The
first NUR Fresco printer was commercially released in February 2000. We believe that the
NUR Fresco printer offers a digital alternative to screen printing for short to medium
length prints, eliminating the high set-up cost associated with films and screen
preparation costs which are the basis of screen printing. The NUR Fresco printers use
piezo continuous drop-on-demand inkjet technology to produce high quality graphics for a
wide range of applications. These include point-of-purchase displays, banners, sheet
billboards, bus shelter graphics, posters, shopping mall displays, airport terminal
displays and many more.

The
NUR Fresco printers print on a wide variety of substrates in roll-to-roll or roll-to-sheet
modes. The 3200 models output in widths up to 3.2 meters (approximately 10 feet).

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In
September 2002, we released the NUR Fresco HiQ 8C models. The NUR Fresco HiQ 8C is based
on the previous model which was modified to print using eight colors mode instead of the
standard 4-color mode. Modifications to the printer included changes to the ink system to
accommodate eight colors and a new switch box that enables fast and easy switching between
the 4-color and the 8-color printing modes. NURs software has also been modified to
support 8-color printing. The NUR Fresco 8C is available both as an upgrade to existing
NUR Fresco 4-color printers and as a new product delivered from the manufacturer.

In
December 2002, we introduced a new mode of operation for the NUR Fresco product line, the
X-Press 100 printing mode. This new 4-color printing mode extends the productivity and
versatility of the NUR Fresco photorealistic production printers to accommodate long print
runs and high volume production environments. Applications suitable for the X-Press 100
printing mode include billboards, outdoor banners and any mesh application such as
building murals, construction covering and wallscapes.

In
April 2004 NUR released the new NUR Fresco II series that replaces the NUR Fresco HiQ
models. It is possible to upgrade former Fresco models to the Fresco II level of
performance. The Fresco II entails improved printing speed, which allows the machine to
print up to 120 square meters per hour, as well as features such as double sided printing
registration that extends the machines versatility and allows its users for even greater
range of applications.

The
NUR Ultima printers were also produced in a wide format, the NUR Ultima HiQ 3200 (3.2
meters or approximately 10 feet wide). During 2004 we ceased to sell the NUR Ultima
printers.

Flatbed Digital Printers

In
September 2003, we commercially released the NUR Tempo flatbed digital printer. The
NUR Tempo uses UV-curable inks that give it the flexibility to print on almost any type of
substrate. These include corrugated board, foam-core paperboard, acrylic sheets, PVC,
polycarbonate, fluted polypropylene, glass, wood and standard rolled media. It also
features a large format table (10 1⁄2 ft. x 6 1⁄2 ft. / 3.2m x 2m) to
accommodate a wide variety of applications and job formats. It can handle both rigid and
rolled substrates with fast and easy changeover between the two for ultimate flexibility.
The printer offers 4 and 8 color printing modes, delivering a combination of high speed
and photo-realistic image quality. The printers fully encapsulated construction
ensures a comfortable working environment. The NUR Tempo is designed to eliminate the
extra steps involved in lamination and cutting/trimming processes common to other
traditional methods of printing graphics on rigid surfaces.

In
April 2004 NUR introduced the Tempo L, a new mid-range, 4-color flatbed printer joining
the NUR Tempo flatbed inkjet press product line. The new NUR Tempo L model is
targeted at customers who wish to enter the UV-curable inks flatbed printing market with a
lower up-front capital investment than is required for the top-of-the-line 8-color NUR
Tempo model, while securing the growth path for future increase in performance. The NUR
Tempo L prints at a speed of up to 50 square meters per hour and is based on the platform
of the top-of-the-line Tempo with the same printing format and robust design. It is
possible to easily upgrade the Tempo L to the Tempo level of performance, thus allowing
for a two-step entry to the flatbed arena. This may expand the potential
market for the Tempo product line.

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In
March 2005 NUR introduced new modular configurations and a host of new options for the NUR
Tempo flatbed inkjet presses which are anticipated to be released to beta testing during
the second calendar quarter of 2005. With the new modular NUR Tempo configurations,
customers that need to print high-quality color directly on a wide variety of wide-format
rigid or flexible substrates can choose from three base configurations of the machine that
print in 4 colors, 6 colors or 8-colors. A roll-to-roll option for printing on roll-fed
media is also available for the machine and enables NUR Tempo to print wide-format
graphics on flexible, roll-fed substrates, as well as rigid media. The new modularity
offers customers the new optional features, including printing with white ink, custom spot
color printing and selective varnish. The new white ink option lets users use white ink as
the basis for overprinting to cover non-white areas of a graphic or to make the backside
of an image printed on transparent media more opaque. White ink can also be used as a spot
color for reproducing the white elements in an image. The use of white ink in the workflow
is familiar to customers that operate screen printing presses in particular. The new spot
color option makes it  easier for NUR Tempo users to match and replicate the colors
specified in corporate ids and logos, which is sometimes difficult to achieve with
standard 4 color ink sets. The new selective varnish option enables the NUR Tempo to apply
varnish to specific areas of a graphic as a way to highlight and add vibrancy to selected
design elements in point-of-purchase and exhibition graphics.

The NUR Printers 
General

The
NUR printers can be operated in a stand-alone mode or in conjunction with pre-press and
desktop publishing systems. When configured with a pre-press system, the pre-press
workstation prepares the digital file containing the specifications for the output to be
produced. The NUR printers require little operator supervision, enabling one operator to
run several machines at once. While an operator must be specifically trained in the
operation of a printer, no special color mixing skills are required unlike conventional
methods such as offset printing.

As
compared to traditional methods of wide format and super wide format printing, the NUR
printers can significantly reduce the set-up costs associated with each print job such as
the skill level of the personnel required and the number of skilled personnel required.
These advantages make wide format and super wide format short-run color printing
significantly more economical than conventional printing methods. Additionally, the
relatively quick turnaround for the printed product enables the NUR printers to produce
more output in a given period, thereby lowering the costs of labor per print.

Unlike
hand painting, and screen or offset printing, the layout can be viewed through the
pre-press workstation prior to printing, permitting last minute fine-tuning. By running a
single copy of the print, corrections of text, enhancements of images, and additions of
color can all be accomplished with minimal time, effort and cost. Additionally, since the
format can readily be changed, the NUR printers allow the end-user to make each print in
the run different, with little time, effort, or additional cost. For example, if so
desired, different languages, graphics and text can be added to each print in a run.

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During
the years ended December 31, 2002, 2003 and 2004, sales of the NUR printers accounted for
approximately 50.4%, 56.8% and 58.3%, respectively, of NURs total consolidated
revenues. Sales of spare parts used in the NUR printers accounted for approximately 11.5%,
14.1% and 15.4% of total sales in the years ended December 31, 2002, 2003 and 2004,
respectively. Currently, the retail prices of the NUR printers generally range from
$185,000 to $550,000 per machine.

Consumables

Inks

The
NUR Tempo and the NUR Expedio printers use specialized UV curable inks designed for the
needs of the wide and super wide format market. The ink is resistant to water and
ultraviolet rays, making it fairly durable and thus well suited for outdoor conditions.
The NUR Tempo, through the utilization of the ink, can print on almost an unlimited
variety of substrates, including corrugated board, foam-core paperboard, acrylic sheets,
PVC, polycarbonate, fluted polypropylene, glass, wood and standard rolled media. The NUR
Expedio prints on a variety of media, including standard less expensive uncoated
substrates that ensure low operating costs and higher profit margins. The ink enables the
output of the NUR Tempo and NUR Expedio to be used both for indoor and outdoor advertising
with out additional lamination. The ink for use with the NUR Tempo and NUR Expedio is
manufactured, exclusively for NUR under the NUR brand name, by SunJet, a division of Sun
Chemical Limited.

The
NUR Fresco and the NUR Ultima printers use specialized all-in-one solvent-pigment based
ink designed for the needs of the wide format market and suited for drop-on-demand
technology printers. This ink is developed to ensure color-real, long lasting, color
consistent, weather resistant prints. The NUR Blueboard printers still in our installed
base use specialized solvent-based pigmented ink designed for the needs of the super wide
format market. The ink is resistant to water and ultraviolet rays, making it fairly
durable and thus well suited for outdoor conditions. The ink for use with the NUR
Blueboard is manufactured, exclusively for NUR under the NUR brand name, by several ink
manufacturers.

Until
September 2003, our ink research and development operations were carried out by our wholly
owned subsidiary NUR Media Solutions in its facilities at Louvain-la-Neuve, Belgium and
our wholly owned subsidiary Salsa Digital Printers in San Antonio, Texas carried out
production of our solvent-based inks. As of September 2003, we manufacture solvent-based
ink in our new plant in Ashkelon, Israel and during 2004 we completed the transfer of the
research and development activities from Belgium to Israel.

During
the years ended December 31, 2002, 2003 and 2004, sales of ink accounted for approximately
25.8%, 25.7% and 23.9%, respectively, of NURs total consolidated revenues.

Substrates

Until
 2003, NUR supplied substrates for use with our printers and ink through our wholly
owned subsidiary in Belgium, NUR Media Solutions. During 2003 we ceased to sell
substrates. As the digital wide format printers have become more widespread, substrates
have become a low margin commodity that is no longer profitable for NUR to resell. We
believe that ceasing the sales of substrates allowed us to more strongly focus on our
proprietary specialty inks.

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# Sales and Marketing

We
distribute and sell our products through the following wholly owned subsidiaries: NUR
Europe (including the Middle East & Africa division), NUR America, NUR Asia Pacific,
NUR DO Brazil Ltda. and NUR Japan.

Our
marketing activities include participating in relevant tradeshows worldwide, advertising
in trade publications, marketing directly to a target base, as well as publishing our own
newsletters, participating in services and industry forums and maintaining an internet
site.

In
addition, we work to develop, market and sell a wide range of advanced inks and clear
coats, all of which are designed to work with our existing range of printers.

The
Israeli Government, through the Fund for the Encouragement of Marketing Activities of the
Ministry of Industry and Trade (the Marketing Fund), awards participation
grants for marketing expenses incurred overseas. During 2004 we did not receive grants
from the Marketing Fund and we are no longer eligible to such grants. NUR is obligated to
pay a royalty of 3-4% of the export added value to the Marketing Fund until 100% of the
grants received in prior years have been repaid. The value of the grants received is linked to the U.S.
dollar. As of December 31, 2004, royalty payments to the Marketing Fund (including amounts
accrued) in respect of the grants we received amounted to approximately $0.78 million.

# Production and Sources
of Supply

During
2004, NUR completed the purchase of the remaining 50% shares of NUR Pro Engineering, from
Ogen Dialogix Ltd. for the price of $0.85  million. After the completion of the transaction, NUR
Pro Engineering became a wholly owned subsidiary of NUR. During the third quarter of 2003,
we completed a consolidation process of our global machinery manufacturing operations into
a single large manufacturing facility in Rosh HaAyin, Israel. During the first
quarter of 2004, we have transferred all manufacturing capabilities from NUR Pro
Engineering to NUR. For more information see Item 10.C: Material Contracts.

As
of September 2004 we increased our production capacity with the opening of an additional
manufacturing facility dedicated to the production of the NUR Expedio. The new 720 square
meters (approximately 7,750 square feet) manufacturing facility is located in Rosh
HaAyin in the same industrial park as are our NUR Fresco and NUR Tempo assembly
lines. Our wide and super wide format printer production area now totals 3,100 square
meters (33,300 square feet).

Full
system integration and acceptance and quality control testing of the printers are
conducted by our employees at the Rosh HaAyin facilities. Product quality control
tests and inspections are performed at various steps throughout the manufacturing process,
and each product is subject to a final test prior to delivery.

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We
believe that, if increases in sales occur, we can expand our production capabilities or
engage subcontractors to carry out certain of the manufacturing or the assembly of our
printers. Most of the components used for the assembly of the NUR printers are available
from several sources; however, the printheads used in each series of printers are
purchased from single suppliers. For additional information see Item 3.D: Risk
Factors.

To
date, we have been able to obtain adequate supplies of the components and raw materials
necessary to produce our printers and have not had any serious problems with our
subcontractors. If our business grows, however, we will need to purchase greater
quantities of components on a timely basis. Any delay in supply could ultimately hurt our
business. The prices of our principal raw materials have not materially been changed
during 2004. NUR is unable to anticipate the volatility of prices of those principal raw
materials in the future. If such prices become volatile it may have an adverse effect on
our results of operations.

As
of September 2003, we manufacture the NUR Fresco and the NUR Ultima inks at our plant in
Ashkelon, Israel. The ink for use with the NUR Blueboard is manufactured, exclusively for
NUR under the NUR brand name, by several ink manufacturers. The ink for use with the NUR
Tempo and NUR Expedio is manufactured, exclusively for NUR under the NUR brand name, by
SunJet, a division of Sun Chemical Limited, a company incorporated in England.

# Service and Support

Installation,
post sale customer support and warranty services of our products are provided by NUR
America, NUR Europe, (including the Middle East & Africa division), NUR Asia Pacific,
NUR DO Brazil Ltda. and NUR Japan. In most cases, our warranty to our direct customers and
distributors covers defects in the NUR printers for a period of six months after
installation. NUR is also committed to maintaining sufficient spare parts and materials
necessary for the operation of the NUR printers for a certain period after cessation of
the manufacturing of such printers.

# Research and Development

NURs
research and development efforts, which currently engage approximately 50 employees, are
focused on developing new products and technologies, enhancing the quality and performance
relative to price of our existing products, reducing manufacturing costs, upgrading and
expanding our product line through the development of additional features and improving
functionality in response to market demand.

After
completion of the transfer of the research and development activities from Belgium to
Israel, we have one research and development center located at our headquarters in Lod,
Israel.

Total
research and development expenses, before royalty bearing grants, were approximately
$9.2million, $7.2 million and $8.0 million in the years ended December 31, 2002,
2003 and 2004, respectively. Total royalty bearing grants amounted to $1.4 in 2002, $0.7
in 2003 and $0 in 2004.

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Research
and development expenses are composed principally of salaries for employees, the hiring of
subcontractors, and depreciation of capital investment in infrastructure for software and
electronic designs and prototype material costs.

In
July 2000, we purchased all of the assets and assumed specified liabilities of Salsa
Digital, Ltd. and related entities, previously one of our competitors in the digital
printing market. The Salsa Digital asset purchase transaction resulted in the recognition
by us of a charge of $4.3 million assigned to in-process research and development.

Between
December 1997 and March 1999, NUR Europe, one of our subsidiaries, received a grant from
local authorities in Belgium for reimbursement of up to 70% of its total research and
development investment, which it carries out in Belgium, up to approximately $0.6 million.
NUR Media Solutions marketed and sold the products developed under the grant, and
reimbursed the Belgian authorities at a rate of 3% of the revenue generated from the sale
of the products. NUR Media Solutions has reimbursed the Belgian authorities for
approximately $0.4 million as of December 31, 2004. NUR Media Solutions has also
established a research and development center in Belgium dedicated to the research and
development of print substrates and inks for use with the NUR printers. During 2003 we
completed the transfer of the ink research and development activities from NUR Media
Solutions in Belgium to the NURs main research and development center in Israel.

Between
May 1999 and April 2000, NUR Media Solutions received a grant from the Belgian authorities
for reimbursement of up to 50% of its total research and development investment, which it
carried out in Belgium, up to approximately $0.3 million. NUR Media Solutions reimburses
the grant at a rate of 6% of the revenue generated from the products developed under the
grant. As of December 31, 2004, NUR Media Solutions paid royalties to the Belgian
authorities in approximately the amount of $0.1 million.

In
addition, between June 2001 and January 2004, NUR Media Solutions received a grant from
the Belgian authorities for reimbursement of up to 50% of its total research and
development investment, which it carried out in Belgium; such number will total up to
approximately $1.9 million. NUR Media Solutions will reimburse the grant at a rate of 4%
of the revenue generated from the products developed under the grant. NUR Media Solutions
received 0.72 million (or $0.86 million) under the grant in January 2003 and
additional 0.67 (or $0.80 million) million in January 2004.

In
the past, NUR  received grants from the Government of Israel, through the Office of the
Chief Scientist (the OCS), for the development of our systems and products.
NUR received approximately $0.3 in the year ended December 31, 2000, but has not received
research and development grants from the OCS in the years ended December 31, 2002,
December 31, 2003 and December 31, 2004. The OCS awards grants of up to 50% (and in
certain circumstances up to 66%) of a projects approved expenditures in return for
royalties. Under the terms of funding, royalties are payable generally at a rate of 2% to
3% on sales of products developed from the funded project and ending when 100% to 150% of
the dollar value of the grant is repaid. During 2001, we made royalty payments of $0.2
million in respect of such grants to the OCS. As of December 31, 2004, we had a contingent
liability to pay $0.8 million in future royalty payments. In February 2005 the OCS
initiated administrative proceedings for the confiscation of certain assets due to an
alleged liability for royalties aggregating to approximately $0.8 million which are
related to the sale of the NUR Fresco printers. On February 21, 2005 we filed a suit with
the District Court in Jerusalem against the OCS for a declaratory judgment denying the
alleged liability for royalties and for the recovery of approximately $0.3 million that
were previously paid to the OCS. For additional information regarding the OCS dispute
please see Item 8.A: Legal Proceedings. The terms of the grants prohibit the
manufacture of products developed with government grants outside of Israel or the transfer
out of Israel of the technology developed pursuant to these grants without the prior
consent of the OCS. These restrictions do not bar exports from Israel of products
developed with such technologies. In addition, the know-how from the research and
development that is used to produce the product may not be transferred to third parties or
out of Israel without the approval of the OCS.

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# Competition

The
principal competitive factors affecting the sales of our products are their performance
relative to price, productivity and throughput, product features and technology, quality,
reliability, cost of operation and consumables, the quality and costs of training, support
and service as well as the flexibility of adapting to customers applications of the
products. Other competitive factors include the ability to provide access to product
financing, NURs reputation and customer confidence in NUR to continually develop new
products and product accessories that will help them maintain and grow their business.

Our
main competitors in the super wide format arena are Vutek, Scitex Vision and Gandi
Innovations. Said companies have introduced products that directly compete with the NUR
Ultima and NUR Expedio super wide format printers. In the wide format market, the main
competitors are Scitex Vision Ltd., Vutek and Gandi
Innovations. These companies have introduced products that compete with the NUR Fresco and
NUR Ultima printers. In the market for flatbed printers utilizing UV curable ink, the main
competitors are Durst Phototechnik, Inca Digital Printers, Scitex Vision and Vutek. These
companies have introduced products that compete with the NUR Tempo. We have also witnessed
continued growth of a local Chinese market where approximately 15 local competitors are
developing, manufacturing and selling inexpensive printers. Recently, these Chinese
manufacturers have begun penetrating the international market.

The
printing industry is large, and many of our competitors may possess greater management,
financial, technical, manufacturing, marketing, sales, distribution and other resources
than those of NUR. As a result, there can be no assurance that competitors will not
develop and market products utilizing new technology that are competitive in price and
performance with the NUR printers, and there can be no assurance that we can compete
effectively with such products.

# Trade Secrets, Patents
and Proprietary Rights

We
currently rely on a combination of trade secrets, licenses and patents, together with
non-disclosure and confidentiality agreements, to establish and protect our proprietary
rights in our products and intellectual property. We cannot provide any assurance that
NURs existing patents or any future patents by NUR will not be challenged,
invalidated, or circumvented, or that our competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our technology. There
can be no assurance that further patent protection will be obtained in Israel, the United
States, or elsewhere, for existing or new products or applications, or that such further
protection, if obtained, will be effective. In some countries, meaningful patent
protection is not available. There can be no assurance that third parties will not assert
infringement claims against NUR in the future, and the cost of responding to such
assertions, regardless of their validity, could be significant. In addition, such claims
may be found to be valid and could result in awards against NUR, which could have a
material effect on our business. As a result, the cost to NUR of protecting our patent
rights could be substantial.

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We
believe that our success is less dependent upon the legal protection afforded by patent
and other proprietary rights than on the knowledge, ability, experience and technological
expertise of our employees and our key suppliers. It is NURs policy to have
employees sign confidentiality agreements, to have selected parties, including key
suppliers, subcontractors and distributors, sign non-competition agreements, and to have
third parties sign non-disclosure agreements. Although NUR takes precautionary measures to
maintain its trade secrets, no assurance can be given that others will not acquire
equivalent trade secrets or otherwise gain access to or disclose NURs proprietary
technology, or that we can meaningfully protect our rights to such proprietary technology
not subject to patent protection.

# Insurance

We
believe that the insurance coverage for our business is in accordance with industry
standards and is adequate and appropriate in light of our businesses and the risks to
which they are subject.

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

NUR
operates through wholly owned subsidiaries that conduct sales and marketing activities in
pre-defined geographical regions.

The
following chart presents, as of July 2005, our corporate structure, the jurisdiction of
incorporation of our significant subsidiaries and the percentage of shares that we hold in
those subsidiaries.

|Subsidiaries                                              | Percentage | Jurisdiction of Incorporation
|--------------------------------------------------------- | ---------- | -----------------------------
|
|
|
|
|                                                          |            |                              
|NUR America, Inc. (NUR America)                           | 100%       | Delaware, United States      
|NUR Asia Pacific Limited (NUR Asia Pacific)               | 100%       | Hong Kong, China             
|NUR DO Brazil Ltda                                        | 100%       | Sao Paulo, Brazil            
|NUR Europe S.A. (NUR Europe)                              | 100%       | Brussels, Belgium            
|NUR Japan Ltd. (formerly Signtech Japan Ltd.) (NUR Japan) | 100%       | Tokyo, Japan                 

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

Israel

NURs
main facilities are located in the high-tech industrial park in Lod, Israel. During 2004
we agreed with the landlord to decrease our leased space by 17,500 square feet leaving NUR
with approximately 42,500 square feet. We use this facility as our headquarters and for
research and development. We have invested a total of approximately $2 million in
improving this facility. The initial five-year lease of the Lod facility, which commenced
November 20, 2000, provides for monthly rent of $57,320. The lease agreement grants NUR an
option to continue the lease term for two consecutive periods of 2.5 years each. Out of
the leased space we sublet to a third party approximately 7,500 square feet. The sublease
expires in September 2005.

NUR
leases approximately 9,117 square feet in Ashkelon, Israel for use as a manufacturing
plant for its solvent based inks. The Ashkelon lease expires in December 2007.

NUR
leases approximately 33,000 square feet in Rosh HaAyin, Israel, for the manufacture
and assembly of the NUR printers. The Rosh HaAyin plant is leased through several
lease agreements the majority of which expire on December 31, 2005. In May 2003, we signed
an agreement to acquire the remaining 50% shares of NUR Pro Engineering. After the
completion of the transaction during 2004, NUR Pro Engineering became a wholly owned
subsidiary of NUR and all the leases of NUR Pro Engineering were assigned to us.

United States

NUR
America leases office space in Newton, Massachusetts consisting of 26,500 square feet that
it had previously used as the subsidiarys headquarters, sales and marketing offices,
and demonstration and service center. The Newton lease expires in January 2011. In 2001,
we consolidated our U.S. operations. NUR America, Inc. in Newton, Massachusetts and Salsa
Digital Printers Ltd. in San Antonio, Texas, were integrated into a single large facility
in San Antonio, Texas. Therefore, NUR America now sublets this space in Newton to a third
party. The sublease expires in January 2011.

Our
North American headquarters and training center are located in Moonachie, New Jersey. The
11,000 square feet facility replaces NURs former facility in San Antonio, Texas. The
new headquarters houses NURs North American sales, marketing, administrative, and
support staff and includes a fully equipped training center and demo site. The New Jersey
lease expires in October 2008. NUR America also leases warehouse and office spaces in
Newark, New Jersey consisting of 7,300 square feet. The Newark lease expires in April
2010.

Europe

NUR
Europe leases approximately 1,970 square feet of office space in Louvain-la-Neuve, Belgium
for use as the subsidiarys headquarters and sales office, demonstration and service
center. The Louvain-la-Neuve lease expires in March 2011. In 2000, NUR Europe expanded its
headquarters space at the above location by an additional 12,355 square feet. The lease
for the additional space expires in March 2012.

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NUR
Media Solutions leased approximately 1,867 square feet office space in Louvain-la-Neuve,
Belgium for use as office space. NUR Europe replaced NUR Media Solutions as lessee and now
occupies this office space as well. The Louvain-la-Neuve lease expires in November 2009.

Asia Pacific

NUR
Asia Pacific leases approximately 3,561 square feet for use as office space in Hong Kong.
The lease for the Hong Kong facility will expire in November 2006.

Japan

NUR
Japan leases approximately 2,173 square feet of office space in Tokyo. The lease expires
in August 2005.

We
believe that our facilities are fully utilized and are adequate to meet our needs.

Environmental Matters

We mix
the solvent ink used in some of our printers with a methyl ethyl-ketone solvent. Methyl
ethyl-ketone solvent is a hazardous substance and is subject to various government
regulations relating to its transfer, handling, packaging, use and disposal. We store the
ink at warehouses in Europe, the United States, South East Asia and Israel, and a shipping
company ships it at our direction. We face potential responsibility for problems that may
arise when we ship the ink to customers. We believe that we are in material compliance
with all applicable environmental laws and regulations. However, in the event we fail to
comply with these laws or an accident involving our ink waste or methyl ethyl-ketone
solvent occurs, however, then our business and financial results could be harmed.

# ITEM 5: Operating and
Financial Review and Prospects

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

# General

Our
discussion and analysis of our financial condition and results of operation are based upon
our consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States. Our operating and financial
review and prospects should be read in conjunction with our financial statements,
accompanying notes thereto and other financial information appearing elsewhere in this
annual report.

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As
of December 31, 2004 NUR had working capital deficit of $27.7 million. NURs cash
resources may be insufficient to fund its current level of operations for the next twelve
months. In their report regarding our consolidated financial statements for the year ended
December 31, 2004, our independent registered public accounting firm, Kost Forer Gabbay
& Kasierer, a member of Ernst & Young Global, indicates that our operating losses,
working capital deficiency and prior non-compliance with certain covenants of loan
agreements with banks, raise substantial doubt as to our ability to continue as a going
concern. NUR believes that the steps it has recently taken to reduce its operating costs
together with the backlog orders and active sales prospects it is pursuing, will enable
NUR to return to profitability and positive cash-flow. However, there can be no assurance
that we will succeed in our efforts to reduce our operating costs or to increase our
revenues, or that we will obtain additional financing.

NUR
is a world leader in the market for the sale of wide format and super wide format digital
printing systems. NUR develops, manufactures, sells and services digital, inkjet color
printing systems for on-demand, production, wide format and super wide format printing.
NUR also supplies inks that are consumable products for the operation of the NUR printers.

NURs
total revenues declined from $84.9 million in the year ended December 31, 2002 to $68.7
million in the year ended December 31, 2003 and increased to $76.7 million in the year
ended December 31, 2004. Our net loss for the years ended December 31, 2002, 2003 and 2004
was $24.4 million, $27.1 million and $22.5 million, respectively.

Our
consolidated balance sheets, consolidated statements of operations, changes in
shareholders equity (deficiency), consolidated statements of cash flows for the
years ended December 31, 2003 and 2002 and the consolidated balance sheet as of December
31, 2003, including the applicable notes thereto, contained in Item 18: Financial
Statements of this annual report on Form 20-F, have been restated from those
financial statements previously presented as a result of the implementation of a new
revenue recognition policy and deferred tax valuation with respect to 2003. The financial
data contained in this Item is reported on a restated basis.

The
financial statements for the years 2002 and 2003 have been restated to reflect revised
accounting treatment of revenue recognition accounting policies to revenues consummated in
2001, 2002 and 2003 and a deferred tax valuation for 2003. We revised our revenue
recognition policy as a result of our observation that our existing policy, which was
adopted in the past, does not meet the actual business practice in recent years. For
further discussion of the revised policy of revenue recognition see Critical
Accounting Policies  Revenue Recognition below. For further discussion of the
deferred tax valuation see Critical Accounting Policies  Deferred Income
Taxes below. The restatement of the financial statements for the year 2002 resulted
in decreasing revenues by $0.3 million and increasing the net loss by $0.3 million. The
restatement of the financial statements for the year 2003 resulted in increasing revenues
by $3.1 million and decreasing the net loss by $0.4 million. For additional information
regarding the impact of the restatement of the financial statements see Note 1(g)
Restatement of financial statements contained in the notes to the audited U.S.
GAAP consolidated financial statements included herein.

Revenues
are derived from the sale of our printers, which include the NUR Fresco printers, the NUR
Ultima printers, the NUR Tempo printers and the NUR Expedio printers, and from the sale of
inks, spare parts and related services.

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Cost
of sales of printers and related materials includes materials, labor, overhead, and other
direct or allocated costs involved in the manufacture, warehousing, delivery, support, and
maintenance of products. Research and development expenses include mainly labor, materials
consumed, expenses by subcontractors, consultants, and others. Research and development
expenses are carried to the statement of operations as incurred. Grants are netted from
research and development costs on an accrual basis as the related expenses are incurred.

The
sales and marketing expenses include the costs associated with the staff of the sales and
marketing force of NUR and our subsidiaries, advertising and promotion of existing and new
products, trade shows, commissions, and other marketing activities. Grants are netted from
sales and marketing costs on an accrual basis as the related expenses are incurred. During
the past couple of years, NUR has invested in the integration of the Salsa Digital and the
NUR worldwide sales and service organizations, in order to strengthen the service and
sales organizations of NUR Europe, (including the Middle East & Africa division), NUR
America, NUR Asia Pacific, NUR DO Brazil and NUR Japan. NUR has also invested in the
consolidation process of its printers and ink manufacturing operations into two
manufacturing plants in Israel and the consolidation of its research and development
capabilities into a single facility in Israel.

Although
we expect the future cost of digital printing to decrease and the ability of digital
technology to produce shorter runs more economically, the existing limitations on
increasing the existing market for digital printed applications, by attracting new market
participants who are currently using traditional methods, result from the relative lower
printing speed currently available by digital printing systems for long runs of identical
prints, and in some aspects, also from the lower quality produced by digital printing
systems.

Our
challenge is to introduce the market with a technological
breakthrough by developing wide format and super wide format digital printing systems
having significant higher printing speeds and a better visual quality, combined with a
cost reduction. If we succeed in that mission we anticipate that digital printing will
gain a much greater market acceptance and as a result of which the market for digital
printing applications would significantly be increased.

The
printing equipment industry is extremely competitive and many of our competitors may have
greater management, financial, technical, manufacturing, marketing, sales, distribution
and other resources than we do. In the past, our competitors in the market digital
printing systems have introduced products that compete with our products. Our ability to
compete depends on factors both within and outside of our control, including the
performance and acceptance of any products we develop in the future. We also face
competition from existing conventional wide format and super wide format printing methods,
including hand painting, screen printing and offset printing. Our competitors could
develop new products, with existing or new technology, that could be more competitive in
our market than our printers. We cannot assure you that we can compete effectively with
any such products.

# Certain Critical
Accounting Policies

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

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These
accounting principles require management to make certain estimates, judgments and
assumptions based upon information available at the time that they are made, historical
experience and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements, as well as the
reported amounts of revenues and expenses during the periods presented. Changes made to
our revenue recognition policy resulted in restatement of our financial statements for the
years 2002 and 2003.

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

NURs
management believes the significant accounting policies which affect managements
more significant judgments and estimates used in the preparation of NURs
consolidated financial statements and which are the most critical to aid in fully
understanding and evaluating the NURs reported financial results include Revenue
Recognition, Allowance for Doubtful Accounts, Inventory Valuation, Technology And Other Intangible Assets, Deferred Income Taxes, Restructuring Charges and
Litigation.

Revenue Recognition

We
generate revenues from the sale of printers, inks and consumable products and from
services to our products. We generate revenues from our products directly to end-users and
indirectly through independent distributors (which are considered end-users).

Revenues
from printer sales are recognized in accordance with Staff Accounting Bulletin No. 104
Revenue Recognition in Financial Statements (SAB. No 104) upon
installation, provided that the collection of the resulting receivable is probable, there
is a persuasive evidence of an arrangement, no significant obligations in respect of
installation remain and the price is fixed or determinable. We do not grant a right of
return.

Revenues
from ink and other consumable products are generally recognized upon shipment assuming all
other criteria have been met.

Revenues
from services are comprised of maintenance and support arrangements, and training, none of
which are considered essential to the functionality of the products.

34

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Revenues
from maintenance and support arrangements are deferred and recognized on a straight-line
basis over the term of the arrangement and revenues from training are recognized at the
time the services are rendered.

Revenues
from trade-in transactions of the NUR printers are recorded at fair value in accordance
with APB 29 Accounting for Non-monetary Transactions and EITF 01-2
Interpretations of APB Opinion No. 29", when the cash consideration involved
with such transactions is material.

Deferred
revenue includes amounts received from customers for which revenue has not yet been
recognized.

We
restated our financial statements for 2002 and 2003 to reflect revised accounting
treatment of revenue recognition accounting policies to revenues consummated in 2001, 2002
and 2003.

Historically,
we recognized revenue on our printers at the time of shipment under the criteria that
evidence of an arrangement existed, the price was fixed, delivery had occurred and
collectibility was assured. We assumed that the existence of those elements was indicative
of the completion of a sale. Based upon our review, it was determined that the actual
business practice in recent years had shown that the decline in market conditions meant
that from the customers point of view acceptance of the risk and title of the
printers occurred only after installation and not at shipment. Consequently, we concluded
that delivery had not in fact occurred upon shipment, and that revenue had been
prematurely recognized in those cases. The restatement adjustments for revenue recognition
resulted in adjustments to revenue, cost of sales, accounts receivable and deferred
revenues.

The
impact of the restatement of the financial statements for the years 2002 and 2003 on
revenues is $(0.3) million and $3.1 million, respectively. For additional information
regarding the impact of the restatement of the financial statements see Note 1(g)
Restatement of financial statements contained in the notes to the audited U.S.
GAAP consolidated financial statements included herein.

Allowance For Doubtful
Accounts

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

On
December 31, 2002, 2003 and 2004, our accounts receivable balance was approximately
$20.8 million, $13.1 million and $11.0 million, respectively.

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Inventory Valuation

At
each balance sheet date, we evaluate our inventory balance for excess quantities and
obsolescence. This evaluation includes analyses of sales levels by product line and
projections of future demand. In addition, we write off inventories that are considered
obsolete. Remaining inventory balances are adjusted to the lower of cost or market value.
If future demand or market conditions are less favorable than our projections, additional
inventory write-downs may be required and would be reflected in cost of sales in the
period the revision is made. During 2002, 2003 and 2004, we recognized inventory
provisions of $1.0, $13.2 and $9.7 million, respectively.

Technology And Other
Intangible Assets

In
June 2001, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under these rules, intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements.

NUR
has conducted an evaluation of its intangible assets as of December 31, 2003 and December
31, 2004, which resulted in an impairment of $0 million and $0.74 million of NURs
intangible assets, respectively. Other intangible assets will continue to be amortized
over their useful lives.

Following
the charge reported in 2004, we are left with an intangible asset in approximately the
amount of $0.5 million related to the purchase of the remaining 50% shares of NUR Pro
Engineering for $0.85 million. Based on an external and independent evaluation, that asset
will be depreciated over a 3-year period as of April 1, 2004. The expert appraised the
intangible asset by evaluating the revenue generating intangible assets according to the
present value of their expected future benefits, and by evaluating assets that are used in
support of revenue generating assets or for which identifiable income streams could not be
identified based on their historical costs.

Deferred Income Taxes

We
record income taxes using the asset and liability approach. Deferred income tax assets and
liabilities are recognized for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and net operating loss and tax credit carry-forwards. Our
financial statements contain fully reserved tax assets, which have arisen as a result of
net operating losses, primarily incurred in 2001, 2002, 2003 and 2004, as well as other
temporary differences between book and tax accounting. Significant management judgment is
required in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax assets. We
have considered future taxable income, prudent and feasible tax planning strategies and
other available evidence in determining the need for a valuation allowance. We evaluate
all of these factors to determine whether it is more likely than not that some portion or
all of the deferred income tax assets will not be realized. As a result of significant net
operating losses incurred in 2001, 2002, 2003 and 2004 and uncertainty as to the extent
and timing of profitability in future periods, we have provided a full valuation
allowances for tax assets. The establishment and amount of the valuation allowance
requires significant estimates and judgment and can materially affect our results of
operations. If the realization of deferred tax assets in the future is considered more
likely than not, an adjustment to the deferred tax assets would increase net income in the
period such determination was made.

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Our
effective tax rate may vary from period to period based on changes in estimated taxable
income or loss, changes to the valuation allowance, changes to state or foreign tax laws,
future expansion into geographic areas with varying country, state and local income tax
rates, deductibility of certain costs and expenses by jurisdiction and as a result of
acquisitions, divestitures and reorganizations.

We
restated our financial statements for 2003 to reflect revised accounting treatment of
deferred tax valuation in 2003. The impact of the restatement of the financial statements
for 2003 on deferred income taxes is $1.0 million.

We
determined, based on our review, that we should have recorded a full valuation allowance
in respect of the remaining deferred tax asset. Our decision was based on our history of
losses in the past three years and our belief that it is more likely than not that the
deferred tax asset will not be realized in the foreseeable future. Accordingly, the
consolidated financial statements for the year ended December 31, 2003 have been restated
from amounts previously reported.

Restructuring Charges

During
the first and fourth quarters of 2001, the second and fourth quarters of 2002 and the
second quarter of 2003 NUR decided to perform a series of strategic initiatives intending
to further reduce costs and increase efficiency. As a result, approximately 60, 72, and 58
employee positions were eliminated by NUR in 2001, 2002 and 2003, respectively. In July
2002, the Financial Accounting Standards Board issued SFAS No. 146 Accounting for
Costs Associated with Exit or Disposal Activities, SFAS No. 146 requires that a
liability for a cost that is associated with an exit activity be recognized only when the
liability is incurred. It supersedes the guidance in EITF 94-3. In SFAS No. 146, an
entitys commitment to a plan does not, by itself, create a present obligation to
other parties that meets the definition of a liability and establishes that fair value is
the objective for the initial measurement of the liability.

In
the event that we redefine our strategic direction and/or difficult economic conditions
continue to prevail, we may be required to implement further restructuring measures. We
are not currently able to determine whether or to what extent such circumstances may
continue or worsen.

Litigation

Management
sets aside liabilities related to litigation brought against us when the amount of the
potential loss can be estimated. In determining whether liabilities should be recorded for
pending litigation claims, NUR assesses the allegations made and the likelihood that it
will successfully defend itself. When NUR believes that it is probable that it will not
prevail in a particular matter, it then estimates the amount of the liability based in
part on advice of legal counsel. As litigation progresses, we continue to assess our
potential liability and revise our estimates accordingly. Such revisions in our estimates
could materially impact our results of operations and financial position. Estimates of
litigation liability affect our accrued liability line item in our consolidated balance
sheet and our general and administrative expense line item in our statement of income.

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# Geographic Breakdown of
Revenues

As
noted above, NUR has decided to change its product revenue recognition policy to reflect
its business and operations. As a result of this change, NUR has restated its financial
statements for the years 2002 and 2003 to reflect this change in revenue recognition
policy.

We
sell our products and services throughout the world. Revenues are generally attributed to
the location of the sale of the product or service to the end-user. The tables below shows
the breakdown of revenues by categories of activities and into geographic markets in the
years ended December 31, 2004, 2003 and 2002. The Service and others category,
below, includes, among other things, revenues generated by the service of the NUR
printers.

|Year Ended December 31,
|-----------------------
|
|
|
|
|Israel                 
|Asia (except China)    
|China                  
|America                
|Europe                 
|Service and others     
|                       
|Total Revenues         
|                       

|Year Ended December 31,
|-----------------------
|
|
|
|
|Printers               
|Ink                    
|Substrates             
|Service and others     
|                       
|Total Revenues         
|                       

# Results of Operations

The
following discussion analyzes our results of operations as restated to give effect to our
amended revenue recognition policy.

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The
following table sets forth for the periods indicated certain line items from NURs
statement of operations as a percentage of NURs revenues:

|                                                     | 2002 | 2003 | 2004
|---------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Revenues                                             |      |      |     
|Cost of sales of printers and related products       |      |      |     
|Inventory charge                                     |      |      |     
|Gross profit                                         |      |      |     
|Research and development                             |      |      |     
|Research and development, net                        |      |      |     
|Selling and marketing, net                           |      |      |     
|General and administrative ongoing expenses          |      |      |     
|Doubtful accounts expenses                           |      |      |     
|Amortization  and  impairment  of goodwill and other |      |     
|intangible assets                                    |      |      |     
|Restructuring  charges                               |      |      |     
|Operating loss                                       |      |      |     
|Financial expenses, net                              |      |      |     
|Other expense, net                                   |      |      |     
|Taxes on income                                      |      |      |     
|Net loss                                             |      |      |     

The
above table presents the financial data for NUR together with our subsidiaries NUR Media
Solutions, NUR America, NUR Europe, NUR Shanghai, NUR Asia Pacific, Salsa Digital
Printers, NUR Hungary Trading and Software Licensing Limited Liability Company, NUR DO
Brazil Ltda., Encre Consumables B.V. and NUR Japan. Financial date for Stillachem is
incorporated only with respect to 2002 and the first three months of 2003, and financial
data for NUR Pro Engineering is incorporated only with respect to 2004.

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

Revenues.
          Revenues were approximately $76.7 million in the year ended December 31, 2004,
          compared to approximately $68.7 million in the year ended December 31, 2003. The
          restatement of the 2003 revenues added approximately $3.1 million as detailed in
          the table below.

The
increase in revenues of approximately $8.0 million was mainly attributable to the
introduction of the NUR Tempo flatbed printer during the fourth quarter of 2003 and the
introduction of the NUR Expedio in 2004. Revenues from equipment increased by 14.7% (or
$5.7 million) from $39.0 million in 2003 to $44.7 million in 2004. The balance of the
increase in revenues is attributable to service of our equipment, which increased as a
result of selling more printers compared to prior periods. The increase in revenues from
service by $2.1 million and from sale of inks and solvents by $0.7 million was offset by a
decrease of $0.6 million attributable to our decision to cease the sales of substrates as
of July 2003.

Analysis
of the geographical breakdown of revenues suggests that the increase of revenues of $8.0
million was mainly attributable to the increased sale efforts in NURs North American
subsidiary, following its reorganization under a new local management and the relocation
of its headquarters from San Antonio, Texas to Moonachie, New Jersey. Revenues from North
and Latin America increased by 54.9% (or $8.3 million) from $18.6 million in 2003 to $26.8
million in 2004. The balance of the increase is attributable to sales in Europe and
Israel, 2.4% (or $0.9 million) and Asia-Pacific, 6.9% (or $0.7 million).

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NUR
expects that revenues during 2005 will not differ materially than those reported for 2004
if it does not succeed in raising additional funds during the third calendar quarter of
2005. If additional funds will be available during the third calendar quarter of 2005
revenues during the second half of 2005 are expected to increase compared to prior
periods.

Cost
of Goods.  The cost of goods was approximately $60.5 million in the year ended
December 31, 2004, compared to $54.5 million in the year ended December 31, 2003. Both
figures reflect  inventory charges of $9.6 million and $13.1 million, respectively.
The restatement of the 2003 financial statements added approximately $1.6 million as
detailed in the table below. The increase in cost of goods sold is attributed to the
increase in revenue and the decrease in gross margins.

The
inventory charge reported in 2004 is mainly associated with our decision to cease the
sales of the NUR Salsa and NUR Ultima printers due to diminished customer demand and in
order to optimize our current and future product lines. The inventory charges include $7.7
million in raw material which will become obsolete as a result of slow usage for this
product line, and $1.9 million in finished goods.

NUR
expects that the cost of goods as a percentage of revenue will not materially change
during 2005 compared to the percentage reported in 2004.

Gross
Profit. The gross profit was approximately $16.2 million in the year ended December
31, 2004, compared to $14.2 million in the year ended December 31, 2003. The gross profit
for the year ended December 31, 2003 as previously reported were approximately $12.8
million. The gross profit as a percentage of revenue has increased from 20.7% in the year
ended December 31, 2003 to 21.9% in the year ended December 31, 2004. The restatement of
revenues added to the year ended December 31, 2003 gross profit of approximately $1.5
million as detailed in the table below.

Excluding
the inventory charge of $9.6 million and $13.1 million, respectively, the gross profit was
approximately $26.4 million in the year ended December 31, 2004, compared to $27.3 million
in the year ended December 31, 2003. Excluding the inventory charge the gross profit as a
percentage of revenue has decreased from 39.8% in the year ended December 31, 2003 to
34.5% in the year ended December 31, 2004. The decrease in gross profit as a percentage of
revenue is mainly attributed to the decline in the average selling prices of our products
which resulted from competition pressure. During the second half of 2004, our average
selling prices of printers has dropped by approximately 15% compared to the average
selling prices we had during the first half of 2004.

We
expect that the gross profit during 2005 will not differ materially than the gross profit
reported for 2004.

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Expenses.
          Research and development costs, net of government grants, were approximately
          $8.0 million in the year ended December 31, 2004, compared to $6.5 million in
          the year ended December 31, 2003. Excluding government grants, the costs were
          approximately $8.0 million in the year ended December 31, 2004, compared to $7.2
          million in the year ended December 31, 2003. The increase in research and
          development costs was attributed to our efforts during 2004 to develop new
          technologies that would extend NURs market within 2-3 years. The
          government grants charges in 2004 are attributable to repayments of grants of
          $0.21 million and an additional accrual of $0.40 million relating to a dispute with the
          Israeli Office of the Chief Scientist (for more information see Item 8.A:
          Legal Proceedings). NUR expects to continue to invest in research and
          development of new products and enhancements of existing products.

Selling
and marketing expenses were approximately $9.5 million in the year ended December 31,
2004, compared to approximately $11.3 million in the year ended December 31, 2003. The
majority of sales and marketing expenses were incurred by our distribution subsidiaries,
NUR Europe (43% of the aggregate amount, or $4.1 million), NUR America (30% of the
aggregate amount, or $2.9 million) and NUR Asia Pacific (17% of the aggregate amount, or
$1.7 million). The balance of sales and marketing expenses of 10% (or $0.8 million) were
incurred by our corporate marketing department. The decrease in expenses is mostly
attributable to organizational changes implemented during 2003, including the appointment
of a local senior management in our subsidiaries in North America and Asia Pacific and a
more focused marketing activities.

General
and administrative expenses were approximately $17.6 million for the year ended December
31, 2004, compared to approximately $19.9 million in the year ended December 31, 2003. The
general and administrative expenses in 2004 include amortization of other intangible
assets in the amount of $0.8 million and other one-time expenses related mostly to a
write-off of bad debts of $6.3 million. The general and administrative expenses in 2003
include amortization of other intangible assets of $0.1 million and restructuring charges
of $2.0 million and other one-time expenses related mostly to a write-off of bad debts of
$6.7 million. Excluding such charges, the general and administrative expenses were
approximately $10.5 million for the year ended December 31, 2004, compared to
approximately $11.1 million in the year ended December 31, 2003.

NUR
expects that selling and marketing expenses and general and administrative expenses during
2005 will be significantly lower than those reported for 2004 if NUR does not succeed in
raising additional funds during the third calendar quarter of 2005, as NUR will implement
its above mentioned plan to reduce expenses. If additional funds will be available during
that period, the selling and marketing expenses as well as the general and administrative
expenses during the second half of 2005 are expected to increase compared to prior
periods.

Financial
expenses, net increased to $3.2 million in the year ended December 31, 2004, compared to
$2.2 million in the year ended December 31, 2003. This increase was mainly due to increase
in interest rates paid by NUR in respect of bank loans taken to finance the cash portion
of the Salsa Digital acquisition in 2000, and foreign exchange gains and amortization of
fair value warrants granted in connection with the convertible loan of October 2003, to
banks and other investors in the amount of $0.5 million.

Taxes.
          Taxes on income were $0.02 million in the year ended December 31, 2004, as
          compared to taxes on income of $1.1 million in the year ended December 31, 2003.
          The charges for 2003 include a charge of a tax asset of $1.0 million.

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We
restated our financial statements for 2003 to reflect a revised accounting treatment of
deferred tax valuation in 2003.

We
determined, based on our review, that we should have recorded a full valuation allowance
in respect of the remaining deferred tax asset. Our decision was based on our history of
losses in the past three years and our belief that it is more likely than not that the
deferred tax asset will not be realized in the foreseeable future. Accordingly, the
consolidated financial statements for the year ended December 31, 2003 have been restated
from amounts previously reported.

We
do not expect to pay taxes on our income during 2005.

Effects
of Restatement. The financial statements for the years 2002 and 2003 have been
restated to reflect revised accounting treatment of revenue recognition accounting
policies to revenues consummated in 2001, 2002 and 2003 and a deferred tax valuation for
2003. The following table summarizes the effect of the restatement on operations data for
2003:

|                                                 | Year ended December 31, 2003
|------------------------------------------------ | ----------------------------
|
|
|
|
|Sales of printers, related products and services |                             
|Cost of sales of printers and related products   |                             
|                                                 |                             
|Total cost of revenues                           |                             
|Gross profit                                     |                             
|Operating loss                                   |                             
|Taxes on income                                  |                             
|Net loss                                         |                             
|                                                 |                             
|Basic and diluted net loss per share             |                             

Year Ended December 31,
2003 Compared with Year Ended December 31, 2002

Revenues.
          Revenues were approximately $68.7 million in the year ended December 31, 2003
          compared to approximately $84.8 million in the year ended December 31, 2002.
          This decrease was mainly attributable to our decision to cease the sales of substrates as of
          the second quarter, a weakened macroeconomic environment, a slowdown in capital
          equipment investments by customers, reduced demand for printing consumables,
          heightened competition in our market and price reductions of our products.

Gross
Profit. Gross profit was approximately $14.2 million in the year ended December 31,
2003 compared to $26.6 million in the year ended December 31, 2002. Excluding inventory
charges of $13.1 million and $1.0 million, respectively, the gross profit was
approximately $27.4 million in the year ended December 31, 2003, compared to $27.5 million
in the year ended December 31, 2002. The decrease in gross profit in 2003 was primarily
due to an inventory charge and a decline in our sales. Excluding the inventory
charges, the gross profit as a percentage of revenue has increased from 33% in the year
ended December 31, 2002 to 39.8% in the year ended December 31, 2003. This increase is
mainly attributed to our decision to cease the sales of substrates as of the second quarter of
2003, which had a negative to no effect on the gross profit. It is also attributed to the
organizational changes implemented during 2003, including consolidating all manufacturing
activities in Israel.

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Expenses.
          Research and development costs, net of government grants, were approximately
          $6.5 million in the year ended December 31, 2003, compared to $7.7 million in
          the year ended December 31, 2002. NUR expects to continue to invest significant
          resources in research and development programs for new products and enhancements
          of existing products.

Selling
and marketing expenses were approximately $11.3 million in the year ended December 31,
2003, compared to approximately $12.7 million in the year ended December 31, 2002. The
majority of sales and marketing expenses were incurred by our distribution subsidiaries,
NUR Europe, NUR America, NUR Shanghai and NUR Asia Pacific. The decrease of expenses is
mostly attributed to organizational changes implemented during 2003, including the
appointment of local senior management in North America and Asia and  more focused marketing
activities. As of December 31, 2002, NUR had received $1.27 million from the Marketing
Fund for selling and marketing expenses. NUR is no longer eligible, however, for support
from the Marketing Fund due to its reaching the maximum allowed export revenues.

General
and administrative expenses were approximately $19.9 million for the year ended December
31, 2003, compared to approximately $29.0 million in the year ended December 31, 2002. The
figures for 2003 include amortization of goodwill and other intangible assets of $0.1
million and restructuring and other one-time expenses of $8.7 million. The figures for
2002 include amortization of goodwill and other intangible assets of $12.9 million and
restructuring and other one-time expenses of $4.2 million during 2002. Without such
charges, general and administrative expenses were approximately $11.1 million for the year
ended December 31, 2003, compared to approximately $11.9 million in the year ended
December 31, 2002. The restructuring efforts in 2003 consisted of a series of strategic
initiatives intended to further reduce costs and increase efficiency and they include
reduction in work force and relocating the US headquarters from San Antonio, Texas to New
Jersey and the Asia Pacific headquarters from China to Hong-Kong.

Financial
expenses, net increased to $2.2 million in the year ended December 31, 2003, compared to
$1.3 million in the year ended December 31, 2002. This increase was mainly due to increase
in interest rates paid by NUR in respect of bank loans taken to finance the cash portion
of the Salsa Digital acquisition in 2000 and foreign exchange gains and an additional
charge in respect of beneficial conversion feature related to conversion of the
convertible loan in the amount of $0.67 million.

Taxes.
          Taxes on income were $1.2 million in the year ended December 31, 2003, as
          compared to taxes on income of $0.03 million in the year ended December 31,
          2002.

Effects
of Restatement. The financial statements for the years 2002 and 2003 have been
restated to reflect revised accounting treatment of revenue recognition accounting
policies to revenues consummated in 2001, 2002 and 2003 and a deferred tax valuation for
2003. The following table summarizes the effect of the restatement on operations data for
2002:

43

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---

|                                                 | Year ended December 31, 2002
|------------------------------------------------ | ----------------------------
|
|
|
|
|Sales of printers, related products and services |                             
|Cost of sales of printers and related products   |                             
|Total cost of revenues                           |                             
|Gross profit                                     |                             
|Operating loss                                   |                             
|Net loss                                         |                             
|                                                 |                             
|Basic and diluted net loss per share             |                             

Subsidiary
Accounting Issues. In our financial statements for 2003, our independent registered
public accounting firm relied on the auditors of one of our subsidiaries whose assets
constituted 7% of total consolidated assets in 2003, and whose revenues constituted 15% of
total consolidated revenues in 2003. That subsidiarys auditors report for 2003
included a qualification, under the local generally accepted accounting principles,
relating to the opening balance of inventories for the fiscal year 2003. This inventory
value as of December 31, 2002 was at corporate historical prices less then 10% of the
consolidated inventory value of NUR. This inventory value was audited on a consolidated
basis by our independent registered public accounting firm, Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, and it was determined that it fairly
stated under the generally accepted accounting principles in the United States.

Impact of Inflation,
Devaluation and Fluctuation of Currencies

Most
of NURs sales are in U.S. dollars and in the Euro. In addition, a substantial
portion of costs are incurred outside Israel in U.S. dollars or paid in U.S. dollars or in
NIS linked to the exchange rate of the U.S. dollar. Costs not effectively denominated in
U.S. dollars are translated to U.S. dollars, when recorded, at prevailing exchange rates
for the purposes of NURs consolidated financial statements, and will increase if the
rate of inflation in Israel exceeds the devaluation of the Israeli currency against the
U.S. dollar or if the timing of such devaluations were to lag considerably behind
inflation. Consequently, NUR is and will be affected by changes in the prevailing NIS/U.S.
dollar exchange rate.

NUR
may also be affected by the U.S. dollar exchange rate to the Euro. Our sales of products
and service in Europe, as well as and purchases of raw materials, are dominated by the
Euro. The existence of a balance of Euro based assets which are mostly derived from sale
of products and service over Euro based liabilities which are mostly related to purchase
of raw materials, exposes us to financial losses deriving from a potential devaluation of
the U.S. dollar against the Euro. In order to reduce such exposure to the Euro we offset
balances of Euro based assets by taking loans in Euro.

The
annual rate of inflation in Israel was 6.7% in the year ended December 31, 2002, decreased
to (1.88)% in the year ended December 31, 2003 and increased to 1.2% in the year ended
December 31, 2004. The NIS was devalued against the U.S. dollar by approximately 7.3% in
2002, by approximately 7.6% in 2003 and by approximately 1.2% in 2004. NUR cannot predict
whether the rate of devaluation of the NIS against the U.S. dollar will continue to exceed
the rate of inflation in the future and whether these conditions will have a material
adverse effect on NUR.

The
representative dollar exchange rate for converting the NIS to dollars, as reported by the
Bank of Israel, was NIS 4.308 for one-dollar U.S. on December 31, 2004. The representative
dollar exchange rate was NIS 4.379 on December 31, 2003 and NIS 4.737 on December 31,
2002.

44

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NURs
transactions and balances denominated in U.S. dollars are presented at their original
amounts. Non-dollar transactions and balances have been measured into U.S. dollars in
accordance with Statement 52 of the FASB. All transaction gains and losses from
remeasurement of monetary balance sheet items denominated in non-dollar currencies are
reflected in the statement of operations as financial income or expenses, as appropriate.
The average exchange rates during the years ended December 31, 2002, 2003 and 2004 were
NIS 4.738, 4.548 and 4.482 for one-dollar U.S., respectively. The exchange rate as of July
1, 2005 was NIS 4.582 for one dollar.

|B. | Liquidity
and Capital Resources
|-- | -------------------------------

NUR
has incurred operating losses during the last three years. NUR may need additional funds
if it seeks to expand its operations or if it does not meet its expected revenues in
future quarters. If NUR is unable to raise funds through public or private financing of
debt or equity, it will be unable to fund expenditures on research and development or the
production and marketing of its products that could ultimately improve its financial
results. We cannot assure you that additional financing will be available on commercially
reasonable terms or at all. We currently have no commitments for additional financing and
are exploring the possibility of raising additional capital. In their report regarding our
consolidated financial statements for the year ended December 31, 2004, our independent
registered public accounting firm, Kost Forer Gabbay & Kasierer, a member of Ernst
& Young Global, indicates that our operating losses, working capital deficiency and
prior non-compliance with certain covenants of loan agreements with our lender banks,
raise substantial doubt as to our ability to continue as a going concern.

NURs
capital requirements and level of expenses depend upon numerous factors, including the
scope and success of our marketing and customer service efforts, and of our research and
development activities, as well as the demand for NURs products and services.

We
have historically funded our operations primarily through the private sale of our equity
securities, commercial bank loans and through cash generated from operations. We invest
our excess cash in cash and cash equivalents that are highly liquid. At December 31, 2004
we had approximately $8.7 million of cash and cash equivalents compared with $10.3 million
at December 31, 2003 and $10.5 million at December 31, 2002.

As
of December 31, 2004, NUR does not have material commitments for capital expenditures.

Operating activities

In the
year ended December 31, 2004, NUR had a net loss of $(22.5) million. Net cash used in
operating activities was approximately $0.7 million. The main changes in NURs
working capital were: (i) a decrease of approximately $4.2 million in trade accounts
receivable and long-term trade accounts receivables; (ii) an increase of approximately
$8.6 million in trade payables; and (iii) an increase of approximately $8.4 million in
inventories.

In
the year ended December 31, 2003, NUR had a net loss of $(27.2) million. Net cash used in
operating activities was approximately $7.9 million. The main changes in NURs
working capital were: (i) a decrease of approximately $9.0 million in trade accounts
receivable and long-term trade accounts receivables; and (ii) a decrease of approximately
$6.7 million in trade payables.

45

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In
the year ended December 31, 2002, NUR had a net loss of $(24.4) million. Net cash used in
operating activities was approximately $4.2 million. The main changes in NURs
working capital were: (i) a decrease of approximately $8.1 million in trade accounts
receivable; and (ii) a decrease of approximately $5.1 million in trade payables.

Investing activities

Net
cash used in investing activities was approximately $1.9 million in the year ended
December 31, 2004, consisting mainly of $2.1 million were attributed to the purchase of
property and equipment. Net cash used in investing activities was approximately $1.1
million in the year ended December 31, 2003, consisting mainly of purchase, net of
property and equipment. Net cash used in investing activities was approximately $2.7
million in the year ended December 31, 2002, consisting mainly of purchase, net of
property and equipment for our production site and our research and development
laboratories.

Financing activities

Net
cash provided by financing activities in the year ended December 31, 2004 was
approximately $1.5 million, deriving primarily from the issuance of shares and warrants in
the aggregate amount of $4.2 million.

On
July 30, 2003, NUR secured a convertible loan commitment from several investors pursuant
to which the investors undertook to provide NUR with a convertible loan in the aggregate
amount of $3.5 million. NURs former chairman and the largest shareholder, Dan
Purjes, provided $1.2 million of the loan. Under the terms of the loan agreement, the loan
was convertible into ordinary shares of NUR at a conversion rate of $0.62 per share. In
consideration for the loan undertaking, NUR paid a cash commitment fee and issued to the
investors warrants to purchase ordinary shares of NUR equal to 15% of the loan at an
exercise price of $0.52 per share exercisable over a five-year period. On December 31,
2003, the investors elected to convert $2 million of the loan into 3,225,805 ordinary
shares of NUR at the conversion price of $0.62 per ordinary share. On March 31, 2004, the
investors elected to convert the remaining $1.5 million of the loan into 2,419,355
ordinary shares at the conversion price of $0.62 per share. NURs former chairman,
former director and the largest shareholder, Dan Purjes, received an aggregate of
1,854,839 ordinary shares and warrants to purchase up to 331,731 ordinary shares. Dan
Purjes is also a chairman of one of the other investors, Y Securities Management, Ltd.,
which provided $50,000 of the loan and received an aggregate of 80,645 ordinary shares and
warrants to purchase up to 14,423 ordinary shares, and the chairman of X Securities Ltd.,
which received placement agent warrants to purchase 111,799 ordinary shares. David Amir,
NURs president and chief executive office, provided $50,000 of the loan and received
an aggregate of 80,645 ordinary shares and warrants to purchase up to 14,423 ordinary
shares.

In
April 2004, we closed a private placement of approximately $2.99 million through the
issuance of 2,586,140 of our ordinary shares to several investors at a price of $1.16 per
share. The investors also received warrants to purchase additional 646,542 ordinary shares
at an exercise price of $1.54 per warrant share, exercisable until March 2009. We also
issued warrants to the placement agent to purchase an aggregate of up to 129,310 ordinary
shares at an exercise price of $1.16 per share, exercisable until March 2009 and paid the
placement agent, Duncan Capital Group, LLC, a cash fee of $142,798. Dan Purjes is the
chairman of one of the investors, X Securities Ltd. that purchased 81,897 ordinary shares
for $95,000 and received warrants to purchase 20,474 ordinary shares.

46

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NUR
maintained long and short-term credit facilities in an aggregate amount of approximately
$44.04 million at December 31, 2004. As of December 31, 2004 NUR has an unutilized
short-term credit in the amount of $1.86 million. NUR maintained long and short-term
credit facilities in an aggregate amount of approximately $45.1 million at December 31,
2003. During 2004, NUR refunded approximately $0.75 million on its long-term loans and
$0.3 million on its short-term loans. During 2003, NUR refunded approximately $1.23
million on its long-term loans. During 2004 NURs long-term loans were linked to the
U.S. dollar and the Euro bearing interest at a rate ranging between 4.5% and 5%.

The
following table shows the outstanding amounts owed to Bank Hapoalim, Bank Leumi and
Discount Bank  as of March 31, 2005:

Outstanding Debt(in thousands of U.S. dollars)

|              | Credit Lines(1) | Long-term loans(2) | Total
|------------- | --------------- | ------------------ | -----
|
|
|
|
|Bank Hapoalim |                 |                    | $    
|Bank Leumi    |                 |                    | $    
|Discount Bank |                 |                    | $    
|              |                 |                    |      
|Total         |                 |                    | $    
|              |                 |                    |      

---

|(1) | The
short-term loans from Bank Hapoalim, Bank Leumi and Bank Discount bear
                    interest rates ranging between LIBOR plus 2.50% and LIBOR plus 2.75%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
long-term loans from Bank Hapoalim and  Bank Leumi   bear
                    interest rates ranging between LIBOR plus 2.25% and LIBOR plus 2.50%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

In
June 2005, we amended the financial covenants governing the loan agreements with our
lender banks for the second, third and fourth quarters of 2005. In addition, the banks
agreed in writing to waive the non-performance by NUR of certain financial covenants for
prior periods ended on March 31, 2005.

Under
the terms of the new agreements with the lender banks NUR agreed to maintain with respect to the
second, third and fourth quarters of 2005:

| | total
revenue of not less than $16 million;
|- | -------------------------------------------

| | operating
loss not greater than $2 million and the operating income shall be greater than zero;
|- | -----------------------------------------------------------------------------------------------

| | inventory
levels of not less than $14 million; and
|- | --------------------------------------------------

| | accounts
receivable of not less than $7 million.
|- | ------------------------------------------------

The
lender banks also agreed that, unless NUR breaches its obligations under the loan
agreements, it shall not be obligated to repay to the lender banks any amounts on account
of principal that are due and payable under the loan agreements until January 1, 2006.

47

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NURs
loans are secured by a floating lien on all assets of NUR, a negative pledge of the assets
of its subsidiaries, NUR America, NUR Europe, NUR Media Solutions, NUR Asia Pacific and
NUR Shanghai and unlimited guarantees by those subsidiaries. The long-term and short-term
loans also contain customary events of default, including the failure to pay interest or
principal, breach of any obligation, representation or warranty made under the loan
agreements, bankruptcy, or a change in control event relating to NUR. The loans are
governed by the laws of the State of Israel.

We
believe that the amendment of the financial covenants that took place in June 2005 will allow
a better alignment between the financial covenants and NURs current business plan. Our
failure to observe covenants when due or satisfy conditions under the loan agreements may
result in the banks accelerating our obligations, which would obligate us to immediately
repay all loans made by the banks plus penalties, and the banks would be entitled to
exercise the remedies available to them under the credit facility, including enforcement
of their lien against all our assets, which may result in a material adverse effect on our
business and financial results. The loans are repayable in January 2006. NUR intends to
negotiate with the lender banks, new payment terms for the year 2006 and thereafter. There
can be no assurance that such agreement can be concluded and in light of the
uncertainties, long-term bank loans are presented in our consolidated financial statements
as short-term bank loans.

As
of December 31, 2004, total current assets of NUR amounted to approximately $45.2 million,
out of which $8.7 million was in cash and cash equivalents, compared with total current
liabilities of approximately $44.7 million. The decrease in current assets is attributable
primarily to the decrease in trade receivables and cash.

As
of December 31, 2003, total current assets of NUR amounted to approximately $50.2 million,
out of which $10.3 million was in cash and cash equivalents, compared with total current
liabilities of approximately $35.6 million. The decrease in current assets is attributable
primarily to the decrease in trade accounts receivable and inventories.

Net
cash provided by financing activities in the year ended December 31, 2003 was
approximately $9.9 million derived mainly from cash generated from short-term loans.

We
have granted several security interests in our assets to various banks and leasing
companies to secure bank credit lines and lease facilities.

During
2002, NUR entered into non-hedging forward and options contracts. On June 26, 2003 the
transactions resulted in a loss of approximately $0.5 million for the year ended December
31, 2003, which is included in the statements of operations as financial expenses.

|C. | Research
and Development, Patents and Licenses
|-- | ----------------------------------------------

NURs
research and development efforts, which currently engage approximately 50 employees, are
focused on developing new products and technologies, enhancing the quality and performance
relative to price of our existing products, reducing manufacturing costs, upgrading and
expanding our product line through the development of additional features, and improving
functionality in response to market demand.

There
is one research and development facility at our headquarters in Lod, Israel.

48

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---

Total research
and development expenses, before royalty bearing grants, were approximately $9.2 million,
$7.2 million and $8.0 million, in the years ended December 31, 2002, 2003 and 2004,
respectively. Research and development expenditures are composed principally of salaries
for employees, the hiring of subcontractors, depreciation of capital investment in
infrastructure for software and electronic designs, and prototype material costs. See
Item 4.B: Research and Development. Royalty bearing grants amounted to $1.4
million in 2002, $0.7 million in 2003 and $0 million in 2004.

|D. | Trend
Information
|-- | -----------------

Losses

Operating
losses during the years ended December 31, 2002, 2003 and 2004 were $22.9, $23.6 and $19.0
million, respectively. Most of our operating losses during the last three years are
attributed to charges and write offs of assets which were purchased during prior years.

Printers Sales

Revenues
from sales of the NUR printers, which comprised 58.3% of NURs total revenues in
2004, increased by $5.7 million in 2004 compared to 2003. This increase was due to
improved operations in North and Latin America and in the Asia Pacific regions. We have
witnessed the expansion of the wide format market to new arenas, such as the UV curable
flatbed and roll-to-roll printers. During 2004, for example, we released several models of
the NUR Tempo flatbed digital printer and the NUR Expedio printer.

We
can offer no assurance that NUR will be able to increase its market share in the wide and
super wide format market or increase its revenues from sales of its printers.

Consumables Sales

During
the past few years, NUR has focused on a recurring revenues strategy for consumables. The
consumable business is composed of two families of products  specialized inks and
specialized substrates. Revenues from consumables increased by 0.8% in 2004 compared to
2003, due to a continued increase in the competitiveness of the consumables market during
2004. NUR is constantly working on development of new products intended to maintain a
differentiation between our consumable products and those of our competitors. In July 2003
we announced our decision to cease the sale of substrates. As the digital wide format
printers have become more widespread, substrates have become a low margin commodity that
is no longer profitable for NUR to resell. We believe that ceasing the sale of substrates
allowed us to more strongly focus on our proprietary specialty inks.

There
can be no assurance that NUR will succeed in maintaining its market share in the
consumables market or increase its revenues from sales of its consumables.

49

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Gross Margins

The
increase in gross margins in 2004 was mainly due the increase in revenues which was mainly
attributable to the introduction of the NUR Tempo flatbed printer during the fourth
quarter of 2003 and the introduction of the NUR Expedio in 2004. The gross margin in 2004
was also influenced by the  inventory charge of $9.6 million and the decline in the
average selling prices of our products which resulted from competitive pressures.

Industry

With
the cost of digital printing expected to decrease and the ability of digital technology
expected to produce shorter runs more economically, we believe that the use of wide format
and super wide format printing, such as that produced by the NUR printers, should grow
over time, and that the portion of the market serviced by digital printing should continue
to increase. The ability to produce wide format and super wide format images digitally has
also opened new media opportunities for advertisers, such as mural printing, carpet
printing, new forms of fleet graphics printing. The growth in demand for wide format
digital printers is fueled both by the replacement of conventional print methods and the
development of new printing applications.

Although
we expect the above trends to continue worldwide, the digital printing penetration rate to
new markets may differ geographically.

During
the second half of 2004 we experienced a decline in our printers average selling
prices by approximately 15%. The decline in selling prices was fueled by a price pressure
introduced by our competitors. We expect that the price pressure will continue to
characterize the wide and super wide format digital printing market. We are devoting
substantial efforts to increase production efficiency and reduce cost of goods in order to
maintain and improve our gross margins. Our ability to successfully compete in those
markets depends on our capability to increase our production efficiency.

|E. | Off-Balance
Sheet Arrangements
|-- | ------------------------------

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

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|F. | Contractual
obligations
|-- | -----------------------

|Payments due by period
(in thousands of U.S. dollars)
|-----------------------------------------------------
|
|
|
|
|Long-Term Rent Obligations(1)                        
|Capital (Finance) Lease obligations(2)               
|Operating Lease Obligations                          
|Purchase Obligations                                 
|Accrued severance pay(3)                             
|Long term loans                                      
|                                                     
|Total                                                
|                                                     

---

|(1) | We
operate from leased premises in Lod, Rosh HaAyin and Ashkelon in
                    Israel. We also lease premises for our subsidiaries activities
in the                     United States, Hong Kong and Japan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | NUR
Europe conducts its activities in Belgium from premises leased by it. Upon
                    completion of payments, NUR Europe will own the premises.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
accrued severance pay is considered to be a contractual obligation of NUR
                    for more than 5 years, as we do not anticipate at present the
dismissal of our                     employees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 6: Directors,
Senior Management and Employees

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

The
executive officers and directors of NUR are as follows:

|Name                       | Age | Position with NUR                        
|-------------------------- | --- | -----------------------------------------
|
|
|
|
|Robert F. Hussey (1)       | 56  | Acting Chairman of the Board of Directors
|Oded Akselrod (1)(2)(3)    | 59  | Director                                 
|Lauri A. Hanover (1)(4)(5) | 45  | Director                                 
|Koby Shtaierman (4)(5)     | 50  | Director                                 
|Tamar Peller(4)            | 38  | Director                                 
|David Amir                 | 47  | President and Chief Executive Officer    
|David Seligman             | 46  | Chief Financial Officer                  

---

|(1) | Member
of NURs Stock Option and Compensation Committee.
|--- | --------------------------------------------------------

|(2) | Member
of the NURs Non-Employee Director Share Option Plan Committee.
|--- | ----------------------------------------------------------------------

|(3) | Elected
to serve on the Board of Directors pursuant to a voting arrangement
                    between Dan Purjes and the Investment Corp. of United Mizrahi Bank
Ltd.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Member
of NURs Audit Committee.
|--- | --------------------------------

|(5) | External
Director.
|--- | ------------------

The
senior managers of NUR are as follows:

|Name            | Age | Position with NUR                          
|--------------- | --- | -------------------------------------------
|
|
|
|
|Kobi Markovitz  | 52  | Chief Technology Officer                   
|Nachum Korman   | 43  | President, NUR America, Inc.               
|Marco Baio      | 42  | Managing Director, NUR Europe S.A.         
|Amir Kleinstern | 44  | Managing Director, NUR Asia Pacific Limited
|Roni Zomber     | 49  | Vice President of Operations               

The
address of each of our executive  officers,  senior managers and directors is c/o NUR
Macroprinters Ltd., 12 Abba Hillel Silver Street, P.O. Box 1281, Lod 71111, Israel.

51

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Robert
F. Hussey has served as acting chairman of the Board of Directors since December 2004
and as a director of the company since September 1997. Mr. Hussey was the chairman of the
Audit Committee until his appointment as acting chairman of the Board. Mr. Hussey is
presently the chief operating officer of HC Wainwright and Company, Inc. From June 1991 to
April 1997, Mr. Hussey served as the president and chief executive officer of Metrovision
of North America. Prior thereto, from 1984 to 1991, Mr. Hussey served as the president,
chief executive officer and director of POP Radio Corp., a company which he helped form.
From 1979 to 1984, Mr. Hussey served as the vice president/management supervisor for Grey
Advertising, Inc. Mr. Hussey is also a director of Digital Lightwave, Inc., Distributed
Power Corp., i2Telecom.Com. and Axcess International Inc., which are all publicly held
companies. Mr. Hussey holds a B.S. degree in Finance from Georgetown University and an MBA
degree in International Finance from George Washington University.

Oded
Akselrodhas served as a director of NUR since February 2002. Mr. Akselrod was the
general manager of the Investment Corp. of United Mizrahi Bank Ltd., a wholly owned
subsidiary of United Mizrahi Bank Ltd. that was merged into United Mizrahi Bank Ltd. on
October 2004. Prior to joining the Investment Corp. of United Mizrahi Bank, from 1994 to
1997, Mr. Akselrod held the position of general manager of Apex-Leumi Partners Ltd. as
well as Investment Advisor of Israel Growth Fund. Prior thereto, from 1991 to 1994, Mr.
Akselrod served as general manager of Leumi & Co. Investment Bankers Ltd. Mr. Akselrod
began his career in various managerial positions in the Bank Leumi Group including member
of the management team of Bank Leumi, deputy head of the international division, head of
the commercial lending department of the banking division, member of all credit committees
at the Bank, assistant to Bank Leumis CEO and head of international lending division
of Bank Leumi Trust Company of New York. Mr. Akselrod holds a Bachelors degree in
Agriculture Economics from Hebrew University, Jerusalem and an M.B.A. degree from Tel Aviv
University. Mr. Akselrod is also a director of Moffet Technology Fund Israel Ltd. which is
a publicly held company.

Lauri
A. Hanoverhas served as an external director of NUR since November 2003. Ms. Hanover
is the chief financial officer of Lumenis Ltd. since August 2004. Prior to that she served
as the corporate vice president and chief financial officer of NICE Systems Ltd. from 2000
to 2004. She previously served as executive vice president and chief financial officer of
Sapiens International Corporation N.V., from 1997 to 2000.  From 1984 to 1997, Ms.
Hanover served in a variety of financial management positions, including corporate
controller at Scitex Corporation Ltd. and from 1981 to 1984 as financial analyst at Philip
Morris Inc. (Altria).  Ms. Hanover holds a Bachelors degree in finance from the
Wharton School of Business and a Bachelor-of-Arts degree from the College of Arts and
Sciences, both of the University of Pennsylvania.  Ms. Hanover also holds a
Masters degree in business administration from New York University.  Ms.
Hanover has served on the Board of Directors of Nova Measuring Instruments Ltd. since
2000. Ms. Hanover qualifies as an external director according to the Companies Law, 1999.

Koby
Shtaiermanhas served as an external director of NUR since November 2003. Mr.
Shtaierman currently serves as vice president marketing and sales of Advanced Vision
Technology Ltd. From 1996 to 1998, Mr. Shtaierman served as vice president of corporate
marketing for Tecnomatix Technologies Ltd. From 1985   to  1995, Mr. Shtaierman served as
marketing director of the input system division of Scitex Corporation. Prior thereto Mr.
Shtaierman held various positions at Israel Aircraft Industries. Mr. Shtaierman holds a
B.Sc. and M.Sc. degrees in Electronics and Computer Engineering from the Technion, Haifa.
Mr. Shtaierman qualifies as an external director according to the Companies Law, 1999.

52

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Tamar
Pellerhas served as a director of NUR since December 2004. Ms. Peller is the
co-founder and CFO of Rubidium Ltd., a high-tech company specializing in digital voice
processing chips and applications. Ms. Peller holds this position since 1997. Prior to
this, Ms. Peller was with the high-tech audit group of the accounting firm of Almagor
& Co. Ms. Peller holds a B.A. in Accounting and Finance from the College of Management
in Tel-Aviv, Israel and she is a certified public accountant. Ms. Peller is a Board Member
and the chairman of the Hi-Tech Committee of the Institute of Certified Public Accountants
in Israel  Tel-Aviv District. Ms. Peller is an external director and chairman of the
audit committee at Lehava, a study fund managed by Bank Hapoalim.

David
Amir has been serving as NURs president and chief executive officer since April
2003. Mr. Amir has also been serving as director of NUR Europe, NUR America, Salsa Digital
Printers, NUR Media Solutions, NUR Asia Pacific and NUR Pro Engineering since April 2003.
Prior to joining NUR, from 1999 to 2002, Mr. Amir served as president and chief executive
officer of Paspartoo Ltd., a high-tech company specializing in virtual to
print technology. Mr. Amir was also the founder of Paspartoo Ltd. Prior thereto,
from 1984 to 1999, Mr. Amir served in various research and development, marketing,
customer support and senior management positions with Scitex Corporation. Mr. Amirs
last position with Scitex Corporation was corporate vice president of business
development. Mr. Amir holds a B.Sc. in Electrical Engineering from the Technion in Haifa.

David
Seligman has served as chief financial officer of NUR since October 2003. Mr. Seligman
has also served as a director of NUR Europe, NUR Media Solutions, NUR America, NUR Asia
Pacific, NUR Japan and Encre Consumables B.V. since October 2003. Prior to joining NUR,
Mr. Seligman served as chief financial officer of RADVISION Ltd. (Nasdaq: RVSN).
Previously, he was chief financial officer for LanOptics Ltd. (Nasdaq: LNOP), a senior
financial analyst for Fidelity Investment Systems in Boston, Massachusetts, and served as
a controller and financial analyst for several hi-tech companies. Mr. Seligman holds a
B.A. degree in political science and geography, and a M.B.A. degree in accounting and
finance, both from Tel-Aviv University.

Kobi
Markovitzserved as chief technology officer since June 2004. Prior to this Mr.
Markovitz served as NURs vice president of technologies since September 1998. Prior
to joining NUR, Mr. Markowitz was founder and CEO of Meital, a private start-up company
specializing in characterizing printing technologies that developed, designed, and
manufactured wide-format, drop-on-demand based digital printers. Meitals assets were
purchased by NUR in 1998 and its technology was integrated into NUR. From 1994 Mr.
Markowitz and Meitals research and development team were strategic partners in
designing the worlds first wide format, drop-on-demand based digital printer at
Idanit.

Nachum
Kormanhas served as president of NUR America, Inc. since June 2003. Mr. Korman joined
NUR in 1999 heading up its NUR Middle East & Africa division, and became vice
president of NUR Europe S.A. in July 2000. Mr. Korman was president of NUR Europe from
January 2001 and until June 2003. Prior to joining NUR Mr. Korman served as operations
director and sales director for the Middle East and Africa at Scitex Corporation.
Previously, Mr. Korman held a sales logistics management role at Scitex Europe S.A.
following his earlier career at Elbit and Optrotec Belgium.

Marco
Baiohas served as managing director of NUR Europe since July 2003. Prior to this Mr.
Baio served as president of Objet Geometries Europe, a company specializing in the
development and marketing of rapid prototyping systems. Previously, Mr. Baio spent 9 years
at Scitex Corporation where he served, at different periods, as managing director of
Scitex Italy and Scitex Germany.

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Amir
Kleinsternhas served as managing director of NUR Asia Pacific since July 2003.
Previously, Mr. Kleinstern had provided consulting services to NUR. Prior to this, Mr.
Kleinstern held the position of vice president of research and development at Paspartoo
Ltd., a company specializing in virtual-to-print technology. Previously, Mr.
Kleinstern spent 12 years with Scitex Corporation, both in Israel and in the U.S., in a
variety of management, marketing and technical positions. Mr. Kleinstern holds a B.Sc. and
a M.Sc. in Mathematics and Computer Sciences from the Ben Gurion University.

Roni
Zomberhas served as vice president of operations since December 2003. Prior to this
Mr. Zomber served as a VP of operations and a member of the management of M-Systems Flash
Disk Pioneers Ltd. (Nasdaq: FLSH). Previously, Mr. Zomber spent 8 years as an executive VP
and a member of the management of Nice Systems Ltd. (Nasdaq: NICE) and prior to this Mr.
Zomber spent 9 years at Scitex as a planning and control manager. Mr. Zomber holds a
practical engineer diploma and a B.A. in Business administration from New England College,
Henniker, New Hampshire.

|B. | Compensation
of Officers and Directors
|-- | --------------------------------------

The
following table sets forth information concerning the total compensation paid with respect
to all of our executive directors and our executive officers as a group in fiscal year
ended December 31, 2004.

|                                          | (in thousands of U.S. dollars)
|----------------------------------------- | ------------------------------
|
|
|
|
|All executive officers and directors as a |                               
|group (nine persons, including 2          |                               
|directors who left the Board during 2004) |                               
|                                          |                               
|Total                                     |                               
|                                          |                               

The
executive officers of NUR received part of the compensation set forth above under
NURs Management by Objectives (MBO) Compensation Plan. The MBO sets annual
individual goals to be achieved by the executive officers throughout the year. The
percentage of individual achievement determines the percent of the MBO bonus paid to each
executive officer. The MBO plan for the benefit of NURs chief executive officer is
administered by the Stock Option and Compensation Committee. The MBO plan for the benefit
of the other executive and senior officers is administered by the Chief Executive Officer.
A portion of the bonus amounts are paid in cash in the year for which they are awarded and
the balance is paid in cash in the year following the financial year for which they are
awarded.

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In
addition, a total of 346,667 options were granted in 2004 to executive officers and
directors to purchase ordinary shares. The 346,667 options granted had a weighted average
exercise price of approximately $0.88 and have expiration dates in 2014. As of June 30,
2005, directors and executive officers of NUR hold options and warrants to purchase an
aggregate of 1,054,424 ordinary shares issuable pursuant to exercise of such securities.
The option and warrants were provided pursuant to the plans and arrangements described
under Item 6.E: Share Ownership.

We
pay our non-employee directors remuneration for their services as directors. This
remuneration includes (other than Robert F. Hussey) an annual payment of $8,000 and
additional payments of approximately $500 per meeting and $250 per committee meeting. The
chairman of the Board and chairman of any committee are also entitled to receive an
additional annual fee of $5,000. Each non-employee director also receives an annual grant
of options to purchase 10,000 ordinary shares under the conditions set forth in NURs
1998 Non-Employee Director Share Option Plan. The directors do not receive any additional
remuneration upon termination of their services as directors.

In
1998, NUR adopted the 1998 Non-Employee Director Share Option Plan to provide for grants
of options to purchase ordinary shares to non-employee directors of NUR. The 1998 Plan, as
amended, is administered by the Non-Employee Director Share Option Committee subject to
Board approval. An aggregate amount of not more than 250,000 ordinary shares is reserved
for grants under the 1998 Plan. The 1998 Plan will expire on December 8, 2008 (10 years
after adoption), unless earlier terminated by the Board.

Under
the 1998 Non-Employee Director Share Option Plan, each non-employee director that served
on the 1998 Grant Date, as defined below, automatically received an option to
purchase 10,000 ordinary shares on such Grant Date and will receive an option to purchase
an additional 10,000 ordinary shares on each subsequent Grant Date thereafter, provided
that he or she is a non-employee director on the Grant Date and has served as such for the
entire period since the last Grant Date. The Grant Date means, with respect to
1998, October 26, 1998, and with respect to each subsequent year, August 1. Directors
first elected or appointed after the 1998 Grant Date, will automatically receive on such
directors first day as a director an option to purchase up to 10,000 ordinary shares
prorated based on the number of full months of service between the prior Grant Date and
the next Grant Date. Each such non-employee director would also automatically receive, as
of each subsequent Grant Date, an option to purchase 10,000 ordinary shares provided he or
she is a non-employee director on the Grant Date and has served for the entire period
since the last Grant Date.

The
exercise price of the option shares under the 1998 Plan is 100% of the fair market of such
ordinary shares at the date of grant of such options. The fair market value means, as of
any date, the average closing bid and sale prices of the ordinary shares for the date in
question as furnished by the National Association of Securities Dealers, Inc. through
Nasdaq or any similar organization if Nasdaq is no longer reporting such information, or
such other market on which the ordinary shares are then traded, or if not then traded, as
determined in good faith (using customary valuation methods) by resolution of the members
of the Board of Directors of NUR, based on the best information available to it. The
exercise price is required to be paid in cash.

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The
term of each option granted under the 1998 Non-Employee Director Share Option Plan is ten
(10) years from the applicable date of grant. All options granted vest immediately upon
the date of grant.

The
options granted would be subject to restrictions on transfer, sale or hypothecation. All
options and ordinary shares issuable upon the exercise of options granted to the
non-employee directors of NUR could be withheld until the payment of taxes due with
respect to the grant and exercise (if any) of such options.

NURs
shareholders approved at the Special Shareholders meeting held on April 17, 2005
remuneration to Mr. Robert F. Hussey, the Acting Chairman of the Board. In his capacity as
Acting Chairman of the Board, Mr. Hussey is to receive during his chairmanship a quarterly
cash fee of $10,000 or a prorate portion for services rendered during part of a calendar
quarter. The foregoing cash fee will replace any other cash compensation or meeting
allowances otherwise due to a Director under NURs policies. In addition, Mr. Hussey
is also entitled during his chairmanship to a quarterly grant of options to purchase 2,500
ordinary shares, or a prorate portion for services rendered during part of a calendar
quarter. The quarterly grants will be made on the first business day following the last
month of each calendar quarter. The options will be fully vested and exercisable
immediately upon their grant and the exercise price per ordinary share shall be the
closing price of the ordinary shares known on the last trading day of the calendar quarter
for which the options are being granted. The grants described in this paragraph are in
addition to any grants under the 1998 Stock Option Plan for Non-Employee Directors.

NURs
shareholders approved at the Annual Shareholders meeting held on February 12, 2002 a Terms
of Service Agreement with Dan Purjes effective as of January 1, 2002. In his capacity as
chairman of the Board, Dan Purjes received an annual fee of $125,000 which was paid in
ordinary shares to Rockwood Group LLC, a company wholly owned by Dan Purjes or to Dan
Purjes. The fee was paid quarterly, at the end of each quarter, by way of issuing ordinary
shares valued at $31,250. Such annual fee was in lieu of any and all payments, which were
due to Dan Purjes in his capacity as a director, chairman of the Board, and a member of
any committees of the Board, including the right to receive options to purchase ordinary
shares in accordance with NURs 1998 Share Option Plan for Non-Employee Directors. On
December 21, 2004 Dan Purjes resigned from the Board of Directors and the Terms of
Services Agreement was automatically terminated.

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

Terms of Directors

The
Board currently consists of five members, including two external directors. Unless
otherwise prescribed by resolution, the Board shall consist of not less than four (4) nor
more than twelve (12) directors. The members of the Board are elected annually at
NURs annual shareholders meeting and remain in office until the next annual
shareholders meeting, unless the director has previously resigned, vacated his
office, or was removed in accordance with NURs Amended and Restated Articles of
Association. The previous Annual Meeting was held on October 27, 2004. In addition, the
Board may elect additional members to the Board. The members of the Board do not receive
any additional remuneration upon termination of their services as directors.

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External Directors

We
are subject to the provisions of the Israeli Companies Law, 1999 which requires that we
have at least two external directors. Under a recent amendment to the Companies Law, at
least one of the external directors is required to have Financial Expertise
and the other external directors are required to have Professional Expertise.
These requirements are subject to regulations to be promulgated in which the terms
Financial Expertise and Professional Expertise would be defined.
This recent amendment does not apply to external directors who were appointed before March
17, 2005 (such as our external directors).

Under
the Companies Law, a person may not be appointed as an external director if he or his
relative, partner, employer or any entity under his control has or had during the two
years preceding the date of appointment any affiliation with the company, any entity
controlling the company or any entity controlled by the company or by this controlling
entity. The term affiliation includes: an employment relationship, a business or
professional relationship maintained on a regular basis, control, and service as an office
holder. No person can serve as an external director if the persons position or other
business creates, or may create, conflicts of interest with the persons
responsibilities as an external director. Until the lapse of two years from termination of
office, a company may not engage an external director to serve as an office holder and
cannot employ or receive services from that person, either directly or indirectly,
including through a corporation controlled by that person.

Under
the Companies Law, external directors must be elected by a majority vote at a
shareholders meeting, provided that either: (1) the majority of shares voted at the
meeting, including at least one-third of the shares of non-controlling shareholders voted
at the meeting, vote in favor of the election; or (2) the total number of shares voted
against the election of the external director does not exceed one percent of the aggregate
voting rights in the company. The initial term of an external director is three years,
which term may be extended for an additional three years. Each committee of a
companys board of directors must include at least one external director, and all
external directors must serve on the audit committee. NURs external directors are
currently Lauri A. Hanover and Koby Shtaierman.

Alternate Directors

The
Amended and Restated Articles of Association provide that, subject to the Boards
approval, a director may appoint an individual, by written notice to NUR, to serve as an
alternate director. The following persons may not be appointed nor serve as an alternate
director: (i) a person not qualified to be appointed as a director, (ii) an actual
director, or (iii) another alternate director. Any alternate director shall have all of
the rights and obligations of the director appointing him or her, except the power to
appoint an alternate (unless the instrument appointing him or her expressly provides
otherwise). The alternate director may not act at any meeting at which the director
appointing him or her is present. Unless the appointing director limits the time period or
scope of any such appointment, such appointment is effective for all purposes and for an
indefinite time, but will expire upon the expiration of the appointing directors
term. There are currently no alternate directors.

57

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Approval of Certain
Transactions Under the Israeli Companies Law

The
Israeli Companies Law, 1999 codifies the duty of care and fiduciary duties which an Office
Holder has to NUR. An Office Holder is defined under the Israeli Companies Law
as a director, general manager, chief business manager, vice general manager, other
manager directly subordinate to the general manager and any other person assuming the
responsibilities of any of the foregoing positions without regard to such persons
title. The duty of care requires an office holder to act at a level of care that a
reasonable office holder in the same position would employ under the same circumstances.
This includes the duty to utilize reasonable means to obtain (i) information regarding the
appropriateness of a given action brought for his or her approval or performed by the
Office Holder by virtue of his or her position and (ii) all other information of
importance pertaining to the foregoing actions. The duty of loyalty includes avoiding any
conflict of interest between the Office Holders position in the company and his or
her personal affairs, avoiding any competition with the company, avoiding exploiting any
business opportunity of the company in order to receive personal gain for the Office
Holder or others, and disclosing to the company any information or documents relating to
the companys affairs which the Office Holder has received due to his or her position
as such. Each person identified as a director or executive officer in the first table in
the section is an Office Holder.

The
Israeli Companies Law requires that an Office Holder promptly disclose any personal
interest that he or she may have and all related material information known to him or her,
in connection with any existing or proposed transaction by us. In addition, if the
transaction is an extraordinary transaction, that is, a transaction other than in the
ordinary course of business, other than on market terms, or likely to have a material
impact on the companys profitability, assets or liabilities, the Office Holder must
also disclose any personal interest held by the Office Holders spouse, siblings,
parents, grandparents, descendants, spouses descendants and the spouses of any of
the foregoing, or by any corporation in which the Office Holder or a relative is a 5% or
greater shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. Some transactions, actions and
arrangements involving an Office Holder (or a third party in which an Office Holder has an
interest) must be approved by the board of directors or as otherwise provided for in a
companys articles of association, as not being adverse to the companys
interest. In some cases, such a transaction must be approved by the audit committee and by
the board of directors itself (with further shareholder approval required in the case of
extraordinary transactions). An Office Holder who has a personal interest in a matter,
which is considered at a meeting of the board of directors or the audit committee, may not
be present during the board of directors or audit committee discussions and may not vote
on this matter, unless the majority of the members of the board or the audit committee
have a personal interest, as the case may be, in which case such transaction will also
require the approval of shareholders.

# Committees of the Board
of Directors

Audit Committee

The
Audit Committee must be composed of members of the Board who are not employees of NUR and
the external directors. In addition, the majority of members of the Audit Committee may
not be holders, directly or indirectly, through family members, of more than five percent
of the ordinary shares.

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NURs
Audit Committee, acting pursuant to a written charter, currently consists of Lauri A.
Hanover, Koby Shtaierman and Tamar Peller. Approval by the Audit Committee and the Board
is required for (i) proposed transactions to which NUR intends to be a party in which an
Office Holder has a direct or indirect personal interest, (ii) actions or arrangements
which may otherwise be deemed to constitute a breach of fiduciary duty or of the duty of
care of an Office Holder to NUR, (iii) arrangements with directors as to the terms of
office or compensation, (iv) indemnification of Office Holders, and (v) compensation and
scope of work of the independent auditor. Arrangements with directors as to the terms of
their service or compensation also require shareholder approval. All arrangements as to
compensation of Office Holders who are not directors require approval of the Board. In
certain circumstances, the matters referred to in (i), (ii), and (iv) may also require
shareholder approval.

Office
Holders (including directors) who have a personal interest in a matter which is considered
at a meeting of the Board or the Audit Committee may not be present at such meeting, may
not participate in the discussion, and may not vote on any such matter.

The
Audit Committee provides assistance to the Board of Directors in fulfilling its legal and
fiduciary obligations in matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting practices and
systems of internal accounting controls. The Audit Committee also oversees the audit
efforts of our independent accountants and takes those actions as it deems necessary to
satisfy itself that the accountants are independent of management. Under the Companies
Law, the Audit Committee also is required to monitor deficiencies in the administration of
a company, including by consulting with the internal auditor, and to review and approve
related party transactions.

The
requirements of the Nasdaq Stock Market, Inc. provide that the Audit Committee reports,
among other things, that it has reviewed and discussed the consolidated financial
statements for the year ended December 31, 2004 with the management of NUR.

The
Audit Committee has discussed with the independent registered public accounting firm the
matters covered by Statement on Auditing Standards No. 61, as well as their independence, and was satisfied as to the independent registered
public accounting firms compliance with said standards.

Stock Option and
Compensation Committee

In
March 1998, NUR established a Stock Option and Compensation Committee to administer
NURs stock option plans, other than the 1998 Non-Employee Director Share Option
Plan. The Stock Option and Compensation Committee is charged with administering and
overseeing the allocation and distribution of stock options under the approved stock
option plans of NUR and approval of the NURs executive officers annual
compensation. The Companies Law, 1999 provides that the Board is entitled to delegate to
Board committees its power, among other things, to allocate shares or securities
convertible into shares of NUR relating to employees incentive plans, and employment or
salary agreements between NUR and its employees, provided, that any such grant is subject
to a detailed plan approved by the Board. The Board is also entitled to delegate to the
general manager or person recommended by the general manager the Boards authority to
issue ordinary shares issuable upon exercise or conversion of NURs securities. The
Stock Option and Compensation Committee is presently composed of three members: Oded
Akselrod, Lauri A. Hanover and Robert F. Hussey.

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Non-Employee Director
Share Option Plan Committee

In
February 1999, NUR established a committee to administer the NURs 1998 Non-Employee
Director Share Option Plan (the NEDSOP Committee). The NEDSOP Committee is
charged with administering and overseeing the allocation and distribution of stock options
under the 1998 Non-Employee Director Share Option Plan. The Israeli Companies Law, 1999
provides that the Board is not entitled to delegate to Board committees its power, among
other things, to allocate shares or securities convertible into shares of NUR, except for
allocation of shares or securities convertible into shares of NUR relating to employees
incentive plans, and employment or salary agreements between NUR and its employees.
Accordingly, the NEDSOP Committee recommendations are subject to the Boards
approval.

# Indemnification and
Exculpation of Executive Officers and Directors

At
the Annual Shareholders meeting held on February 12, 2002, NURs shareholders
authorized it to enter into indemnification agreements with each of its current and future
directors. The shareholders of NUR further authorized certain amendments to the
indemnification agreements at the Annual Shareholders meeting held on November 18, 2003.
According to the terms of the indemnification agreements, as amended, NUR shall, subject
to the provisions of the indemnification agreement, indemnify each director for the
following:

| | monetary
liabilities imposed on the director for the benefit of another person pursuant to a final
judgment by a competent court relating to acts performed by the director in his/her
capacity as a director or officer of NUR or its subsidiaries; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | reasonable
litigation expenses.
|- | -------------------------------

The
indemnification undertaking shall be limited to certain categories of events and to the
maximum amount equal to fifty percent (50%) of the net equity of NUR or to one time annual
revenue of NUR in the year prior to the date of the claim (the higher amount of the two)
with regard to judgment liability, and $3.0 million with regard to litigation expenses. In
addition, a policy of directors and officers liability insurance is maintained
by us that insures our directors and officers and those of our subsidiaries against
liability incurred by, arising from or against them for certain of their acts, errors or
omissions.

At
the Annual Shareholders meeting held on October 27, 2004, NURs shareholders
authorized the Company to exculpate our office holders in advance from liability to NUR,
in whole or in part, for a breach of the duty of care.

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

As
of December 31, 2004, we had 328 employees and independent contractors compared to 322
employees and independent contractors as of December 31, 2003 and 355 as of December 31,
2002. Out of NURs 328 employees and independent contractors, as of December 31,
2004, 49 were in sales and marketing, 52 were in research and development, 169 were in
customer support, operations and production, and 58 were in management finance and
administration. As of December 31, 2004, we had 195 employees located in Israel, 56
employees located in Belgium, 44 employees located in the U.S., 3 employees located in
Central and Latin America and 30 employees located in Asia Pacific.

We
intend to eliminate approximately 40 positions during the third quarter of 2005 in order
to lower our operating expenses.

All
of NURs employees who have access to confidential information are required to sign a
non-disclosure agreement covering all of our confidential information that they might
possess or to which they might have access.

We
believe our relations with employees are satisfactory. We have never experienced a strike
or work stoppage. We believe our future success will depend, in part, on our ability to
continue to attract, retain, motivate and develop highly qualified technical, marketing
and sales as well as management personnel.

Israeli
law generally requires the payment of severance pay equal to one months salary for
each year of employment upon the termination of employment by NUR.

NURs
liability for future severance pay obligations is fully provided for by payments equal to
8.33% of an employees salary each month made to various managers insurance
policies or similar financial instruments and by accrual. The employees of NUR are usually
provided with an additional contribution toward their retirement that amounts to 10% of
wages, of which the employee and the employer each contributes half. Furthermore, Israeli
employees and employers are required to pay predetermined sums to the National Insurance
Institute, which is similar to the United States Social Security Administration, and
additional sums towards compulsory health insurance.

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

# Beneficial Ownership of
Executive Officers and Directors

The
following table sets forth certain information regarding the beneficial ownership of
NURs ordinary shares as of June 30, 2005, of (i) each director of NUR and (ii) each
executive officer of NUR. All of the information with respect to beneficial ownership of
the ordinary shares is given to the best of NURs knowledge and has been furnished in
part by the respective directors and executive officers.

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|Name of Beneficial Owner | Number of Shares
Beneficially Held(1) | Percent of Class
|------------------------ | ------------------------------------- | ----------------
|
|
|
|
|Robert F. Hussey         | *                                     | *               
|Lauri A. Hanover         | *                                     | *               
|Koby Shtaierman          | *                                     | *               
|Oded Akselrod            | *                                     | *               
|Tamar Peller             | *                                     | *               
|David Amir               | 420,070                               | 1.58%           
|David Seligman           | *                                     | *               
|Dan Purjes(2)(3)         | 10,872,437                            | 36.54%          

---

* Less than one percent of the
outstanding ordinary shares.

|(1) | As
used in this table, beneficial ownership means the sole or shared
                    power to vote or direct the voting or to dispose or direct the
disposition of                     any security. For purposes of this table, a person is
deemed to be the                     beneficial owner of securities that can be acquired
within 60 days from June 30,                     2005 through the exercise of any option
or warrant. Ordinary shares subject to                     options or warrants that are
currently exercisable or exercisable within 60 days                     are deemed
outstanding for computing the ownership percentage of the person
                    holding such options or warrants, but are not deemed outstanding for
computing                     the ownership percentage of any other person. The amounts
and percentages are                     based upon 26,205,681 ordinary shares outstanding
as of June 30, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Resigned
from the board in December 2004.
|--- | -----------------------------------------

|(3) | According
to a Voting Agreement between NUR and Dan Purjes dated January 23,
                    2005, Dan Purjes and certain of his affiliates granted to our Board
or a nominee                     appointed by it voting control over the ordinary shares
beneficially owned by                     them, coupled with an irrevocable proxy, and
the Board or the nominee appointed                     by it will vote the shares in any
meeting or actions of the shareholders and                     with respect to any matter
submitted to shareholder with the majority of votes                     of the other
shareholders of NUR. For additional information regarding the                     Voting
Agreement see Item 10.C: Material Contracts.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
directors and executive officers of NUR hold, in the aggregate, options and warrants
exercisable into 1,054,424 ordinary shares. The 1,054,424 options have a weighted average
exercise price of approximately $1.96 and have expiration dates until 2014. Under the 1998
Share Option Plan for Non-Employee Directors (the 1998 Plan), Robert F.
Hussey, who is the acting chairman of the Board, was granted on October 26, 1998, August 1, 1999, August
1, 2000, August 1, 2001, August 1, 2002, August 1, 2003 and   August 1, 2004 options to
purchase 10,000 ordinary shares, respectively. Oded Akselrod, director of NUR, was granted
options to purchase 10,000 ordinary shares on December 30, 2004. Tamar Peller, director of
NUR, was granted options to purchase 10,000 ordinary shares on December 30, 2004. Lauri A.
Hanover and Kobi Shtaierman, both external directors of NUR as of November 18, 2003 were
each granted 6,667 options on November 18, 2003 and each was also granted options to
purchase 10,000 ordinary shares on December 30, 2004. The exercise price for the
underlying shares of such options is the Fair Market Value (as defined in the
1998 Plan) of the ordinary shares of NUR at the date of grant.

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# Outstanding Options and
Warrants

As
of June 30, 2005, NUR had outstanding options under NURs stock option plans to
purchase a total of 3,533,884 of its ordinary shares. Of such options, 48,300 have been
issued under the 1995 Israel Stock Plan, 330,200 have been issued under the 1997 Stock
Option Plan, 136,667 have been issued under the 1998 Non-Employee Director Share Option
Plan and 3,018,717 have been issued under the 2000 Stock Option Plan. The
options granted under the 1995 Plan, the 1997 and the 2000 Plan are subject to various
vesting requirements and have been issued at exercise prices ranging from $0.37 to
$7.50per share with various expiration dates. The options granted under the 1998
Plan are not subject to vesting requirements and have an exercise price ranging from $0.37
to $13.50 per share, with various expiration dates. See Note 15 to NURs consolidated
financial statements included as a part of this annual report on Form 20-F for more
details.

As
of June 30, 2005, NUR had outstanding warrants exercisable into a total of 6,958,896
ordinary shares. Of such warrants (i) 50,000 were issued to Josephthal & Co., Inc. as
placement agent in connection with NURs private placement between September and
December 1997 and subsequently transferred by Josephthal to David Fuchs, (ii) 37,411 were
issued to Investec Clali Trust Company Ltd. as placement agent in connection with
NURs private placement in September 2000, (iii) 612,500 were issued to the
Investment Corp. of United Mizrahi Bank Ltd. as part of the private placement in January
2002 and subsequently transferred to United Mizrahi Bank Ltd., (iv) 70,000 were issued to
Bank Hapoalim as part of the rescheduling of NURs long-term debt, (v) 50,000 were
issued to Bank Leumi as part of the rescheduling of NURs long-term debt (vi) 140,000
were issued to Bank Hapoalim as part of the amendments of the covenants governing the
rescheduling of NURs long-term debt, (vii) 100,000 were issued to Bank Leumi as part
of the amendments of the covenants governing the rescheduling of NURs long-term
debt, (viii) 11,000 were issued to Poalim Capital Markets as part of an out-of-court
settlement, (ix) 505,000 were issued to Bank Hapoalim as part of the amendments of the
covenants governing NURs debt, (x) 350,000 were issued to Bank Leumi as part of the
amendments of the covenants governing NURs debt, (xi) 27,000 were issued to Bank
Discount as part of the amendments of the covenants governing NURs debt, (xii)
98,000 were granted to Bank Discount as part of the agreement regarding the covenants
governing NURs debt, (xiii) 951,922 were granted to the investors participating in
NURs convertible loan in October 2003, (xiv) 67,308 were granted to the placement
agent in connection with NURs convertible loan in October 2003, (xv) 112,903 were
granted to the placement agent in connection with NURs convertible loan in October
2003, (xvi) 646,542 were granted to the investors participating in NURs private
placement in March 2004, (xvii) 129,310 were issued to Duncan Capital Group, LLC as
placement agent in connection with NURs private placement of March 2004, and (xviii)
3,000,000 were granted to Dan Purjes in connection with a voting trust agreement discussed
in Item 10.C: Material Contracts. The Fuchs warrants are exercisable at $1.00.
NUR extended the exercise period for the Fuchs warrants to December 2005 in consideration
for certain services provided by Fuchs. The Investec Clali warrants are exercisable at
$13.365 no later than September 2005. The Mizrahi warrants are exercisable at $4.50 no
later than January 2006. The Bank Hapoalim and Bank Leumi warrants are exercisable at
$5.00 no later than February 2006. The additional Bank Hapoalim and Bank Leumi warrants
are exercisable at $0.34 no later than March 2007. The Poalim Capital Markets warrants are
exercisable at $0.784 no later than November 2006. The first Bank Discount warrant is
exercisable at $0.72 no later than June 2007. The second Bank Discount warrant, the third
Bank Hapoalim and Bank Leumi warrants are exercisable at $0.62 no later than August 2007.
The convertible loan investment warrants and the first convertible loan placement agent
warrants are exercisable at $0.52 no later than October 2008. The second convertible loan
placement agent warrants are exercisable at $0.62 no later than March 2009. The private
placement warrants are exercisable at $1.54 no later than March 2009. The Duncan Capital
warrants are exercisable at $1.16 no later than March 2009. The Dan Purjes warrants are
exercisable at $0.75 no later than April 2010.

63

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1995 Israel Stock Option
Plan

In
1995, NUR adopted the 1995 Israel Stock Option Plan, which provides for grants of stock
options to employees and consultants of NUR. Options to purchase an aggregate of 500,000
ordinary shares were originally available for grant under the 1995 Israel Stock Option
Plan, as amended, including service options for future services, options for performance,
and options to consultants for service or performance.

NURs
shareholders approved at the Annual Shareholders meeting held on November 18, 2003 the
Boards resolution to terminate the 1995 Plan and to increase the number of ordinary
shares authorized for issuance under NURs 2000 Plan (as amended) in the aggregate
amount that was outstanding for grant under the 1995 Plan as of July 15, 2003, thereby
increasing the number of ordinary shares authorized for issuance under NURs 2000
Stock Option Plan by 33,261.

1997 Stock Option Plan

In
1997, NUR adopted the 1997 Stock Option Plan, which provides for grants of stock options
to employees, directors of NUR and consultants to NUR. Options to purchase an aggregate of
2,200,000 ordinary shares were originally available for grant under the 1997 Stock Option
Plan, as amended.

NURs
shareholders approved, at the Annual Shareholders meeting held on November 18, 2003, the
Boards resolution to terminate the 1997 Plan and to increase the number of ordinary
shares authorized for issuance under NURs 2000 Plan in the aggregate amount that was
outstanding for grant under the 1997 Plan as of July 15, 2003, thereby increasing the
number of ordinary shares authorized for issuance under NURs 2000 Stock Option Plan
by 464,329.

1998 Non-Employee
Director Share Option Plan

For
discussion of the 1998  Non-Employee  Director Share Option Plan see "Item 6.B:
 Compensation of Officers and Directors."

2000 Stock Option Plan

In
2000, NUR adopted the 2000 Stock Option Plan to provide for grants of service and
non-employee options to purchase ordinary shares to officers, employees, directors and
consultants of NUR. The 2000 Stock Option Plan provides that it may be administered by the
Board, or by a committee appointed by the Board, and is currently administered by the
Stock Option and Compensation Committee subject to the Board approval.

NURs
shareholders approved, at the Annual Shareholders meeting held on November 18, 2003, the
termination of the 1995 Plan and the 1997 Plan and the increase of the number of ordinary
shares authorized for issuance under the 2000 Stock Option Plan (as amended) in the
aggregate amount that was outstanding for grant under the 1995 Plan and the 1997 Plan as
of July 15, 2003, thereby increasing the number of ordinary shares authorized for issuance
under the 2000 Stock Option Plan (as amended) by 497,590, from 2,000,000 to 2,497,590.
NURs shareholders further approved, at the Annual Shareholders meeting held on
October 27, 2004, the increase of the number of ordinary shares authorized for issuance
under the 2000 Stock Option Plan (as amended) by 500,000, from 2,497,590 to 2,997,590. The
2000 Stock Option Plan will expire on August 31, 2008, unless previously terminated or
extended by the Board.

64

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The Board has broad
discretion  to determine  the persons  entitled to receive  options under the 2000 Stock Option Plan,
the terms and  conditions on which  options are granted,  and the number of ordinary  shares  subject  thereto.  The Board
delegated to NUR's  management  its authority to issue  ordinary  shares  issuable upon exercise of options under the 2000
Stock Option Plan.  The exercise  price of the option  shares under the 2000 Stock Option Plan is  determined by the Stock
Option and  Compensation  Committee,  provided,  however,  that the exercise price of any option granted shall not be less
than eighty  percent (80%) of the stock value at the date of grant of such  options.  The stock value at any time is equal
to the then current fair market value of NUR's ordinary  shares.  For purposes of the 2000 Stock Option Plan (as amended),
the fair market value means,  as of any date, the last reported sale price,  on such date, of the ordinary  shares on such
principal securities exchange of the most recent prior date on which a sale of the ordinary shares took place.

The Board determines
the term of each option granted under the 2000 Stock Option Plan;  provided,  however,  that the term
of an option shall not be for more than ten (10) years.  Upon  termination of employment,  all unvested options lapse. The
Board determines the vesting period of each option grant under the 2000 Stock Option Plan.

The
options granted are subject to restrictions on transfer, sale or hypothecation. Options
and ordinary shares issuable upon the exercise of options granted to Israeli employees of
NUR are held in a trust until the payment of all taxes due with respect to the grant and
exercise (if any) of such options.

# ITEM 7: Major
Shareholders and Related Party Transactions

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

The
following table sets forth information regarding the beneficial ownership of NURs
ordinary shares as of June 30, 2005, by each person known by NUR to be the beneficial
owner of more than 5% of our outstanding ordinary shares. Each of our shareholders has
identical voting rights with respect to its shares. All of the information with respect to
beneficial ownership of the ordinary shares is given to the best of NURs knowledge
and has been furnished in part by the beneficial owner.

65

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|                             | Ordinary Shares
Beneficially Owned(1) | Percentage of Ordinary Shares
Beneficially Owned
|---------------------------- | ------------------------------------- | ------------------------------------------------
|
|
|
|
|Dan Purjes(2)                | 10,872,437                            | 36.54%                                          
|United Mizrahi Bank Ltd. (3) | 2,945,833                             | 10.98%                                          
|Myles Wittenstein            | 1,656,311                             | 6.25%                                           

---

|(1) | As
used in this table, beneficial ownership means the sole or shared
                    power to vote or direct the voting or to dispose or direct the
disposition of                     any security. For purposes of this table, a person is
deemed to be the                     beneficial owner of securities that can be acquired
within 60 days from June 30,                     2005 through the exercise of any option
or warrant. Ordinary shares subject to                     options or warrants that are
currently exercisable or exercisable within 60 days                     are deemed
outstanding for computing the ownership percentage of the person
                    holding such options or warrants, but are not deemed outstanding for
computing                     the ownership percentage of any other person. The amounts
and percentages are                     based on a total of 26,205,681 ordinary shares
outstanding as of June 30, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | According
to a Voting Agreement between NUR and Dan Purjes dated January 23,
                    2005, Dan Purjes and certain of his affiliates granted to our Board
or a nominee                     appointed by it voting control over the ordinary shares
beneficially owned by                     them, coupled with an irrevocable proxy, and
the Board or the nominee appointed                     by it will vote the shares in any
meeting or actions of the shareholders and                     with respect to any matter
submitted to shareholder with the majority of votes                     of the other
shareholders of NUR. For additional information regarding the                     Voting
Agreement see Item 10.C: Material Contracts.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
Investment Corp. of United Mizrahi Bank Ltd. that previously held the securities detailed at the table above notified NUR that effective as
                    of October 20, 2004 it was merged into United Mizrahi Bank Ltd., an
Israeli                     public company traded on the Tel Aviv Stock Exchange (TASE:
Mizrahi).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Significant Changes in
the Ownership of Major Shareholders

As
of December 31, 2004 Dan Purjes was the beneficial owner of 7,836,138, or 30%, of our
ordinary shares. The Purjes ownership interest increased to 36.54% in April 2005.
The Investment Corp. of United Mizrahi Bank Ltd. notified NUR that effective as of October
20, 2004 it was merged into United Mizrahi Bank. As of December 31, 2004 United Mizrahi
Bank was the beneficial owner of 2,945,833, or 11.25%, of our ordinary shares. The
Mizrahis interest in our company decreased to 10.98% in April 2005. On May 19, 2004
Myles Wittenstein filed a Schedule 13G with the Securities and Exchange Commission
reflecting ownership of 1,994,491 of our ordinary shares which reflected as of December
31, 2004 7.53%, of our ordinary shares. The Wittensteins interest in our company
decreased to 6.25% in April 2005.

# Record Holders

Based
on a review of the information provided to us by our transfer agent, as of June 30, 2005,
there were 79* record holders of ordinary shares, of which 43 represented
United States* record holders holding approximately 54.43% of the outstanding
ordinary shares of NUR.

---

|* | Including
the Depository Trust Company.
|- | ---------------------------------------

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

On
July 30, 2003 NUR secured a convertible loan commitment from several investors according
to which the investors have undertaken to provide NUR with a convertible loan in the
aggregate amount of $3.50 million. NURs former chairman and the largest shareholder,
Dan Purjes, provided $1.2 million of the loan and David Amir, NURs president and
chief executive officer, provided $50,000 of the loan. Our shareholders approved the
participation of Mr. Purjes in this transaction in November 2003. Our audit committee and
board of directors approved the participation of Mr. Amir in this transaction in September
2003. On December 31, 2003, the investors elected to convert $2 million of the loan into
ordinary shares of NUR at the conversion rate of $0.62 per ordinary share. On March 31,
2004, the investors elected to convert the remaining $1.5 million of the loan into
2,419,355 ordinary shares at the conversion price of $0.62 per share. Following this
conversion, Dan Purjes received, directly and indirectly, an aggregate of 1,935,484
ordinary shares and warrants to purchase up to 457,953 ordinary shares. David Amir
received an aggregate of 80,645 ordinary shares and warrants to purchase up to 14,423
ordinary shares.

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In
October 2003, NUR entered into an engagement agreement with the law offices of Avi Omer
& Co. (formerly, Omer, Zohari & Co.), a law firm owned by Avi Omer and certain
other partners. Avi Omer is the brother of David Amir, our president and chief executive
officer. Under the engagement agreement, Avi Omer & Co. represents us in litigations
against third parties and provides us with legal services as needed in Israel and in
Belgium. The cost of these services is intended to at least equal the cost of these
services if performed by unrelated parties. The aggregate consideration for the services
that Avi Omer & Co. provided to us and to the subsidiaries was $0.12 million in 2004.
On March 2004, our Audit Committee and Board of Directors reviewed, ratified and approved
the terms of the engagement with Avi Omer & Co.

In
April 2004, we closed a private placement of approximately $2.99 million through the
issuance of 2,586,140 of our ordinary shares to several investors at a price of $1.16 per
share. The investors also received warrants to purchase an additional 646,542 ordinary
shares at an exercise price of $1.54 per warrant share, exercisable until March 31, 2009.
Dan Purjes, our former chairman, former director and the largest shareholder, is the
chairman of one of the investors, X Securities Ltd. that purchased 81,897 ordinary shares
for $95,000 and received warrants to purchase 20,474 ordinary shares. X Securities
participation in the private placement was ratified and approved by our Audit Committee
and the Board.

At
the Special Shareholders meeting held on April 17, 2005, NURs shareholders approved
the grant to Dan Purjes, a former director and former chairman of the Board, and the owner
of approximately 36% of NURs ordinary shares, of a five-year warrant to purchase
3,000,000 ordinary shares at $0.75 per share. The warrant was granted to Dan Purjes in
consideration for his agreement to enter into the Voting Agreement dated as of January 23,
2005, coupled with an irrevocable proxy, and the Voting Trust Agreement dated as of March
7, 2005 under which voting control of all shares owned by Dan Purjes and his family and
affiliates was controlled by an independent trustee. As a result of the delisting of our ordinary shares from
the Nasdaq SmallCap Market, the Voting Trust Agreement was automatically terminated and
converted into the Voting Agreement.

At
the Special Shareholders meeting held on April 17, 2005, NURs shareholders approved
to pay to Robert F. Hussey, acting chairman of the Board, during his chairmanship, a
quarterly cash fee of $10,000 or a prorate portion for services rendered during part of a
calendar quarter. The foregoing cash fee will replace any other cash compensation or
meeting allowances otherwise due to a director under NURs policies. In addition, the
shareholders approved a quarterly grant to Robert F. Hussey of options to purchase 2,500
ordinary shares, or a prorate portion for services rendered during part of a calendar
quarter. The quarterly grants will be made on the first business day following the last
month of each calendar quarter. The options will be fully vested and exercisable
immediately upon their grant and the exercise price per ordinary share shall be the
closing price of the ordinary shares known on the last trading day of the calendar quarter
for which the options are being granted. The grants described in this paragraph are in
addition to any grants under the 1998 Stock Option Plan for Non-Employee Directors.

67

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For
a further discussion of the March 2004 private placement, October 2003 convertible loan
and the Dan Purjes voting agreement, as well as transactions and balances with related
parties see Item 10.C: Material Contracts and Note 14 to NURs
consolidated financial statements, which are included as a part of this annual report.

|C. | Interests
of experts and counsel
|-- | --------------------------------

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

# ITEM 8: Financial
Information

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

# Consolidated Statements

For
our audited consolidated financial statements for the year ended December 31, 2004, please
see pages F-[2] to F-[48] of this report. In their report regarding our consolidated
financial statements for the year ended December 31, 2004, our independent registered
public accounting firm, Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, indicates that there is a substantial doubt about our ability to continue as a
going concern.

# Export Sales

See
Item 5: Operating and Financial Review and Prospects under the caption
Geographic Breakdown of Revenues for certain details of export sales for the
last three fiscal years.

# Legal Proceedings

We
are a party to various legal proceedings incident to our business. Except as noted below,
there are no material legal proceedings pending or, to our knowledge, threatened against
us or our subsidiaries, and we are not involved in any legal proceedings that our
management believes, individually or in the aggregate, would have a material adverse
effect on our business, financial condition or operating results.

In
August 2001, Printable B.V., a client of NUR Europe, filed a suit against NUR Europe in
the Commercial Court of Brussels. The client claims that the contract between Printable
and NUR Europe for the sale of two machines is null and void, and it further seeks for
damages amounting to approximately 0.92 million (or $1.10 million). NUR Europe filed
a counter claim for the collection of outstanding amounts. In April 2004 the Commercial
Court of Brussels denied Printables claims and ordered Printable to pay NUR Europe
an amount of approximately 0.15 million (or $0.19 million). Printable appealed that
judgment. We believe that the clients appeal is without merit and NUR Europe is
defending itself vigorously against the claim.

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In
October 2001, Distrade SL, a client of NUR Europe, filed a suit against NUR Europe in the
Commercial Court of Brussels, alleging technical defaults in a machine purchased by it.
Distrade is seeking reimbursement of the purchase price it paid amounting to approximately
$0.23 million, as well as damages of approximately 0.25 million (or $0.30 million).
The Commercial Court of Brussels appointed an expert in order to hear the parties
claims, to examine the machine and provide an opinion regarding the damages suffered by
Distrade from the machines use. NUR Europe is defending itself vigorously against
the claim.

In
August 2002, Jiaxing Dapeng Advertising Limited Company, an end-user of NURs
equipment, filed a suit against NUR Shanghai in the Jiaxing Intermediate Court in the
People Republic of China, alleging that the equipment purchased by it was of bad quality.
The Jiaxing Intermediate Court ruled that NUR Shanghai should reimburse Dapeng with the
purchase price of approximately $0.184 million and pay a compensation of approximately
$0.02 million. Following an appeal filed by NUR Shanghai, the Zhejiang Higher Court ruled
in September 2003 that NUR Shanghai is to pay Dapeng approximately $0.184 million.

In
November 2002, Guangzhou Junhao Printing Limited Company, a client of NUR Asia Pacific,
filed a suit against NUR Asia Pacific in the Guangzhou Intermediated Court situated in the
Peoples Republic of China, alleging that the equipment purchased by it from NUR Asia
Pacific was of bad quality. Junhao was seeking reimbursement of the purchase price it paid
in approximately the amount of $0.24 million, as well as compensation of approximately
$0.16 million. In July 2005 the Guangzhou Intermediate Court ruled that NUR Asia Pacific
should reimburse Junhao with the purchase price of $0.24 million and pay a compensation of
approximately $0.04 million.

In
May 2003 Julius Hewinkel GmbH, a former supplier and manufacturer of NUR Media Solutions
filed a suit against NUR Media Solutions in the Court of Osnabrück, Germany. Hewinkel
claims that NUR Media Solutions is in breach of an OEM agreement signed between Hewinkel
and NUR Media Solutions by failing to purchase minimum quantities prescribed under such
agreement. Hewinkel seeks damages in approximately the amount of 0.94 million (or
$1.12 million). NUR Media Solutions is defending itself vigorously against the claim.

In
August 2003, as a result of our intention to consolidate the manufacturing operation in
San Antonio, Texas we notified Ram Global Ltd., the landlord under the five-year lease
agreement signed between Ram Global and Salsa Digital Printers in July 2001, that we
intend to terminate the lease agreement prior to its predetermined termination date in
July 2006. Ram Global filed suit in the 288th Judicial District, Bexar County, Texas
claiming for the rent owed under the lease agreement until its expiration in July 2006 and
other damages. In September 2003, the parties reached an out-of-court settlement whereby
the Salsa Digital Printers undertook to pay Ram Global $0.18 million (reflecting six
months rent) for the complete and final settlement of this matter.

In
September 2003, NUR filed a suit in the Magistrate Court of Tel Aviv, Israel against R.R.
Graphics Ltd., a former distributor of NUR in Israel, for the collection of unpaid
invoices in approximately the amount of $0.42 million. In February 2004, Graphics filed
a statement of defense denying NURs claims and it also filed a counter-claim for
alleged damages caused to it by NUR in approximately the amount of $0.18 million. We
believe that the counter-claim that was filed by Graphics is without merit and NUR is
both pursuing its own suit and defending itself vigorously against the counter-claim.

69

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In
December 2003 Imagens Digitais Ltda., a client of NUR DO Brazil Ltda., filed a suit
against NUR DO Brazil Ltda. and NUR America in Brazil, alleging that a machine purchased
by it failed to perform. Imagens is seeking reimbursement of the purchase price paid by it
in the amount of approximately $0.12 million. We believe that the claim is without merit
and both NUR DO Brazil and NUR America are defending themselves vigorously against the
claim.

In
October 2004 Screen +, a client of NUR Europe, filled a suit against NUR Europe with the
Commercial Court of Nivelles requesting the cancellation of a sale contract and payment of
damages by NUR Europe, alleging that a machine delivered to it did not comply with its
contractual specifications. NUR Europe filed a counterclaim for the collection of the
outstanding sale price of approximately 0.32 million (or $0.38 million). We believe
that the claim filed by Screen + is without merit and NUR Europe is defending itself
vigorously against it.

In
November 2004 Citicorp Vendor Finance, Inc. (CVF), a corporation that extended
equipment lease financing to a client, filed a complaint against NUR America in the
Superior Court of New Jersey alleging that NUR America is in default under remarketing
agreement related to the sale of equipment to Print Systems, Inc. (PSI) in
2001. CVF is seeking damages in the amount of $0.29 million. NUR has filed a counterclaim
against CVF and a cross-claim against PSI for goods sold and delivered to PSI. NUR America
is defending itself vigorously against CVFs claim.

In
February 2005 the Israeli Office of the Chief Scientist (OCS) initiated
administrative proceedings for the confiscation of certain assets of NUR due to an alleged
liability for royalties related to the sale of equipment aggregating to approximately
$0.81 million. On February 21, 2005 NUR filed a suit with the District Court in Jerusalem
against the OCS requesting a declaratory judgment denying the OCS claim for royalties and
for the recovery of approximately $0.27 million that were previously paid to the OCS. NUR
also filed a motion requesting the court to direct the OCS to cease and cancel the
confiscations procedures. The parties reached a procedural agreement whereby the
confiscation procedures were terminated and NUR deposited with the court a bank guarantee
in the amount of approximately $0.45 million securing the disputed amount and undertook to
place by October 2005 an additional bank guarantee of approximately $0.35 million. We
believe that the OCS claim for royalties is without merit.

We
may from time to time become a party to various legal proceedings in the ordinary course
of our business.

# Dividends

NUR
does not anticipate that it will pay any cash dividend on its ordinary shares in the
foreseeable future. Dividends, if any, will be paid in NIS. Dividends paid to shareholders
outside Israel will be converted to U.S. dollars, on the basis of the exchange rate
prevailing at the date of payment. NUR has determined that it will not distribute
dividends out of tax-exempt profits.

70

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

Except
as otherwise disclosed in this annual report, no significant change has occurred since
December 31, 2004.

# ITEM 9: The Offer and
Listing

| | Not
Applicable, except for Items 9.A.4 and Item 9.C, which are detailed below.
| | ------------------------------------------------------------------------------

# Stock Price History

The
prices set forth below are high and low closing market prices for the ordinary shares of
NUR as reported by Nasdaq National Market,  the Nasdaq SmallCap Market  or the Pink Sheets, as applicable,
for the fiscal year ended December 31 of each year indicated below, as of the end of each
fiscal quarter indicated below, and for each month for the six-month period ending June
2005. Such quotations reflect inter-dealer prices, without retail markup, markdown, or
commission and may not necessarily represent actual transactions. Our ordinary shares were
delisted from the Nasdaq SmallCap Market in May 2005 and are currently quoted in the
over-the-counter market in the Pink Sheets under the symbol
NURM.PK.

|Year                   | High (US) | Low (US)
|---------------------- | --------- | --------
|
|
|
|
|2000                   |           |         
|2001                   |           |         
|2002                   |           |         
|2003                   |           |         
|2004                   |           |         
|                       |           |         
|2003                   |           |         
|First Quarter          |           |         
|Second Quarter         |           |         
|Third Quarter          |           |         
|Fourth Quarter         |           |         
|                       |           |         
|2004                   |           |         
|First Quarter          |           |         
|Second Quarter         |           |         
|Third Quarter          |           |         
|Fourth Quarter         |           |         
|                       |           |         
|2005                   |           |         
|First Quarter          |           |         
|                       |           |         
|Most Recent Six Months |           |         
|June 2005              |           |         
|May 2005               |           |         
|April 2005             |           |         
|March 2005             |           |         
|February 2005          |           |         
|January 2005           |           |         

71

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# Markets

Our
ordinary shares are currently quoted in the over-the-counter market in the Pink
Sheets under the symbol NURM.PK.

Our
ordinary shares were traded on the Nasdaq National Market between October 1995 and July
2003. During 2002, our ordinary shares closed for a period of 30 consecutive trading days
below the minimum bid price of $1.00 per share as required for continued listing on the
Nasdaq National Market. Accordingly, in July 2003, we transferred our securities to the
Nasdaq SmallCap Market, whereby we were granted an extension of 180 days to meet the
minimum requirement of $1.00 per share. NUR regained compliance with this requirement in
October 2003. Our ordinary shares were traded on the Nasdaq SmallCap Market between July
2003 and May 2005. On March 24, 2004, we received a compliance notice from the Nasdaq
Stock Market, Inc., stating that we are not in compliance with the continued listing
requirements of the Nasdaq SmallCap Market. In previous years we complied with the listing
requirement since we had stockholders equity of more than $2.5 million. However, as
of December 31, 2003, we had negative stockholders equity of $1.5 million. NUR
provided Nasdaq with a plan to achieve and sustain compliance with the continued listing
requirements and regained compliance during the second quarter of 2004.

On
December 21, 2004 we received a notice from the Nasdaq Listing Qualifications indicating
that our securities will be delisted from the Nasdaq SmallCap Market at the opening of
business on December 31, 2004 due to failure to comply with the minimum $2.5 million
stockholders equity requirement for continued listing set forth in Marketplace Rule
4320(e)(2)(B). NUR requested a hearing to appeal that determination before a Nasdaq
Listing Qualification Panel (the Panel). NUR presented to the Panel its plan
to improve its financial stability and regain compliance with the Nasdaq listing
standards. On April 5, 2005 we received a notice from Nasdaq Listing Qualifications
indicating that pursuant to the hearing before the Panel, the Panel has determined to
postpone the delisting of NURs ordinary shares from trade on the Nasdaq SmallCap
Market, and maintain NURs listing, subject to satisfaction of certain conditions.
However, as a result of our failure to meet the conditions set by the Panel, our ordinary
shares were delisted on May 19, 2005 from the Nasdaq SmallCap Market and are currently
quoted in the over-the-counter market in the Pink Sheets under the symbol
NURM.PK.

# ITEM 10: Additional
Information

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

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

72

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|B. | Memorandum
of Association and Amended and Restated Articles of Association
|-- | --------------------------------------------------------------------------

Set
forth below is a brief description of certain provisions contained in the Memorandum of
Association, the Amended and Restated Articles of Association (Articles) as
well as certain statutory provisions of Israeli law. The Memorandum of Association and the
Articles have been filed as exhibits to this annual report or incorporated by reference
herein. The description of certain provisions does not purport to be a complete summary of
these provisions and is qualified in its entirety by reference to such exhibits.

Authorized Share Capital

The
authorized share capital of NUR is one hundred twenty million (120,000,000) New Israeli
Shekel, divided into one hundred and twenty million ordinary shares.

Purpose and Objective

We
are a public company registered under the Israel Companies Law, 1999 as NUR Macroprinters
Ltd., registration number 52-003986-8. Pursuant to Section 3.1 of NURs Articles, our
objective is to undertake any lawful activity, including any objective set forth in our
Memorandum of Association. Pursuant to Section 3.2 of our Articles, our purpose is to
operate in accordance with commercial considerations with the intentions of generating
profits.

Board of Directors

Under
the Israeli Companies Law, 1999, the Board is authorized to set NURs strategy and
supervise the performance of the duties and actions of NURs chief executive officer.
The Board may not delegate to a committee of the Board or the chief executive officer the
right to decide on certain of the authorities vested with it, including determination of
NURs strategy, distributions, certain issuances of securities and approval of
financial reports. The powers conferred upon the Board are vested in the Board as a
collective body and not in each one or more of the directors individually. Unless
otherwise set forth in a resolution of the shareholders, the Board shall consist of not
less than four (4) nor more than twelve (12) directors (including any external directors
whose appointment is mandated under the Companies Law).

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The
directors are elected annually at a general meeting of shareholders and remain in office
until the next annual meeting at which time they shall retire, unless their office is
previously vacated as provided in the Articles. A retiring director may be reelected. If
no directors are elected at the annual meeting, all of the retiring directors remain in
office pending their replacement at a general meeting. Holders of the ordinary shares do
not have cumulative voting rights in the election of directors. Consequently, the holders
of ordinary shares in the aggregate conferring more than 50% of the voting power
represented in person or by proxy will have the power to elect all the directors. Pursuant
to the Israeli Companies Law, publicly traded companies must appoint two external
directors to serve on their Board of Directors and Audit Committee. The external directors
are appointed for a 3-year term. Under a recent amendment to the Companies Law, at least
one of the external directors is required to have Financial Expertise and the
other external directors are required to have Professional Expertise. These
requirements are subject to regulations to be promulgated in which the terms
Financial Expertise and Professional Expertise would be defined.
This recent amendment does not apply to external directors who were appointed before March
17, 2005 (such as our external directors). The election of external directors requires the
vote of the majority of the voting power represented at the meeting, provided that either
(i) such a majority includes at least one third of the shareholders present who do not
qualify as controlling shareholders (as such term is defined in the Israeli Companies Law)
or (ii) the aggregate number of shares held by non-controlling shareholders voting at the
meeting against such election does not exceed one percent of the outstanding voting rights
of the company.

Subject
to the provisions of Israeli Companies Law, the Board may approve each of the following
transactions that are not detrimental to the best interest of NUR: (i) a transaction to
which NUR is a party to, and in which an officer of NUR has an interest; (ii) a
transaction between NUR and an officer of NUR; (iii) a private offer of NURs
securities to a holder of five percent (5%) or more of NURs shares; or (iv) such
other transactions that require special approval pursuant to the Companies Law. In the
event of an extraordinary transaction or the approval of the terms of service or
employment (including any waiver, insurance or indemnification) of an officer of NUR, such
transaction shall require additional approvals of the Audit Committee, or of the Audit
Committee and of a meeting of shareholders, by regular or special majority, all as
stipulated by the Companies Law. Any officer who has an interest in a transaction shall
not participate in the meeting of the Board or Audit Committee in which such transaction
is considered and shall not vote in such meeting, provided that if the majority of the
members of the Board or the Audit Committee have an interest in the transaction, they may
attend and vote at the meeting and then the transaction must also be approved by a general
meeting of the shareholders. For a further discussion of the Board practices see
Item 6.C: Board Practices.

No
person shall be disqualified to serve as a director by reason of his not holding shares in
NUR. Additionally, there is no age limit for the retirement of directors.

Rights of Shareholders

No
preemptive rights are granted to holders of ordinary shares under the Articles or the
Israeli Companies Law. Each ordinary share is entitled to one vote on all matters to be
voted on by shareholders, including the election of directors. Non-residents of Israel may
freely hold and trade the ordinary shares pursuant to general and specific permits issued
under Israels Currency Control Law, 1978. Neither the Memorandum of Association nor
the Articles make any distinction between residents and non-residents of Israel with
respect to the ownership of ordinary shares. The Memorandum of Association, the Articles
and Israeli law do not make any distinction between residents and non-residents of Israel
with respect to the voting rights related thereto.

An
annual meeting of shareholders must be held once in every calendar year at such time
(within a period of not more than fifteen months after the last preceding annual meeting)
and at such place as may be determined by the Board. The Board may, at any time, convene
general meetings of shareholders, and shall be obligated to do so upon receipt of a
requisition in writing in accordance with Israeli law. Prior to any general meeting a
written notice thereof shall be delivered to all registered holders and to all other
persons entitled to attend, and shall be otherwise made public as required by Israeli law.

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Two
or more members present in person or by proxy and holding shares conferring in the
aggregate more than 33 1/3% of the total voting power attached to our shares shall
constitute a quorum at general meetings. If a meeting is adjourned due to the lack of a
quorum, one or more shareholders, holding not less than 33 1/3% of all the outstanding
voting power attached to the ordinary shares, present in person or by proxy at the
subsequent adjourned meeting, will constitute a quorum. Unless provided otherwise by the
terms of issue of the shares, no member shall be entitled to be present or vote at a
general meeting (or to be counted as part of the quorum) unless all amounts due as of the
date designated for same general meeting with respect to his shares were paid. A
resolution shall be deemed adopted if the requisite quorum is present and the resolution
is supported by members present, in person or by proxy, vested with more than fifty
percent (50%) of the total voting power attached to the shares whose holders were present,
in person or by proxy, at such meeting and voted thereon, or such other percentage
required by law.

Changing Rights Attached
to Shares

According
to our Articles, in order to change the rights attached to any class of shares, unless
otherwise provided by the terms of the class, such change must be adopted by a general
meeting of the shareholders and by a separate general meeting of the holders of the
affected class with a majority of the voting power participating in such meeting.

Dividends and Profits

The
Board may from time to time, subject to the provisions of Israeli Companies Law, declare
and order the payment of a dividend from NURs accrued profits at the rate it may
deem, provided that there is no reasonable concern that payment of such dividend may
prevent NUR from meeting its current and expected liabilities when they become due.
Subject, if any, to special or restricted rights conferred upon the holders of shares as
to dividends, the dividends shall be distributed in accordance with the paid-up capital of
NUR attributable to the shares for which the dividend has been declared. Our obligation to
pay dividends or any other amount in respect of shares may be set-off against any
indebtedness, however arising, liquidated or non-liquidated, of the person entitled to
receive the dividend. Any dividend unclaimed within the period of seven years from the
date stipulated for their payment, shall be forfeited and returned to us, unless otherwise
directed by the Board. In the event of the winding up of NUR, then, subject to provisions
of any applicable law and to any special or restricted rights attached to a share, our
assets in excess of our liabilities will be distributed among the stockholders in
proportion to the paid-up capital attributable to the shares in respect of which the
distribution is being made.

Certain Transactions with
Controlling Persons

The
Israeli Companies Law also provides that some transactions between a public company and a
controlling shareholder, or transactions in which a controlling shareholder of the company
has a personal interest but which are between a public company and another entity, require
the approval of the board of directors and of the shareholders. The Companies Law defines
a controlling shareholder as a person who holds 25% or more of the voting rights at the
companys general meeting, provided there is no other person that holds more than 50%
of the voting rights in the company; for purposes of holding, two or more persons who hold
voting rights in the company and each of whom has a personal interest in the approval of
the same transaction up for approval by the company shall be deemed one holder. Moreover,
an extraordinary transaction with a controlling shareholder or the terms of compensation
of a controlling shareholder, or an extraordinary transaction with another person in whom
the controlling shareholder has a personal interest must be approved by the audit
committee, the board of directors and shareholders. The shareholder approval for an
extraordinary transaction must include at least one-third of the shareholders who have no
personal interest in the transaction who voted on the matter. The transaction can be
approved by shareholders without this one-third approval, if the total shareholdings of
those shareholders who have no personal interest and voted against the transaction do not
represent more than one percent of the voting rights in the company.

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Anti-takeover Provisions;
Mergers and Acquisitions under Israeli Law

The
Companies Law permits merger transactions with the approval of each partys board of
directors and generally requires shareholder approval, as well. Under a recent amendment
to the Companies Law, a merger with a wholly owned subsidiary does not require approval of
the surviving companys shareholders. A merger does not require approval of the
surviving companys shareholders if (i) the merger does not require amending the
surviving companys memorandum of association or articles of association and (ii) the
surviving company does not issue more than 25% of its voting power in connection with the
merger and pursuant to the issuance no shareholder would become a controlling shareholder.
Shareholder approval of the surviving company would nevertheless be required if the other
party to the merger, or a person holding more than 25% of the outstanding voting shares or
means of appointing the board of directors of the other party to the merger, holds any
shares of the surviving company. In accordance with the Companies Law, our Articles
provide that a merger may be approved at a shareholders meeting by a majority of the
voting power represented at the meeting, in person or by proxy, and voting on that
resolution. The Companies Law provides that in determining whether the required majority
has approved the merger, shares held by the other party to the merger, any person holding
at least 25% of the outstanding voting shares or means of appointing the board of
directors of the other party to the merger, or the relatives or companies controlled by
these persons, are excluded from the vote.

Under
the Companies Law, a merging company must inform its creditors of the proposed merger. Any
creditor of a party to the merger may seek a court order blocking the merger, if there is
a reasonable concern that the surviving company will not be able to satisfy all of the
obligations of the parties to the merger. Moreover, a merger may not be completed until at
least 50 days have passed from the time that a merger proposal was filed with the Israeli
Registrar of Companies and 30 days have passed from the shareholder approval of the merger
in each merging company.

The
Israeli Companies Law 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. This rule does not apply if there is
already another 25% or greater shareholder of the company. Similarly, the Israeli
Companies Law 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 hold greater
than a 45% interest in the company, unless there is another shareholder holding more than
a 45% interest in the company. These requirements do not apply if, in general, the
acquisition (1) was made in a private placement that received shareholder approval, (2)
was from a 25% or greater shareholder of the company which resulted in the acquiror
becoming a 25% or greater shareholder of the company, or (3) was from a shareholder
holding more than a 45% interest in the company which resulted in the acquiror becoming a
holder of more than a 45% interest in the company.

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If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a
companys outstanding shares, the acquisition must be made by means of a tender offer
for all of the outstanding shares. If less than 5% of the outstanding shares are not
tendered in the tender offer, all the shares that the acquirer offered to purchase will be
transferred to the acquirer. The Israeli Companies Law provides for appraisal rights if
any shareholder files a request in court within three months following the consummation of
a full tender offer. If more than 5% of the outstanding shares are not tendered in the
tender offer, then the acquiror may not acquire shares in the tender offer that will cause
his shareholding to exceed 90% of the outstanding shares.

Regulations
under the Israeli Companies Law provide that the Israeli Companies Laws tender offer
rules do not apply to a company whose shares are publicly traded outside of Israel, if
pursuant to the applicable foreign securities laws and stock exchange rules there is a
restriction on the acquisition of any level of control of the company, or if the
acquisition of any level of control of the company requires the purchaser to make a tender
offer to the public shareholders.

Duties of Shareholders

Under
the Companies Law, a shareholder has a duty to act in good faith towards the company and
other shareholders and to refrain from abusing his or her power in the company including,
among other things, when voting in a general meeting of shareholders or in a class meeting
on the following matters:

| | any
amendment to the articles of association;
|- | ---------------------------------------------

| | an
increase in the company's authorized share capital;
|- | ------------------------------------------------------

| | a
merger; or
|- | ------------

| | approval
of related party transactions that require shareholder approval.
|- | -------------------------------------------------------------------------

A
shareholder has a general duty to refrain from depriving any other shareholder of their
rights as a shareholder. In addition, any controlling shareholder, any shareholder who
knows that it possesses the power to determine the outcome of a shareholder vote and any
shareholder who has the power to appoint or prevent the appointment of an office holder in
the company is under a duty to act with fairness towards the company. The Companies Law
does not describe the substance of this duty of loyalty.

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

Inspire Private Placement
and Debt Restructuring Agreement

On
December 29, 2004 we reached an agreement with Inspire Investments Ltd. for the investment
by Inspire of $10 million in NUR. The consummation of the Inspire investment was
conditioned, among other things, upon Inspires completion of its due diligence
review. As a pre-condition to entering into the agreement Inspire required, among others,
that NUR will enter into a debt restructuring agreement with its Israeli lender banks and
that a substantial part of the holdings of Dan Purjes, a former director and former
chairman of the Board and the largest shareholder, will be voted under an irrevocable
proxy. On March 21, 2005 NUR reached a debt restructuring agreement with its three lender
banks, Bank Hapoalim, Bank Leumi and Bank Discount, providing for the conversion of $15
million of NURs outstanding debt into equity and for the rescheduling of NURs
remaining $28 million of outstanding debt and the replacement of the financial ratios
governing NURs loan agreements with the lender banks. In June 2005, Inspire notified
us that it had terminated the investment agreement. As a result, the restructuring
agreement with its lender banks was terminated.

Loan Agreements and
Recent Amendments

In
July 2000, NUR entered into long-term loan agreements with Bank Hapoalim and Bank Leumi,
as subsequently amended. The loan agreements provided for a three-year long-term credit
line of up to $20.0million and $15.0 million from Bank Hapoalim and Bank Leumi,
respectively.

In
July 2003 and February 2004 we amended the loan agreement. Such amendments provided for a
twelve-month grace period regarding the quarterly payments of the principal and a balloon
payment of the remainder of the long-term loans in the first quarter of 2006. In addition,
NUR undertook to maintain certain financial rations.

During
2004 NUR failed to meet certain of the financial covenants governing its long-term and
short-term loans.

The
following table shows the outstanding amounts owed to Bank Hapoalim, Bank Leumi and
Discount Bank  as of March 31, 2005:

|             
|-------------
|
|
|
|
|Bank Hapoalim
|Bank Leumi   
|Discount Bank
|             
|Total        
|             

---

|(1) | The
short-term loans from Bank Hapoalim, Bank Leumi and Bank Discount bear
                    interest rates ranging between LIBOR plus 2.50% and LIBOR plus 2.75%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
long-term loans from Bank Hapoalim and Bank Leumi  bear
                    interest rates ranging between LIBOR plus 2.25% and LIBOR plus 2.50%.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

In
June 2005, we amended the financial covenants governing the loan agreements with our
lender banks for the second, third and fourth quarters of 2005. In addition, the banks
agreed in writing to waive the non-performance by NUR of certain financial covenants for
prior periods ended on March 31, 2005.

Under
the terms of the new agreements with the lender banks NUR agreed to maintain with respect to the
second, third and fourth quarters of 2005:

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| | total
revenue of not less than $16 million;
|- | -------------------------------------------

| | operating
loss not greater than $2 million and the operating income shall be greater than zero;
|- | -----------------------------------------------------------------------------------------------

| | inventory
levels of not less than $14 million; and
|- | --------------------------------------------------

| | accounts
receivable of not less than $7 million.
|- | ------------------------------------------------

The
lender banks also agreed that, unless NUR breaches its obligations under the loan
agreements, it shall not be obligated to repay to the lender banks any amounts on account
of principal that are due and payable under the loan agreements until January 1, 2006.

NURs
loans are secured by a floating lien on all assets of NUR, a negative pledge of the assets
of its subsidiaries, NUR America, NUR Europe, NUR Media Solutions, NUR Asia Pacific and
NUR Shanghai and unlimited guarantees by those subsidiaries. The long-term and short-term
loans also contain customary events of default, including the failure to pay interest or
principal, breach of any obligation, representation or warranty made under the loan
agreements, bankruptcy, or a change in control event relating to NUR. The loans are
governed by the laws of the State of Israel.

We
believe that the amendment of the financial covenants that took place in June 2005 will allow
a better alignment between the financial covenants and NURs current business plan. Our
failure to observe covenants when due or satisfy conditions under the loan agreements may
result in the banks accelerating our obligations, which would obligate us to immediately
repay all loans made by the banks plus penalties, and the banks would be entitled to
exercise the remedies available to them under the credit facility, including enforcement
of their lien against all our assets, which may result in a material adverse effect on our
business and financial results. The loans are repayable in January 2006. NUR intends to
negotiate with the lender banks, new payment terms for the year 2006 and thereafter. There
can be no assurance that such agreement can be concluded and in light of the
uncertainties, long-term bank loans are presented in our consolidated financial statements
as short-term bank loans.

Dan Purjes Voting
Agreement and Voting Trust Agreement

As
a pre-condition to entering into investment, Inspire required that a substantial part of
the holdings of Dan Purjes, a former director and former chairman of the Board and the
largest shareholder, will be voted with Inspire under an irrevocable proxy. Inspire agreed
to transfer to Mr. Purjes 3,000,000 warrants out of the warrants to be granted to it at
the closing of the Inspire investment.

Mr.
          Purjes and Inspire did not reach an agreement regarding the future management of
          NUR. In order to enable the Inspire investment, NUR negotiated a voting
          agreement, with Mr. Purjes.

On
January 23, 2005, NUR entered into a Voting Agreement coupled with an irrevocable proxy,
with Dan Purjes. Key features of the Voting Agreement are as follows:

| | Mr.
Purjes granted to our Board or a nominee appointed by it voting control over 7,706,683
ordinary shares beneficially owned by him, coupled with an irrevocable proxy (the Proxy),
and the Board or the nominee appointed by it will vote the shares in any meeting or
actions of the shareholders and with respect to any matter submitted to shareholder with
the majority of votes of the other shareholders of NUR.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | The
Proxy became effective on January 23, 2005, the date of the Voting Agreement, and will
terminate when Mr. Purjes is no longer the record holder or beneficial owner of ordinary
shares or securities exercisable for or convertible into ordinary shares (the Term).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the Term Mr. Purjes may not dispose of any of the ordinary shares and securities
exercisable for or convertible into ordinary shares which are subject to the Proxy, other
than:
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | any
number of shares in the open market through a stock broker or dealer for the sole purpose
of effecting an immediate sale of such shares;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | n | to
a person or entity that is not affiliated, directly or indirectly, with Mr. Purjes
through a private transaction. During the period ending on the earlier of January 23,
2006 or immediately following NURs general meeting of shareholders which would be
convened for electing directors appointed or recommended by a new investor to NURs
board of directors (the Restricted Period), the transferee will grant to NURs
Board or a nominee appointed by it a proxy with respect to the transferred shares, which
proxy will be effective until the end of the Restricted Period;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | to
a certain unaffiliated third party through a private transaction;
| | - | --------------------------------------------------------------------

| | n | pledging,
hypothecating, creating a security interest in or lien on, or commit to do any of the
foregoing with respect to the subject securities, provided, that such securities will
continue to be subject to the Proxy; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | transfers
of securities covered by the Proxy to Mr. Purjes family and affiliates. The
transferee will be bound by the terms of the Voting Agreement and the securities so
transferred will continue to be subject to the Proxy.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NUR
agreed to indemnify Mr. Purjes for claims, demands and actions, and liabilities, damages,
or expenses resulting therefrom, resulting from the Proxy given to NUR or its
representative or NUR or its representative voting such shares.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
accordance with conversations between representatives of NUR and Nasdaq, NUR and Mr.
Purjes entered into a Voting Trust Agreement, dated as of March 7, 2005 (the Voting
Trust Agreement), that amended, superseded and suspended the Voting Agreement.

Under
the Voting Trust Agreement with Dan Purjes and an independent trustee, New York Private
Bank & Trust (the Trustee), Mr. Purjes agreed to place all the ordinary
shares and securities exercisable for or convertible into ordinary shares of NUR owned by
him and by his family and affiliates (hereinafter referred as the subject
securities) into a voting trust. As a result, voting control of all subject
securities are controlled by the Trustee who was to vote those securities proportionally
according to the votes cast by NURs other shareholders on any matter submitted to a
shareholder vote. However, as a result of the delisting of our ordinary shares from the
Nasdaq SmallCap Market, the Voting Trust Agreement was automatically terminated and
converted into the Voting Agreement.

In
exchange for the voting control of Mr. Purjes, NUR granted to Mr. Purjes a five-year
warrant to purchase 3,000,000 ordinary shares at a purchase price per share of $0.75 (the
Purjes Warrant).

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NUR
agreed to include in any registration statement filed by NUR all or part of the Purjes
Warrant and the ordinary shares underlying the Purjes Warrant, as well as other securities
held by Mr. Purjes only to the extent they are not registered for public sale under the
applicable securities laws.

Our
Audit Committee, Board of Directors and shareholders have approved the Voting Agreement.

NUR Pro Engineering
Acquisition

During
2004, NUR consummated the purchase of the remaining 50% shares of NUR Pro Engineering, its
subcontractor for the assembly and manufacturing of its printers, from Ogen Dialogix Ltd.,
for $0.85  million. Upon completion of the transaction, NUR Pro Engineering became a wholly owned
subsidiary of NUR. During the third quarter of 2003, we completed a consolidation process
of our global machinery manufacturing operations into a single large manufacturing
facility in Rosh HaAyin, Israel. During the transition period between the signing of
the agreement and the transfer of the ownership of the shares we completed the transfer of
all NUR Pro Engineerings operations to NUR.

March 2004 Private
Placement

On
March 31 and April 1, 2004, we raised approximately $2.99 million through the private
placement of 2,586,140 of our ordinary shares to several investors at a price of $1.16 per
share. The investors also received warrants to purchase an additional 646,542 ordinary
shares at an exercise price of $1.54 per warrant share, exercisable until March 2009. We
also issued warrants to the placement agent to purchase an aggregate of up to 129,310
ordinary shares at an exercise price of $1.16 per share, exercisable until March 2009 and
paid the placement agent, Duncan Capital Group, LLC, a cash fee of $142,798. Dan Purjes is
the chairman of one of the investors, X Securities Ltd. that purchased 81,897 ordinary
shares for $95,000 and received warrants to purchase 20,474 ordinary shares.

Convertible Loan

On
July 30, 2003 NUR secured a convertible loan commitment from several investors according
to which the investors have undertaken to provide NUR with a convertible loan in the
aggregate amount of $3.50 million. NURs former chairman and the largest shareholder,
Dan Purjes, provided $1.2 million of the loan. Under the terms of the loan agreement, the
loan is convertible at any time into ordinary shares of NUR at a conversion rate of $0.62
per share. In consideration for the loan undertaking, NUR agreed to pay a cash commitment
fee and issue to the investors warrants to purchase ordinary shares of NUR equal to 15% of
the loan at an exercise price of $0.52 per share exercisable over a five-year period. On
December 31, 2003, the investors elected to convert $2 million of the loan into ordinary
shares of NUR at the conversion rate of $0.62 per ordinary share. On March 31, 2004, the
investors elected to convert the remaining $1.5 million of the loan into 2,419,355
ordinary shares at the conversion price of $0.62 per share. NURs former chairman,
former director and the largest shareholder, Dan Purjes, received an aggregate of
1,854,839 ordinary shares and warrants to purchase up to 331,731 ordinary shares. Mr.
Purjes is also a chairman of one of the other investors, Y Securities Management, Ltd.,
which provided $50,000 of the loan and received an aggregate of 80,645 ordinary shares and
warrants to purchase up to 14,423 ordinary shares. Mr. Purjes is also the chairman of X
Securities Ltd., which received placement agent warrants to purchase 111,799 ordinary
shares. David Amir, NURs president and chief executive office, provided $50,000 of
the loan and received an aggregate of 80,645 ordinary shares and warrants to purchase up
to 14,423 ordinary shares.

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

Israeli
law places limitations on foreign currency transactions and transactions between Israeli
and non-Israeli residents, including payment of dividends. The Controller of Foreign
Exchange at the Bank of Israel, through permits, may regulate or waive these limitations.
As of May 1998, foreign currency transactions are generally permitted, although certain
restrictions still apply. Restricted transactions include foreign currency transactions by
institutional investors, including futures contracts by foreign residents for periods of
more than one month, and investments outside of Israel by pension funds and insurers.
Under the permit, all foreign currency transactions must be reported to the Bank of
Israel.

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

# Israeli Taxation,
Foreign Exchange Regulation and Investment Programs

The
following is a summary of the material Israeli tax consequences, Israeli foreign exchange
regulations and certain Israeli government programs as they relate to NUR and its
shareholders. To the extent that the discussion is based on new tax or other legislation
that has not been subject to judicial or administrative interpretation, there can be no
assurance that the views expressed in the discussion will be accepted by the tax or other
authorities in question. The discussion is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax considerations.

Holders
of our ordinary shares should consult their own tax advisors as to the United States,
Israeli or other tax consequences of the purchase, ownership and disposition of ordinary
shares, including, in particular, the effect of any foreign, state or local taxes.

# The Tax Reform

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

The
tax reform, aimed at broadening the categories of taxable income and reducing the tax
rates imposed on employment income, introduced the following, among other things:

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

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

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

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

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

# General Corporate Tax
Structure

Generally,
Israeli companies are subject to Company Tax at the rate of 35% of taxable
income (34%, 32%, 30% commencing 2005, 2006 and 2007,
respectively) and are subject to Capital Gains Tax at a rate of 25% for capital gains
derived after January 1, 2003. However, the effective tax rate payable by a company which
derives income from an approved enterprise (as further discussed below) may be
considerably less.

# Stamp Duty

The
Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law, provides that any
document (or part thereof) that is signed in Israel or that is signed outside of Israel
and refers to an asset or other thing in Israel or to an action that is executed or will
be executed in Israel, is subject to a stamp duty, generally at a rate of between 0.4% and
1% of the value of the subject matter of such document. De facto, it has been common
practice in Israel not to pay such stamp duty unless a document is filed with a
governmental authority. An amendment to the Stamp Duty Law, that came into effect on June
1, 2003, determines the party liable for payment of stamp duty with respect to each type
of document subject to such law. Following such amendment, Section 15(5) of the Stamp Duty
Law generally provides that stamp duty on most agreements shall be paid by the parties
that signed such agreement, jointly or severally, or by the party that undertook under
such agreement to pay the stamp duty.

As
a result of the aforementioned amendment to the Stamp Duty Law, the Israeli tax
authorities have approached many companies in Israel, and required disclosure of all
agreements signed by such companies since June 1, 2003, with the aim of collecting stamp
duty with respect to such agreements. The legitimacy of the aforementioned amendment to
the Stamp Duty Law and of said actions by the Israeli tax authorities are currently under
review by the Israeli High Court of Justice.

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In
January 2005, an order was signed in accordance with which the said requirement to pay
stamp duty is cancelled with effect from January 1, 2008. Furthermore, pursuant to
such order, as of January 1, 2005, stamp duty is no longer chargeable on, among others,
loan agreements.

# Tax Benefits Under the
Law for the Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments, 1959, as amended (the Investment
Law), provides that a proposed capital investment in eligible facilities may, upon
application to the Investment Center of the Ministry of Industry and Commerce of the State
of Israel, be designated as an approved enterprise. The Investment Center approves
applications based upon the criteria set forth in the Investment Law and regulations, the
then prevailing policy of the Investment Center, and the specific objectives and financial
criteria of the applicant. Each certificate of approval for an approved enterprise relates
to a specific investment program delineated both by its financial scope, including its
capital sources, and by its physical characteristics, e.g., the equipment to be purchased
and utilized pursuant to the program.

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

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

Taxable
income of a company derived from an approved enterprise is subject to company tax at the
maximum rate of 25%, rather than 34%, for the benefit period. This period is ordinarily 7
years commencing with the year in which the approved enterprise first generates taxable
income, and is limited to twelve years from commencement of production or 14 years from
the date of approval, whichever is earlier.

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

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A
company that has elected the alternative package of benefits, such as us, that
subsequently pays a dividend out of income derived from the approved enterprise during the
tax exemption period, will be subject to tax in respect of the amount distributed,
including any taxes thereon, at the rate which would have been applicable had it not
elected the alternative package of benefits, generally 10%-25%, depending on the
percentage of the companys ordinary shares held by foreign shareholders. The
dividend recipient is taxed at the reduced rate of 15%; such rate is applicable to
dividends from approved enterprises if the dividend is distributed during the tax
exemption period or within twelve years thereafter. The company must withhold this tax at
source, regardless of whether the dividend is converted into foreign currency.

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

On
April 1, 2005, an amendment to the Investments Law came into force. Pursuant to the
amendment, a companys facility will be granted the status of Approved
Enterprise only if it is proven to be an industrial facility (as defined in the
Investments Law) that contributes to the economic independence of the Israeli economy and
is a competitive facility that contributes to the Israeli gross domestic product. The
amendment provides that the Israeli Tax Authority and not the Investment Center will be
responsible for an Approved Enterprise under the alternative package of benefits, referred
to as a Benefiting Facility. A company wishing to receive the tax benefits afforded to a
Benefiting Facility is required to select the tax year from which the period of benefits
under the Investment Law are to commence by notifying the Israeli Tax Authority within 12
months of the end of that year. In order to be recognized as owning a Benefiting Facility,
a company is required to meet a number of conditions set forth in the amendment, including
making a minimal investment in manufacturing assets for the Benefiting Facility and having
completed a cooling-off period of no less than three to four years from the companys
previous year of commencement of benefits under the Investments Law.

Pursuant
to the amendment, a company with a Benefiting Facility is entitled, in each tax year, to
accelerated depreciation for the manufacturing assets used by the Benefiting Facility and
to certain tax benefits, provided that no more than 12 years have passed since the
beginning of the year of commencement of benefits under the Investments Law. The tax
benefits granted to a Benefiting Factory are determined according one of the following new
tax routes:

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| | Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefiting Facility within Israel, and a reduced corporate tax rate of 10
to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of from seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Benefiting Facility during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%).
The company is required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefiting Facility.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
special tax route enabling companies owning facilities in favorite geographical locations
in Israel to pay corporate tax at the rate of 11.5% on income of the Benefiting Facility.
The benefits period is ten years. Upon payment of dividends, the company is required to
withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for
foreign residents.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
amendment changes the definition of foreign investment in the Investments Law
so that instead of an investment of foreign currency in the company, the definition now
requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such
definition now also includes the purchase of shares of a company from another shareholder,
provided that the companys outstanding and paid-up share capital exceeds NIS 5
million. Such changes to the aforementioned definition will take effect retroactively from
2003.

The
amendment will apply to Approved Enterprise programs in which the year of commencement of
benefits under the Investments Law is 2004 or later, unless such programs received
approval from the Investment Center on or prior to December 31, 2004 in which case the
provisions of the amendment will not apply. This amendment does not affect our existing
Approved Enterprise programs.

Part
of NURs production facilities have been granted the status of an Approved
Enterprise under the Investment Law, under three separate investment plans. The
implementation of the investments under the first plan was completed in 1993. The
implementation of the second plan was finalized in 1999. NURs application for a
third plan was approved in 2000.

According
to the provisions of the Investment Law, NUR chose to enjoy alternative
benefitswaiver of grants in return for tax benefits. Accordingly, NURs
income from the Approved Enterprise will be tax-exempt for a period of two years for the
first and the third plans and for a period of four years for the second plan, commencing
with the year it first earns taxable income, and subject to corporate tax at the rate of
15% based on the percentage of foreign ownership of the company, for additional periods of
five, three and five years, for the first, second and third plans, respectively.

The
period of tax benefits, detailed above, is subject to limits of twelve years from the
commencement of production, or fourteen years from receiving the approval, whichever is
earlier. Given the above-mentioned conditions, the period of benefits for the first plan
commenced in the year 1994 and terminated in the year 2000, and the period of benefits for
the second plan commenced in the year 1998 and will terminate in the year 2004. The period
of benefits for the third plan has not yet been determined.

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If
dividends are distributed out of profits derived from an Approved Enterprise,
NUR will be liable for corporate tax at the rate, which would have been applied if it had
not chosen the alternative tax benefits (currently 15% based on the percentage of foreign
ownership of NUR for an Approved Enterprise). Therefore, income derived from
NURs Approved Enterprise tax-exempt profits, is not available for
distribution to shareholders as a dividend. See Note 16(a) to NURs consolidated
financial statements, which are included as a part of this annual report on Form 20-F.

The
dividend recipient is taxed at the reduced rate applicable to dividends from
Approved Enterprises (i.e., 25%), if the dividend is distributed during the
tax benefits period or within a twelve years period thereafter, or for an unlimited period
in the case of a Foreign Investors Companya company over 25%
foreign-owned with an approved enterprise. This tax must be withheld by the company at
source, regardless of whether the dividend is converted into foreign currency. See below
 Capital Gains Tax on Sales of Our Ordinary Shares.

Grants
and certain other incentives received by a company in accordance with the Investment Law
remain subject to final ratification by the Israel Investment Center, such ratification
being conditional upon fulfillment of all terms of the approved program. Failure to comply
with all such terms may require the return of such grants and incentives (inclusive of
interest as of the date of the grant).

NURs
existing Approved Enterprise status and any new programs, if and when
approved, are subject to various conditions. The tax benefits derived from NURs
Approved Enterprise status are conditioned upon fulfillment of the conditions
stipulated by the Investment Law, the regulations promulgated thereunder and the criteria
set forth in the certificate of approval issued pursuant to the Investment Law. In the
event of a failure by NUR to comply with these conditions and criteria, the tax benefits
could be canceled, in whole or in part, and NUR would be required to refund the amount of
the canceled benefits, adjusted for inflation, interest and penalties. Management believes
that NUR has operated and will continue to operate in compliance with all the
Approved Enterprise conditions and other criteria applicable to us from the
Office of Chief Scientist, the Marketing Fund and our Approved Enterprise
status, although there can be no assurance of this. Management further believes that the
likelihood is remote that NUR will be required to refund tax benefits that we derive from
the Office of Chief Scientist, the Marketing Fund and under our Approved
Enterprise status. There can be no assurance, however, that the funding and tax
benefits will continue. See Item 4.B: Research and Development and Item
3.D: Risk Factors.

The
Israeli government may reduce or eliminate tax benefits available to approved enterprise
programs in the future. We cannot assure you that our approved program and the benefits
thereunder shall continue in the future at its current level or at any level  see
Item 3.D: Risks relating to location in Israel).

# Tax Benefits Under the
Law for the Encouragement of Industry (Taxes), 1969

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

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

| | accelerated
depreciation rates on equipment and buildings.
|- | ----------------------------------------------------------

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

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

# Taxation Under
Inflationary Conditions

The
Income Tax Law (Adjustment for Inflation), 1985 (the Adjustment for Inflation
Law) attempts to overcome some of the problems experienced in a traditional tax
system by an economy experiencing rapid inflation, which was the case in Israel at the
time the Adjustment for Inflation Law was enacted. Generally, the Adjustment for Inflation
Law was designed to neutralize for Israeli tax purposes the erosion of capital investments
in businesses and to prevent unintended tax benefits resulting from the deduction of
inflationary financing expenses. The Adjustment for Inflation Law applies a supplementary
set of inflationary adjustments to taxable profit computed according to regular historical
cost principles.

The
Adjustment for Inflation Law introduced a special tax adjustment for the preservation of
equity based on changes in the Israeli CPI whereby certain corporate assets are classified
broadly into fixed (inflation resistant) assets and non-fixed assets. Where
shareholders equity, as defined in the Adjustment for Inflation Law, exceeds the
depreciated cost of fixed assets, a corporate tax deduction which takes into account the
effect of inflationary change on such excess is allowed (up to a ceiling of 70% of taxable
income for companies in any single tax year, with the unused portion permitted to be
carried forward on a linked basis with no ceiling). If the depreciated cost of fixed
assets exceeds shareholders equity, then such excess multiplied by the annual rate
of inflation is added to taxable income.

In
addition, subject to certain limitations, depreciation on fixed assets and losses carried
forward are adjusted for inflation based on changes in the Israeli CPI. The net effect of
the Adjustment for Inflation Law on NUR might be that NURs taxable income, as
determined for Israeli corporate tax purposes, will be different than NURs U.S.
dollar income, as reflected in our consolidated financial statements, due to the
difference between the annual changes in the CPI and in the NIS exchange rate with respect
to the U.S. Dollar, causing changes in the effective tax rate.

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# Capital Gains Tax on
Sales of Our Ordinary Shares

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

Prior
to the tax reform, sales of our ordinary shares by individuals were generally exempt from
Israeli capital gains tax for so long as they were quoted on Nasdaq.

Pursuant
to the tax reform, generally, capital gains tax is imposed at a rate of 15% on real gains
derived on or after January 1, 2003, from the sale of shares in companies
(i) publicly traded on the Tel-Aviv Stock Exchange (TASE) or; (ii)
(subject to a necessary determination by the Israeli Minister of Finance) Israeli
companies publicly traded on a recognized stock exchange outside of Israel (such as NUR).
This tax rate does not apply to: (i) dealers in securities; (ii) shareholders that
report in accordance with the Inflationary Adjustment Law; or (iii) shareholders who
acquired their shares prior to an initial public offering (that are subject to a different
tax arrangement). The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a request may be made to the tax authorities to
consider the actual adjusted cost of the shares as the tax basis if it is higher than such
average price.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on the TASE, and are exempt from Israeli capital gains tax on any
gains derived from the sale of shares of Israeli companies publicly traded on a recognized
stock exchange outside of Israel; provided, however, that such capital gains are not
derived from a permanent establishment in Israel and provided further that such
shareholders did not acquire their shares prior to an initial public offering. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the
beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.

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

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

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# Taxation of Non-Resident
Holders of Shares

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

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

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

# U.S. Tax Considerations
Regarding Ordinary Shares

The
following is a general summary of the material United States federal income tax
consequences relating to the acquisition, ownership and disposition of our ordinary shares
by an investor that holds those shares as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the Code). The summary
is based on the tax laws of the United States, and existing final, temporary and proposed
Treasury Regulations, Revenue Rulings and judicial decisions, as in effect on the date
hereof, all of which are subject to prospective and retroactive changes, and to differing
interpretations. The summary does not purport to address all federal income tax
consequences that may be relevant to particular investors, and does not take into account
the specific circumstances of any particular investors, some of which (such as tax-exempt
entities, banks and financial institutions, insurance companies, broker-dealers, traders
in securities that elect to use a mark-to-market method of accounting for their securities
holdings, investors liable for alternative minimum tax, investors that own or are treated
as owning 10% or more of our voting stock, investors that hold ordinary shares as part of
a straddle, hedge, conversion transaction or other integrated transaction and investors
whose functional currency is not the U.S. dollar) may be subject to special tax rules.
ACCORDINGLY, PERSONS CONSIDERING THE PURCHASE OF ORDINARY SHARES SHOULD CONSULT THEIR OWN
TAX ADVISORS CONCERNING THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX LAWS, AS WELL
AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.

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For
purposes of this discussion, a U.S. Holder is any beneficial owner of shares
of our ordinary shares that, for U.S. federal income tax purposes, is:

| | (1) | an
individual citizen or resident of the United States,
| | --- | -------------------------------------------------------

| | (2) | a
corporation or other entity taxable as a corporation for U.S. federal income
               tax purposes organized in or under the laws of the United States or any
               political subdivision thereof,
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | an
estate the income of which is subject to U.S. federal income tax without
               regard to its source, or
| | --- | -------------------------------------------------------------------------------------------------------------------

| | (4) | a
trust, if such trust validly elects to be treated as a U.S. person for U.S.
               federal income tax purposes, or if (a) a court within the U.S. can
exercise                primary supervision over its administration and (b) one or more
U.S. persons                have the authority to control all of the substantial
decisions of such trust.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
a partnership (including for this purpose any entity treated as a partnership for U.S. tax
purposes) is a beneficial owner of shares of our ordinary shares, the U.S. tax treatment
of a partner in the partnership will generally depend on the status of the partner and the
activities of the partnership. A holder of shares of our ordinary shares that is a
partnership and partners in such partnership should consult their individual tax advisors
about the U.S. federal income tax consequences of holding and disposing of shares of our
ordinary shares.

A
Non-U.S. Holder is any beneficial owner of shares of our ordinary shares that
is not a U.S. Holder.

# Taxation of U.S. Holders

Distributions
on Ordinary Shares. Subject to the discussion in Passive Foreign Investment
Companies below, distributions made by us with respect to ordinary shares generally
will constitute dividends for federal income tax purposes and will be taxable to a U.S.
Holder as dividend income to the extent of our undistributed current or accumulated
earnings and profits (as determined for United States federal income tax purposes).
Distributions in excess of our current or accumulated earnings and profits will be treated
first as a nontaxable return of capital reducing the U.S. Holders tax basis in the
ordinary shares, thus increasing the amount of any gain (or reducing the amount of any
loss) which might be realized by such Holder upon the sale or exchange of such ordinary
shares. Any such distributions in excess of the U.S. Holders tax basis in the
ordinary shares will be treated as capital gain to the U.S. Holder and will be either long
term or short term capital gain depending upon the U.S. Holders federal income tax
holding period for the ordinary shares. Dividends paid by us generally will not be
eligible for the dividends received deduction available to certain United States corporate
shareholders under Code Sections 243 and 245. If you are a noncorporate U.S. Holder,
dividends paid to you in taxable years beginning before January 1, 2009, that constitute
qualified dividend income will be taxable to you at a maximum rate of 15% provided that
you hold ordinary shares for more than 60 days during the 120-day period beginning 60 days
before the ex-dividend date and meet other holding period requirements.

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A
dividend paid in Israeli NIS will be included in gross income in a U.S. dollar amount
based on the Israeli NIS/U.S. dollar exchange rate in effect on the date the dividend is
included in the income of the U.S. Holder, regardless of whether the payment, in fact, is
converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend payment is included in the gross
income of a U.S. Holder through the date that payment is converted into U.S. dollars (or
otherwise disposed of) will be treated as U.S. source ordinary income or loss and will not
be eligible for the special tax rate applicable to qualified dividend income.

Subject
to certain conditions and limitations, any Israeli withholding tax imposed upon
distributions which constitute dividends under United States income tax law will be
eligible for credit against a U.S. Holders federal income tax liability.
Alternatively, a U.S. Holder may claim a deduction for such amount, but only for a year in
which a U.S. Holder elects to do so with respect to all foreign income taxes. The overall
limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed with respect to our
ordinary shares will generally constitute passive income.

Sale
or Exchange of Ordinary Shares. Subject to the discussion in Passive Foreign
Investment Companies below, a U.S. Holder of ordinary shares generally will
recognize capital gain or loss upon the sale or exchange of the ordinary shares measured
by the difference between the amount realized and the U.S. Holders tax basis in the
ordinary shares. Gain or loss will be computed separately for each block of shares sold
(shares acquired separately at different times and prices). The deductibility of capital
losses is restricted and generally may only be used to reduce capital gains to the extent
thereof. However, individual taxpayers generally may deduct annually $3,000 of capital
losses in excess of their capital gains.

Passive
Foreign Investment Company. A foreign corporation generally will be treated as a
passive foreign investment company (PFIC) if, after applying
certain look-through rules, either (i) 75% or more of its gross income is
passive income or (ii) 50% or more of the average value of its assets is attributable to
assets that produce or are held to produce passive income. Passive income for this purpose
generally includes dividends, interest, rents, royalties and gains from securities and
commodities transactions. The look-through rules require a foreign corporation that owns
at least 25%, by value, of the stock of another corporation to treat a proportionate
amount of assets and income as held or received directly by the foreign corporation. We
must make a separate determination each year as to whether we are a PFIC. As a result, our
PFIC status may change. The determination of whether or not we are a PFIC depends on the
composition of our income and assets, including goodwill, from time to time.

Based
on our current operations, we do not believe that we currently are a PFIC and we do not
anticipate that we will be a PFIC in the future. However, there can be no assurance that
we are not and will not be treated as a PFIC in the future. If we are classified as a
PFIC, U.S. Holders who own our ordinary shares during the taxable year in which we become
a PFIC generally will be subject to increased U.S. tax liabilities and reporting
requirements for that taxable year and all succeeding years, regardless of whether we
continue to meet the income or asset test for PFIC status, although shareholder elections
may apply in certain circumstances. U.S. Holders should consult their own tax advisors
regarding our status as a PFIC and the consequences of investment in a PFIC.

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If
we are a PFIC for any taxable year during which you hold ordinary shares, you will be
subject to special tax rules with respect to any excess distribution that you
receive and any gain you realize from a sale or other disposition (including a pledge) of
the ordinary shares, unless you make a mark-to-market election as discussed
below. Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three preceding
taxable years or your holding period for the ordinary shares will be treated as an excess
distribution. Under these special tax rules:

| | (1) | the
excess distribution or gain will be allocated ratably over your holding
               period for the ordinary shares,
| | --- | --------------------------------------------------------------------------------------------------------------------------

| | (2) | the
amount allocated to the current taxable year, and any taxable year prior to
               the first taxable year in which we were a PFIC, will be treated as
ordinary                income, and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | the
amount allocated to each other year will be subject to tax at the highest
               tax rate in effect for that year and the interest charge generally
applicable to                underpayments of tax will be imposed on the resulting tax
attributable to each                such year.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
tax liability for amounts allocated to years prior to the year of disposition or
excess distribution cannot be offset by any net operating losses, and gains
(but not losses) realized on the sale of the ordinary shares cannot be treated as capital,
even if you hold the ordinary shares as capital assets.

If
we are a PFIC, you may avoid taxation under the rules described above by making a
qualified electing fund election to include your share of our income on a
current basis, or a deemed sale election once we no longer qualify as a PFIC.
However, you may make a qualified electing fund election only if we agree to furnish you
annually with certain tax information, and we do not presently intend to prepare or
provide such information.

Alternatively,
a U.S. Holder of marketable stock in a PFIC may make a mark-to-market election
for stock of a PFIC to elect out of the tax treatment discussed three paragraphs above. If
you make a mark-to-market election for the ordinary shares, you will include in income
each year an amount equal to the excess, if any, of the fair market value of the ordinary
shares as of the close of your taxable year over your adjusted basis in such ordinary
shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the
ordinary shares over their fair market value as of the close of the taxable year. However,
deductions are allowable only to the extent of any net mark-to-market gains on the stock
included in your income for prior taxable years. Amounts included in your income under a
mark-to-market election, as well as gain on the actual sale or other disposition of the
ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to
the deductible portion of any mark-to-market loss on the ordinary shares, as well as to
any loss realized on the actual sale or disposition of the ordinary shares, to the extent
that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ordinary shares. Your basis in the ordinary shares will be adjusted to
reflect any such income or loss amounts. The tax rules that apply to distributions by
corporations which are not passive foreign investment companies would apply to
distributions by us.

93

---

---

The
mark-to-market election is available only for stock which is regularly traded on a
national securities exchange that is registered with the Securities and Exchange
Commission or on Nasdaq, or an exchange or market that the U.S. Secretary of the Treasury
determines has rules sufficient to ensure that the market price represents a legitimate
and sound fair market value. The ordinary shares currently are listed on the Nasdaq
SmallCap Market. However, if the ordinary shares are delisted from the Nasdaq SmallCap
Market (see Risk Factors-We may not comply with the Nasdaq SmallCap Market
standards), the mark-to-market election may not be available to you if we were to
become a PFIC.

Dividends
paid by a PFIC are not qualified dividend income for purposes of the
preferential tax rate on qualified dividends discussed above.

If
you hold ordinary shares in any year in which we are a PFIC, you would be required to file
Internal Revenue Service Form 8621 regarding distributions received on the ordinary shares
and any gain realized on the disposition of the ordinary shares.

# Taxation of Non-U.S.
Holders

Distributions
on Ordinary Shares. Distributions made with respect to our ordinary shares to non-U.S.
Holders who are not engaged in the conduct of a trade or business within the United States
will be subject to United States federal income tax only if 25% or more of our gross
income (from all sources for the three-year period ending with the close of the taxable
year preceding the declaration of the distribution) was effectively connected with our
conduct of a trade or business in the United States. We do not anticipate engaging in the
conduct of a trade or business within the United States, except through subsidiaries.
However, if the 25% threshold for such period is exceeded, a portion of any distribution
paid by us to a non-U.S. Holder could be subject to federal income tax withholding at the
rate of 30%; the portion of the distribution that could be subject to withholding would
correspond to the portion of our gross income for the period that is effectively connected
to its conduct of a trade or business within the United States.

Sale
or Exchange of Ordinary Shares. A non-U.S. Holder will not be subject to United States
federal income tax on any gain realized upon the sale or exchange of ordinary shares
unless (i) the gain is effectively connected with a trade or business in the United States
of the non-U.S. Holder, or (ii) the non-U.S. Holder is an individual who was present in
the United States for 183 days or more in the taxable year of the disposition and other
conditions exist.

United
States Business. Dividends and gains that are effectively connected with a Non-U.S.
Holders conduct of a trade or business in the United States generally will be
subject to tax in the same manner as they would be for U.S. Holder. Effectively connected
dividends and gains received by a corporate Non-U.S. Holder may also be subject to an
additional branch profits tax at a 30% rate or a lower tax treaty rate.

94

---

---

# Backup Withholding and
Information Reporting

In
general, information reporting requirements will apply to dividends in respect of our
ordinary shares or the proceeds received on the sale, exchange or redemption of our
ordinary shares paid within the United States (and in certain cases, outside the United
States) to U.S. Holders other than certain exempt recipients, such as corporations, and a
30% backup withholding tax may apply to such amounts if the U.S. Holder fails to provide
an accurate taxpayer identification number or to report interest and dividends required to
be shown on its U.S. federal income tax returns. The amount of any backup withholding from
a payment to a U.S. Holder will be allowed as credit against the U.S. Holders U.S.
federal income tax liability provided that the appropriate returns are filed.

A
Non-U.S. Holder generally may eliminate the requirement for information reporting and
backup withholding by providing certification of its foreign status to the payor, under
penalties of perjury, on IRS Form W-8BEN.

|F. | Dividends
and paying agents
|-- | ---------------------------

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

|G. | Statement
by experts
|-- | --------------------

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

|H. | Documents
on display
|-- | --------------------

Any
statement in this annual report about any of our contracts or other documents is not
necessarily complete. If the contract or document is filed as an exhibit to a registration
statement, the contract or document is deemed to modify the description contained in this
annual report. You must review the exhibits themselves for a complete description of the
contract or document.

You
may review a copy of our filings with the SEC, including exhibits and schedules, and
obtain copies of such materials at the SECs public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W, Washington, D.C. 20549. You may also obtain copies
of such materials from the Public Reference Section of the SEC, Room 1580, 100 Street,
N.E., Washington, D.C. 20549, at proscribed rates. You may call the SEC at 1-800-SEC-0330
for further information on the public reference room. The SEC maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC.

These
SEC filings are also available to the public from commercial document retrieval services.

|I. | Subsidiary
Information
|-- | ----------------------

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

95

---

---

# ITEM 11: Quantitative
and Qualitative Disclosures About Market Risk

Market
risks relating to NURs operations result primarily from weak economic conditions in
the markets in which NUR sells its products and from changes in exchange rates or in
interest rates.

Inflation, Deflation and
Fluctuation of Currencies

| | See
Item 5.A: Impact of Inflation, Deflation and Fluctuation of Currencies.
| | -----------------------------------------------------------------------------

Interest Rate

NURs
exposure to market risk due to changes in interest rates relates primarily to NURs
long-term loans interest rate variation. As of December 31, 2004 we had a balance of
$28.87 million of long term loans carrying annual interest rates ranging between LIBOR +
2.25% and LIBOR + 2.5%. Changes in the LIBOR interest rate might affect our financial
expenses. As of March 31, 2005 $28.12 million were outstanding in the aggregate under the
long-term loans.

NUR
does not otherwise believe the disclosure required by Item 11 of this annual report to be
material to NUR.

# ITEM 12: Description of
Securities Other Than Equity Securities

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

# PART II

# ITEM 13: Defaults,
Dividend Arrearages and Delinquencies

During
2004 NUR failed to meet certain of the financial covenants governing its long-term and
short-term loans. However, under the terms of with our lender banks dated June 29, 2005,
the banks agreed to waive these defaults for all periods prior to March 31, 2005. We
believe that the new financial covenants set forth in our recent agreements with our lender
banks for the second, third and fourth quarters of 2005 will allow a better alignment
between the financial covenants and NURs business plan for 2005. For more information
see Item 10.C: Material Contracts.

ITEM 14: Material Modifications to
the Rights of Security Holders and Use of Proceeds

There
are no material modifications to, or qualifications of, the rights of security holders
that are required to be disclosed.

96

---

---

# ITEM 15: Controls and
Procedures

Disclosure Controls and
Procedures

We
performed an evaluation under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(c) and 15d-15(c) of the Securities Exchange Act of 1934) as of the
end of the period covered by this report and each has concluded that such disclosure
controls and procedures were effective as of such date to ensure that information required
to be disclosed in NURs reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.

Internal control over
Financial Reporting

Except
as stated below, there were no changes in NURs internal control over financial
reporting that occurred during the year ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, NURs internal control over
financial reporting. In addition, except as stated below, we have not identified any
significant deficiencies or material weaknesses in our internal controls.

NUR
has restated its previously issued financial results for the years 2002 through 2003. This
restatement was primarily the result of the implementation of a new revenue recognition
policy and deferred tax valuation with respect to 2003. Senior management concluded in
2004 that the previous revenue recognition policy did not suit the business environment of
NUR and did not provide appropriate control over financial reporting regarding revenue
recognition. In recognition of this material weakness, senior management, with the
assistance of the Audit Committee, adopted a revised revenue recognition policy.

Examination
of the previous policy regarding revenue recognition revealed that certain sales of
machines which were recorded by NUR as revenue were not actually installed. Therefore, the
previous policy constituted a material weakness in our internal control over financial
reporting.

The
new policy of revenue recognition that was adopted by NUR is designed to address that
weakness by recognizing revenues only upon installation of a machine. The changes to
internal control over financial reporting described above were implemented as of the fourth
quarter of 2004.

All
internal control systems no matter how well designed have inherent limitations. Therefore,
even those systems determined to be effective may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial statements preparation and
presentation. In addition, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

# ITEM 16: Reserved

97

---

---

# ITEM 16A: Audit
Committee Financial Expert

In
March 2004, the Board determined that it has at least one Audit Committee financial
expert, as defined in Item 16A of Form 20-F, serving on the Audit Committee. Lauri A.
Hanover has been designated as the Audit Committee financial expert. For additional
information regarding Lauri A. Hanovers financial experience, see Item 6:
Directors and Senior Management.

# ITEM 16B: Code of Ethics

NURs
Audit Committee and Board have adopted a code of ethics, as defined in Item 16B of Form
20-F, that applies to NURs chief executive officer, chief financial officer, vice president
of finance, controller and any other person bearing the title of vice president
 or higher in the Finance Department. A copy of the code of ethics has been filed
as an exhibit to our annual report of 2003 on Form 20-F.

There
are no material modifications to, or waivers from, the provisions of the code of ethics
that are required to be disclosed.

# ITEM 16C: Principal
Accountant Fees and Services

# Fees paid to the Auditors

Audit Fees

In
the years ended December 31, 2003 and December 31, 2004, the aggregate fees billed for
professional services rendered by our independent registered public accounting firm for the audit of our annual
financial statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal years
amounted to approximately $0.36 million and $0.4 million, respectively.

Audit-Related Fees

In
the years ended December 31, 2003 and December 31, 2004, the aggregate fees billed for
assurance and related services by our independent registered public accounting firm that are reasonably related
to the performance of the audit of NURs financial statements and are not under audit
fees mentioned above amounted to approximately $0.12 million and $0.2 million,
respectively. The audit related services included mainly audit services of the
subsidiaries related to the annual financial statements performed by external auditors.

98

---

---

Tax Fees

In
the years ended December 31, 2003 and December 31, 2004, the aggregate fees billed for
professional services rendered by our independent registered public accounting firm for tax compliance, tax
advice, and tax planning amounted to approximately $0.12 million and $0.1 million,
respectively. The nature of services was mainly focused international tax consultancy
services.

All Other Fees

In
the years ended December 31, 2003 and December 31, 2004, the aggregate fees billed for
products and services rendered by our independent registered public accounting firm other than the above reported
services amounted to approximately $0.04 million and $0.02 million, respectively. The
nature of the other services was mainly focused advisory services pertaining to approved
enterprise issues, transfer prices, etc.

# Audit Committees
pre-approval policies and procedures

Our
Audit Committee nominates and engages our independent auditors to audit our financial
statements. See also the description under the heading in Item 6.C:  Board Practices. In July 2003, our Audit Committee
also adopted a policy requiring management to obtain the Audit Committees approval
before engaging our independent auditors worldwide to provide any other audit or permitted
non-audit services to us. Pursuant to this policy, which is designed to assure that such
engagements do not impair the independence of our auditors, the Audit Committee
pre-approves annually a catalog of specific audit and non-audit services in the categories
audit service, audit-related service and tax services that may be performed by our
auditors.

# ITEM 16D: Exemptions
from the Listing Standards for Audit Committees

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

# ITEM 16E: Purchase of
Equity Securities by the Company and Affiliated Purchasers

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

# PART III

# ITEM 17: Financial
Statements

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

99

---

---

# ITEM 18: Financial
Statements

| | See
Financial Statements included at the end of this report.
| | ------------------------------------------------------------

100

---

---

# ITEM 19: Exhibits

|Number |  | Description
|------ |  | -----------

|1.1 |  | Memorandum
of Association of the Registrant, in Hebrew with a translation to English(1)
|--- |  | ---------------------------------------------------------------------------------------

|1.2 |  | Amended
and Restated Articles of Association of the Registrant
|--- |  | --------------------------------------------------------------

|1.3 |  | Certificate
of Name Change(2)
|--- |  | -----------------------------

|2.1 |  | Specimen
Certificate for ordinary shares(1)
|--- |  | -------------------------------------------

|2.2 |  | Forms
of Placement Agent's Warrant Agreement and Certificate(3)
|--- |  | ---------------------------------------------------------------

|2.3 |  | Forms
of Qualified Independent Underwriter's Warrant Agreement and Certificate(3)
|--- |  | ---------------------------------------------------------------------------------

|2.4 |  | Form
of Share and Warrant  Purchase  Agreement  dated January 17, 2002 between the  Registrant
and The                Investment Corp. of United Mizrahi Bank Ltd.(4)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.5 |  | Form
of Warrant  Agreement,  dated January 17, 2002 between the Registrant and The Investment
Corp. of                United Mizrahi Bank Ltd.(4)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|2.6 |  | Form
of  Registration  Rights  Agreement,  dated  January 17,  2002  between  the  Registrant
 and The                Investment Corp. of United Mizrahi Bank Ltd.(4)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.7 |  | Form
of Warrant Agreement, dated February 12, 2002 between the Registrant and Bank Hapoalim
B.M.(4)
|--- |  | ---------------------------------------------------------------------------------------------------

|2.8 |  | Form
of Registration  Rights Agreement,  dated February 12, 2002 between  Registrant and Bank
Hapoalim                B.M.(4)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.9 |  | Form
of Warrant  Agreement,  dated February 12, 2002 between the  Registrant and Bank Leumi
 le-Israel                Ltd.(4)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.10 |  | Form
of  Registration  Rights  Agreement,  dated  February 12, 2002 between  Registrant and
Bank Leumi                le-Israel Ltd.(4)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|2.11 |  | Form
of Warrant  Agreement,  dated November 21, 2002 between the Registrant and Poalim Capital
Markets                & Investments Ltd.(5)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|2.12 |  | Form
of  Registration  Rights  Agreement,  dated  November 7, 2002 between the  Registrant
 and Poalim                Capital Markets & Investments Ltd.(5)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|2.13 |  | Form
of Warrant Agreement dated, March 11, 2003 between the Registrant and Bank Hapoalim
B.M.(5)
|---- |  | ------------------------------------------------------------------------------------------------

|2.14 |  | Form
of  Registration  Rights  Agreement,  dated March 11, 2003 between  Registrant  and Bank
Hapoalim                B.M.(5)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.15 |  | Form
of Warrant  Agreement,  dated March 11,  2003  between the  Registrant  and Bank Leumi
 le-Israel                Ltd.(5)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.16 |  | Form
of  Registration  Rights  Agreement,  dated  March 11,  2003  between  Registrant  and
Bank Leumi                le-Israel Ltd.(5)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|2.17 |  | Form
of  Convertible  Loan and  Warrant  Agreement,  dated July 2003  between  Registrant  and
certain                investors(6)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|2.18 |  | Form
of Warrant Agreement, dated October 15, 2003 between the Registrant and certain
investors(6)
|---- |  | -------------------------------------------------------------------------------------------------

101

---

---

|Number |  | Description
|------ |  | -----------

|2.19 |  | Form
 of  Registration  Rights  Agreement,  dated  July,  2003  between  the  Registrant  and
 certain                investors(6)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|2.20 |  | Form
of Warrant  Agreement,  dated October 15, 2003 between the Registrant and the Placement
 Agent (X                Securities Ltd.)(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|2.21 |  | Form
of Warrant  Agreement,  dated October 15, 2003 between the  Registrant  and the
 Placement  Agent                (Matthew Norton)(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|2.22 |  | Form
of Warrant  Agreement,  dated October 15, 2003 between the  Registrant  and the
 Placement  Agent                (David Fuchs)(6)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------

|2.23 |  | Form
of Warrant Agreement, dated August 1, 2003 between the Registrant and Bank Hapoalim
B.M.(6)
|---- |  | ------------------------------------------------------------------------------------------------

|2.24 |  | Form
of Registration  Rights Agreement,  dated August 1, 2003 between the Registrant and Bank
Hapoalim                B.M.(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.25 |  | Form
of Warrant  Agreement,  dated  August 1, 2003  between the  Registrant  and Bank Leumi
 le-Israel                Ltd.(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.26 |  | Form
of  Registration  Rights  Agreement,  dated August 1, 2003 between the  Registrant and
Bank Leumi                le-Israel Ltd.(6)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|2.27 |  | Form
of Warrant Agreement, dated June 27, 2003 between the Registrant and Israel Discount Bank
Ltd.(6)
|---- |  | ------------------------------------------------------------------------------------------------------

|2.28 |  | Form
of Registration Rights Agreement,  dated June 27, 2003 between the Registrant and Israel
Discount                Bank Ltd.(6)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|2.29 |  | Form
of Warrant  Agreement,  dated  August 1, 2003 between the  Registrant  and Israel
 Discount  Bank                Ltd.(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|2.30 |  | Form
of  Registration  Rights  Agreement,  dated  August 1, 2003  between  the  Registrant
 and Israel                Discount Bank Ltd.(6)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|2.31 |  | Form
of Warrant Agreement, dated April 17, 2005 between the Registrant and Dan Purjes
|---- |  | -------------------------------------------------------------------------------------

|2.32 |  | Form
of Registration Rights Agreement, dated March 7, 2005 between the Registrant and Dan
Purjes
|---- |  | ------------------------------------------------------------------------------------------------

|3.1 |  | Voting
Agreement, dated January 23, 2005 between the Registrant and Dan Purjes (7)
|--- |  | ----------------------------------------------------------------------------------

|3.2 |  | Voting
 Trust  Agreement,  dated  March 7, 2005  between  the  Registrant,  Dan Purjes and
New York                Private Bank & Trust Company (8)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | 1995
Israel Stock Option Plan  (previously  referred to in Company  filings as the 1995
Flexible Stock                Incentive Plan or the 1995 Stock Option / Stock Purchase
Plan)(1)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Amendment
to the 1995 Israel Stock Option Plan(3)
|--- |  | -------------------------------------------------

|4.3 |  | 1997
Stock Option Plan(9)
|--- |  | -------------------------

|4.4 |  | 1998
Non-Employee Director Share Option Plan(10)
|--- |  | ------------------------------------------------

|4.5 |  | Amendment
to the 1998 Non-Employee Director Share Option Plan(8)
|--- |  | ----------------------------------------------------------------

|4.6 |  | 2000
Stock Option Plan(11)
|--- |  | --------------------------

102

---

---

|Number |  | Description
|------ |  | -----------

|4.7 |  | Lease
 Agreement for office space in Brussels,  Belgium  between  Nivellease,  S.A. and the
Registrant                dated November 26, 1996(3)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Lease
 Agreement for office space in Newton  Center,  Massachusetts  between WHTR Real Estate
 Limited                Partnership and the Registrant dated July 10, 1998(3)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Distribution
Agreement between Imaje S.A. and the Registrant dated June 26, 1995(1)
|--- |  | -----------------------------------------------------------------------------------

|4.10 |  | Bank
Hapoalim Loan Agreements(4)
|---- |  | --------------------------------

|4.11 |  | Bank
Hapoalim Rescheduling Loan Agreement dated February 10, 2002(4)
|---- |  | --------------------------------------------------------------------

|4.12 |  | Bank
Leumi le-Israel Loan Agreements(4)
|---- |  | ---------------------------------------

|4.13 |  | Bank
Leumi le-Israel Rescheduling Loan Agreement dated February 11, 2003(5)
|---- |  | ---------------------------------------------------------------------------

|4.14 |  | Bank
Hapoalim Amendment to the Rescheduling Loan Agreement dated March 11, 2003(5)
|---- |  | ----------------------------------------------------------------------------------

|4.15 |  | Bank
Leumi le-Israel Amendment to the Rescheduling Loan Agreement dated March 12, 2003(5)
|---- |  | -----------------------------------------------------------------------------------------

|4.16 |  | Bank
Hapoalim Amendment to the Rescheduling Loan Agreement dated August 7, 2003(6)
|---- |  | ----------------------------------------------------------------------------------

|4.17 |  | Bank
Leumi le-Israel Amendment to the Rescheduling Loan Agreement dated July 30, 2003(6)
|---- |  | ----------------------------------------------------------------------------------------

|4.18 |  | Israel
Discount Bank Amendment to the Rescheduling Loan Agreement dated July 30, 2003(6)
|---- |  | ----------------------------------------------------------------------------------------

|4.19 |  | Bank
Hapoalim Amendment to the Covenants dated February 18, 2004(6)
|---- |  | -------------------------------------------------------------------

|4.20 |  | Bank
Leumi le-Israel Amendment to the Covenants dated February 18, 2004(6)
|---- |  | --------------------------------------------------------------------------

|4.21 |  | Israel
Discount Bank Amendment to the Covenants dated February 22, 2004(6)
|---- |  | --------------------------------------------------------------------------

|4.22 |  | Bank
Hapoalim Waiver and Amendment to the Covenants dated June 29, 2005
|---- |  | -----------------------------------------------------------------------

|4.23 |  | Bank
Leumi le-Israel Waiver and Amendment to the Covenants dated June 29, 2005
|---- |  | ------------------------------------------------------------------------------

|4.24 |  | Israel
Discount Bank Waiver and Amendment to the Covenants dated June 29, 2005
|---- |  | ------------------------------------------------------------------------------

|4.25 |  | Lod
Lease Agreement  dated January 11, 2000 between A. Barzilai  Investments and Assets Ltd.
and Kamim                Investments and Assets Ltd. and the Registrant(12)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.26 |  | Amendment
to Lod Lease Agreement,  dated September 20, 2004 between A. Barzilai Investments and
Assets                Ltd. and Kamim Investments and Assets Ltd. and the Registrant
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.27 |  | Form
of Agreement  dated May 11, 2003 between the Registrant  and Ogen Dialogix  Ltd.,  Gera
Eiron and                NUR Pro Engineering Ltd.(6)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|8 |  | List
of Subsidiaries of the Registrant
|- |  | --------------------------------------

|11 |  | Code
of Ethics(6)
|-- |  | -----------------

|12.1 |  | Certification
of Principal  Executive  Officer required by Rule 13a-14(a) and Rule 15d-14(a)  (Section
               302 Certifications)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Principal  Financial  Officer required by Rule 13a-14(a) and Rule 15d-14(a)  (Section
               302 Certifications)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

103

---

---

|Number |  | Description
|------ |  | -----------

|13 |  | Certification
 of  Principal  Executive  Officer  and  Principal  Financial  Officer  required by Rule
               13a-14(b) and Rule 15d-14(b) (Section 906 Certifications)
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14.1 |  | Consent
of Kost Forer Gabbay & Kasierer
|---- |  | ---------------------------------------

|14.2 |  | Consent
of BDO McCabe Lo & Company
|---- |  | ----------------------------------

|14.3 |  | Consent
of Grant Thornton Hong Kong
|---- |  | -----------------------------------

---

|(1) | Previously
filed with NURs F-1 (File No. 33-93160) and incorporated by
                    reference herein.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Previously
filed with NURs Form 6-K dated January 7, 1998 and incorporated
                    by reference herein.
|--- | --------------------------------------------------------------------------------------------------------------------

|(3) | Previously
filed with NURs Form F-1 (File No. 333-66103) and incorporated
                    by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------

|(4) | Previously
filed with NURs Form 20-F for the year ended December 31, 2001
                    and incorporated by reference herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(5) | Previously
filed with NURs Form 20-F for the year ended December 31, 2002
                    and incorporated by reference herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(6) | Previously
filed with NURs Form 20-F for the year ended December 31, 2003
                    and incorporated by reference herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously
filed with NURs Form 6-K dated February 6, 2005 and
                    incorporated by reference herein.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(8) | Previously
filed with NURs Form 6-K dated April 18, 2005 and incorporated
                    by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------

|(9) | Previously
filed with NURs Form 20-F for the year ended December 31, 1997
                    and incorporated by reference herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(10) | Previously
filed with NURs Form 6-K dated November 13, 1998 and
                    incorporated by reference herein.
|---- | ----------------------------------------------------------------------------------------------------------------------

|(11) | Previously
filed with NURs Schedule TO-I (File No. 5-56015) on May 16,
                    2002 and incorporated by reference herein.
|---- | --------------------------------------------------------------------------------------------------------------------------------------

|(12) | Previously
filed with NURs Form 20-F for the year ended December 31, 2000
                    and incorporated by reference herein.
|---- | ------------------------------------------------------------------------------------------------------------------------------------

104

---

---

# SIGNATURES

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

| |  | NUR Macroprinters Ltd.BY: /S/ David AmirDavid AmirPresident and Chief Executive Officer
| |  | -----------------------------------------------------------------------------------------------------

Dated: July 14, 2005

105

---

---

# NUR MACROPRINTERS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2004

# IN U. S. DOLLARS

# INDEX

|                                                           | Page      
|---------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm    | F-2       
|Consolidated Balance Sheets                                | F-3 - F-4 
|Consolidated Statements of Operations                      | F-5       
|Statements of Changes in Shareholders' Equity (Deficiency) | F-6       
|Consolidated Statements of Cash Flows                      | F-7 - F-8 
|Notes to Consolidated Financial Statements                 | F-9 - F-48



---

---

| | n | Kost Forer Gabbay & Kasierer           | n | Phone: 972-3-6232525
| | - | -------------------------------------- | - | --------------------
| |   | 3 Aminadav St. 
Tel-Aviv 67067, Israel |   | Fax: 972-3-5622555  

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders ofNUR MACROPRINTERS LTD.

We
have audited the accompanying consolidated balance sheets of NUR Macroprinters Ltd.
(the Company) and its subsidiaries as of December 31, 2003 and 2004 and the
related consolidated statements of operations, changes in shareholders equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of certain
consolidated subsidiaries, whose assets constitute 7% in 2003 and 5% in 2004 of total
consolidated assets and whose revenues constitute 15% in 2003 and 9% in 2004 of total
consolidated revenues. Those financial statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to amounts
included for these subsidiaries, is based solely on the reports of the other auditors.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits and
the reports of the other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of the other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2003 and 2004 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States.

As
described in Note 1g to the consolidated financial statements, the accompanying 2002 and
2003 financial statements, have been restated to correct amounts previously reported in
connection with revenue transactions and deferred tax valuation .

The
accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1b to the
accompanying consolidated financial statements, the Company has incurred recurring
operating losses and, has a working capital deficiency. In addition, the Company has not
complied with certain covenants of loan agreements with banks. These conditions raise
substantial doubt as to the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 1b. The
financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

|Tel-Aviv, Israel            
June 6, 2005 except as      
to Notes 1b, 10 and 11e
which are dated July 10, 2005 |  | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------

F - 2

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|CONSOLIDATED BALANCE SHEETS                
|                                           
|U.S. dollars in thousands                  

|                                                                         | December 31,
|------------------------------------------------------------------------ | ------------
|
|
|
|
|ASSETS                                                                   |             
|                                                                         |             
|CURRENT ASSETS:                                                          |             
|Cash and cash equivalents                                                |             
|Short-term restricted cash                                               |             
|Trade receivables (net of allowance for doubtful accounts of $ 4,963 and |             
|$ 11,010 as of December 31, 2003 and 2004, respectively)                 |             
|Other accounts receivable and prepaid expenses (Note 3)                  |             
|Inventories (Note 4)                                                     |             
|                                                                         |             
|                                                                         |             
|Total current assets                                                     |             
|                                                                         |             
|                                                                         |             
|LONG-TERM INVESTMENTS:                                                   |             
|Long-term trade receivables (Note 5)                                     |             
|Investments in an affiliated company (Note 6)                            |             
|Restricted long-term bank deposits (Note 7)                              |             
|Severance pay fund                                                       |             
|Long-term prepaid expenses                                               |             
|                                                                         |             
|                                                                         |             
|Total long-term investments                                              |             
|                                                                         |             
|                                                                         |             
|PROPERTY, PLANT AND EQUIPMENT, NET (Note 8)                              |             
|                                                                         |             
|                                                                         |             
|TECHNOLOGY AND OTHER INTANGIBLE ASSETS, NET (Note 9)                     |             
|                                                                         |             
|                                                                         |             
|Total assets                                                             |             
|                                                                         |             

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

F - 3

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES  
|---------------------------------------------
|                                             
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|U.S. dollars in thousands (except share data)

|                                                                           | December 31,
|-------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' DEFICIENCY                                   |             
|                                                                           |             
|CURRENT LIABILITIES:                                                       |             
|Short-term bank credit and loans (Note 10)                                 |             
|Current maturities of long-term loans (Note 11)                            |             
|Trade payables                                                             |             
|Trade payables to affiliated company (Note 6)                              |             
|Other accounts payable and accrued expenses (Note 12)                      |             
|                                                                           |             
|                                                                           |             
|Total current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|LONG-TERM LIABILITIES:                                                     |             
|Long-term loans, net of current maturities (Note 11)                       |             
|Accrued severance pay                                                      |             
|                                                                           |             
|                                                                           |             
|Total long-term liabilities                                                |             
|                                                                           |             
|                                                                           |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)                           |             
|                                                                           |             
|SHAREHOLDERS' DEFICIENCY (Note 15):                                        |             
|Share capital                                                              |             
|Ordinary shares of NIS 1 par value:                                        |             
|Authorized: 50,000,000 shares as of December 31, 2003 and 2004; Issued and |             
|outstanding: 17,414,281 and 26,165,215 shares as of December 31, 2003 and  |             
|2004, respectively                                                         |             
|Additional paid-in capital                                                 |             
|Receipts on account of shares                                              |             
|Accumulated other comprehensive loss                                       |             
|Accumulated deficit                                                        |             
|                                                                           |             
|                                                                           |             
|Total shareholders' deficiency                                             |             
|                                                                           |             
|                                                                           |             
|Total liabilities and shareholders' deficiency                             |             
|                                                                           |             

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

F - 4

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|CONSOLIDATED STATEMENTS OF OPERATIONS                     
|                                                          
|U.S. dollars in thousands, except share and per share data

|                                                               | Year ended December 31,
|-------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues (Note 17):                                            |                        
|Sales of printers, related products and services               |                        
|                                                               |                        
|                                                               |                        
|Cost of revenues:                                              |                        
|Cost of sales of printers and related products (a)             |                        
|Inventory write-off                                            |                        
|                                                               |                        
|                                                               |                        
|Total cost of revenues                                         |                        
|                                                               |                        
|                                                               |                        
|Gross profit                                                   |                        
|                                                               |                        
|                                                               |                        
|Operating expenses:                                            |                        
|Research and development, net (Note 18a)                       |                        
|Selling and marketing                                          |                        
|General and administrative                                     |                        
|Doubtful accounts expenses                                     |                        
|Impairment of goodwill (Note 2k)                               |                        
|Amortization and impairment of technology and other            |                        
|intangible assets (Note 2k)                                    |                        
|Restructuring charges (Note 1f)                                |                        
|                                                               |                        
|                                                               |                        
|Total operating expenses                                       |                        
|                                                               |                        
|                                                               |                        
|Operating loss                                                 |                        
|Financial expenses, net (Note 18b)                             |                        
|Other expenses, net                                            |                        
|                                                               |                        
|                                                               |                        
|Loss before taxes on income                                    |                        
|Taxes on income (Note 16d)                                     |                        
|                                                               |                        
|                                                               |                        
|Net loss                                                       |                        
|                                                               |                        
|                                                               |                        
|Basic and diluted net loss per share                           |                        
|                                                               |                        
|                                                               |                        
|Weighted average number of shares used for computing basic and |                        
|diluted net loss per share                                     |                        
|                                                               |                        

|(a) | Cost of sales includes purchases from related parties for the years ended
                    December 31, 2002, 2003 and 2004 in the amounts of $ 9,026, $ 8,273
                    and $ 801, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 5

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES               
|----------------------------------------------------------
|                                                          
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
|                                                          
|U.S. dollars in thousands (except share data)             

|                                                                                               | Number of
Ordinary
shares
outstanding | Share
capital | Additional
paid-in
capital | Receipts
on
account of
shares | Accumulated
other
comprehensive
loss | Accumulated
deficit | Total
comprehensive
loss | Total
shareholders'
equity
(deficiency)
|---------------------------------------------------------------------------------------------- | ------------------------------------- | ------------- | -------------------------- | ----------------------------- | ------------------------------------ | ------------------- | ------------------------ | ---------------------------------------
|
|
|
|
|Balance as of January 1, 2002                                                                  |                                       |               |                            | 14,751,753                    |                                      | $                   | 3,674                    |                                        
|Comprehensive loss:                                                                            |                                       |              
|Net loss                                                                                       |                                       |               |                            |                              |                                      |                     |                         |                                        
|Other comprehensive loss:                                                                      |                                       |              
|Foreign currency translation adjustments                                                       |                                       |               |                            |                              |                                      |                     |                         |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|Total comprehensive loss                                                                       |                                       |               |                            |                               |                                      |                     |                          |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|Issuance of shares, net                                                                        |                                       |               |                            | 2,404,106                     |                                      |                     | 528                      |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|                                                                                               |                                       |              
|                                                                                               |                                       |              
|Balance as of December 31, 2002                                                                |                                       |               |                            | 17,155,859                    |                                      |                     | 4,202                    |                                        
|Comprehensive loss:                                                                            |                                       |              
|Net loss                                                                                       |                                       |               |                            |                              |                                      |                     |                         |                                        
|Other comprehensive loss:                                                                      |                                       |              
|Foreign currency translation adjustments                                                       |                                       |               |                            |                              |                                      |                     |                         |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|Total comprehensive loss                                                                       |                                       |               |                            |                               |                                      |                     |                          |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|Issuance of shares to the chairman of the 
   board of directors for services rendered,    net |                                       |               |                            | 184,754                       |                                      |                     | 42                       |                                        
|Exercise of employee stock options                                                             |                                       |               |                            | 73,668                        |                                      |                     | 17                       |                                        
|Receipts on account of shares, net                                                             |                                       |               |                            |                              |                                      |                     |                         |                                        
|Fair value of warrants granted in connection                                                   |                                       |              
|to convertible loan                                                                            |                                       |               |                            |                              |                                      |                     |                         |                                        
|Amortization of fair value of warrants                                                         |                                       |              
|granted in connection with convertible                                                         |                                       |              
|loan and warrants granted to banks and    investors                                            |                                       |               |                            |                              |                                      |                     |                         |                                        
|Beneficial conversion feature related to                                                       |                                       |              
|convertible loan                                                                               |                                       |               |                            |                              |                                      |                     |                         |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|                                                                                               |                                       |              
|                                                                                               |                                       |              
|                                                                                               |                                       |              
|Balance as of December 31, 2003                                                                |                                       |               |                            | 17,414,281                    |                                      |                     | 4,261                    |                                        
|Comprehensive loss:                                                                            |                                       |              
|Net loss                                                                                       |                                       |               |                            |                              |                                      |                     |                         |                                        
|Other comprehensive loss:                                                                      |                                       |              
|Foreign currency translation adjustments                                                       |                                       |               |                            |                              |                                      |                     |                         |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|Total comprehensive loss                                                                       |                                       |               |                            |                               |                                      |                     |                          |                                        
|                                                                                               |                                       |              
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|Issuance of shares (private placement)                                                         |                                       |               |                            | 2,586,140                     |                                      |                     | 573                      |                                        
|Issuance of shares related to Convertible    loan                                              |                                       |               |                            | 5,645,160                     |                                      |                     | 1,250                    |                                        
|Exercise of warrants                                                                           |                                       |               |                            | 43,460                        |                                      |                     | 10                       |                                        
|Issuance of shares to the chairman of the                                                      |                                       |              
|board of directors for services rendered,    net                                               |                                       |               |                            | 131,290                       |                                      |                     | 29                       |                                        
|Amortization of fair value of warrants                                                         |                                       |              
|granted in connection with convertible loan    and warrants granted to bank and investors      |                                       |               |                            |                              |                                      |                     |                         |                                        
|Exercise of employee stock options                                                             |                                       |               |                            | 344,884                       |                                      |                     | 75                       |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        
|                                                                                               |                                       |              
|Balance as of December 31, 2004                                                                |                                       |               |                            | 26,165,215                    |                                      | $                   | 6,198                    |                                        
|                                                                                               |                                       |               |                            |                               |                                      |                     |                          |                                        

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

F - 6

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|CONSOLIDATED STATEMENTS OF CASH FLOWS      
|                                           
|U.S. dollars in thousands                  

|                                                           | Year ended December 31,
|---------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                      |                        
|                                                           |                        
|Net loss                                                   |                        
|Adjustments to reconcile net loss to net cash used in      |                        
|operating activities:                                      |                        
|Depreciation, amortization and impairment of goodwill,     |                        
|technology and other intangible assets                     |                        
|Write-off of property and equipment                        |                        
|Issuance of shares to the chairman of the board of         |                        
|directors for services rendered, net                       |                        
|Beneficial conversion feature related to convertible loan  |                        
|Amortization of fair value of warrants                     |                        
|Loss on sale of property and equipment                     |                        
|Deferred income taxes, net                                 |                        
|Accrued severance pay, net                                 |                        
|Decrease in trade receivables                              |                        
|Decrease (increase) in other accounts receivable and       |                        
|prepaid expenses                                           |                        
|Increase in inventories                                    |                        
|Write-off of inventories                                   |                        
|Decrease in long-term trade receivables                    |                        
|Decrease in long-term related parties' accounts            |                        
|Decrease in long-term prepaid expenses                     |                        
|Increase (decrease) in trade payables                      |                        
|Increase (decrease) in trade payables from related parties |                        
|Increase (decrease) in other accounts payable and accrued  |                        
|expenses                                                   |                        
|                                                           |                        
|                                                           |                        
|Net cash used in operating activities                      |                        
|                                                           |                        
|                                                           |                        
|Cash flows from investing activities:                      |                        
|                                                           |                        
|Proceeds from (investment in) short-term restricted cash   |                        
|Proceeds from restricted long-term bank deposit and        |                        
|restricted cash                                            |                        
|Purchase of property and equipment                         |                        
|Proceeds from sale of property and equipment               |                        
|Payment for the purchase of "NUR Pro-Engineering Ltd." (*) |                        
|                                                           |                        
|                                                           |                        
|Net cash used in investing activities                      |                        
|                                                           |                        

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

F - 7

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|CONSOLIDATED STATEMENTS OF CASH FLOWS      
|                                           
|U.S. dollars in thousands                  

|                                                             | Year ended December 31,
|------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from financing activities:                        |                        
|                                                             |                        
|Proceeds from issuance of shares and warrants, net           |                        
|Proceeds from exercise of options, net                       |                        
|Proceeds from convertible loans, net                         |                        
|Short-term bank credit and short-term loans, net             |                        
|Principal payment of long-term loans                         |                        
|                                                             |                        
|                                                             |                        
|Net cash provided by financing activities                    |                        
|                                                             |                        
|                                                             |                        
|Effect of exchange rate changes on cash and cash equivalents |                        
|                                                             |                        
|                                                             |                        
|Decrease in cash and cash equivalents                        |                        
|                                                             |                        
|Cash and cash equivalents at the beginning of the year       |                        
|                                                             |                        
|                                                             |                        
|Cash and cash equivalents at the end of the year             |                        
|                                                             |                        
|                                                             |                        
|Non-cash activities:                                         |                        
|(1) Supplemental disclosure of cash flows activities:        |                        
|Cash paid during the year for:                               |                        
|                                                             |                        
|Interest                                                     |                        
|                                                             |                        
|                                                             |                        
|Income taxes                                                 |                        
|                                                             |                        
|                                                             |                        
|(2) Supplemental disclosure of non-cash operating financing  |                        
|activities:                                                  |                        
|Conversion of long-term loans into shares                    |                        
|                                                             |                        
|                                                             |                        
|Transfer of equipment from property, plant and               |                        
|equipment to inventory                                       |                        
|                                                             |                        
|                                                             |                        
|                                                             |                        
|(*) Payment for purchase of Nur Pro-Engineering Lt. (see     |                        
|Note 1c)                                                     |                        
|Fair value of assets acquired and liabilities assumed at     |                        
|the date of acquisition:                                     |                        
|Working capital, net (excluding cash and cash                |                        
|equivalents in the amount of $ 160)                          |                        
|Production Agreement                                         |                        
|                                                             |                        
|                                                             |                        
|                                                             |                        
|                                                             |                        

| | (*) | During
2003, the Company paid an advance of $ 460 from the total purchase price.
| | --- | --------------------------------------------------------------------------------

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

F - 8

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

NOTE 1:- GENERAL

| | a. | NUR
 Macroprinters  Ltd. (the  Company),  an Israeli  corporation,  and its
subsidiaries                      (collectively,  the Group)  develop,
 manufacture,  sell and provide services of digital                      printing systems
for on-demand,  short-run,  wide format and super-wide format printing as
                     well as related consumable products.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company operates  through  wholly-owned  subsidiaries for sales,  support services and
                     marketing  of the  Companys  products  in their  country  or
 region  of  domicile.  Such                      entities  include NUR Europe S.A.  (NUR
 Europe) in Belgium,  NUR  America,  Inc.  (NUR                      America)
in the U.S.,  NUR Asia  Pacific  Limited  (NUR Asia  Pacific) in Hong Kong
and                      NUR Japan Ltd. (NUR Japan).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company  manufactures  all its  printers in a single  plant  located in Rosh  HaAyin,
                     Israel.  The  Company  manufactures  ink in a  manufacturing  plant
 located in  Ashkelon,                      Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to principal markets and customers, see Note 17.
| | ---------------------------------------------------

| | b. | The
 financial  statements  have  been  prepared  on a  going  concern  basis,  which
 contemplates  the                      realization  of  assets  and the  satisfaction
 of  liabilities  in the  normal  course of                      business.  In 2004,
2003, and 2002, the Company had net losses of $ 22,515, $ 27,191,  and
                     $ 24,423,  respectively.  As of December 31, 2004, the Companys
shareholders  deficiency                      amounted  to $23,642  and its total
cash and cash  equivalents  amounted  to $ 8,745.  Net                      cash  used in
 operating  activities  in 2004,  2003,  and 2002 was $ 757,  $7,891,  and $
                     4,244,  respectively.  In light of the current  condition of the
Company and the amount of                      its liquid assets,  as described  above,
 if the Company  continues to incur losses and is                      unable  to  secure
 additional  financing  sources  to fund  its  operations,  there  is a
                     substantial  doubt  as to the  Companys  ability  to  continue
 as a  going  concern  and                      therefore  the  Company  may be  required
 to take  certain  actions  in order to meet its                      obligations.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Companys  management has taken  initiatives to lower  operating  expenses
in                      order to focus on  preserving  the  current  level of  operations
 and to slow down growth                      efforts.  Cost  reduction  initiatives
 include  reducing  the  current  staff head count,                      lowering R&D and
marketing  activities that were aimed at growth,  and further  monitoring
                     cost and  expenditure  controls.  Furthermore,  on June 30, 2005
Bank Hapoalim B.M.,  Bank                      Leumi  Israel B.M. and Israel  Discount
 Bank Ltd.  (the  Lender  Banks) gave waivers of                      default
 and the  outstanding  bank debt is  currently  not subject to  acceleration.  The
                     Lender Banks waived their  contractual  rights  related to the
 Companys  non  compliance                      with certain  agreed upon
 financial  covenants  for all previous  periods ended March 31,
                     2005.  The Lender  Banks waived  these  defaults and agreed that the
Company  shall not be                      obligated to make principal  repayments  until
January 1, 2006. The Lender Banks have also                      agreed to new financial
 covenants which will govern the Companys  credit lines (see also
                     Notes 10 and 11(e)).  The Company also  reported that it is
 continuing  discussions  with                      several parties and its Lender Banks
regarding a financial  transaction that  contemplates                      an investment
in, or strategic  partnership  with, the Company,  and the  restructuring of
                     the Companys  outstanding  debt. There can be no assurance
that any of these  discussions                      will result in a completed
transaction or transactions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

NOTE 1:- GENERAL (Cont.)

| | These
 financial  statements do not include any adjustments to reflect the possible future
                     effects  on  the   recoverability   and  classification  of  assets
 or  the  amounts  and                      classification  of  liabilities  that may
result  should the Company be unable to continue                      as a going concern.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Acquisition
of NUR Pro Engineering Ltd.:
| | -- | ----------------------------------------

| | NUR
Pro  Engineering  Ltd. (NUR Pro  Engineering),  a 50% joint venture,  was
engaged in                      the  assembly  of the  Companys  printers.  On May
11,  2003,  the  Company and the other                      shareholder of NUR Pro
Engineering  signed a share purchase  agreement  (the  Agreement)
                     since the Company  decided to  terminate  the  cooperation  through
the joint  venture and                      transfer  the assembly of the printers to its
full  control.  According to the  Agreement,                      the Company purchased
the remaining shares held by the other shareholder  (i.e.,  50%), in
                     consideration  for $ 850,  which were paid in monthly  installments
 until March 31, 2004.                      The Company completed the acquisition of NUR
Pro Engineering during 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
operations of NUR Pro  Engineering  are included in the  consolidated  statements from
                     April 1, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition  was accounted for using the purchase method of accounting,  in accordance
                     with SFAS No. 141, and  accordingly,  the purchase  price has been
allocated to the assets                      acquired and the  liabilities  assumed based
on their  estimated fair value at the date of                      acquisition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 following  table   summarizes  the  estimated  fair  value  of  assets  acquired  and
                     liabilities assumed at the date of acquisition:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 
|
|
|
|
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

| | (*) | Amortized
on a straight line basis over the useful life of the production           agreement (3
years).
| | --- | --------------------------------------------------------------------------------------------------------

| | Pro-forma
results of operations for the years ended December 31, 2002 and 2003 assuming that the
acquisition had been consummated as of January 1, 2002 and 2003 was not presented due to
immateriality.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 1:- GENERAL (Cont.)

| | d. | The
Company purchases some of the ink and all of the ink-jet printer-heads used           in
its printers from a single supplier for each series of printers. The           Companys
customers rely on the ink and ink-jet printerheads to operate           their printers.
Because the Companys business depends on these items for           sale and
maintenance of its printers, a failure in supply or a change in credit           terms
could have a material adverse effect on the Companys results of
          operations and financial position.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | The
Company employs a limited number of unaffiliated subcontractors to           manufacture
components for its printers.
| | -- | -------------------------------------------------------------------------------------------------------------------------

| | Because
the Company relies on a limited number of subcontractors, if the Company fails to
maintain its relationships with its subcontractors or fails to develop alternative
sources for its printer components, it could have a material adverse effect on the Companys
results of operations and financial position.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Restructuring
charges:
| | -- | ----------------------

| | During
the second and fourth quarters of 2002 and the second quarter of 2003 the Company decided
to perform a series of strategic initiatives intending to further reduce costs and
increase efficiency. As a result, approximately 72 and 58 positions were eliminated by
the Group in 2002 and 2003, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
restructuring charges consisted of the following:
| | -----------------------------------------------------

| | In
2002:
| | --------

| | a) | Downsizing
the number of employees due to the reduction in sales levels.
| | -- | ------------------------------------------------------------------------

| | b) | Relocating
operations in Asia Pacific from China to Hong Kong.
| | -- | --------------------------------------------------------------

| | In
2003:
| | --------

| | a) | Consolidating
the operations of NUR Media Solutions S.A. (NUR Media           Solutions)
and NUR Europe.
| | -- | ----------------------------------------------------------------------------------------------------------

| | b) | Relocating
Salsa Digital Printers Ltd. (NUR Salsa) operations to           Israel.
| | -- | ------------------------------------------------------------------------------------

| | c) | Relocating
the operations of NUR Macroprinters (Shanghai) Ltd. (NUR           Shanghai)
to NUR Asia Pacific.
| | -- | --------------------------------------------------------------------------------------------------------------

| | In
connection with SFAS No. 146, Accounting for Costs Associated With An Exit Or
Disposal Activity (SFAS 146), the Group recorded during 2002 and 2003
restructuring charges of $ 1,300 and $ 2,001, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 1:- GENERAL (Cont.)

| |                                          | Year ended December 31,
| | ---------------------------------------- | -----------------------
|
|
|
|
| | Restructuring charges:                   |                        
| | Employee termination and severance costs |                        
| | Other exit costs                         |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        

| | g. | Restatement
of financial statements:
| | -- | ------------------------------------

| | The
Company has restated its financial statements for 2002 and 2003 to reflect revised
accounting treatment of revenue recognition accounting policies to revenues consummated
in 2001, 2002 and 2003, and deferred tax valuation in 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Historically,
the Company recognized revenue on its printers at time of shipment under the criteria
that evidence of an arrangement existed, the price was fixed, delivery had occurred and
collectibility was assured. Based upon the Companys review, it was determined that
the actual business practice in recent years had shown that the decline in market
conditions caused that in the customers point of view acceptance of the risk and
title of the printers occurred only after installation and not at shipment. Consequently,
the Company concluded that delivery had not in fact occurred upon shipment, and that
revenue had been prematurely recognized in those cases. The restatement adjustments for
revenue recognition resulted in adjustments to revenue, cost of sales, accounts
receivable and deferred revenues.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company determined, based on its review, that, as of December 31, 2003, it
should have recorded a full valuation allowance in respect of the remaining deferred tax
asset. The Companys decision was based on its history of losses in the past three
years and its belief that it is more likely than not that the deferred tax asset will not
be realized in the foreseeable future. Accordingly, the consolidated financial statements
for the year ended December 31, 2003 have been restated from amounts previously reported.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 1:- GENERAL (Cont.)

| | The
impacts of these restatements of the financial statements are summarized below:
| | -----------------------------------------------------------------------------------

| | Consolidated
statement of operations data:
| | ------------------------------------------

| |                                                  | Year ended December 31, 2003
| | ------------------------------------------------ | ----------------------------
|
|
|
|
| | Sales of printers, related products and services |                             
| | Cost of sales of printers and related products   |                             
| |                                                  |                             
| | Total cost of revenues                           |                             
| | Gross profit                                     |                             
| | Operating loss                                   |                             
| | Taxes on income                                  |                             
| | Net loss                                         |                             
| |                                                  |                             
| | Basic and diluted net loss per share             |                             
| |                                                  |                             
| | Consolidated statement of cash flows data:       |                             
| |                                                  |                             
|
|
| |                                                  |                             
| | Cash flows from operating activities:            |                             
| |                                                  |                             
| | Net loss                                         |                             
| |                                                  |                             
| | Decrease in trade receivables                    |                             
| | Increase in inventories                          |                             
| | Deferred income taxes                            |                             
| | Decrease in other accounts payable               |                             
| | Net cash used in operating activities            |                             
| |                                                  |                             
| | Consolidated balance sheet:                      |                             
| |                                                  |                             
|
|
| |                                                  |                             
| | Trade receivables                                |                             
| | Inventories                                      |                             
| | Total current assets                             |                             
| | Deferred income taxes                            |                             
| | Total assets                                     |                             
| | Other accounts payable                           |                             
| | Total current liabilities                        |                             
| | Accumulated deficit                              |                             
| | Total shareholders' deficiency                   |                             

F - 13

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 1:- GENERAL (Cont.)

| | Consolidated
statement of operations data:
| | ------------------------------------------

| |                                                  | Year ended December 31, 2002
| | ------------------------------------------------ | ----------------------------
|
|
|
|
| | Sales of printers, related products and services |                             
| | Cost of sales of printers and related products   |                             
| | Total cost of revenues                           |                             
| | Gross profit                                     |                             
| | Operating loss                                   |                             
| | Net loss                                         |                             
| |                                                  |                             
| | Basic and diluted net loss per share             |                             
| |                                                  |                             
| | Consolidated statement of cash flows data:       |                             
| |                                                  |                             
|
|
| |                                                  |                             
| | Cash flows from operating activities:            |                             
| | Net loss                                         |                             
| | Decrease in trade receivables                    |                             
| | Decrease in inventories                          |                             
| | Decrease in other accounts payable               |                             
| | Net cash used in operating activities            |                             
| |                                                  |                             
| | Consolidated balance sheet data:                 |                             
| |                                                  |                             
|
|
| |                                                  |                             
| | Trade receivables                                |                             
| | Inventories                                      |                             
| | Total current assets                             |                             
| | Total assets                                     |                             
| | Other accounts payable                           |                             
| | Total current liabilities                        |                             
| | Accumulated deficit                              |                             
| | Total shareholders' equity                       |                             

F - 14

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES

| | The
consolidated financial statements have been prepared according to United States generally
accepted accounting principles (US GAAP), applied on a consistent basis, as
follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

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

| | b. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

| | The
Companys management believes that the currency of the primary economic environment
in which the operations of the Company and certain of its subsidiaries are conducted is
the U.S. dollar (dollar). Thus, the dollar is the reporting and functional
currency of the Company and certain of its subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys and certain subsidiaries transactions and balances denominated in
dollars are presented at their original amounts. Non-dollar transactions and balances
have been remeasured to dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, Foreign Currency Translation. All
transaction gains and losses from remeasurement of monetary balance sheet items
denominated in non-dollar currencies are reflected in the statements of operations as
financial income or expenses, as appropriate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
those subsidiaries whose functional currency has been determined to be their local
currency, assets and liabilities are translated at year-end exchange rates and statement
of operations items are translated at average exchange rates prevailing during the year.
Such translation adjustments are recorded as a separate component of accumulated other
comprehensive loss in shareholders equity (deficiency).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its wholly-
owned subsidiaries. Intercompany transactions and balances including profit from
intercompany sales not yet realized outside the Group, have been eliminated upon
consolidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible to cash
with original maturities of three months or less at the date acquired.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | e. | Short-term
restricted cash
| | -- | --------------------------

| | Short-term
restricted cash is primarily invested in highly liquid deposits, which are used as
security for certain of the Companys liabilities and obligations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value. The Company reviewed its inventory
quantities based primarily on its estimated forecast of product demand, production
requirements and servicing commitments and as a result, inventory write-offs were
provided to cover risks arising from slow-moving items, technological obsolescence,
excess inventories, discontinued products and for market prices lower than cost. The
Company recorded inventory write-offs in the amount of $ 975, $ 13,154 and $ 9,658 in
2002, 2003 and 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
is determined as follows:
| | ------------------------------

| | Raw
materials  using the average cost method.
| | ----------------------------------------------

| | Work-in-progress
and finished products  using the average cost method on the basis of direct
manufacturing costs with the addition of allocable indirect manufacturing costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Long-term
trade receivables:
| | -- | ----------------------------

| | Long-term
receivables from extended payment agreements are recorded at estimated present values
determined based on prevailing rates of interest at the date of transaction and reported
at the net amounts in the accompanying consolidated financial statements. Imputed
interest is recognized, using the effective interest method as a component of interest
income in the accompanying statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Investments
in an affiliated company:
| | -- | -------------------------------------

| | Affiliated
companies are companies held to the extent of 20% or more (which are not subsidiaries),
or companies less than 20% held, which the Company can exercise significant influence
over operating and financial policy of the affiliate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investment in an affiliated company is accounted for by the equity method.
Profits from intercompany sales, not realized outside the Group, were eliminated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investments in an affiliated company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an investment may
not be recoverable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investment
in an affiliated company represents investments in ordinary shares. The Company applies
EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses(EITF
No. 99-10). Accordingly, losses of the investee are recognized based on the
ownership level of the particular investee security held by the investor.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | As
of December 31, 2004, the Company has completed the acquisition of the affiliated
company, and as a result its financial statements are fully consolidated with the
financial statements of the Group (see Note 1b).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Property,
plant and equipment, net:
| | -- | -----------------------------------

| | Property,
plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated useful lives of the assets
at the following annual rates:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | %
| |  | -
|
|
|
|
| |  |  
| |  |  
| |  |  
| |  |  
| |  |  
| |  |  

| | j. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Groups long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with Statement of Financial Accounting Standard No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144),
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 the future undiscounted cash flows
expected to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. As of December 31, 2002 and 2003, impairment
losses in the amount of approximately $ 321 and $ 1,021 have been identified,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, no impairment losses were identified.
| | --------------------------------------------------

| | k. | Goodwill,
technology and other intangible assets:
| | -- | -------------------------------------------------

| | Intangible
assets acquired are amortized over their useful lives using a method of amortization that
reflects the pattern in which the economic benefits of the intangible assets are consumed
or otherwise used up, in accordance with Statement of Financial Accounting Standards No.
142 Goodwill and Other Intangible Assets, (SFAS No. 142).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Acquired
technology is amortized over 5 years, customer list is amortized over 7 years and
production agreement is amortized over 3 years. The Company recorded amortization
expenses during 2002, 2003 and 2004, in the amount of $ 2,054, $ 118 and $ 126,
respectively. The Company performed an impairment test during the fourth quarter of 2002,
2003 and 2004 and accordingly recognized an impairment loss of $ 6,995, $ 0 and $
736, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | Goodwill
represents excess of the costs over the net assets of businesses acquired. Goodwill
arising from acquisitions prior to July 1, 2001, was amortized until December 31, 2001,
on a straight-line basis over 10 years. As from January 1, 2002, pursuant to Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets(SFAS
No. 142) tested for impairment on adoption and at least annually thereafter or
between annual tests in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required. Goodwill attributable to
each of the reporting unit is tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value is determined using discounted cash
flows, market multiples and market capitalization. Significant estimates used in the
methodologies include estimates of future cash flows, future short-term and long-term
growth rates, weighted average cost of capital and estimates of market multiples for the
reportable unit. The Company performed the impairment test during the fourth quarter of
2002 and, accordingly, recognized an impairment loss of $ 3,836.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Revenue
recognition:
| | -- | --------------------

| | The
Company generates revenues from the sale of its printers, inks and consumable products
and from services to its products. The Company generates revenues from its products
directly to end-users and indirectly through independent distributors (which are
considered as end-users).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from printer sales are recognized in accordance with Staff Accounting Bulletin No. 104
Revenue Recognition in Financial Statements (SAB. No 104) upon
installation, provided that the collection of the resulting receivable is probable, there
is a persuasive evidence of an arrangement, no significant obligations in respect of
installation remain and the price is fixed or determinable. The Company does not grant a
right of return.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from ink and other consumable products are generally recognized upon shipment assuming
all other criteria have been met.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from services are comprised of maintenance and support arrangements. Revenues from
maintenance and support arrangements are deferred and recognized on a straight-line basis
over the term of the arrangement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Value
of trade-in transactions of the Companys printers are recorded at fair value in accordance with APB 29, Accounting for Non-monetary
Transactions, and EITF 01-2, Interpretations of APB Opinion No. 29",
when the cash consideration involved with such transactions is material.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenue includes amounts received from customers for which revenue has not yet been
recognized.
| | --------------------------------------------------------------------------------------------------------

F - 18

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | m. | Warranty
costs:
| | -- | ---------------

| | The
Group generally provides a warranty period of six months, at no extra charge. The Group
estimates the costs that may be incurred under its basic limited warranty and records a
liability in the amount of such costs at the time product revenue is recognized. Factors
that affect the Groups warranty liability include the number of installed units,
historical and anticipated rates of warranty claims, and cost per claim. The Group
periodically assesses the adequacy of its recorded warranty liabilities and adjusts the
amounts as necessary.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Groups liability during the year are as follows:
| | ----------------------------------------------------------------

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

| | n. | Research
and development costs:
| | -- | -------------------------------

| | Research
and development costs net of grants received are charged to the statement of operations
as incurred.
| | -------------------------------------------------------------------------------------------------------------

| | o. | Government
grants:
| | -- | ------------------

| | Royalty-bearing
grants from the Government of Israel for funding approved research and development
projects are recognized at the time the Company is entitled to such grants, on the basis
of the costs incurred and included as a reduction in research and development costs.
Research and development grants amounted to $ 1,449, $ 687 and $ 0 in 2002, 2003 and
2004, respectively. Total royalties expenses accrued or paid amounted to $ 180, $ 67 and $ 785
in 2002, 2003 and 2004, respectively and were recorded as part of the cost of revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is also entitled to non-royalty-bearing grants for its participation in the MAGNET project
financed by the Government of Israel. These grants are recognized at the time the Company
is entitled to such grants, on the basis of the costs incurred and are recorded as a
reduction in research and development expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | p. | Income
taxes:
| | -- | -------------

| | The
Group accounts for income taxes in accordance with Statement of Financial Accounting
Standards 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
Group provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Groups valuation allowance are as follows:
| | ----------------------------------------------------------

| |  | Valuation Allowance
for Deferred Tax Assets
| |  | -------------------------------------------
|
|
|
|
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            
| |  |                                            

| | q. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments that potentially subject the Group to concentrations of credit risk consist
principally of cash and cash equivalents, short-term restricted cash, trade receivables,
long-term trade receivables and restricted long-term bank deposits.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Groups cash and cash equivalents and short-term restricted cash are
invested in dollar and Euro instruments with major banks in Israel, the U.S., Asia and
Belgium. Management believes that the financial institutions that hold the Groups
investments are financially sound and accordingly, minimal credit risk exists with
respect to these investments. Such deposits in the United States may be in excess of
insured limits and are not insured in other jurisdictions. However, management believes
that such financial institutions are financially sound, and accordingly, minimal credit
risk exists with respect to these investments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | The
trade receivables and the long-term trade receivables of the Group are derived mainly
from sales to customers located primarily in the U.S. and Europe. Management believes
that credit risks are moderated by the diversity of its end-customers and geographic
sales areas. The Group performs ongoing credit evaluations of its customers financial
condition. The Group does not require collateral from its customers. An allowance for
doubtful accounts is determined with respect to specific debts that the Group has
determined to be doubtful of collection and a general reserve. The allowance was
determined principally on the basis of past collection experience applied to ongoing
evaluations of the receivables and evaluations of the default risks of repayment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Groups allowance for doubtful accounts are as follows:
| | ----------------------------------------------------------------------

| |  | Allowance for
Doubtful Accounts
| |  | -------------------------------
|
|
|
|
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                
| |  |                                

| | The
Group has no significant off-balance-sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Severance
pay:
| | -- | --------------

| | The
Companys liability for severance pay is calculated pursuant to Israels
Severance Pay Law based on the most recent salary of the employees multiplied by the
number of years of employment, as of the balance sheet date. Employees are entitled to
one months salary for each year of employment, or a portion thereof. The Companys
liability for all of employees, is fully provided by monthly deposits with severance pay
funds, insurance policies and by an accrual. The value of these policies is recorded as
an asset in the Companys consolidated balance sheet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israels
Severance Pay Law or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial profits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2002, 2003 and 2004 amounted to $ 716, $ 1,388
and $ 652, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | s. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Group in estimating their fair value
disclosures for financial instruments:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents, short-term restricted cash, trade
receivables, other accounts receivable and prepaid expenses, short-term bank credit,
current maturities of long-term loans, trade payables, trade payables to related parties,
customer advances and other accounts payable and accrued expenses approximate their fair
value, due to the short-term maturity of such instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of the Groups long-term trade receivables, long-term loans to an
affiliate and restricted long-term bank deposits, approximate their fair value. The fair
value was estimated using discounted cash flow analyses, based on the Groups
investment rates currently available for similar type of investment arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amount of the Groups long-term loans approximates their fair value. The
fair value was estimated using discounted cash flow analyses, based on the Groups
incremental borrowing rates for similar type of borrowing arrangements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to the statement of operations, as incurred. Advertising expenses
for the years ended December 31, 2002, 2003 and 2004 amounted to $ 261, $ 291
and $ 368, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Basic
and diluted net loss per share:
| | -- | -------------------------------------

| | Basic
net loss per share is computed based on the weighted average number of Ordinary shares
outstanding during each year. Diluted net loss per share is computed based on the
weighted average number of Ordinary shares outstanding during the period plus dilutive
potential Ordinary shares considered outstanding during the year, in accordance with
Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS
No. 128).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Outstanding
stock options and warrants have been excluded from the calculation of the diluted net
loss per Ordinary share when such securities are anti-dilutive for all periods presented.
The total weighted average number of shares related to the outstanding options and
warrants excluded from the calculations of diluted net loss per share was 1,194,630,
1,446,455 and 2,177,587 for the years ended December 31, 2002, 2003 and 2004,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | v. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

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

| | The
Company adopted the disclosure provisions of Financial Accounting Standards Board
Statement No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure (SFAS No. 148), which amended certain provisions of SFAS 123
to provide alternative methods of transition for an entity that voluntarily changes to
the fair value based method of accounting for stock-based employee compensation,
effective as of the beginning of the fiscal year. The Company continues to apply the
provisions of APB No. 25, in accounting for stock-based compensation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro
forma information regarding net income and net earnings per share is required under
Statement of Financial Accounting Standard No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123) and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No. 123. The
fair value for these options is amortized over their vesting period and estimated at the
date of grant using a Black-Scholes Option Valuation Model with the following
weighted-average assumptions for 2002, 2003 and 2004: risk-free interest rates of 2.0%,
3.2% and 3.25%, respectively; dividend yields of 0% for each year; volatility factors of
the expected market price of the Companys Ordinary shares of 0.78, 0.76 and 0.86,
respectively; and an expected average life of the option of 2 years for each year.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | The
following table illustrates the effect on net loss and loss per share, assuming that the
Company had applied the fair value recognition provision of SFAS 123 on its stock-based
employee compensation:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Year ended December 31,
| |  | -----------------------
|
|
|
|
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        

| | The
Company applies SFAS No. 123 and EITF 96-18 Accounting for Equity Instruments That
Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services (EITF 96-18) with respect to options issued to
non-employees. SFAS No. 123 requires use of an option valuation model to measure the fair
value of the options at the grant date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Derivative
activities:
| | -- | ----------------------

| | The
Company accounts for derivatives based on Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS
No. 133). SFAS No. 133 requires companies to recognize all of its derivative
instruments as either assets or liabilities in the statement of financial position at
fair value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
derivative instruments not designated as hedging instruments, the gain or loss is
recognized in financial expenses in current earnings during the period of change.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 28, 2002, the Company entered into call/put option agreement in the amount of
approximately $ 10,000, to be executed on June 26, 2003. The gain (loss) that resulted
was included in the statements of operations during 2002 and 2003, and was $ 221 and$
(5), respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | x. | Reclassification:
| | -- | -----------------

| | Certain
amounts from prior years have been reclassified to conform to the current year
presentation. The reclassification had no effect on previously reported net loss,
shareholders equity and cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | y. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, Inventory
Costs, an Amendment of ARB No. 43, Chapter 4.. SFAS No. 151 amends Accounting
Research Bulletin (ARB) No. 43, Chapter 4, to clarify that abnormal amounts
of idle facility expense, freight handling costs and wasted materials (spoilage) should
be recognized as current-period charges. In addition, SFAS 151 requires that the
allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SAFS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company does not
expect that the adoption of SFAS No. 151 will have a material effect on its financial
position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No.
123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement
of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative.
Early adoption will be permitted in periods in which financial statements have not yet
been issued. The new standard will be effective for the Company in the first interim
period beginning after January 1, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options. In addition, non-compensatory
plans under APB 25 will be considered compensatory for FAS 123(R) purposes. Accordingly,
the adoption of Statement 123(R)s fair value method will have a significant impact
on the Company result of operations, although it will have no impact on the Company
overall financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted Statement 123(R) in prior periods, the
impact of that standard would have approximated the impact of Statement 123 as described
in the disclosure of pro forma net income and earnings per share in Note 2v to the
consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107) to give
guidance on implementation of SFAS 123R, which the Company plans to consider in
implementing SFAS 123R.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 3:- OTHER ACCOUNTS
RECEIVABLE AND PREPAID EXPENSES

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

# NOTE 4:- INVENTORIES

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

# NOTE 5:- LONG-TERM TRADE
RECEIVABLES

| | The
aggregate annual maturities of long-term trade receivables from the sale of products are
as follows:
| | --------------------------------------------------------------------------------------------------------

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

F - 26

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 6:- INVESTMENTS IN
AN AFFILIATED COMPANY

| | Investment
in NUR Pro Engineering:
| | ----------------------------------

| |                                          | December 31,
| | ---------------------------------------- | ------------
|
|
|
|
| | Equity, net (1)                          |             
| | Long-term loans (2)                      |             
| |                                          |             
| |                                          |             
| | Total investments in NUR Pro Engineering |             
| |                                          |             
| |                                          |             
| | (1) Net equity as follows:               |             
| | Net equity as of purchase date           |             
| | Accumulated net earnings                 |             
| | Additional investment                    |             
| |                                          |             
| |                                          |             
| |                                          |             
| |                                          |             

| | *) | Represents
an amount lower than $ 1.
| | -- | ------------------------------------

| | (2) | The
Company granted NUR Pro Engineering loans as follows:
| | --- | ---------------------------------------------------------

| | A
loan in the amount of $ 175 linked to the U.S. dollar bearing annual interest at the
rate of 3%. A maturity date has not yet been determined.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | A
loan in the amount of $ 100 denominated in NIS bearing no interest and to be repaid
in 20 years.
| | --------------------------------------------------------------------------------------------------

| | As
per the acquisition of the remaining 50% of NUR Pro Engineerings shares by the
Company refer to Note 1c.
| | ------------------------------------------------------------------------------------------------------------

# NOTE 7:- RESTRICTED
LONG-TERM BANK DEPOSITS

| | Restricted
long-term bank deposits are maintained to secure rent and leasing obligations.
| | -----------------------------------------------------------------------------------------

F - 27

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 8:- PROPERTY, PLANT
AND EQUIPMENT

| | a. | Composition
of property and equipment is as follows:
| | -- | ----------------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Cost:                          |             
| | Machinery and equipment        |             
| | Motor vehicles                 |             
| | Office furniture and equipment |             
| | Buildings (c)                  |             
| | Leasehold improvements         |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             
| | Accumulated depreciation       |             
| |                                |             
| |                                |             
| | Depreciated cost               |             
| |                                |             

| | b. | Depreciation
expenses for the years ended December 31, 2002, 2003 and 2004,           amounted to $ 2,860,
$ 3,452 and $ 1,889 respectively. (As for           impairment, see Note 2j).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for floating lien, see Note 13c.
| | -----------------------------------

| | c. | Capital
lease obligations
| | -- | -------------------------

| | NUR
Europe leases certain buildings under lease agreements which are recorded as capital
leases. The related facilities are included in property, plant and equipment and
depreciated accordingly.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
facilities cost and accumulated depreciation for the years ended December 31, 2003 and
2004 were $ 1,392, $ 1,493 and $ 81, $ 72, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 9:- TECHNOLOGY AND
OTHER INTANGIBLE ASSETS, NET

| | Composition
of technology and other intangible assets:
| | ------------------------------------------------------

| |                                          | December 31,
| | ---------------------------------------- | ------------
|
|
|
|
| | Original amounts:                        |             
| | Technology (1)                           |             
| | Customer list (2)                        |             
| | Production Agreement (3)                 |             
| |                                          |             
| |                                          |             
| |                                          |             
| |                                          |             
| |                                          |             
| | Accumulated amortization and impairment: |             
| | Technology                               |             
| | Customer list (2)                        |             
| | Production Agreement (3)                 |             
| |                                          |             
| |                                          |             
| |                                          |             
| |                                          |             
| |                                          |             
| | Amortized cost                           |             
| |                                          |             

| | (1) | Resulting
from the acquisition of Stillachem technology in 2001. The Stillachem
          technology was used until the second quarter of 2004 for ink production. From
          the second quarter of 2004, the Company uses a new technology for the
production           of ink and therefore the Companys management has recorded an
impairment on           all of the outstanding balance.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Resulting
from the acquisition of Nur Salsa in 2000. During 2004, the Company           lowered its
sales of the Salsa product significantly; therefore management has           recorded an
impairment on all of the outstanding balance.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Resulting
from the acquisition of the remaining 50% of Nur Pro Engineering in           2004. This
reflects the value of the production agreement of the Companys           printers.
See Note 1c.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 10:- CREDIT AND
LOANS

| |                           | Linkage
terms | Interest rate | December 31.
| | ------------------------- | ------------- | ------------- | ------------
|
|
|
|
| |                           |               |               |             
| | Short-term bank loans and |               |               |             
| | credits (1)               |               |               | U.S. dollar 
| |                           |               |               |             
| | Short-term bank credit    |               |               | Euro        
| |                           |               |               |             
| |                           |               |              
| |                           |               |               |             
| |                           |               |               |             

| | (1) | On
June 30, 2005, the Lender Banks agreed to waive principal payments until
          January 1, 2006. As discussed in Note 1b, in light of the uncertainties,
          long-term bank loans in the amount of $ 28,912 (as of December 31, 2004) are
          presented as short-term bank loans (see also Note 11(e)).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average interest rate as of December 31, 2003 and 2004 was 3.77% and 4.9%,
respectively.
| | -----------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the total authorized credit line of the Company is $ 15,165,
of which an amount of $ 12,557 was utilized by way of short term loan and credit and $
735 in guarantees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the total authorized credit line of NUR Europe is  2,035
thousand ($ 2,768), of which an amount of  710 thousand ($ 966) was utilized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for guarantees and liens of certain subsidiaries refer to Note 14(e).
| | ------------------------------------------------------------------------

# NOTE 11:- LONG-TERM LOANS

| | a. | Composed
as follows:
| | -- | --------------------

| |                           | Linkage
terms | Interest rate | December 31.
| | ------------------------- | ------------- | ------------- | ------------
|
|
|
|
| |                           |               |               |             
| | From banks                |               |               | U.S. dollar 
| | From leasing companies    |               |               | Euro        
| |                           |               |               |             
| |                           |               |              
| |                           |               |               |             
| | Less - current maturities |               |               |             
| |                           |               |               |             
| |                           |               |              
| |                           |               |               |             
| |                           |               |               |             

F - 30

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

NOTE 11:- LONG-TERM LOANS (Cont.)

| | b. | The
aggregate annual maturities of long-term loans are as follows:
| | -- | ------------------------------------------------------------------

| |                                 | December 31,
| | ------------------------------- | ------------
|
|
|
|
| | First year (current maturities) |             
| |                                 |             
| |                                 |             
| | Second year                     |             
| | Third year                      |             
| | Fourth year                     |             
| | Fifth year                      |             
| | Sixth year and thereafter       |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             

| | (*) | As
to the classification of long-term loans to short term loans see Notes 10           and
11(e).
| | --- | -------------------------------------------------------------------------------------------------

| | c. | Convertible
loan agreement:
| | -- | ---------------------------

| | In
July 2003, the Company entered into a Convertible Loan Agreement (the Agreement)
with certain existing shareholders (the Lenders), according to which the
Company was entitled to receive up to a maximum possible loan (the Loan)
amount of $ 3,500. In 2003 and 2004, the Company received amounts of $ 2,000 and $ 1,500
from the Lenders, on account of the Loan, respectively. The Loan is to be repaid after
three and one-half years, unless converted into Ordinary shares by the Lenders or a
defined event triggering early repayment is met. The Loan bears interest at a rate of 12%
per annum. Furthermore, the Loans principal and interest may be converted by the
Lenders into Ordinary shares of the Company at any time during the loan term, at a
conversion price of $ 0.62 per Ordinary share (the Conversion Price).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warrants
exercisable for purchase of up to 1,076,922 of the Companys Ordinary shares (the
warrants) were also issued to the Lenders (based on such loan amounts, divided by
the Conversion Price). The warrants are exercisable at a price per Ordinary share of $
0.52, at any time until October 2008. As of December 31, 2004, the Lenders exercised
57,692 warrants into 43,460 Ordinary shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the warrants amounted to $ 711. However, for accounting purposes, in
accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants (APB No. 14), the net proceeds received from
the Lenders has been allocated between the Loan and the warrants, resulting in a value
ascribed to the warrants in the amount of $466.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 11:- LONG-TERM
LOANS (Cont.)

| | The
fair value of the warrants was estimated at the grant date using a Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 3.2%, dividend
yield of 0%, volatility factors of the expected market price of the Companys
Ordinary shares of 0.76 and an expected life of ten years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the issuance of the Loan and Warrants, the Company has applied EITF
00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, which
resulted in the recognition of $ 676 related to the beneficial conversion feature on the
Loan, because the effective Conversion Price of the convertible debt was less than the
fair value of the Ordinary shares on the date of issuance, which is also the commitment
date. As of December 31, 2003, the entire amount was recorded as financial expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the Agreement, the placement agent of the Loan was granted with warrants
exercisable for the purchase of up to 112,903 of the Companys Ordinary shares. The
placement agents warrants are exercisable at a price per Ordinary share of $ 0.62,
at any time until March 2009.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2003, the Loan was converted into Ordinary shares by the Lenders and
recorded as receipts of $2,000 on account of 3,225,805 shares, net of issuance expenses
of $ 133. On March 31, 2004, the remaining $ 1,500 of the Loan was paid by the
Lenders on account of issuance of 2,419,355 Ordinary shares underlying the conversion of
the Loan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Rescheduling
and Warrants agreement with Banks:
| | -- | -----------------------------------------------

| | During
2003, the Company entered into agreements with certain banks according to which the banks
agreed to reschedule the repayment dates of the Companys long-term loans and bank
credit.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the loan rescheduling, the Company issued to the banks warrants to
purchase an aggregate amount of 1,220,000 Ordinary shares of the Company, at an exercise
price of $ 0.34 through $ 0.72 per share. The warrants expire on various dates during
2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded compensation of approximately $ 494, which is being amortized from March
2003 and is included in financial expenses. For the year ended December 31, 2003 and
2004, the Company recorded $ 92 and $ 198, respectively, in financial expenses. This
transaction was accounted for in accordance with APB No.14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants (APB 14).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the warrants was estimated at the grant date using a Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 3.2%, dividend
yield of 0%, volatility factors of the expected market price of the Companys
Ordinary shares of 0.76 and a contractual life of four years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 11:- LONG-TERM
LOANS (Cont.)

| | e. | Covenants:
| | -- | ----------

| | During
2003, the Company did not comply with certain terms of the covenants set under their loan
agreements with the banks. The Company received from the banks written waivers, under
which the banks agreed, not to act upon their contractual rights on the Companys
abovementioned default.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2004, the Company signed new agreements with the banks, according to which new
covenants were determined. The new covenants are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | To
maintain an equity of no less than $ 500, $ 700, $ 1,000 and
               $ 1,300 during the first, second, third and fourth quarters of 2004,
               respectively, to maintain an equity of no less than $ 15,500 or less
than                16% of the Companys tangible assets in 2005.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | To
maintain at the end of each quarter a cash balance of at least $ 6,000.
| | -- | --------------------------------------------------------------------------

| | 3. | To
refrain from merging, consolidating, amalgamating or entering into any other
          form of business combination with a third party, or liquidating or dissolving.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | To
maintain certain financial ratios relating to the Companys earnings
          before income tax, depreciation and amortization (EBITDA) and the Companys
          overall long-term debt to financial institutions.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | To
further secure the Companys outstanding credit by a guarantee in favor           of
the banks issued by the Companys subsidiaries.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, the Company did not comply with certain terms of the covenants. On June 30, 2005
the Company reached a new agreement (the New Agreement) with its Lender Banks
to give waivers of default and the outstanding bank debt is currently not subject to
acceleration. Following the New Agreement new covenants were determined. The new
covenants are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | The
Lender Banks shall waive the non-performance by the Company of the financial
               covenants of prior facility agreements (the Facility Agreements),
for                all of previous periods ending March 31, 2005 (including the repayment
               provisions resulting from the non-performance by the Company of such
financial                covenants prior to March 31, 2005).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
total revenue of the Company for each of the quarters ending June 30, 2005,
               September 30, 2005 and December 31, 2005, as reported in each of the
respective                quarterly consolidated financial statements of the Company,
shall not be less                than $ 16,000.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
operating loss of the Company for each of the quarters ending on June 30,
               September 30, 2005, and December 31, 2005, as reported in the consolidated
               financial statements of the Company for each respective quarter, shall not
be                greater than $ 2,000.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 11:- LONG-TERM
LOANS (Cont.)

| | 4. | For
each of the quarters ending on June 30, 2005, September 30, 2005 and
               December 31, 2005, the inventory balance of the Company, as reported in
the                respective consolidated financial statements of the Company, shall not
be less                than $ 14,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | For
each of the quarters ending on June 30, 2005, September 30, 2005 and
               December 31, 2005, the accounts receivable balance of the Company, as
reported                in the respective quarterly consolidated financial statements of
the Company,                shall not be less than $ 7,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unless
in a case of a breach by the Company of any of its obligations hereunder, the Company
shall not be obligated to repay to the Lender Banks any amounts on account of principal
that are due and payable under the Facility Agreements until January 1, 2006. The Loans
are repayable in January 2006. The Company intends to negotiate with the Lender Banks,
new payment terms for the year 2006 and thereafter. There can be no assurance that such
agreement can be concluded. In such event the Lender Banks shall have the right to call
for the entire debts.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
breach by the Company of any of its obligations abovementioned, shall entitle the Lender
Banks to immediately, at its sole discretion, declare the New Agreement, or any of the
provisions stipulated by it as immediately being null and void and to exercise all or any
of its rights and remedies under the Facility Agreements and/or under any law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
any case of a breach by the Company, including non-achievement by the Company of any of
the new financial covenants (i) the Company shall repay all amounts then owing under any
or all documentation between the Company and the Lender Banks, to the Lender Banks and
(ii) the Lender Banks shall be entitled to exercise any and all rights set forth in any
or all documentation between the Lender Banks and the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
discussed in Note 1b, in light of the uncertainties, long-term bank loans in the amount
of $ 28,912 (as of December 31, 2004) are presented as short-term bank loans.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 12:- OTHER ACCOUNTS
PAYABLE AND ACCRUED EXPENSES

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Employees and payroll accruals |             
| | Government Authorities         |             
| | Royalties payable              |             
| | Deferred income                |             
| | Warranty                       |             
| | Accrued expenses               |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             

F - 34

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 13:- COMMITMENTS
AND CONTINGENT LIABILITIES

| | a. | Operating
lease commitments:
| | -- | ----------------------------

| | The
Company and most of its subsidiaries rent their facilities under various operating lease
agreements, which expire on various dates, the latest of which is in 2011. The minimum
rental payments under non-cancelable operating leases are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year
ended December 31,
| | -----------------------

| |                     | 
| | ------------------- | 
|
|
|
|
| | 2005                | 
| | 2006                | 
| | 2007                | 
| | 2008                | 
| | 2009                | 
| | 2010 and thereafter | 
| |                     | 
| |                     | 
| |                     | 
| |                     | 

| | Total
lease expenses for the years ended December 31, 2002, 2003 and 2004, were $ 1,570, $ 1,654
and $ 1,835, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------

| | b. | Royalty
commitments:
| | -- | --------------------

| | 1. | The
Company entered into several project plans with the Office of the Chief
          Scientist of Israels Ministry of Industry and Trade (OCS).
The           Company has an obligation to pay royalties at the rate of 2%-3% of the
sales           derived from the applicable products developed within the framework of
such           research and development projects, up to an amount equal to 100%  150%
of           the grant received, linked to the U.S. dollar and for grants received after
          January 1, 1999, accrued for interest at the rate of LIBOR. The Company has no
          obligation to repay this amount if sales are not sufficient to satisfy the
          royalty obligations. The Company disputes the OCS claim for payment of
          certain royalties, see Note 13d.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, NUR Media Solutions has an obligation to pay royalties at rates of 3%-6% on the
sales of products developed with funds provided by the Government of Belgium, up to an
amount equal to the research and development grants received in connection with such
products, linked to the Euro.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
royalties paid amounted to $ 67, $ 675 and $ 489 for the years ended December
31, 2002, 2003 and 2004, respectively.
| | --------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the Company and NUR Media Solutions have no contingent obligation
to pay royalties.
| | ------------------------------------------------------------------------------------------------------------

F - 35

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 13:- COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)

| | 2. | The
Company is required to pay royalties to the Fund for the Encouragement of
          Marketing Activity at the rate of 3%-4% of the increases in export sales of
          products for which the Company received participations for its marketing
          activities, up to an amount equal to 100%-150% of the grant received, linked to
          the U.S. dollar.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
grant is repayable only in respect of sales of the related products, as a percentage of
the growth in export sales. If there is no increase in export sales, or if the Company
ceases producing the relevant products, the grant would not be repaid.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the Company has a contingent obligation to pay royalties in the
amount of $ 937.
| | ---------------------------------------------------------------------------------------------------------

| | c. | Charges
and guarantees:
| | -- | -----------------------

| | 1. | As
collateral for its liabilities to the banks, the Company recorded fixed           charges
on its share capital, as well as a floating lien on all of its assets.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Litigations:
| | -- | ------------

| | 1. | In
August 2001, a client of NUR Europe filed a lawsuit against NUR Europe in           the
amount of  920. NUR Europe filed a counter claim. In April 2004 the           court
denied the clients claims and the client appealed that judgment.           Based on
managements estimate and the opinion of its legal counsel, the           Company
did not record any provision in respect of this claim.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | During
2002, the Company filed three lawsuits against customers of NUR           Shanghai. As a
result, the customers filed lawsuits against NUR Shanghai, in the           amount of $
392. Based on the opinion of its legal counsel and managements           opinion,
management did not record any provision with respect to these claims.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2003, a former supplier filed a lawsuit against NUR Media Solutions, in
               the amount of  943 in connection with a disputed supply agreement.
Based                on the opinion of its legal counsel and managements opinion,
management                recorded in 2004 a provision in the amount of $ 600 with
respect to this claim.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | In
February 2004, the Company received a demand letter from the OCS claiming
               that the Companys outstanding liability for royalties to the OCS in
               connection with the sale of NUR Fresco printers aggregates to $ 750.
The                Company responded to the demand letter by denying the OCS claims.
On                February 2005 the Company filed a lawsuit against the OCS in an amount
of $ 250                and requested the court to determine that it is not under an
obligation to the                royalties demanded by the OCS. The Company and the OCS
reached a procedural                agreement whereby NUR deposited with the court a bank
guarantee in the amount of                approximately $ 450 securing the disputed
amount and undertook to place by                October 2005 an additional bank guarantee
of approximately $ 350. Based on                managements estimate and the
opinion of its legal counsel, the Company                recorded in 2004 a provision in
an amount of $ 785 in respect of this                dispute.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 14:- TRANSACTIONS
AND BALANCES WITH RELATED PARTIES

| | a. | A
company wholly-owned by the Companys former CEO rendered services to
          certain subsidiaries. The Groups expenses during the years 2003 and 2004
          in respect of such services amounted to $ 70 and $ 12, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | As
for loans to an affiliated company, see Note 6.
| | -- | --------------------------------------------------

| | c. | In
February 2002, the Company signed a service agreement with the former           Chairman
of the Board of Directors for an annual fee of $ 125, which is           payable by
the issuance of Ordinary shares of the Company. In 2002, 2003 and           2004, in
respect of this agreement, 70,773, 184,754 and 131,290 Ordinary shares           were
issued, respectively. The number of Ordinary shares that were issued was
          calculated by dividing $ 31 which represents its quarterly fee, by the average
          closing price of the Ordinary shares in the last five trading days of the
          relevant calendar quarter.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
October 2003, the Company entered into an engagement agreement with a           certain
law firm, that is owned, among others, by the brother of the           Companys
CEO. Under the engagement agreement, the law firm represented the           Company in
litigations against third parties and provided legal services as           needed in
Israel and in Belgium. The aggregate consideration for the services           provided to
the Company and its subsidiaries by the law firm amounted to           approximately $
220 and $ 120 in 2003 and 2004, respectively. During 2004 the           Companys
audit committee and Board of Directors reviewed, ratified and           approved the
terms of the engagement agreement.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 15:-
SHAREHOLDERS DEFICIENCY

| | a. | The
Ordinary shares of the Company are currently traded on the over-the-counter
          market in the so called pink sheets as from May 2005, as a result of the
          Companys non compliance with Nasdaq minimum stockholders equity
          listing requirements.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Shareholders rights:
| | -- | ---------------------

| | Ordinary
shares confer upon their holders voting rights, the right to receive dividends and the
right to share in excess assets upon liquidation of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | On
March 31, 2004, the Company effected a private offering of its securities in
               which the Company issued 2,586,140 Ordinary shares of NIS 1 par value each
in                consideration of $ 3,000 (excluding issuance expenses).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, as part of the share purchase agreement, the Company issued to the investors
warrants exercisable into an aggregate of 646,542 Ordinary shares. The warrants are
exercisable at a price per Ordinary share of $ 1.54, at any time until March 2009.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 15:-
SHAREHOLDERS DEFICIENCY (Cont.)

| | The
Company granted to the placement agent of the private placement warrants exercisable into
129,310 Ordinary shares. Those warrants will be exercisable until March 2009 at $ 1.16
per Ordinary share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Stock
Option Plans:
| | -- | -------------------

| | 1. | In
October 1995, the Companys Board of Directors adopted a Flexible Stock
          Incentive Plan (1995 Plan). The Stock Incentive Plan provides for
          grants of stock options to the Companys employees and outside
consultants.           An aggregate amount of not more than 500,000 stock options are
available for           grant under the Stock Incentive Plan. Of such amount, (i) not
more than 414,768           options are available for grant as stock options on the basis
of future services           (service options), (ii) not more than 18,232
options may be granted           as stock options on the basis of performance (performance
options           as of December 31, 2004 there are no outstanding
performance options) and           (iii) not more than 67,000 options may be granted as
stock options to           consultants on the basis of service or performance in respect
of the public           offering (consultant options).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
service options usually vest over a four-year period with an exercise price of not less
than 80% of the fair market value of the Ordinary shares at the date of grant (as defined
in the stock incentive plan).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consultant
options usually vest immediately based on past services rendered as the board determines.
The options expire usually after 10 years from the date of grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 1997, the Company adopted an additional stock option plan. According to that
option plan, 1,200,000 options will be granted to the Company and its subsidiariesemployees,
directors and consultants. In October 1998 and August 1999, the Company and its
subsidiaries shareholders approved the increase in the number of options available
for grant by 500,000, and 500,000 options, respectively. The options usually vest over a
three-year period with an exercise price of not less than 80% of the fair market value of
the Ordinary shares at the date of grant (as defined in the stock option plan). Each
option usually expires after 10 years from the date of grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 1998, the Companys shareholders approved the non-employee director stock
option plan (1998 plan) according to which 250,000 options are available for
grant with an exercise price of the average of the closing bid and sale price at the
issuance date. Each option is vested immediately and will expire after 10 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2000, the Companys Board of Directors adopted the 2000 Stock Option Plan (2000
plan). According to that option plan, 1,000,000 options may be granted to officers,
directors, employees and consultants of the Company and its subsidiaries. The Options
usually vest over a three-year period. The exercise price of the options under the 2000
plan is determined to be not less than 80% of the fair market value of the Companys
Ordinary shares at the time of grant, and they usually expire after 10 years from the
date of grant. The 2000 plan expires on August 31, 2008, unless previously terminated or
extended by the Board of Directors.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 15:-
SHAREHOLDERS DEFICIENCY (Cont.)

| | In
November 2003, the Company decided to terminate the 1995 and 1997 plans and to increase
the number of Ordinary shares authorized to be issued under the 2000 plan by 497,590
options which reflects the aggregate amount that was outstanding under these plans.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2004, the Companys shareholders approved the increase in the number of
options available for grant under the 2000 plan by 500,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | During
2002, 2003 and 2004, the Company granted to directors (including the Chairman of the
Board of Directors) 10,000, 27,501 and 46,667 options, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Companys 1995, 1997, 1998 and 2000 plans, the Company reserved for issuance
466,739, 1,735,671, 250,000 and 2,997,590 Ordinary shares, respectively. As ofDecember
31, 2004, 0, 0, 45,832, and 489,139 options, respectively, are still available for future
grants under these plans. Any options, which are cancelled or forfeited before
expiration, become available for future grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | A
summary of the Companys share option activity through December 31,
          2004 for the Plans is as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------

| |                                 | Options outstanding
| | ------------------------------- | -------------------
|
|
|
|
| | Balance as of January 1, 2002   |                    
| |                                 |                    
| | Options granted                 |                    
| | Options forfeited or cancelled  |                    
| |                                 |                    
| |                                 |                    
| | Balance as of December 31, 2002 |                    
| |                                 |                    
| | Options granted                 |                    
| | Options exercised               |                    
| | Options forfeited or cancelled  |                    
| |                                 |                    
| |                                 |                    
| | Balance as of December 31, 2003 |                    
| |                                 |                    
| | Options granted                 |                    
| | Options exercised               |                    
| | Options forfeited or cancelled  |                    
| |                                 |                    
| |                                 |                    
| | Balance as of December 31, 2004 |                    
| |                                 |                    

| | The
number of options exercisable as of December 31, 2002, 2003 and 2004 was 1,388,501,
1,244,878 and 1,370,022, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 15:-
SHAREHOLDERS DEFICIENCY (Cont.)

| | The
weighted average exercise price of options exercisable as of December 31, 2002, 2003 and
2004 is $ 1.66, $ 7.52 and $ 1.33, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
options outstanding as of December 31, 2004 have been separated into ranges           of
exercise price, as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------

| | Range of
exercise price | Options
outstanding
as of
December 31,
2004 | Weighted
average
remaining
contractual
life | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2004 | Weighted
average
exercise
price of
exercisable
options
| | ----------------------- | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | 0.37-0.69               |                                             | 705,834                                     |                                 |                                             | 8.29                                                  
| | 0.72-0.80               |                                             | 390,317                                     |                                 |                                             | 7.82                                                  
| | 0.85-1.40               |                                             | 1,639,549                                   |                                 |                                             | 6.34                                                  
| | 1.63-1.88               |                                             | 372,334                                     |                                 |                                             | 8.97                                                  
| | 1.94-2.75               |                                             | 43,000                                      |                                 |                                             | 3.05                                                  
| | 3.20-4.67               |                                             | 21,500                                      |                                 |                                             | 6.62                                                  
| | 5.00-7.00               |                                             | 26,100                                      |                                 |                                             | 4.51                                                  
| | 7.50-13.5               |                                             | 38,400                                      |                                 |                                             | 5.78                                                  
| |                         |                                             |                                             |                                 |                                             |                                                       
| |                        
| |                         |                                             | 3,237,034                                   |                                 |                                             |                                                       
| |                         |                                             |                                             |                                 |                                             |                                                       

| | 4. | Weighted-average
fair values and exercise price of options on dates of grant           are as follows:
| | -- | ------------------------------------------------------------------------------------------------------

| |                  | For exercise prices on the date of grant that
| | ---------------- | ---------------------------------------------
|
|
|
|
| | Weighted average |                                              
| | exercise prices  |                                              
| |                  |                                              
| | Weighted average |                                              
| | fair value on    |                                              
| | grant date       |                                              
| |                  |                                              

F - 40

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

# NOTE 15:-
SHAREHOLDERS DEFICIENCY (Cont.)

| | e. | The
Companys outstanding warrants as of December 31, 2004, are as follows:
| | -- | ---------------------------------------------------------------------------

| | Issuance date  | Number of
warrants issued | Exercise price
per share | Warrants
exercisable | Expiration date
| | -------------- | ------------------------- | ------------------------ | -------------------- | ---------------
|
|
|
|
| | December 1997  |                           |                          |                      | 50,000         
| |                |                           |                         
| |                |                           |                         
| | September 2000 |                           |                          |                      | 37,411         
| | January 2002   |                           |                          |                      | 612,500        
| | February 2002  |                           |                          |                      | 120,000        
| | November 2002  |                           |                          |                      | 11,000         
| | March 2003     |                           |                          |                      | 240,000        
| | June 2003      |                           |                          |                      | 27,000         
| | August 2003    |                           |                          |                      | 953,000        
| | October 2003   |                           |                          |                      | 1,019,230      
| | March 2004     |                           |                          |                      | 646,542        
| | March 2004     |                           |                          |                      | 112,903        
| | March 2004     |                           |                          |                      | 129,310        
| |                |                           |                          |                      |                
| |                |                           |                         
| |                |                           |                          |                      | 3,958,896      
| |                |                           |                          |                      |                

| | f. | Dividends:
| | -- | ----------

| | In
the event that cash dividends are declared in the future, such dividends will be paid in
NIS.
| | ------------------------------------------------------------------------------------------------

| | A
dividend paid to shareholders outside Israel will be converted into dollars, on the basis
of the exchange rate prevailing at the date of payment. The Company does not intend to
pay cash dividends in the foreseeable future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 16:- TAXES ON INCOME

| | a. | Tax
benefits under the Israeli Law for the Encouragement of Capital           Investments,
1959 (the law):
| | -- | ------------------------------------------------------------------------------------------------------------

| | Certain
of the Companys production facilities have been granted the status of Approved
Enterprise under the law, for three separate investment plans.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the provisions of this law, the Company elected to enjoy alternative benefits which
provide tax benefits in exchange for waiver of grants. Accordingly, the Companys
income from the Approved Enterprise will be tax-exempt for a period of 2, 4
and 4 years, for the first, second and third plan, respectively, commencing with the year
it first earns taxable income. Based on the percentage of foreign ownership of the
Company, income derived during the remaining periods of five, three and three years,
respectively of benefits is taxable at the rate of 15%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits detailed above is subject to limits of 12 years from the
commencement of production, or 14 years from receiving the approval, whichever is
earlier. Given the abovementioned conditions, the period of benefits for the first and
second plans commenced in 1994 and 1999, respectively. The first plan was terminated in
2001 and the second plan was terminated in 2004. The period of benefits for the third
plan has not yet commenced.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Company fulfilling the
conditions stipulated by the above law, regulations published thereunder and the letters
of approval for the specific investments in Approved Enterprises. In the
event of failure to comply with these conditions, the benefits may be canceled and the
Company may be required to refund the amount of the benefits, in whole or in part,
including interest. As of the balance sheet date, the Company complies with all these
conditions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax-exempt profits earned by the Companys Approved Enterprise can be
distributed to shareholders, without imposing a tax liability on the Company, only upon
the complete liquidation of the Company. If these retained tax-exempt profits are
distributed in a manner other than upon the complete liquidation of the Company, they
would be taxed at the corporate tax rate applicable to such profits as if the Company had
not elected the alternative tax benefits (currently  15%-20% for an Approved
Enterprise based on the percentage of foreign ownership of the Company).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has decided to permanently reinvest the tax exempt profits resulting from the
Approved Enterprise status and not to distribute such profits as dividends.
Accordingly, no deferred income taxes have been provided in respect of said tax exempt
profits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 16:- TAXES ON
INCOME (Cont.)

| | The
law also entitles the Company to claim accelerated rates of depreciation on equipment
used by the Approved Enterprise during five tax years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise during the benefit period
will be subject to tax at the regular corporate tax rate of 35%. The regular corporate
tax rate is to be gradually reduced to 30% by 2007 (34% in 2005, 32% in 2006 and 30% in
2007).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Measurement
of results for tax purposes under the Income Tax Law (Inflationary
          Adjustments), 1985:
| | -- | ------------------------------------------------------------------------------------------------------------

| | Results
for tax purposes are measured in terms of earnings in NIS after certain adjustments for
increases in Israels Consumer Price Index (CPI). As explained in Note
2b, the financial statements are measured in U.S. dollars. The difference between the
annual change in Israels CPI and in the NIS/dollar exchange rate causes a
difference between taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not
provided deferred income taxes in respect of the difference between the reporting
currency and the tax bases of assets and liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Tax
benefits under the Law for the Encouragement of Industry (Taxation), 1969:
| | -- | ------------------------------------------------------------------------------

| | The
Company is an industrial company, as defined by this law and, as such, is
entitled to certain tax benefits, including accelerated rates of depreciation, in
accordance with regulations published under the inflationary adjustments law. The Company
is also entitled to claim public issuance expenses and patent amortization costs from its
taxable income in three and eight equal annual installments, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 16:- TAXES ON
INCOME (Cont.)

| | d. | Theoretical
tax expense:
| | -- | ------------------------

| | A
reconciliation of the theoretical tax expense, assuming all income is taxed at the
statutory rate applied to corporations in Israel and the actual tax expense, is as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                              | Year ended December 31,
| | -- | -------------------------------------------- | -----------------------
|
|
|
|
| |    | Loss before taxes on income                  |                        
| |    |                                              |                        
| |    |                                              |                        
| |    | Statutory tax rate                           |                        
| |    |                                              |                        
| |    |                                              |                        
| |    | Theoretical taxes on income (tax benefit)    |                        
| |    | Increase (decrease) in taxes:                |                        
| |    | Approved enterprise                          |                        
| |    | Reduced statutory tax rate of a subsidiary   |                        
| |    | Non-deductible and other expenses            |                        
| |    | Carryforward loss, generated during the year |                        
| |    | for which a valuation allowance was          |                        
| |    | provided                                     |                        
| |    |                                              |                        
| |    |                                              |                        
| |    | Actual tax expense                           |                        
| |    |                                              |                        
| |    |                                              |                        
| |    |                                              |                        
| | e. | Taxes on income (benefit) included in the    |                        
| |    | statements of operations:                    |                        
| |    |                                              |                        
| |    | Current:                                     |                        
| |    | Domestic                                     |                        
| |    | Foreign                                      |                        
| |    |                                              |                        
| |    |                                              |                        
| |    |                                              |                        
| |    |                                              |                        
| |    | Deferred:                                    |                        
| |    | Domestic                                     |                        
| |    |                                              |                        
| |    |                                              |                        
| |    |                                              |                        
| |    |                                              |                        

F - 44

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|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 16:- TAXES ON
INCOME (Cont.)

| | f. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Groups deferred tax assets
are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Deferred tax asset:                                |             
| | Net operating losses and deductions carryforward   |             
| | Others                                             |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets before valuation allowance |             
| |                                                    |             
| |                                                    |             
| | Valuation allowance (1)                            |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets                            |             
| |                                                    |             

| | (1) | The
Group has provided valuation allowances in respect of deferred tax assets
          resulting from tax losses carryforward and other temporary differences.
          Management currently believes that since the Company has a history of losses it
          is more likely than not that the deferred tax regarding all loss carryforwards
          will not be utilized in the foreseeable future.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Carryforward
tax losses and deductions:
| | -- | ---------------------------------------

| | As
of December 31, 2004, the Company had available carryforward tax losses and deductions
aggregating to approximately $ 20,000.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Additional
carryforward losses of NUR America and NUR Salsa, in the amount of approximately $ 30,053,
which is located in the U.S., will expire in 2021. Utilization of U.S. net operating
losses may be subject to substantial annual limitation due to the change in
ownership provision of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating losses
before utilization.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NUR
Asia Pacific and NUR Shanghai had available carryforward losses as of December 31, 2004
aggregating to approximately $ 15,881, which have no expiration date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NUR
Japan had available carryforward losses as of December 31, 2004 aggregating to
approximately $ 213, which expire in 2007.
| | -----------------------------------------------------------------------------------------------------------------------------

| | NUR
Europe and NUR Media Solutions had available carryforward losses as of December 31, 2004
aggregating to approximately $ 18,564, which have no expiration date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

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---

|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 16:- TAXES ON
INCOME (Cont.)

| | h. | Loss
before income taxes consists of the following:
| | -- | ---------------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

# NOTE 17:- MAJOR
CUSTOMERS AND GEOGRAPHIC INFORMATION

| | a. | Summary
information about geographic areas:
| | -- | -------------------------------------------

| | The
Company manages its business on the basis of one reportable segment. See Note 1a for a
brief description of the Companys business. The following data is presented in
accordance with Statement of Financial Accounting Standard No. 131 (SFAS No 131),
Disclosures about Segments of an Enterprise and Related Information. Total
revenues are attributed to geographical areas based on location of end customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table presents total revenues and long lived assets for the years ended December 31,
2002, 2003 and 2004 and as of December 31, 2002, 2003 and 2004, respectively:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |         | 2002 | 2003 | 2004
| | ------- | ---- | ---- | ----
|
|
|
|
| | Israel  |      |      | $   
| |         |      |     
| | Asia    |      |      |     
| |         |      |     
| | China   |      |      |     
| |         |      |     
| | America |      |      |     
| |         |      |     
| | Europe  |      |      |     
| |         |      |     
| | Other   |      |      |     
| |         |      |      |     
| |         |      |     
| |         |      |      | $   
| |         |      |      |     

F - 46

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|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES
|-------------------------------------------
|                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
|                                           
|U.S. dollars in thousands                  

# NOTE 17:- MAJOR
CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)

| | b. | Product
lines:
| | -- | --------------

| | Total
revenues from external customers distributed on the basis of the Companys product
lines are as follows:
| | --------------------------------------------------------------------------------------------------------------

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Printers   |                        
| | Ink        |                        
| | Substrates |                        
| | Others     |                        
| |            |                        
| |            |                        
| |            |                        
| |            |                        

| | c. | Major
customer data as a percentage of total revenues:
| | -- | ------------------------------------------------------

| | The
Group does not have any major customer that represents 10% or more of the consolidated
revenues for 2002, 2003 and 2004.
| | ----------------------------------------------------------------------------------------------------------------------------

# NOTE 18:- SELECTED
STATEMENTS OF OPERATIONS DATA

| | a. | Research
and development expenses, net:
| | -- | ---------------------------------------

| |    |                                                  | Year ended December 31,
| | -- | ------------------------------------------------ | -----------------------
|
|
|
|
| |    | Research and development expenses                |                        
| |    | Less - participation of the Israeli and Belgian  |                        
| |    | governments in research and development projects |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| | b. | Financial expenses:                              |                        
| |    |                                                  |                        
| |    | Expenses:                                        |                        
| |    | Interest on short-term bank credit and charges   |                        
| |    | Interest on long-term loans                      |                        
| |    | Foreign currency translation differences (1)     |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    | Income:                                          |                        
| |    | Interest on bank deposits and other              |                        
| |    | Foreign currency translation differences (1)     |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        
| |    |                                                  |                        

| | (1) | Include
losses from non-hedging forward and option contracts (See Note 2w).
| | --- | ---------------------------------------------------------------------------

F - 47

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|NUR MACROPRINTERS LTD. AND ITS SUBSIDIARIES                
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

NOTE 19:- SUBSEQUENT EVENTS (UNAUDITED)

| | On
 December  29,  2004  the  Company  reached  an  agreement  with  Inspire   Investments
 Ltd.                (Inspire)  regarding an investment  by Inspire of $10
million in the Company (the  Investment                Agreement).  The
consummation of the Investment Agreement was conditioned,  among other things,
               upon Inspires completion of its due diligence review.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a  pre-condition  to entering into the agreement  Inspire  required,  among others,  that
the                Company  will  enter  into a debt  restructuring  agreement  with the
 Lender  Banks  and that a                substantial  part of the holdings of Dan
Purjes,  a former  director and former  chairman of the                Board of
 directors  and the largest  shareholder  of the  Company,  will be voted with  Inspire
               under an irrevocable proxy.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company  negotiated a voting  agreement,  with Dan Purjes.  On January 23, 2005, the
Company                entered into a voting  agreement  (the Voting  Agreement)
 coupled with an irrevocable  proxy,                with Dan  Purjes.  Further to
 conversations  between  representatives  of the  Company  and the                NASDAQ,
 the Company and Dan Purjes  entered  into a voting trust  agreement  (the Voting
Trust                Agreement)  as of March 7, 2005 that amended,  superseded  and
suspended the Voting  Agreement.                The Company granted Dan Purjes a five
year warrant to purchase  3,000,000  Ordinary shares at an                exercise  price
of $ 0.75 per share.  On May 16, 2005,  the Companys  shares were delisted from
               the NASDAQ  SmallCap  Market  since the  Company  has failed to  maintain
 the  minimum  listing                requirements  and as a result  the Voting  Trust
 Agreement  was  automatically  terminated  and                converted into the Voting
Agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 21, 2005 the Company has also reached a debt  restructuring  agreement  with the
Lender                Banks  (the  Restructuring  Agreement),  providing  for
 the  conversion  of $  15,000  of the                Companys   outstanding   debt
 into  equity  and  for  the   rescheduling   of  the   Companys
               remaining  $  28,000   outstanding   debt  and  the   replacement   of
 the   financial   ratios                governing  the  debt  agreements  with  the
 Lender  Banks.  The  Restructuring   Agreement  was                conditioned upon the
closing of the Investment Agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 16,  2005,  the Company was notified by Inspire that it had  terminated  the
 Investment                Agreement claiming that they were not satisfied with the due
diligence  results.  As a result of                Inspire  terminating  the  Investment
 Agreement,  the  Restructuring  Agreement with the Lender                Banks was
terminated.  Following the termination of the agreements  above-mentioned  the company
               and the Lender Banks signed on June 30, 2005 the New Agreement (see Note
1b and 11e).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

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