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

                                   FORM 10-KSB

(Mark One)
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

[_]   TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
      OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION
      FILE NUMBER ________________________________

                            LAPIS TECHNOLOGIES, INC.
                            ------------------------
                 (Name of small business issuer in its charter)

           DELAWARE                                      27-001666420
(State or other jurisdiction                (I.R.S. Employer Identification No.)
 of incorporation or organization)

                19 W. 34TH STREET, SUITE 1008, NEW YORK, NY 10001
                -------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone Number: (212) 937-3580

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: None

      Check  whether  the issuer (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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
[_]

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

      State issuer's revenues for its most recent fiscal year: $6,176,000

      The aggregate market value of the voting and non-voting common equity held
by  non-affiliates,  computed by reference to the average bid and asked price of
such common equity as of March 25, 2005, was $1,035,320.

      As of March 25,  2005,  the issuer  had  5,483,000  outstanding  shares of
Common Stock.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

    Transitional Small Business Disclosure Format (check one): Yes [_] No [X]


<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                                     PART I

Item 1.   Description of Business...........................................   1
Item 2.   Description of Property...........................................   8
Item 3.   Legal Proceedings.................................................   9
Item 4.   Submission of Matters to a Vote of Security Holders...............   9

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters..........  10
Item 6.   Management's Discussion and Analysis or Plan of Operation.........  11
Item 7.   Financial Statements..............................................  15
Item 8.   Changes In and Disagreements with Accountants on Accounting and
           Financial Disclosure.............................................  15
Item 8A.  Controls and Procedures...........................................  15
Item 8B.  Other Information.................................................  15

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
           Compliance With Section 16(a) of the Exchange Act................  16
Item 10.  Executive Compensation............................................  17
Item 11.  Security Ownership of Certain Beneficial Owners and Management....  18
Item 12.  Certain Relationship and Related Transactions.....................  18
Item 13.  Exhibits..........................................................  19
Item 14.  Principal Accountant Fees and Services............................  19

SIGNATURES..................................................................  21


<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

         We were formed in  Delaware on January 31, 2002 under the name  Enertec
Electronics, Inc. and have filed two Certificates of Amendment changing our name
to Opal  Technologies,  Inc.  and then to Lapis  Technologies,  Inc.  We conduct
operations in Israel through our wholly owned  subsidiary,  Enertec  Electronics
Limited ("Enertec  Electronics"),  an Israeli corporation formed on December 31,
1991, and Enertec Systems 2001 LTD ("Enertec  Systems"),  an Israeli corporation
formed  on  August  28,  2001,  of which we own a 55%  equity  interest.  We are
manufacturers and distributors of electronic components and products relating to
power supplies, converters and related power conversion products, automatic test
equipment (ATE), simulators and various military and airborne systems. Where the
context  requires,  references to "we" or "us" throughout this document  include
reference to Enertec Electronics and Enertec Systems.

         Our revenues are comprised of two main sources,  the commercial and the
military  markets.  In the military  market we, design,  develop and manufacture
test systems,  airborne,  shipborne, land electronic equipment and other various
military   systems,   for  military   manufacturers  in  accordance  with  their
specifications.  Most of this  military  business is carried out by the majority
owned  subsidiary  Enertec Systems 2001 Ltd. In the commercial  market we market
and  distribute  test systems,  power supplies and other  electronic  components
manufactured  in-house,  and by other  manufacturers who engage us to distribute
their products. This activity is carried out primarily by Enertec Electronics, a
wholly owned subsidiary.  We have entered into  representative  and distribution
agreements  with seven such  manufacturers,  four of which have been  reduced to
written contracts.  Enertec Electronics owns 100% of Enertec Management which in
turn owns 55% of Enertec Systems 2001 Ltd.,  consequently the financial  results
of Enertec  Systems 2001 Ltd. are  consolidated  up to Lapis  Technologies  Inc,
through its wholly owned subsidiary Enertec Electronics.

OUR SUBSIDIARIES

         In April 2002,  we acquired  all of the  outstanding  capital  stock of
Enertec Electronics, making it our wholly owned subsidiary. In this transaction,
we acquired  99  ordinary  shares of Enertec  Electronics  from Harry Mund,  our
President and Chief Executive  Officer,  in exchange for 4,750,000 shares of our
common  stock.  The common  stock  issued to Mr. Mund  represented  86.6% of our
outstanding common stock after the transaction.

         Enertec  Management  Limited (f/k/a  Elcomtech Ltd.), a private Israeli
company, is a wholly owned subsidiary of Enertec Electronics

         Enertec  Systems,  a  private  Israeli  company,  is owned  by  Enertec
Management Limited ("Enertec Management") (55%), Harry Mund (27%), our President
and Chief  Executive  Officer,  and Zvi Avni (18%), a former employee of Enertec
Electronics  Limited.  The  President  and Chief  Executive  Officer  of Enertec
Systems is Harry  Mund,  and the Chief  Operating  Officer is Zvi Avni.  Enertec
Systems commenced operations on January 1, 2002.


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<PAGE>

ENERTEC ELECTRONICS

         Enertec Electronics is responsible for:

         o    The marketing and distribution of power supplies and other related
              power  products  manufactured  by us and  third-party  firms  that
              engage us to distribute their products; and

         o    The marketing and  distribution of power supply testing  equipment
              to our military and commercial customers.

         Our  customers  have  products  that  require  power  supplies.  We are
contacted by them with their specifications,  and based on that data, we provide
a standard, or if necessary, a semi-custom or custom, power supply solution. Our
technical  sales  staff  in  Israel  has a  comprehensive  understanding  of our
customers'  product base,  which allows us to provide the most  efficient  power
supply  solution to our customers.  Our  professional  marketing and sales teams
include  engineers  who provide  support to  customers  from the early stages of
product  definition and first sampling,  through the production stages and up to
after-sales  support.  Examples of products  that  require  power  supplies  are
computers,  modems,  printers,  faxes,  telephones,   transmitter/receivers  for
commercial  and military  communications,  radar,  airborne  infra-red  cameras,
surveillance  equipment,  telecom  network  routers,  video-conference  routers,
cellular    telephone     transmitters/receivers,     television     on-routers,
internet-routers,  medical MRI scanners,  x-ray equipment,  robots,  drivers for
electric motors, and industrial control systems.

         We have also entered  into  representative  contracts  or  distribution
contracts  with  various   international  power  supply   manufacturers,   these
manufacturers  granted us exclusive rights to sell their products in Israel.  We
solicit sales within Israel and upon receipt of purchase orders,  we contact the
supply  manufacturers  to fulfill such orders.  We thereafter apply a mark-up to
the products.  We have exclusive rights in that the supply  manufacturers do not
promote their products directly within Israel.  Further,  if a customer contacts
the supply manufacturers  directly, such manufacturer will redirect the customer
to us, or advise us to contact the customer regarding the order.

         We are  also  a  major  local  Israeli  distributor  of  power  testing
equipment. This includes DC and AC electronic loads, that is, equipment used for
the testing of power  supplies which utilize  alternate  current (AC) and direct
current  (DC)  technology.  We also  provide  various  measurement  devices that
measure factors such as electrical values, voltage,  current, power, resistance,
and simulators - that is, pieces of equipment used during the testing process to
simulate different input/output conditions while monitoring the responses of the
unit to determine whether the equipment is functioning correctly.  Additionally,
we provide  complete ATE Systems  (automatic  test systems),  which are complete
systems  typically  built to  automatically  test  electronic  systems  in their
entirety.  Examples  of such  systems  are power  supplies,  computers,  modems,
telecom  systems,  electronic  motors,   communication  equipment,  and  various
military systems used on aircrafts, ships or tanks.

         Although Enertec Electronics is delivering its final customized systems
within the military industry,  it is an area in which Enertec  Electronics is no
longer generating new revenues and has specialized its focus almost  exclusively
on power supplies and power supply testing equipment.

ENERTEC SYSTEMS 2001

         Enertec Systems 2001 ltd. is responsible for designing,  developing and
manufacturing  test  systems  for  electronics  manufacturers  in  the  military
industry based on their specifications. Our systems are highly sophisticated and
we have achieved  recognition as a major local  manufacturer of ATE Systems.  We
also design and manufacture  various  airborne  military  systems - for example,
electronic systems used in aircrafts such as a power supply, mission computer or
a  control  system  for a motor  or a pump,  a radio  transceiver,  an  altitude
measuring device, and sub-assemblies, which are parts of a system developed with
a customer's specifications.

         Through our  subsidiaries we cover distinct areas of power supplies and
ATE's.  Enertec Electronics  focuses on manufacturing and distributing  standard
and  customized  power  supplies  in the  non-military  arena,  as  well  as the
distribution of standard  military related power supplies.  In addition to this,
we have increased our equity position in Enertec Systems,  an entity in which we
currently  own a 55%  equity  interest.  Enertec  Systems  meets the  scrupulous
customer  standards who demand compliance with the stringent  security clearance
standards.  Enertec Systems exclusively manufactures customized military related
products. In 2004 we upgraded our quality control system from ISO9001 to the new
ISO9001:2000.  This is a much higher standard of product design and manufacture.
Only a few companies in our arena accomplished this.


                                       2
<PAGE>


         The  International  Organization of  Standardization  (ISO)  designated
ISO9001:2000 to apply to organizations that design, develop,  produce,  install,
and service products. ISO expects organizations to apply this model, and to meet
certain  requirements,  by developing a quality control system.  ISO9001:2000 is
the international standard for quality assurance and quality design. This is the
most  common  worldwide   standard  and  is  implemented  across  all  kinds  of
organizations, including manufacturers, schools and shops. Most customers in our
industry  insist on doing business with  companies  that are least  ISO9002:2000
approved,  a standard that is less demanding than IS9001:2000.  The ISO9002:2000
standard  is  related  mainly  to the  quality  assurance  of the  manufacturing
process,  while the  higher  ISO9001:2000  standard  includes  both the  quality
assurance of the  manufacturing  process component as well as the quality of the
design.  The  ISO9001:2000  standard is important  to customers  who are placing
orders for custom made products.

         The ISO9001:2000 quality assurance model is made up of a combination of
quality  system  requirements.  The key  requirements  are that an  organization
should:

         o    Determine  the  needs  and  expectations  of  customers  and other
              interested parties;
         o    Establish policies, objectives and a work environment necessary to
              motivate the organization to satisfy these needs;
         o    Design,  resource and manage a system of interconnected  processes
              necessary to implement the policy and attain the objectives;
         o    Measure and analyze the adequacy,  efficiency and effectiveness of
              each process in fulfilling its purpose and objectives; and
         o    Pursue the continual  improvement  of the system from an objective
              evaluation of its performance.

         A typical  process for designing,  planning and  implementing a quality
system is likely to involve:

         o    Planning   the  quality   initiative   and   obtaining   executive
              sponsorship;
         o    Establishing the quality policy for the organization;
         o    Designing  and  planning  the  Quality  Management  System  (QMS),
              usually based on international standards;
         o    Establishing  the  quality  organization,  developing  the quality
              manual and structure of quality records;
         o    Determining the scope of implementation;
         o    Assuring quality plans;
         o    Reviewing deliverables and determining any actions;
         o    Auditing quality records;
         o    Defining areas for process improvement; and
         o    Managing the improvement program.

NEW PRODUCTS

ENERTEC SYSTEMS 2001

         During 2004,  Enertec Systems 2001,  began focusing  exclusively on the
military arena,  and entered into numerous new fields of military  technology in
addition to our "classic" ATE field of expertise.

         We have  successfully  marketed a new line of  ruggedized  Command  and
Control     mobile     stations     of    modular     architecture,     allowing
adaptation/customization  to  various  applications  for  which we have  already
received and delivered an order.  This was followed in December for several more
units for  delivery  in the first half of 2005,  and we expect  this order to be
followed by a much larger order to be delivered over the next few years.

         We also entered a new field of ruggedized  mission computers for combat
vehicles.  This new line has been well  received and we have already  received a
first order for three prototypes from the I.A.I. (Israeli Aircraft Industry) who
intends to replace their computers which were previously  manufactured  in-house
and have been active in the field for many years. The delivery of the prototypes
is expected to be in the second  quarter of 2005. If the  qualification  test is
well received, we should get a significant follow on order.


                                       3
<PAGE>


         We introduced a new line of military grade Power Distribution Units for
use in airborne, shipborne and ground applications.  We have already received an
order for 113 Units, to be delivered over the next 4 years.

         We introduced a new test system for the  helicopter's  flight computer.
The first customer was pleased with our presentation and during the last quarter
of 2004  placed an order for the first  unit which we hope to be  followed  with
more going forward.

         We are trying to capitalize  on our technical  expertise in the testing
of missiles and have introduced a comprehensive test system to test and simulate
all stages of a ground-to-air  anti-missile  missile.  We have also introduced a
new test system for air-to-air missiles.

         We  have   also   designed   an   innovative,   very   small   airborne
multiple-output  power  supply that has been  specially  designed  for  infrared
payloads. It uses a proprietary  technology that was developed in-house to power
a planar  switching  transformer  which enables  further  miniaturization  and a
higher  output power to size ratio.  This new line has been well received by our
customers,  and the first  samples have already  passed the  stringent  military
screening tests.

ENERTEC ELECTRONICS

         We started distributing an external power supply for a Network Security
Product.  The first order of 1000 units was received during the third quarter of
2004.

         We successfully completed the UL safety approvals for a new custom-made
power supply. It is implemented in a series of modems for fast network access of
data and voice over the IP network for which we have already  received the first
order of 1000 units with an expected delivery in the first quarter of 2005.

         We delivered  the first  samples of DC/DC  converters  for military CDU
(Command  Display  Units) in the fourth  quarter  of 2004.  These  samples  were
followed with an order for 1500 units with an expected delivery during 2005.

         We entered into a new arena of customized  power supplies for fast data
networking  systems.  We customized  compact PCI power  supplies and during 2004
received  orders  for 200  units.  We also  designed a  customized  small-  size
multiple-output power supply this product generated an order for 290 units which
were delivered in 2004.

         We customized a redundant power supply for IP Storage  Networking which
generated an order for 200 units.

MARKETING STRATEGIES

         We  market  our  products  to a  diverse  group of  manufacturers.  Our
products  serve the various needs of local Israeli  manufacturers  of electronic
systems in the following fields:

         o    Telecommunications;
         o    Medical;
         o    Military; and
         o    Industrial.

         We currently sell only to Israeli companies that, in turn,  incorporate
our  components  into their products for resale to the global  markets.  However
going  forward we anticipate  creating  some kind of platform to market  Enertec
Systems 2001 products to U.S. Companies as well as creating a manufacturing base
within  the States so as to  benefit  from US  government  dollars  directed  to
Israel's  military  aid with the  condition  of being spent on U.S  manufactured
products.  Currently we advertise in all the local Israeli  technical  magazines
and  participate  in electronic  shows three to five times a year. A substantial


                                       4
<PAGE>


part of the business is from  "captive"  customers who have been working with us
for many years.  Many companies have engaged us from their  inception,  and have
implemented  our  custom  designed  solutions.  Many  of  our  customers  use us
exclusively,  and have become dependent on us for technical  services,  products
and support,  and consider us to be their own "power supply department" and "ATE
systems department".

         Word-of-mouth  also drives our  business.  Our  reputation is backed by
many years of providing  quality products and services.  Our marketing  strategy
has been based on our brand name and reputation,  which has grown  substantially
over the last eighteen  years,  including  eight years prior to the formation of
Enertec  Electronics,  when Mr. Mund conducted  business under the name "Enertec
International." Interest in our business has also been generated at seminars and
exhibitions.

         Over the next 24 months, we plan to be more aggressive in our marketing
efforts  by  introducing  an  array  of new  advertisements,  a web site and new
catalogs.  Part of our success within Enertec Systems has been to anticipate the
needs of our clients and to start  working on products that we know they will be
needing  thus  gaining  an  edge  on our  competition  in our  time  to  market.
Furthermore by having our ear close to the ground, we have been able to identify
those of our  clients  and  potential  clients  that look  poised to get the big
orders and focus our  attention on gaining a foothold  within that client.  When
successful  this  strategy  enables us to benefit from the large order flow that
they  receive  both in terms of the  typical  products  they would  expect us to
produce for them as well as the more sophisticated  products that they might not
expect that we are then in the perfect position to offer to them,  especially if
they are  inundated  with business we are able to step in and ease the burden of
some of the non-core components.

         Unlike Enertec Systems 2001 whose  competitive edge lies much more with
the  sophistication  and complex  nature of the  products,  Enertec  Electronics
maintains its competitive  advantage primarily through its range of products and
their price.

         By  continuously  diversifying  into  new and  more  complex  products,
Enertec Systems 2001 has been able to set itself apart from its competition.

MARKET CONDITIONS

         Worldwide  recession  in  high-tech,  telecommunications,  and Internet
related  products has affected the Electronics  Division's power supplies sales.
The overall market  experienced a recession during 2003 and the first quarter of
2004.  During 2004 our power  supply  sales  remained  steady at the 2003 level.
However  starting in the second half of 2004 this market  started to improve and
we received more new orders  resulting in a significantly  increased  backlog of
$1,226,000.  During the last quarter of 2003 the market for  military/customized
systems was reduced due to end-of-year  2003 budget cuts by the Israeli Ministry
of Defense.  However  during the last two  quarters  of 2004 the local  military
market  improved  significantly  resulting  in many new  orders  received  which
contributed to a large backlog of military products of about $1,913,000.

         Additionally,  manufacturers  that sell end products  such as missiles,
aircrafts or  computers,  also provide a support  system  (e.g.,  an ATE) to the
end-user.  The end-user  uses this  support  system for  maintenance  of the end
product.  Historically,  support systems were made by manufacturers  selling the
end  products.  Recently,  however,   manufacturers  have  been  focusing  their
resources on the end products rather than on support systems. This has opened up
a market for us to develop these systems.

         The local Israeli market for ATE and simulators is estimated at $100 to
$200 million annually.  We have about 4% of this market,  approximately the same
level  of  market  penetration  as  our  competitors.  This  market  is  largely
controlled  by big  local  defense  manufacturers.  However,  there  has  been a
noticeable  trend by these and other  defense  manufacturers  to outsource  test
systems  to  specialized  firms so that  large  manufacturers  can  focus  their
resources on designing their core products.

         The local market for outsourced  custom  designed  military  systems is
above $ 500 million.  We have just begun to penetrate  parts of this market with
products in the field of avionic systems, ruggedized control systems to name but
a few.


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<PAGE>


         Our stability is largely due to our diversified client base. We service
clients in the telecommunications,  industrial control, medical and the military
core  business  sectors.  In addition to this our sales force pays a significant
amount of attention to our customer relationships,  providing more opportunities
to gain our foothold into a contract than our competition  does.  Furthermore we
offer more customized power supplies, which, we believe, makes it more difficult
for our  competitors  to bid  successfully  on the same  projects or replace our
product down the road in production or for follow on orders.

         A key  element of our growth  potential  is our  ability to enhance our
sales and marketing  team.  We will need to expand our sales and marketing  team
significantly over the next several years to achieve our sales targets.  We will
face  significant  challenges  and risks in building  and managing our sales and
marketing team,  including managing  geographically  dispersed sales efforts and
adequately training our sales people in the use and benefits of our products.

CUSTOMERS

         Our  customers  are mostly local  Israeli  manufacturers  of electronic
systems from different segments of the electronics  industry,  representing such
fields as military, commercial,  medical, and telecommunications industries. Due
to the high level of diversification  of our customers,  we are not dependent on
any one specific  market  segment;  so overall  performance  is less affected by
fluctuation in the markets.  Until 2003 IAI (Israel Aircraft Industries) was our
major customer  representing approx 38% of our sales. During 2004 we made effort
to increase  our sales in other  fields of  technologies,  for  example  avionic
equipment  and combat  stations.  This  resulted  in an increase in our sales to
Rafael to approx 25% of our total sales in 2004 as  compared to 10% in 2003.  In
2004 Israeli Aircraft Industry (IAI) accounted for approximately only 18% of our
sales.

BACKLOG

         As of December 31 2004 we had a backlog of written  firm orders for our
products and services in the amount of approximately $3,139,000 as compared to a
backlog of  approximately  $1,137,000  as of December 31, 2003.  The increase of
176% in the backlog as of Dec 2004  compared to Dec 2003 is due to the fact that
during the second half of 2004,  there was a significant  increase in orders for
military systems.  The delivery  lead-time for military systems is six to twelve
months, which gives rise to a significant backlog.

         The orders  included in the  December  31, 2004  backlog  figure are as
follows:

Enertec Systems 2001

         $413,000 representing test systems for IAI missiles and avionic systems
         $162,000  representing  airborne  power  supplies  and test systems for
         infra-red payloads
         $1,273,000  representing airborne power supplies,  flight computers and
         test systems for avionics and military systems.
         $65,000 representing data link test equipment.

Enertec Electronics

         $1,226,000
         This figure includes a variety of orders for commercial/telecom/medical
         /industrial  power supplies as well as several orders for standard test
         equipment for both the commercial and military industry.

COMPETITION

ENERTEC ELECTRONICS

         We  face  intense  competition  within  Enertec  Electronics  from  the
existing  manufacturers and distributors of electronic  components and products.
Presently,  several competing  companies that have greater resources than we do,
such as financial,  operational,  sales, marketing, and research and development
resources,   are  actively  engaged  in  the  manufacture  and  distribution  of
electronic  components  and  products.  Our  main  competitors  include;  Advise
Electronics Ltd.,  Appletec Ltd., Migvan  Technologies  Ltd., Boran Technologies
Ltd., Telkoor Power Supplies Ltd., and Horizon Electronics Ltd.


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<PAGE>


         However,  we have been able to compete effectively with these companies
for the following reasons:

         o    Our power supplies are high quality, low cost, and are backed by a
              large number of  experienced  technicians - unique  combination in
              this industry. Most of our sales people are engineers, who have an
              understanding  of  our  customer's  requirements,  allowing  us to
              provide cost-effective solutions.
         o    We have  comprehensive  experience in test systems,  which enables
              our  sales  people  to  propose  the most  cost-effective  testing
              solutions,  incorporating  the highest  grade of software  and the
              most sophisticated hardware.
         o    We maintain a strong technical team that provides solutions to our
              customers' needs within our target niche.
         o    Our  products are sold in  diversified  activity  fields,  namely,
              commercial, industrial, military, medical, systems and components.

         Our products have been  incorporated  into many high volume  production
projects with long-term  purchasing  agreements of up to two years. That is, our
customers' products are sold in high volume intervals, and to ensure delivery in
a timely fashion,  our customers  place long-term  orders with us to cover their
production needs over a period of several months to up to a year and even longer
in some cases. Additionally, we mass-produce power supplies for a client's entry
control system and are the major  manufacturer  of power supplies for a Video On
Demand  provider.  Due to the significant  approval  process these products must
pass to get to the market,  it is not cost  effective  to replace our  component
with a cheaper  competitor's  product  because  they would have to resubmit  the
product for re-approval with the new component inside.

ENERTEC SYSTEMS 2001

         Our chief  source  of  competition  for  Enertec  Systems  2001 are our
clients  themselves.  Heretofore most of our clients have done their own systems
testing and core component  manufacturing in house. But as their volume of sales
start  increasing it is easier for us to provide an  outsourcing  capability for
them. Furthermore as we continue to prove our expertise and our clients allow us
to create increasingly complex products for them, we have started to build their
trust and are overtaking a lot of the functions that  previously they would have
produced in house. Outside competitors that we face are:

         Chaban Electronics Ltd
         Symcotech Ltd
         Rada Electronic Industries ltd

SUPPLIES AND SUPPLIERS

         Our suppliers are  diversified  and we are not dependent upon a limited
number of suppliers  for  essential raw  materials,  energy or other items.  The
manufacturers  that supply to us are all  established  companies with facilities
and products in compliance with all relevant international  standards.  However,
while we are not dependent on any one supplier,  disruptions in normal  business
arrangements  by the  loss  of  one  or a few  suppliers  could  cause  possible
short-term  losses.  These  disruptions  may  be  experienced  if  our  existing
suppliers  are no longer able to meet our  requirements.  They may also occur if
there is an industry shortage of electronic or mechanical  components.  Not only
could  these  disruptions  affect  our  product  line and limit  our  production
capacity,  but also, in relation to the shortage of components,  could result in
higher  costs  due  to the  supply  shortage  or the  need  to use  higher  cost
substitute components.

         The raw materials we use are either electronic components or mechanical
components.  The  electronic  components  are purchased  from  suppliers and the
mechanical components are mainly manufactured by local subcontractors.


                                       7
<PAGE>

EMPLOYEES

         As of December 31, 2004, Enertec  Electronics  Limited had 15 employees
and Enertec Systems 2001 Limited had 47 employees.  All technical employees must
sign a two-year confidentiality  agreement and a two-year non-compete agreement,
which  prohibits  our  employees,  if they cease  working for us, from  directly
competing with us or working for our competitors.  However,  Israeli courts have
required  employers  seeking to  enforce  non-compete  undertakings  of a former
employee to demonstrate  that the competitive  activities of the former employee
will harm one of a limited number of material interests of the employer, such as
the  secrecy  of  a  company's   confidential   commercial  information  or  its
intellectual  property.  We may not be able to  demonstrate  that harm  would be
caused to us, and  therefore,  may be unable to  prevent  our  competitors  from
hiring and benefiting  from the expertise of our former  employees.  None of our
employees are subject to a collective bargaining agreement. We do not employ any
supplemental  benefits or incentive  arrangements for our officers or employees.
All of our employees are full-time.  Management considers its employee relations
to be good.

RESEARCH AND DEVELOPMENT EXPENDITURES

         Research  and  Development  costs  totaled  approximately  $110,000 and
$100,000  for the twelve  months ended  December 31, 2004 and 2003  respectively
which equates to approximately  1.8% and 1.5% of revenues  respectively for both
periods.   These  expenditures  have  adequately   satisfied  our  research  and
development requirements.  The reason for the relatively low budget dedicated to
R&D as a percentage  of our revenues is that our clients  drive our R and D with
projects that they want us to develop, consequently these costs are passed on as
cost of sales to our clients who request the new product development.

SEASONAL ASPECTS OF OUR BUSINESS

         The sales of military products  experience  seasonal variations this is
due to the fact that the  Israeli  Ministry  of  Defense  frequently  delays the
release of budgets near the end of the fiscal year,  therefore new orders to the
military  industry  are  delayed,  leading  to  delays  of  orders  to the local
subcontractors.  When this happens it negatively affects the sales volume of the
1st quarter of the year. In addition,  some of our customers  push for increased
deliveries  during the last  weeks of the year in order to  fulfill  contractual
delivery  obligations  to  their  customers  and  also to show  better  business
results. This often causes an upward spike in our fourth quarter results.

PATENTS AND TRADEMARKS

         We are not dependent on patents or trademark protection with regards to
the operation of our business and do not expect to be at any time in the future.

GOVERNMENT REGULATION

         Every  electronic  product  must  comply with the UL  standards  of the
United  States  and CE  standards  of  Europe  to be  eligible  for  sale in the
respective  countries  subject to these standards.  Every system must be tested,
qualified and labeled under the relevant  standards.  This is a complicated  and
expensive  process and once completed,  the approved  product may not be altered
for sale. The power supply system has the most stringent approval standards.

ITEM 2.  DESCRIPTION OF PROPERTY.

         We  currently  maintain  plants in both Haifa and  Carmiel.  We have no
plans to secure more space,  as we believe both  locations  are suitable for our
needs.

         Our Haifa plant is 400 square meters and includes a production hall and
management  offices.  We lease this  property  for  $16,800  per annum from Mund
Holding  Limited,  an entity wholly owned by our  President and Chief  Executive
Officer, Harry Mund. We entered into this lease in January 2001. The Haifa plant
houses the headquarters and accounting offices,  the imports  department,  sales
and administration  employees,  application engineers, and a service laboratory.
This plant is suitable  for our present and near future  needs.  There is enough
space to accommodate an additional two to four sales engineers,  if needed. This
space is also used to sell standard power supplies products.


                                       8
<PAGE>


         Our Carmiel  plant is 800 square  meters and also includes a production
hall, with a research and  development and engineering  facility for our Systems
Division.  The  Carmiel  property  is leased at $38,400  per  annum.  We use the
Carmiel plant for  manufacturing.  It houses  engineers,  software  programmers,
electronic  hardware  designers,   mechanical  designers,   and  electronic  and
mechanical  assembly  personnel.  It consists  of office  rooms for one to three
people,  and  contains one room for  electronics  assembly,  one for  mechanical
assembly,  and two for final testing of finished products.  The Systems Division
manufactures its customized  products in this facility,  and accordingly,  it is
not a plant for high volume production.  It is located in the Carmiel industrial
area, and is in close proximity to many of our Systems Division  clients.  Every
engineer  has  individual   workstations,   which  contain  computers  that  are
inter-connected by our own local network for fast  communication.  The plant has
been updated to satisfy all our present and near future needs. In this facility,
there  is  space  for  five   additional   offices,   which  would   accommodate
approximately 15 more people,  and the existing assembly rooms could accommodate
three to eight additional workers.

ITEM 3.  LEGAL PROCEEDINGS.

         Except  as  described  below,  we are not  subject  to any  pending  or
threatened  legal  proceedings,  nor is our property the subject of a pending or
threatened legal  proceeding.  None of our directors,  officers or affiliates is
involved in a  proceeding  adverse to our  business  or has a material  interest
adverse to our business.

         On April 16, 2002, Orckit  Communications  brought an action in the Tel
Aviv  District  Court  against  Gaia  Converter,  a French  company  and  Alcyon
Production Systems, also a French company and a subcontractor of Gaia Converter,
seeking  $1,627,966,  alleging  that the DC  converters  supplied  to it by Gaia
Converter  were  defective  and caused  Orckit to replace  the  converters  at a
substantial financial expense. Enertec Electronics was joined in the action as a
local Israeli  distributor  of the Gaia Converter  products.  Gaia Converter has
advised us that the  converters  in issue were free from any and all defects and
were in good working  order and that it was the faulty  performance  of Orckit's
product into which the converters were  incorporated that caused them to fail at
a greater rate than anticipated by Orckit.  Enertec Electronics filed a response
to this  claim  that  there is no cause of action  against  it,  as among  other
things,  Enertec Electronics is merely the local Israeli sales representative of
Gaia  Converter  and did not make any  implied  or  express  representations  or
warranties to Orckit  regarding the  suitability of the converters or otherwise,
nor was Enertec Electronics  required to do so by law. Technical  specifications
required by Orckit for the converters were determined and communicated  directly
by  Orckit  to  Gaia  Converter  and  all  other  communications  regarding  the
converters  were directly  between Orckit and Gaia Converter.  Moreover,  Orckit
conducted a qualification test of the converters and confirmed to Gaia Converter
that the converters complied with their requirements subsequent to such testing.
Neither Gaia  Converter nor Alcyon  Production  Systems have filed a response to
this  action,  and  consequently  Orkit  Communications  requested  and obtained
default  judgments  from the Tel Aviv District Court against both Gaia Converter
and  Alcyon  Production  Systems.   Enertec  Electronics  is  defending  and  is
continuing to defend this action  vigorously  and we do not believe that it will
have a  material  adverse  impact on our  business.  Orkit has filed  affidavits
setting out the  evidence  supporting  their  allegations  and Enertec will file
answering affidavits in response.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.


                                       9
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

         Our common stock began  quotation on the OTC Bulletin  Board on June 1,
2004 under the symbol LPST.OB.  For the periods  indicated,  the following table
sets forth the high and low bid prices per share of common  stock.  These prices
represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions.

                                 Fiscal 2005               Fiscal 2004
                         -------------------------- -------------------------
Calendar Quarter              High          Low          High         Low
------------------------ ------------- ------------ ------------ ------------
First Quarter            $1.75         $1.75        N/A          N/A
Second Quarter           N/A           N/A          $1.20        $1.01
Third Quarter            N/A           N/A          $1.75        $1.01
Fourth Quarter           N/A           N/A          $2.00        $1.01

HOLDERS

         As of  March  25,  2005,  we  had  5,483,000  shares  of  common  stock
outstanding  and such  shares  were held by  approximately  36  stockholders  of
record.

DIVIDENDS

         We have  not  declared  any  dividends  to  date.  We  have no  present
intention of paying any cash  dividends  on our common stock in the  foreseeable
future, as we intend to use earnings, if any, to generate growth. The payment by
us of dividends, if any, in the future, rests within the discretion of our Board
of Directors and will depend, among other things, upon our earnings, our capital
requirements  and our financial  condition,  as well as other relevant  factors.
There are no  restrictions  in our  articles  of  incorporation  or bylaws  that
restrict us from declaring dividends.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The  following  table  shows  information  with  respect to each equity
compensation  plan under which the  Company's  common  stock is  authorized  for
issuance as of the fiscal year ended December 31, 2004.

<TABLE>
<CAPTION>

                                       EQUITY COMPENSATION PLAN INFORMATION

------------------------------------ ------------------------ ----------------------- ---------------------------
PLAN CATEGORY                        NUMBER OF SECURITIES     WEIGHTED AVERAGE        NUMBER OF SECURITIES
                                     TO BE ISSUED UPON        EXERCISE PRICE OF       REMAINING AVAILABLE FOR
                                     EXERCISE OF              OUTSTANDING OPTIONS,    FUTURE ISSUANCE UNDER
                                     OUTSTANDING OPTIONS,     WARRANTS AND RIGHTS     EQUITY COMPENSATION PLANS
                                     WARRANTS AND RIGHTS                              (EXCLUDING SECURITIES
                                                                                      REFLECTED IN COLUMN (a)
------------------------------------ ------------------------ ----------------------- ---------------------------
                                               (a)                       (b)                         (c)
------------------------------------ ------------------------ ----------------------- ---------------------------
<S>                                  <C>                      <C>                     <C>
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS                            -0-                     -0-                     500,000
------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS
                                               -0-                     -0-                       -0-
------------------------------------ ------------------------ ----------------------- ---------------------------
TOTAL                                          -0-                     -0-                     500,000
------------------------------------ ------------------------ ----------------------- ---------------------------
</TABLE>


                                                       10
<PAGE>


2002 STOCK OPTION PLAN

         We adopted, subject to stockholder approval, our 2002 Stock Option Plan
on October 16,  2002.  The plan  provides  for the grant of options  intended to
qualify as  "incentive  stock  options",  options  that are not  intended  to so
qualify or "nonstatutory stock options" and stock appreciation rights. The total
number of  shares  of  common  stock  reserved  for  issuance  under the plan is
500,000,  subject to adjustment in the event of a stock split,  stock  dividend,
recapitalization  or similar capital  change,  plus an  indeterminate  number of
shares of common stock issuable upon the exercise of "reload options"  described
below.  We have not yet granted any options or stock  appreciation  rights under
the plan.

         The plan is administered  by our board of directors,  which will select
the eligible persons to whom options shall be granted,  determines the number of
common shares subject to each option, the exercise price therein and the periods
during which options are exercisable, interprets the provisions of the plan and,
subject to certain  limitations,  may amend the plan.  Each option granted under
the plan shall be evidenced by a written agreement between us and the optionee.

         Options  may be  granted  to our  employees  (including  officers)  and
directors, any of our subsidiaries, and certain of our consultants and advisors.
Incentive  stock  options can be issued to all employees  (including  officers).
Nonstatutory stock options can be issued to employees,  non-employee  directors,
or consultants and advisors.

         The exercise price for incentive  stock options  granted under the plan
may not be less than the fair market  value of the common  stock on the date the
option is granted,  except for options  granted to 10%  stockholders  which must
have an  exercise  price of not less than 110% of the fair  market  value of the
common  stock on the  date  the  option  is  granted.  The  exercise  price  for
nonstatutory stock options is determined by the board of directors,  in its sole
discretion,  but  may not be less  than  85% of the  fair  market  value  of the
Company's  common stock at the date of grant.  Incentive  stock options  granted
under the plan have a maximum term of ten years, except for 10% stockholders who
are subject to a maximum  term of five  years.  The term of  nonstatutory  stock
options is determined by the Board of Directors.  Options granted under the plan
are not transferable, except by will and the laws of descent and distribution.

         The  board of  directors  may  grant  options  with a  reload  feature.
Optionees  granted a reload  feature shall receive,  contemporaneously  with the
payment of the option price in common stock,  a right to purchase that number of
common  shares equal to the sum of (i) the number of shares of common stock used
to exercise the option, and (ii) with respect to nonstatutory stock options, the
number of shares of common stock used to satisfy any tax withholding requirement
incident to the exercise of such nonstatutory stock option.

         Also,  the plan allows the board of  directors  to award to an optionee
for each share of common stock covered by an option,  a related  alternate stock
appreciation  right,  permitting the optionee to be paid the appreciation on the
option in lieu of  exercising  the  option.  The  amount of  payment to which an
optionee  shall be entitled upon the exercise of each stock  appreciation  right
shall be the amount, if any, by which the fair market value of a share of common
stock on the exercise date exceeds the exercise price per share of the option.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

FORWARD-LOOKING STATEMENTS

         The  information  in  this  annual  report   contains   forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  This Act  provides a "safe  harbor"  for  forward-looking  statements  to
encourage companies to provide prospective  information about themselves so long
as they  identify  these  statements as forward  looking and provide  meaningful
cautionary  statements  identifying  important  factors  that could cause actual
results  to  differ  from the  projected  results.  All  statements  other  than
statements  of  historical  fact made in this  report are  forward  looking.  In
particular,  the  statements  herein  regarding  industry  prospects  and future
results of  operations  or financial  position are  forward-looking  statements.
Forward-looking  statements reflect  management's  current  expectations and are
inherently   uncertain.   Our  actual  results  may  differ  significantly  from
management's expectations.


                                       11
<PAGE>


         The following  discussion  and analysis  should be read in  conjunction
with the financial  statements of Lapis  Technologies,  Inc., included herewith.
This  discussion  should not be  construed  to imply that the results  discussed
herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment of our management.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 2004, our cash balance was $124,000,  as compared to
$181,000 at December 31,  2003.  The decrease in cash balance is mainly due to a
decrease in the total bank debt.  Total current assets at December 31, 2004 were
$5,739,000,  as compared to  $5,332,000  at December 31,  2003.  The increase in
current assets is mainly due to the increase in work in process inventory.

         Our  accounts  receivable  at  December  31,  2004 was  $2,544,000,  as
compared to $3,083,000 at December 31, 2003. This change in accounts  receivable
is  primarily  due to a large  increase  of revenues  from  Rafael with  shorter
payment  terms,  45-60  days as  compared  to  90-120  days of most of our other
customers. Another reason is the lower revenue of 2004 as compared to 2003.

         As of December 31, 2004 our working capital was $1,249,000, as compared
to $713,000  at  December  31,  2003 and an  accumulated  loss of  $57,000.  The
increase  in the  working  capital is mainly due to  increase in work in process
inventory  and decrease in short term bank loans.  Bank Leumi and Bank  Hapoalim
have together  extended us a total  available bank debt of $3,027,000 as opposed
to $3,201,000 at December  31,2003.  We have used this debt in a combination  of
ways: as short-term  debt, as long-term debt and in the form of lines of credit,
which we use from time to time to satisfy our  temporary  cash flow needs.  Bank
Leumi has  provided  us with  $2,358,000  of total  debt  based on our pledge of
$1,900,000 of our working  capital and customers'  receivables  due from Israeli
Aircraft  Industry  and  Rafael,  and  $458,000  by the  pledge  of  some of the
financial  assets of our  president,  Harry Mund.  Bank Hapoalim has provided us
with $669,000 of total debt based on our pledging of $500,000 of our  customers'
receivables due from Tadiran  Spectralink Ltd. and Bigband,  Zycon and Rad., and
$169,000 by the pledging of some of the financial  assets of Mr. Mund.  Mr. Mund
has personally on deposit with our banks monies in excess of $1,000,000 which he
has pledged as collateral against our bank debt.

         The current portion of our term loans at December 31, 2004 consisted of
$163,000  compared to $202,000 at December 31, 2003. Our total  short-term  loan
consisted of $1,926,000 of short-term  loans and $163,000 of current  portion of
long-term debt broken down as follows:

         $279,000 due January 2005,
         $10,000 due Feb 2005,
         $745,000 due March 2005,
         $736,000 due July 2005 and
         $319,000 due December 2005.

         At December 31, 2004,  our total bank debt was $3,027,000 as opposed to
$3,201,000  at  December  31,  2003.  These  funds  were  borrowed  as  follows:
$2,089,000  which  includes  the current  portion of long term debt,  as various
short term bank loans due through 2005,  $236,000 of long-term  debt due through
September  2007 and  $702,000  borrowed  using our bank  lines of  credit.  As a
result, we decreased the amount borrowed for the year ended December 31, 2004 by
$174,000 from  $3,201,000 as of December 31, 2003.  The decrease in bank debt is
mainly due to a decrease in account receivables.

         There are no other lines of credit  available  to us to  refinance  our
short-term bank loans. Additionally,  we currently do not have any other sources
of  financing  available  to us for  refinancing  our  short-term  loans.  As of
December  31, 2004 we are current with all of our bank debt and  compliant  with
all the terms of our bank debt.

         At December 31, 2004, and at December 31, 2003, we had receivables from
Harry  Mund,  our Chief  Executive  Officer  and  President,  in the  amounts of
$359,000  and  $147,000  respectively.  The loan to Mr.  Mund was  extended as a
salary  advance.  We believe that the current payment status will not affect our
future cash flow or liquidity.


                                       12
<PAGE>


FINANCING NEEDS

         Although we currently do not have any material  commitments for capital
expenditures,  we expect our  capital  requirements  to  increase  over the next
several years as we continue to develop and test our suite of products, increase
marketing and administration  infrastructure,  and embark on developing in-house
business  capabilities and facilities.  Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of our research and development initiatives, the cost of hiring
and training  additional  sales and marketing  personnel to promote our products
and the cost and timing of the expansion of our marketing efforts.

         Based on our current  business  plan, we  anticipate  that our existing
cash balances and cash  generated from future sales will be sufficient to permit
us to conduct our  operations and to carry out our  contemplated  business plans
for the next twelve months.  Currently,  the only external  sources of liquidity
are our  banks,  and we may  seek  additional  financing  from  them or  through
securities offerings to expand our operations,  using new capital to develop new
products,  enhance existing products or respond to competitive pressures. At the
present time, we do not have definitive plans to seek additional financing.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED  DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED  DECEMBER 31,
2003

         For the fiscal year ended  December  31,  2004 we had total  revenue of
$6,176,000  compared to revenue of $6,490,000 for the fiscal year ended December
31, 2003.  The  decrease in revenue of  $314,000,  or 5%, is a result of a lower
number of orders for military systems received at the end of year 2003 and first
half of  2004,  due to 2003  end-of-year  budget  cuts of  Israeli  Ministry  of
Defense,  which  affected  the sales in the first three  quarters  of 2004.  The
impact of the government  cuts at the end of the year usually lasts two to three
quarters since the average lead-time for military products is 6-12 months. There
has also been a delay in new orders for the Arrow project since the customer has
been involved preparing the August 2004 USA tests.

          Gross profit totaled $2,046,000 for the fiscal year ended December 31,
2004 as compared to $1,871,000  for the fiscal year ended  December 31, 2003, an
increase of $175,000 or 9%. Gross profit as a percentage of sales for the fiscal
year ended  December  31,  2004 was 33% as  compared  to 29% for the fiscal year
ended  December  31,  2003.  The increase in our gross profit was a result of an
increased  number of repeat  orders  delivered  during 2004 and more orders with
higher profit margins.

         Total operating expenses in each of the fiscal years ended December 31,
2004 and December 31, 2003 were comprised of selling, general and administrative
expenses.  Operating  expenses for the fiscal years ended  December 31, 2004 and
2003 were $1,221,000 and $1,110,000,  respectively,  an increase of $111,000, or
10%.  The  increase  in  operating  expenses is  attributable  to an increase of
$40,000  in  salary  expenses,  approximately  $55,000  in cost of  professional
services legal and accounting associated with being a public company and $16,000
in selling  expenses as a result of our effort to develop the market for our new
airborne products.

         Our net income was $343,000 in the fiscal year ended  December 31, 2004
compared to $252,000 in the fiscal year ended  December 31, 2003.  This increase
in net  income by $91,000 or 36% was due to the  increase  in gross  profit of $
175,000 and the decrease of interest  expenses and  provisions for income taxes.
The decrease in net interest  expenses is due to lower  interest rates and lower
total bank debt.

         As detailed in this annual report, our business is comprised of Enertec
Electronics  which  derives  its  revenues  from the  commercial  arena and from
standard  military power  supplies that it sells to the military  industry and a
few orders that were  received in 2002 and are still  being  fulfilled  out till
2005 that are  systems  for the  military  industry.  Consequently  from  hereon
forward when we refer to commercial revenues we will be referring exclusively to
Enertec  Electronics  commercial business and when we refer to military business
we will be  referring to Enertec  Systems 2001 and the military  part of Enertec
Electronics business.


                                       13
<PAGE>


         For the fiscal year ended December 31, 2004, our non-military  revenue,
costs of sales  and gross  profits  were  $2,403,000,  $1,792,000  and  $611,000
respectively,  and $2,248,000,  $1,200,000 and $1,048,000  respectively  for the
fiscal year ended December 31, 2003.  Revenue increased $155,000 or 6.9% because
the market for  non-military  goods started to recover  towards the end of 2004,
costs of sales increased  approximately  $572,000 or 47.7% because of efforts to
increase our market share and  penetrate  new  markets.  Gross profit  decreased
$437,000 or 41.7%  because of the higher cost of sales which was directly due to
several  orders booked at lower unit prices in order to meet  customer's  target
prices.

         For the twelve months ended December 31, 2004, revenues, costs of sales
and gross profits from our military  business were  $3,773,000,  $2,338,000  and
$1,435,000 respectively, and $4,242,000,  $3,419,000 and $823,000,  respectively
for twelve months ended  December 31, 2003.  Revenue  decreased  $469,000 or 11%
because fewer orders for military  systems were received due to 2003 end of year
budget  cuts  from the  Israeli  Ministry  of  Defense,  as well as a  strategic
decision to focus on fewer but more profitable projects. Cost of sales decreased
approximately  $1,081,000 or 31.6 % because an increased number of repeat orders
were  delivered  during 2004 as well as projects with a lower cost of sales than
the previous  year  December  2003.  Gross Profit  increased  $612,000 or 74.4 %
because  we focused on a  significant  amount of  projects  with  higher  profit
margin.

         At  December  31,  2004,  we had three  customers  that  accounted  for
approximately 62% of accounts receivable.  For the years ended December 31, 2004
and  2003,  approximately  43% and  61%,  of our  sales  were  to two and  three
customers, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

         We do not have any off balance sheet  arrangements  that are reasonably
likely to have a current or future effect on our financial condition,  revenues,
results of operations, liquidity or capital expenditures.

CRITICAL ACCOUNTING POLICIES

         Concentration  of Credit  Risk -  Concentrations  of  credit  risk with
respect to trade receivables are limited to customers dispersed primarily across
Israel.  All  trade  receivables  are  concentrated  in  the  manufacturing  and
distribution of electronic  components  segment of the economy;  accordingly the
Company is exposed to business and economic risk.  Although the Company does not
currently  foresee a  concentrated  credit  risk  associated  with  these  trade
receivables, repayment is dependent upon the financial stability of this segment
of the economy.

         Revenue  Recognition  and  Customer  Deposits - Revenue is  recorded as
product is shipped,  the price has been fixed or determined,  collectibility  is
reasonably assured and all material specific  performance  obligations have been
completed. The product sold by the Company is made to the specifications of each
customer;  sales returns and allowances are allowed on a case-by-case basis, are
not material to the  financial  statements  and are recorded as an adjustment to
sales. Cash payments received in advance are recorded as customer deposits.

         Revenue  relating to service is recognized on the  straight-line  basis
over the life of the agreement, generally one year. For the years ended December
31, 2004 and 2003 revenue relating to service contracts is less than one percent
of net sales.

         Research and  Development  Costs - Research and  development  costs are
charged to general and administrative  expense in the accompanying  statement of
income and consist of  salaries.  Research  and  development  cost for the years
ended  December  31, 2004 and 2003 were  approximately  $110,000  and  $100,000,
respectively.

         Financial Instruments - The carrying amounts of financial  instruments,
including cash and cash equivalents,  accounts receivable,  bank line of credit,
short term bank loans and accounts payable and accrued expenses approximate fair
value at  December  31, 2004  because of the  relatively  short  maturity of the
instruments. The fair value of due from stockholder is not practical to estimate
without  incurring  excessive  cost and is carried at cost at December 31, 2004.
The carrying value of the long-term debt  approximate fair value at December 31,
2004 based upon debt terms available for companies under similar terms.


                                       14
<PAGE>


         Foreign Currency Translation - Lapis Technologies,  Inc. has one wholly
owned subsidiary,  Enertec Electronics Limited, an Israeli corporation,  and one
majority owned subsidiary,  Enertec Systems 2001 Ltd., an Israeli  corporation..
The assets and liabilities of the foreign subsidiaries are translated at current
exchange  rates and related  revenues and expenses at average  exchange rates in
effect during the year.  Resulting  translation  adjustments,  if material,  are
recorded as a separate  component of accumulated other  comprehensive  income or
loss.

ITEM 7.  FINANCIAL STATEMENTS.

         All financial  information  required by this Item is attached hereto at
the end of this report.

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

         On April 1, 2004,  Rogoff & Company,  P.C.  informed  us that they were
resigning  as our  principal  independent  auditors  because they were no longer
going to do audit work for public  companies.  Going  forward from April 1, 2004
our principal  independent  auditor will be Gvilli & Co. C.P.A.  The decision to
engage  Gvilli & Co.  was  taken  upon the  unanimous  approval  of our Board of
Directors.

         During the fiscal  years ended  December 31, 2003 and December 31, 2002
and through April 1, 2004, (i) there were no  disagreements  between the Company
and  Rogoff & Company  on any  matter of  accounting  principles  or  practices,
financial  statement  disclosure or auditing  scope or procedure  which,  if not
resolved to the  satisfaction  of Rogoff & Company  would have  caused  Rogoff &
Company  to  make  reference  to the  matter  in its  reports  on the  Company's
financial  statements,  and (ii)  Rogoff &  Company's  reports on the  Company's
financial  statements  did not  contain an  adverse  opinion  or  disclaimer  of
opinion,  or  was  modified  as  to  uncertainty,   audit  scope  or  accounting
principles. During the last two most recent fiscal years ended December 31, 2003
and December 31, 2002 and through April 1, 2004, there were no reportable events
as the term described in Item 304(a)(1)(iv) of Regulation S-B.

         During the recent fiscal years ended December 31, 2003 and December 31,
2002 and through April 1, 2004,  we did not consult with Gvilli & Co.  regarding
either:

         1.   the   application   of  accounting   principles  to  any  specific
              transaction,  either  completed or proposed,  or the type of audit
              opinion that might be rendered on our  financial  statements,  and
              neither a written  report was  provided  to us nor oral advice was
              provided  that  Gvilli & Co.  concluded  was an  important  factor
              considered  by us in  reaching  a  decision  as to an  accounting,
              auditing or financial reporting issue; or

         2.   any matter that was either subject of  disagreement  or event,  as
              defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related
              instruction to Item 304 of Regulation S-B, or a reportable  event,
              as that term is explained in Item  304(a)(1)(iv)(A)  of Regulation
              S-B.

ITEM 8A. CONTROLS AND PROCEDURES.

         As of the end of the period  covered by this  report,  we  conducted an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive  officer and chief  financial  officer of our disclosure  controls and
procedures  (as defined in Rule  13a-15(e)  and Rule  15d-15(e)  of the Exchange
Act).  Based  upon  this  evaluation,  our  chief  executive  officer  and chief
financial  officer  concluded  that our  disclosure  controls and procedures are
effective  to ensure  that  information  required to be  disclosed  by us in the
reports that we file or submit  under the  Exchange Act is recorded,  processed,
summarized and reported,  within the time periods  specified in the Commission's
rules  and  forms.  There was no change  in our  internal  controls  or in other
factors that could affect these controls during our last fiscal quarter that has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 8B. OTHER INFORMATION.

         None.


                                       15
<PAGE>


                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         The  members  of our board of  directors  and our  executive  officers,
together with their respective ages and certain biographical information are set
forth below.  Our directors  receive no compensation for their services as board
members but are  reimbursed  for expenses  incurred by them in  connection  with
attending  board  meetings.  All  directors  hold  office  until the next annual
meeting of our  stockholders  and until their  successors have been duly elected
and  qualified.  Our  executive  officers  are  elected  by,  and  serve  at the
designation  and  appointment  of, the board of  directors.  There are no family
relationships among any of our directors or executive officers.

----------------------- ----- -----------------------------------------------
            NAME         AGE                        POSITION
----------------------- ----- -----------------------------------------------
Harry Mund                57  Chairman of the Board, Chief Executive Officer,
                              President and Secretary
----------------------- ----- -----------------------------------------------
Miron Markovitz           57  Director, Chief Financial Officer and Principal
                              Accounting Officer
----------------------- ----- -----------------------------------------------

         The following is a brief account of the business  experience of each of
our directors and executive officers during the past five years or more.

         HARRY  MUND,  our  Chairman  of the  Board,  Chief  Executive  Officer,
President and Secretary  since our inception,  and has been the Chief  Executive
Officer and President of our  subsidiary,  Enertec  Electronics  Limited,  since
1987.  Mr. Mund is also the Chief  Executive  Officer and  managing  director of
Enertec Management Limited (f/k/a Elcomtech Limited),  a wholly owned subsidiary
of Enertec  Electronics  Limited.  From 1983 to 1987, Mr. Mund was the President
and Chief Executive Officer of Enercon International, a marketing and sales firm
of  military  and  commercial   power  supplies  and  test  equipment.   Enercon
International's  activities were  transferred to Enertec  International in 1987,
which  subsequently  became Enertec  Electronics  Limited in 1992.  From 1975 to
1983,  Mr. Mund worked for Elbit  Systems as a design  engineer of advanced test
systems  and as the  head  of the  ATE  engineering  group.  Mr.  Mund  attended
Ben-Gurion  University  from 1970 to 1974 and earned a Bachelor of Science as an
Electronic Engineer.

         MIRON MARKOVITZ,  a Director, our Chief Financial Officer and Principal
Accounting Officer since our inception,  has been the Chief Financial Officer of
our subsidiary,  Enertec Electronics  Limited,  since 1992,  responsible for its
accounting and financial  management.  He attended Haifa University from 1975 to
1978 and earned a BA in economics and accounting.

SIGNIFICANT EMPLOYEES

         The following is a brief description of the business experience of each
of our significant employees:

         ZVI AVNI,  43,  was the System  Division  Manager  for our  subsidiary,
Enertec   Electronics   Limited,   from  February  1997  to  January  2002.  His
responsibilities  included the design and manufacture of automatic test systems.
Mr. Avni has 18 years of experience with ATE systems for the military market and
worked at Elbit Systems for 12 years as an ATE group leader. Since January 2002,
Mr. Avni has worked for  Enertec  Systems  2001 Ltd.,  which is owned by Enertec
Management  Limited (55%), Harry Mund (27%) and Mr. Avni (18%), and continues to
be responsible for the design and manufacture of the Automatic Test Systems. Mr.
Avni graduated from Haifa Technion  Institute of Technology in 1982 and earned a
degree as a Practical Electronic Engineer.

         YAAKOV  OLECH,  53,  has  been  employed  by  our  subsidiary,  Enertec
Electronics Limited, since March 1991. Mr. Olech is head of our customer service
electronic lab and technical support, providing after-sales customer support and
repair  services for products under warranty or by utilizing  service  contracts
for repair of power supplies. He attended Radiotechnical Institute,  Minsk, USSR
from 1976 to 1979 and has earned a Master in Science in electronic engineering.


                                       16
<PAGE>


         DR.  ALEXANDER  VELICHKO,  58,  has 28 years of  experience  as leading
research and development engineer and head of the research and development group
at several  companies.  From 1981 to 1990, he was a lecturer of electronics  and
automation at the Engineering Institute,  Karatau,  Kazahtan. From 1990 to 1999,
Dr.   Velichko  was  chief  engineer  of  the  Laboratory  of  Electronics   and
Automatization  Karatau,  Kazakhtan,  responsible  for  development  of  compact
analog/digital  measurement  devices.  Since  February  2000 he has been Enertec
Electronics  Limited's chief scientist and head of research and development.  Dr
Velichko is responsible for the design of custom-made power supplies.  He earned
a PhD in Automatic Control at the Moscow Institute of Mining,  which he attended
from  1964 to 1969,  and  earned a  Master  in  Science  at Tomsk  Institute  of
Electronic Engineering.

         Our future  success  depends,  in  significant  part,  on the continued
service of Mr. Mund,  and certain other key executive  officers,  managers,  and
sales and  technical  personnel,  who  possess  extensive  expertise  in various
aspects of the our business,  including Mr. Markovitz,  Mr. Avni, Mr. Olech, and
Dr. Velichko.  We may not be able to find an appropriate  replacement for any of
our key personnel.  Any loss or  interruption  of our key  personnel's  services
could adversely affect our ability to implement our business plan. It could also
result in our  failure  to create  and  maintain  relationships  with  strategic
partners that are critical to our success.  We do not presently maintain key-man
life insurance policies on any of our officers.

AUDIT COMMITTEE FINANCIAL EXPERT

         We do not have an audit  committee  financial  expert,  as that term is
defined  in Item 401 of  Regulation  S-B.  We have not been able to  identify  a
suitable nominee to serve as an audit committee financial expert.

CODE OF ETHICS

         We have  adopted a Code of Ethics and  Business  Conduct for  Officers,
Directors  and  Employees  that applies to all of our  officers,  directors  and
employees.  The Code of Ethics is filed as Exhibit 14.1 to our annual  report on
Form  10-KSB  for the  fiscal  year  ended  December  31,  2003,  filed with the
Securities  and Exchange  Commission  on June 28, 2004.  Upon  request,  we will
provide to any  person  without  charge a copy of our Code of  Ethics.  Any such
request should be made to Attn:  Harry Mund, 19 W. 34th Street,  Suite 1008, New
York, NY 10001. Our telephone number is (212) 937-3580.

ITEM 10. EXECUTIVE COMPENSATION.

         The following  table sets forth  information  concerning the annual and
long-term compensation of our Chief Executive Officer, for services as executive
officer  for the  last  three  fiscal  years.  Since we did not  compensate  any
executive  during  fiscal  2004,  2003 and 2002,  the  information  in the table
includes  compensation paid or awarded by Enertec  Electronics  Limited only. No
executive  officer other than Mr. Mund  received  total annual  compensation  in
excess of $100,000 during fiscal 2004, 2003 and 2002.

<TABLE>
<CAPTION>
                                                     SUMMARY COMPENSATION TABLE

                                                                                            LONG-TERM
                                                                                           COMPENSATION
                                                                            -------------------------------------------
                                              ANNUAL COMPENSATION                      AWARDS                PAYOUTS
                                      ------------------------------------- ------------------------------ ------------
                                                                  OTHER                       SECURITIES                   ALL
                                                                 ANNUAL     RESTRICTED        UNDER-LYING                 OTHER
        NAME AND                                                 COMPEN-    STOCK AWARD(S)    OPTIONS/        LTIP       COMPEN-
   PRINCIPAL POSITION         YEAR       SALARY ($)  BONUS ($)  SATION ($)        ($)           SARS (#)     PAYOUTS ($) SATION ($)
------------------------- ----------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
<S>                       <C>         <C>           <C>        <C>          <C>               <C>          <C>          <C>
Harry Mund, Chief           2004        $261,000      -0-         -0-            -0-             -0-          -0-         -0-
     Executive Officer      2003        $216,000      -0-         -0-            -0-             -0-          -0-         -0-
     and President          2002        $145,550      -0-         -0-            -0-             -0-          -0-         -0-
</TABLE>


                                                                 17
<PAGE>



ITEM 11. SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT  AND
         RELATED STOCKHOLDER MATTERS.

         The following  table sets forth  information  regarding the  beneficial
ownership  of our common  stock as of March 25, 2005.  The  information  in this
table provides the ownership information for:

         o    each person known by us to be the beneficial owner of more than 5%
              of our common stock;
         o    each of our directors;
         o    each of our executive officers; and
         o    our executive officers and directors as a group.

         Unless otherwise  indicated,  the persons named in the table below have
sole voting and investment  power with respect to the number of shares indicated
as  beneficially  owned  by  them.  Enertec   Electronics   Limited,  27  Rechov
Ha'Mapilim, Kiriat Ata, Israel, P.O. Box 497, Kiriat Motzkin 26104, Israel.

                                      Number of Shares       Percentage
Name of Beneficial Owner              Beneficially Owned *   Ownership *
------------------------------------  ---------------------  ----------------
Harry Mund                                    4,750,000           86.6%
Miron Markovitz                                   9,000            0.2%
------------------------------------  ---------------------  ----------------
All Directors and Executive Officers          4,759,000           86.8%
as a Group (2 persons)

*     Applicable  percentage  ownership is based on  5,483,000  shares of common
      stock  outstanding  as  of  March  25,  2005,   together  with  securities
      exercisable or  convertible  into shares of common stock within 60 days of
      March 25, 2005 for each stockholder. Beneficial ownership is determined in
      accordance  with the rules of the Securities  and Exchange  Commission and
      generally  includes voting or investment power with respect to securities.
      Shares of common  stock  that are  currently  exercisable  or  exercisable
      within 60 days of March 25,  2005 are deemed to be  beneficially  owned by
      the person  holding  such  securities  for the  purpose of  computing  the
      percentage of ownership of such person, but are not treated as outstanding
      for the purpose of computing the percentage ownership of any other person.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On April 26, 2002,  we issued  4,750,000  shares of our common stock to
Harry Mund in exchange  for his 99 shares of Enertec  Electronics  Limited,  our
wholly owned  subsidiary,  which  constituted  all of its issued and outstanding
shares. The 4,750,000 shares were valued at a price of $.10 per share or a total
of $475,000.

         At December 31, 2001, our subsidiary Enertec  Electronics Limited had a
loan receivable from Harry Mund, our Chief Executive  Officer and President,  in
the amount of $687,000 bearing interest at a rate of 4% per annum. This loan was
extended to Mr. Mund in October 2001.  At December 31, 2003 the loan  receivable
was $296,000.  The loan was extended as a salary advance to Mr. Mund.  There are
no written  agreements  setting out  repayment  terms.  The parties  have orally
agreed that the amount outstanding is due on demand.

         During 2001, our subsidiary Enertec Electronics Limited sold a building
to Mund  Holding  Limited,  an  entity  wholly  owned by Harry  Mund,  our Chief
Executive  Officer and President,  for  approximately  $170,320.  An independent
appraiser and  governmental  body, The Capital Gains  Authority,  determined the
sale price.  The  building  was paid in part with cash in the amount of $93,245,
and the balance by a  non-interest  bearing loan.  This loan is unrelated to the
interest bearing loan receivable from Mr. Mund discussed above. A portion of the
loan was paid down on June 6, 2003 in the amount of  $12,600,  and again on July
1, 2003 in the amount of $10,971.  There are no written  agreements  setting out
repayment terms.  The parties have orally agreed that the amount  outstanding is
due on demand.  As of December 31, 2003, the amount of the loan  outstanding was
$51,000.

         Enertec Electronics rents the building's office and manufacturing space
from Mund Holding  Limited for $16,800  annually for  twenty-four  months ending
December 31,  2003.  We have  exercised  our option to lease the building for an
additional twenty-four months ending December 31, 2005 for approximately $18,000
annually.


                                       18
<PAGE>


         On December 31,  2000,  Enertec  Management  Limited  (f/k/a  Elcomtech
Limited), a wholly-owned subsidiary of Enertec Electronics Limited, and of which
Harry Mund is the Chief  Executive  Officer  and  managing  director,  loaned an
aggregate amount of $23,000 to Enertec  Electronics  Limited at an interest rate
of 4% per annum due  December  31,  2002.  This loan was repaid on December  31,
2002.

         Enertec Systems 2001 Ltd. ("Enertec  Systems"),  an Israeli company, is
owned by Enertec  Management  Limited (55%) ("Enertec  Management"),  Harry Mund
(27%) and Zvi Avni  (18%),  an  employee  of Enertec  Systems.  Enertec  Systems
commenced  operations on January 1, 2002. Enertec Management  initially acquired
25% of Enertec  Systems from Harry Mund on January 1, 2002. This 25% represented
founding equity and was acquired by Enertec  Management for 250 NIS. On December
31,  2002,  Enertec  Management  increased  its  securities  position  to 55% of
Systems'  outstanding  stock by purchasing  additional  shares from Zvi Avni for
$71,000. A total of 300 shares of Systems'  outstanding stock were acquired from
Mr.  Avni for  $236.66  per  share.  The  purchase  price  was  paid by  Enertec
Electronics  through  Enertec  Management.  The source of the funds was  Enertec
Electronics'  cash from  operations.  No liabilities were assumed as a result of
the purchases.

ITEM 13. EXHIBITS.

EXHIBIT
NUMBER                              DESCRIPTION
-------  -----------------------------------------------------------------------
3.1      Certificate of Incorporation of Enertec Electronics, Inc. filed January
         31, 2002  (Incorporated by reference to our  registration  statement on
         Form SB-2 (File No. 333-100979), filed with the Securities and Exchange
         Commission on November 4, 2002)
3.2      Certificate of Amendment of Enertec  Electronics,  Inc. filed April 23,
         2002  (Incorporated by reference to our registration  statement on Form
         SB-2 (File No.  333-100979),  filed with the  Securities  and  Exchange
         Commission on November 4, 2002)
3.3      Certificate of Amendment of Opal  Technologies,  Inc. filed October 17,
         2002  (Incorporated by reference to our registration  statement on Form
         SB-2 (File No.  333-100979),  filed with the  Securities  and  Exchange
         Commission on November 4, 2002)
3.4      By-Laws of Lapis Technologies,  Inc.  (Incorporated by reference to our
         registration  statement on Form SB-2 (File No. 333-100979),  filed with
         the Securities and Exchange Commission on November 4, 2002)
14.1     Code of Ethics  (Incorporated by reference to our annual report on Form
         10-KSB for the fiscal  year ended  December  31,  2003,  filed with the
         Securities and Exchange Commission on June 28, 2004)
21.1     List of Subsidiaries
31.1     Certification by Chief Executive Officer, required by Rule 13a-14(a) or
         Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302
         of the Sarbanes-Oxley Act of 2002.
31.2     Certification by Chief Financial Officer, required by Rule 13a-14(a) or
         Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302
         of the Sarbanes-Oxley Act of 2002.
32.1     Certification by Chief Executive Officer, required by Rule 13a-14(b) or
         Rule  15d-14(b)  of the  Exchange Act and Section 1350 of Chapter 63 of
         Title 18 of the United States Code, promulgated pursuant to Section 906
         of the Sarbanes-Oxley Act of 2002.
32.2     Certification by Chief Financial Officer, required by Rule 13a-14(b) or
         Rule  15d-14(b)  of the  Exchange Act and Section 1350 of Chapter 63 of
         Title 18 of the United States Code, promulgated pursuant to Section 906
         of the Sarbanes-Oxley Act of 2002.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES

         The aggregate  fees billed for  professional  services  rendered by our
principal accountants for the audit of our financial statements, for the reviews
of the financial  statements  included in our annual report on Form 10-KSB,  and
for other services  normally  provided in connection with statutory filings were
$8,250 and $10,500 for the years ended  December 31, 2004 and December 31, 2003,
respectively.


                                       19
<PAGE>

AUDIT-RELATED FEES

         We incurred fees of $0 and $0 for the years ended December 31, 2004 and
December 31,  2003,  respectively,  for  professional  services  rendered by our
principal  accountants  that are  reasonably  related to the  performance of the
audit or review of our financial statements and not included in "Audit Fees."

TAX FEES

         The aggregate  fees billed for  professional  services  rendered by our
principal  accountants  for tax  compliance,  tax advice,  and tax planning were
$1,500 and $1,500 for the years ended  December  31, 2004 and December 31, 2003,
respectively. The services for which such fees were paid consisted of filing our
tax returns for 2003 and 2004.

ALL OTHER FEES

         We did not incur any fees for other  professional  services rendered by
our principal  accountants during the years ended December 31, 2004 and December
31, 2003.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

         Not applicable



                                       20
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                               LAPIS TECHNOLOGIES, INC.


         Dated:   March 28, 2005               By:  /s/ Harry Mund
                                                 -------------------------------
                                                 Harry Mund
                                                 Chief Executive Officer


         Dated:   March 28, 2005               By:  /s/ Miron Markovitz
                                                 -------------------------------
                                                 Miron Markovitz
                                                 Chief Financial Officer and
                                                 Principal Accounting Officer

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.


         SIGNATURE                   TITLE                       DATE
         ---------                   -----                       ----


          /s/ Harry Mund             Chairman of the Board       March 28, 2005
         --------------------
         Harry Mund


          /s/ Miron Markovitz        Director                    March 28, 2005
         --------------------
         Miron Markovitz



                                       21
<PAGE>

Gvilli & Co. C.P.A. (isr.)



                          INDEPENDENT AUDITORS' REPORT


To the Stockholders' and the Board of Directors
of Lapis Technologies, Inc.

We  have  audited  the   accompanying   consolidated   balance  sheet  of  Lapis
Technologies,  Inc. and  Subsidiaries  (the "Company") at December 31, 2004, and
the related consolidated  statements of income,  changes in stockholders' equity
and comprehensive income and cash flows for the year then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility is to express an opinion on these financial statements based upon
our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,   the  financial  position  of  the  Lapis
Technologies,  Inc. and  Subsidiaries at December 31, 2004, and the consolidated
results of their  operations  and their cash flows for the year then  ended,  in
conformity with accounting principles generally accepted in the United States of
America.


/s/ Gvilli and Co.
Gvilli & Co.
March 17, 2005
Casarea, Israel


                                      F-1

<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Stockholders' and the Board of Directors
of Lapis Technologies, Inc.

We  have  audited  the   accompanying   consolidated   balance  sheet  of  Lapis
Technologies,  Inc. and  Subsidiaries  (the "Company") at December 31, 2003, and
the related consolidated  statements of income,  changes in stockholders' equity
and comprehensive income and cash flows for the year then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility is to express an opinion on these financial statements based upon
our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  condition  of  the  Lapis
Technologies,  Inc. and  subsidiaries at December 31, 2003, and the consolidated
results of their  operations  and their cash flows for the year then  ended,  in
conformity with accounting principles generally accepted in the United States of
America.



/s/ Gvilli & Co.
June 25, 2004
Casarca, Israel


                                      F-2
<PAGE>


                           LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  CONSOLIDATED BALANCE SHEET
                             (In Thousands, Except Share Amounts)

<TABLE>
<CAPTION>

                                            ASSETS
                                                                                  December 31,
                                                                                      2004
                                                                                  ------------
<S>                                                                               <C>
Current Assets:
    Cash and cash equivalents                                                     $        124
    Accounts receivable                                                                  2,544
    Inventories                                                                          2,274
    Prepaid expenses and other current assets                                              438
    Due from stockholder                                                                   359
                                                                                  ------------
      Total Current Assets                                                               5,739

Property and equipment, net                                                                414
Deferred income taxes                                                                       20
                                                                                  ------------
                                                                                  $      6,173

                             LIABILITIES AND STOCKHOLDERS' EQUITY

Current  Liabilities:
    Bank line of credit                                                           $        702
    Short term bank loans                                                                1,926
    Current portion of term loans                                                          163
    Accounts payable and accrued expenses                                                1,520
    Income taxes payable                                                                   179
                                                                                  ------------
      Total Current Liabilities                                                          4,490

Term loans, net of current portion                                                         236
Severance payable                                                                           59
                                                                                  ------------
                                                                                         4,785
    Commitments and contingencies

Minority interest                                                                          372

Stockholders' Equity:
    Preferred stock; $.001 par value, 5,000,000 shares authorized,  none issued
    - Common stock; $.001 par value, 100,000,000 shares authorized, 5,483,000
      shares issued and outstanding                                                          5
    Additional paid-in capital                                                              78
    Accumulated other comprehensive loss                                                   (57)
    Retained Earnings                                                                      990
                                                                                  ------------
      Total Stockholders' Equity                                                         1,016
                                                                                  ------------
                                                                                  $      6,173
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                             F-3
<PAGE>


                           LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF INCOME
                  (In Thousands, Except Earnings Per Share and Share Amounts)

<TABLE>
<CAPTION>
                                                                             Years Ended
                                                                             December 31,
                                                                     --------------------------
                                                                        2004            2003
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
Sales                                                                $     6,176    $     6,490
Cost of sales                                                              4,130          4,619
                                                                     -----------    -----------
    Gross profit                                                           2,046          1,871
                                                                     -----------    -----------
Operating Expenses:
    Selling expenses                                                          56             40
    General and administrative                                             1,165          1,070
                                                                     -----------    -----------
      Total operating expenses                                             1,221          1,110
                                                                     -----------    -----------
    Income from operations                                                   825            761
                                                                     -----------    -----------
Other Income (Expense):
    Interest expense, net                                                   (238)          (327)
    Other income                                                               8             --
    Foregiveness of debt                                                      --             15
                                                                     -----------    -----------
      Total other income (expense)                                          (230)          (312)
                                                                     -----------    -----------
    Income before provision for income taxes and minority interest           595            449

    Provision for income taxes                                                61            120
    Minority interest                                                       (191)           (77)
                                                                     -----------    -----------
Net income                                                           $       343    $       252
                                                                     ===========    ===========

Basic net loss per share                                             $      0.06    $      0.05
                                                                     ===========    ===========
Basic weighted average common shares outstanding                       5,483,000      5,483,000
                                                                     ===========    ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                              F-4
<PAGE>

<TABLE>
<CAPTION>
                                           LAPIS TECHNOLOGY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                                            YEAR ENDED DECEMBER 31, 2003 AND 2004
                                            (In Thousands, Except Share Amounts)


                                                                             Accumulated
                                              Common Stock        Additional    Other                    Total
                                          ---------------------    Paid-in   Comprehensive  Retained Stockholders'Comprehensive
                                           Shares       Amount     Capital       Loss       Earnings    Equity      Income
                                          ---------   ---------   ---------   ---------    ---------   ---------   ---------
<S>                                       <C>         <C>         <C>         <C>          <C>         <C>         <C>
Balance, January 1, 2003                  5,483,000   $       5   $      78   $    (104)   $     395   $     374

Foreign currency translation adjustment          --          --          --          41           --          41          41

Net income                                       --          --          --          --          252         252         252
                                          ---------   ---------   ---------   ---------    ---------   ---------   ---------
Balance, December 31, 2003                5,483,000           5          78         (63)         647         667         293
                                                                                                                   =========

Foreign currency translation adjustment          --                                   6                        6           6

Net income                                       --                                              343         343         343
                                          ---------   ---------   ---------   ---------    ---------   ---------   ---------
Balance, December 31, 2004                5,483,000   $       5   $      78   $     (57)   $     990   $   1,016   $     349
                                          =========   =========   =========   =========    =========   =========   =========
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                                            F-5
<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

                                                         Years Ended
                                                         December 31,
                                                      ------------------
                                                        2004       2003
                                                      -------    -------
Cash flows from operating activities:
   Net income                                         $   343    $   252
   Adjustments to reconcile net income to net cash
     used in operating activities:
       Depreciation and amortization                      146        137
       Minority interest                                  215         77
       Foregiveness of debt                                --        (16)
       Gain on sale of property and equipment              (8)        --
       Deferred income tax                                            (4)
   Change in operating assets and liabilities:
     Accounts receivable                                  539       (910)
     Inventories                                         (616)       266
     Prepaid expenses and other current assets           (203)        86
     Accounts payable and accrued expenses               (184)       (98)
     Income taxes payable                                  65         52
     Customer deposits                                     --       (212)
     Severance payable                                     --        (36)
                                                      -------    -------
Net cash used in operating activities                     297       (406)
                                                      -------    -------
Cash flows from investing activities:
   Proceeds from sale of property and equipment            19         --
   Purchase of property and equipment                     (11)      (213)
   Decrease in due from stockholder                      (139)       121
   Decrease in due from affiliates                        (24)        57
                                                      -------    -------
Net cash (used in) provided by investing activities      (155)       (35)
                                                      -------    -------
Cash flows from financing activities:
   Increase (decrease) in bank line of credit, net       (254)      (495)
   Proceeds from long term debt                         3,682      5,180
   Repayment of long-term debt                         (3,608)    (4,395)
                                                      -------    -------
Net cash provided by financing activities                (180)       290
                                                      -------    -------
Effects of exchange rates on cash                         (19)        19
                                                      -------    -------
Increase (decrease) in cash                               (57)      (132)
Cash, beginning of period                                 181        313
                                                      -------    -------
Cash, end of period                                   $   124    $   181
                                                      =======    =======

The accompanying notes are an integral part of these financial statements.


                                      F-6
<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)


                                                         Years Ended
                                                         December 31,
                                                      ------------------
                                                       2004       2003
                                                      -------    -------
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
     Interest                                         $   238    $   327
                                                      =======    =======
     Income taxes                                     $    40    $   172
                                                      =======    =======

Supplemental disclosure of non-cash financing
  activities:
   Common stock issued for services                   $    --    $    50
                                                      =======    =======


The accompanying notes are an integral part of these financial statements.


                                      F-7
<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 1 - DESCRIPTION OF BUSINESS AND ACQUISITION

     Lapis  Technologies,  Inc. (the "Company") was incorporated in the State of
     Delaware  on January 31,  2002.  The  Company's  operations  are  conducted
     through its wholly  owned  Israeli  Subsidiary,  Enertec  Electronics  Ltd.
     ("Enertec") and its majority owned Israeli  subsidiary Enertec Systems 2001
     Ltd. ("Systems"). Enertec is engaged in the manufacturing, distribution and
     marketing of electronic components and products relating to power supplies,
     converters and related power conversion products, automatic test equipment,
     simulators and various military and airborne  systems,  within the State of
     Israel.

     On January  1, 2002  Enertec  assisted  in the  organization  of Systems in
     exchange  for 25% of the  common  stock of  Systems.  This  investment  was
     accounted  for  under  the  equity  method.   Systems  is  engaged  in  the
     manufacturing  of  electronic  components  primarily  for military  use. On
     December 31, 2002 Enertec increased its common stock ownership  interest in
     Systems to 55% for $71, which was included in accounts  payable and accrued
     expenses in the  accompanying  consolidated  balance  sheet at December 31,
     2002.  This  amount was paid  during  January  2003.  Due to the  Company's
     increased  ownership  of Systems at December  31, 2002 the Systems  balance
     sheet has been consolidated at December 31, 2002 and System's  statement of
     income is being consolidated beginning in 2003.

NOTE 2 - BASIS OF PRESENTATION

     The accompanying  consolidated  financial statements present the results of
     operations  of the Company for the years ended  December  31, 2004 and 2003
     and their  wholly  owned  subsidiary  Enertec  Electronics  Ltd.  and their
     ownership  interest in Enertec Systems 2001 Ltd. All material  intercompany
     accounts and transactions have been eliminated in consolidation.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Concentration of Credit Risk

     Concentrations of credit risk with respect to trade receivables are limited
     to customers  dispersed  primarily across Israel. All trade receivables are
     concentrated in the manufacturing and distribution of electronic components
     segment of the economy;  accordingly the Company is exposed to business and
     economic  risk.   Although  the  Company  does  not  currently   foresee  a
     concentrated credit risk associated with these trade receivables, repayment
     is dependent upon the financial stability of this segment of the economy.


                                       F-8

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Cash and Cash Equivalents

     For the purpose of the  statement of cash flows the Company  considers  all
     highly liquid investments with an original maturity of three months or less
     at the time of purchase to be cash equivalents.

     Allowance for Doubtful Accounts

     The Company estimates  uncollectibility of accounts receivable by analyzing
     historical bad debts, customer  concentrations,  customer credit worthiness
     and current  economic  trends when evaluating the adequacy of the allowance
     for doubtful accounts. At December 31, 2004 the Company has not recorded an
     allowance for doubtful accounts.

     Inventories

     Inventories are stated at the lower of cost (first-in,  first-out basis) or
     market.

     Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
     amortization.  Routine  maintenance and repairs and minor replacement costs
     are charged to expense as incurred, while expenditures that extend the life
     of these assets are capitalized. Depreciation and amortization are provided
     for in  amounts  sufficient  to relate  the cost of  depreciable  assets to
     operations  over their estimated  service lives.  The Company uses the same
     depreciation method for both financial reporting and tax purposes. Upon the
     sale or  retirement  of  property  and  equipment,  the  cost  and  related
     accumulated depreciation and amortization will be removed from the accounts
     and the  resulting  profit or loss will be  reflected  in the  statement of
     income. The estimated lives used to determine depreciation and amortization
     are:

                 Leasehold   improvements   10 years
                 Machinery  and equipment   10 years
                 Furniture  and fixtures    14 years
                 Transportation equipment    7 years
                 Computer equipment          3 years


                                       F-9

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Income Taxes

     The Company uses the  liability  method of  accounting  for income taxes as
     required by Statement of Financial  Accounting  Standards  ("SFAS") No. 109
     "Accounting  for Income Taxes." Under this method,  deferred tax assets and
     liabilities are determined based on differences between financial reporting
     and  tax  basis  of  assets  and  liabilities.   Deferred  tax  assets  and
     liabilities  are measured  using enacted tax rates and laws that will be in
     effect when the differences are expected to reverse.  Valuation  allowances
     are established  when it is determined that it is more likely than not that
     the deferred tax assets will not be realized.

     Warranty Reserves

     The Company includes a one-year  warranty on all products sold. A provision
     for estimated warranty costs, if material, is recorded at the time of sale.
     Based upon  historical  experience  the Company has not  incurred  material
     costs  relating to its warranty and has  therefore  not recorded a warranty
     provision at December 31, 2004.

     Revenue Recognition and Customer Deposits

     Revenue is  recorded  as product  is  shipped,  the price has been fixed or
     determined,  collectability is reasonably assured and all material specific
     performance  obligations  have  been  completed.  The  product  sold by the
     Company is made to the  specifications of each customer;  sales returns and
     allowances  are allowed on a  case-by-case  basis,  are not material to the
     financial  statements  and are  recorded as an  adjustment  to SALES.  Cash
     payments received in advance are recorded as customer deposits.

     Revenue relating to service is recognized on the  straight-line  basis over
     the life of the agreement, generally one year. For the years ended December
     31, 2004 and 2003  revenue  relating to service  contracts is less than one
     percent of net sales.

     Shipping and Handling Costs

     Shipping  and handling  costs are  included in cost of sales in  accordance
     with guidance  established by the Emerging Issues Task Force ("EITF") issue
     No. 00-10, "Accounting for Shipping and Handling Costs."

     Stock Based Compensation

     Effective  January  1,  2003 the  Company  adopted  the fair  method  value
     alternative    of   SFAS   No.    148,    "Accounting    for    Stock-Based
     Compensation-Transition and Disclosure." Under the fair value based method,
     compensation  cost is  measured at the grant date based on the value of the
     award and is  recognized  over the  service  period,  which is usually  the
     vesting  period.  For stock  options,  fair  value is  determined  using an
     option-pricing  model that takes into  account the stock price at the grant
     date, the exercise price,  the expected life of the option,  the volatility
     of the underlying stock and the expected dividends on it, and the risk-free
     interest  rate over the  expected  life of the option.  For the years ended
     December 31, 2004 and 2003 the Company did not issued any stock options.


                                      F-10

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Research and Development Costs

     Research and  development  costs are charged to general and  administrative
     expense in the  accompanying  statement  of income and consist of salaries.
     Research  and  development  cost for the years ended  December 31, 2004 and
     2003 were approximately $110 and $100, respectively.

     Earnings per Share

     The Company presents basic earnings per share and, if appropriate,  diluted
     earnings  per  share in  accordance  with the  provisions  of SFAS No.  128
     "Earnings per Share" ("SFAS 128").

     Under SFAS 128 basic net earnings per share is computed by dividing the net
     earnings  for the year by the  weighted  average  number of  common  shares
     outstanding  during the year. Diluted net earnings per share is computed by
     dividing the net earnings  for the year by the weighted  average  number of
     common  shares and common share  equivalents  outstanding  during the year.
     Common stock  equivalents  would arise from the granting of stock  options.
     For the years  ended  December  31, 2004 and 2003 the Company did not grant
     any stock options.  Diluted earnings per share is not included as it is the
     same as basic for all periods shown.

     Impairment of Long-Lived Assets

     The Company reviews long-lived assets for impairment whenever circumstances
     and  situations  change such that there is an indication  that the carrying
     amounts may not be  recovered.  In such  circumstances,  the  Company  will
     estimate the future cash flows expected to result from the use of the asset
     and its eventual disposition. Future cash flows are the future cash inflows
     expected to be generated by an asset less the future  outflows  expected to
     be  necessary to obtain those  inflows.  If the sum of the expected  future
     cash flows  (undiscounted  and without  interest  charges) is less than the
     carrying amount of the asset, the Company will recognize an impairment loss
     to adjust to the fair value of the asset. Management believes that there is
     no impairment of long-lived assets at December 31, 2004.

     Minority Interest

     Minority interest represents the minority stockholders' proportionate share
     of the  equity of the  Company's  subsidiary  at  December  31,  2004.  The
     minority  interest is adjusted for the minority's  share of the earnings or
     loss of Systems.

     Financial Instruments

     The carrying  amounts of  financial  instruments,  including  cash and cash
     equivalents,  accounts  receivable,  bank line of  credit,  short term bank
     loans and accounts payable and accrued  expenses  approximate fair value at
     December  31,  2004  because  of  the  relatively  short  maturity  of  the
     instruments.  The fair value of due from  stockholder  is not  practical to
     estimate  without  incurring  excessive  cost  and is  carried  at  cost at
     December 31, 2004.  The carrying  value of the long-term  debt  approximate
     fair  value at  December  31,  2004 based  upon debt  terms  available  for
     companies under similar terms.


                                      F-11

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Comprehensive Income (Loss)

     Comprehensive income (loss) consists of net income for the year and foreign
     currency translation adjustments.

     Foreign Currency Translation

     The assets and  liabilities of the foreign  subsidiaries  are translated at
     current  exchange  rates and  related  revenues  and  expenses  at  average
     exchange   rates  in  effect   during  the  year.   Resulting   translation
     adjustments,   if  material,  are  recorded  as  a  separate  component  of
     accumulated other comprehensive income or loss.

     Use of Estimates

     In preparing financial statements in conformity with accounting  principles
     generally accepted in the United States of America,  management is required
     to make  estimates  and  assumptions  that affect the  reported  amounts of
     assets  and  liabilities  and  the  disclosure  of  contingent  assets  and
     liabilities  at the  date of the  financial  statements  and  revenues  and
     expenses  during the  reporting  period.  Actual  results could differ from
     those estimates.

     Reclassification

     Certain  reclassifications  have been made to the  prior  year's  financial
     statements in order to conform to the current year presentation.

     New Accounting Pronouncements

     During  November  2002,  the FASB  issued  EITF Issue No.  00-21,  "Revenue
     Arrangements  with  Multiple   Deliverables"  ("EITF  00-21").  EITF  00-21
     addresses  certain aspects of the accounting by a company for  arrangements
     under which it will perform multiple  revenue-generating  activities.  EITF
     00-21 addresses when and how an arrangement involving multiple deliverables
     should be divided into separate  units of  accounting.  EITF 00-21 provides
     guidance  with  respect  to the effect of  certain  customer  rights due to
     company nonperformance on the recognition of revenue allocated to delivered
     units  of  accounting.   EITF  00-21  also  addresses  the  impact  on  the
     measurement  and/or  allocation of  arrangement  consideration  of customer
     cancellation provisions and consideration that varies as a result of future
     actions of the  customer  or the  company.  Finally,  EITF  00-21  provides
     guidance  with  respect  to  the   recognition   of  the  cost  of  certain
     deliverables that are excluded from the revenue accounting arrangement. The
     provisions of EITF 00-21 will apply to revenue arrangements entered into in
     fiscal  periods  beginning  after June 15, 2003. The adoption of EITF 00-21
     has not had a  material  effect  on the  Company's  financial  position  or
     results of operations.

     During November 2002, the FASB issued  Interpretation No. 45,  "Guarantor's
     Accounting and Disclosure  Requirements for Guarantees,  Including Indirect
     Guarantees of Indebtedness to Others,  an interpretation of FASB Statements
     No. 5, 57 and 107 and a  rescission  of FASB  Interpretation  No. 34" ("FIN
     45"). FIN 45 requires the recognition of an initial  liability for the fair
     value of an  obligation  assumed by issuing a guarantee.  The provision for
     the initial recognition and measurement of the liability will be applied on
     a prospective  basis to guarantees  issued or modified  after  December 31,
     2002. The adoption of FIN 45 has not had a material affect on the Company's
     financial position or results of operations.


                                      F-12

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     During January 2003, the FASB issued  Interpretation No. 46, "Consolidation
     of Variable Interest  Entities" ("FIN 46"). The consolidation  requirements
     of FIN 46 apply  immediately to variable  interest  entities  created after
     January 31, 2003. The consolidation requirements apply to older entities in
     the first  fiscal year or interim  periods  beginning  after June 15, 2003.
     Certain of the disclosure  requirements  apply in all financial  statements
     issued after  January 31, 2003,  regardless  of when the variable  interest
     entity  was  established.  The  Company  does  not have  variable  interest
     entities  so the  adoption  of this  statement  will  have no effect on the
     Company's financial position or results of operations.

     During April 2003,  the FASB issued SFAS No. 149,  "Amendment  of Statement
     133 on Derivative  Instruments and Hedging  Activities"  ("SFAS 149"). This
     statement  amends  SFAS  133 to  provide  clarification  on  the  financial
     accounting and reporting of derivative  instruments and hedging  activities
     with similar  characteristics  entered into or modified after June 30, 2003
     to be accounted to be accounted for on a comparable basis. The Company does
     not have any derivative  instruments or hedging  activities so the adoption
     of this statement will have no effect on the Company's  financial  position
     or results of operations.

     During May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
     Financial  Instruments with Characteristics of both Liabilities and Equity"
     ("SFAS 150").  SFAS 150  establishes  standards on the  classification  and
     measurement  of  financial   instruments  with   characteristics   of  both
     liabilities  and  equity.  SFAS 150 will  become  effective  for  financial
     instruments  entered into or modified  after May 31, 2003.  The adoption of
     SFAS 150 has not had a material effect on the Company's  financial position
     or results of operations.

     During  December  2003 the FASB issued SFAS No. 132  (revised)  "Employers'
     Disclosures  about  Pensions  and Other  Post  Retirement  Benefits,"  that
     improves the financial statement disclosures for defined benefit plans. The
     revision  changes the  existing  disclosure  requirements  for  pensions by
     requiring  company's  to provide  more  details  about  their plan  assets,
     benefit   obligations,   cash  flows,  benefit  costs  and  other  relevant
     information.  The Company does not have a defined  benefit  pension plan so
     the  adoption  of this  statement  will  have no  effect  on the  Company's
     financial position or results of operations.

NOTE 4 - INVENTORIES

     Inventories consist of the following at December 31, 2004:

              Raw materials                            $     671
              Work in process                              1,046
              Finished goods                                 557
                                                       ---------
                                                       $   2.274
                                                       =========


                                      F-13

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 5 - PROPERTY AND EQUIPMENT

     Property and equipment consists of the following at December 31, 2004:

     Leasehold improvements                                   $  96
     Machinery and equipment                                      6
     Furniture and fixtures                                     172
     Transportation equipment                                   245
     Computer equipment                                         322
                                                              -----
                                                                841
     Less accumulated depreciation and amortization            (427)
                                                              -----
                                                              $ 414
                                                              =====

NOTE 6 - INCOME TAXES

     The  provision  for income taxes  consists of the  following  for the years
     ended December 31:

                                                        2004        2003
                                                     ---------   ---------
                  Current:
                    Foreign                          $      60   $     124
                  Deferred:
                    Foreign                                  1          (4)
                                                     ---------   ---------
                                                     $      61   $     120
                                                     =========   =========

     At December 31, 2004, the Company has a net operating loss  carryforward of
     approximately  $70,  which may be utilized to offset future  taxable income
     for  United  States   Federal  tax  purposes.   This  net  operating   loss
     carryforward  begins to expire in 2022.  The only timing  difference  which
     creates a deferred tax asset is the net operating loss  carryforward.  This
     net  operating   loss   carryforward   creates  a  deferred  tax  asset  of
     approximately  $10.  Since it is more likely than not that the Company will
     not realize a benefit from these net operating  loss  carryforwards  a 100%
     valuation  allowance  has been recorded to reduce the deferred tax asset to
     its net realizable value.

     Deferred tax assets are classified as current or non-current,  according to
     the  classification  of  the  related  asset  or  liability  for  financial
     reporting.  At  December  31,  2004  the  Company's  wholly  owned  Israeli
     subsidiary  has a deferred  tax asset of  approximately  $20, due to timing
     differences  relating to severance payable.  The Israeli subsidiary has not
     recorded  a  valuation  allowance  as it is more  likely  than not that the
     timing differences will be utilized.

     The following is a summary of the  components of  non-current  deferred tax
assets at December 31, 2004:

              Severance payable                                  $      20
              Net operating loss carryforward                           10
              Valuation allowance                                      (10)
                                                                 ---------
              Deferred tax assets                                $      20
                                                                 =========


                                      F-14

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 6 - INCOME TAXES - continued

     Differences between the United States Federal statutory income tax rate and
     the effective tax rate are as follows for the years ended December 31:

                                                        2004       2003
                                                     ---------   ---------
                  Federal statutory rate                  34.0%       34.0%
                  Valuation Allowance                    (34.0)      (34.0)
                  Effect on foreign taxes                 10.3        26.7
                                                     ---------   ---------
                                                          10.3%       26.7%
                                                     =========   =========

NOTE 7 - LONG-TERM DEBT

     Long-term debt consists of the following at December 31, 2004:

              Bank line of credit due December 31, 2004
                at 6.7% per annum                                $     702

              Short-term bank loans, payable within
                twelve months at rates ranging from
                7% per annum and 9.5% per annum                      1,926

              Term loans, due between February 2005 and
                September 2007 at rates ranging from 7.0%
                per annum and 8.5% per annum                           399
                                                                 ---------
                                                                     3,027
     Less current portion of term loans                              2,791
                                                                 ---------
                                                                 $     236
                                                                 =========

     The Company has pledged its accounts  receivables as collateral against its
     long term debt, which is payable to one financial institution. In addition,
     the president has guaranteed  personal assets, as defined in the agreement,
     against the Company's long term debt.

     The aggregate  maturities of long-term  debt are as follows at December 31,
     2004:

                    Year Ended
                       2005                                      $   2,089
                       2006                                            145
                       2007                                             91
                                                                 ---------
                                                                 $   2,325
                                                                 =========

NOTE 8 - SEVERANCE PAYABLE

     Severance  payable  represents  amounts  computed on employees' most recent
     salary and the number of years working in Israel.  The Company's  liability
     is partially offset by amounts deposited to insurance  policies,  which are
     under the company's control.


                                      F-15

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 9 - STOCK OPTION PLAN

     On October 16, 2002 the Board of  Directors of the Company  authorized  the
     formation  of  the  2002  Stock  Option  Plan  (the  "Plan"),   subject  to
     stockholder approval. The Plan provides for the granting of incentive stock
     options,  non-statutory  stock options and stock  appreciation  rights. The
     incentive stock options can be granted to employees, including officers, or
     any  subsidiary  of the Company.  The  non-statutory  stock  options can be
     granted  to all  employees,  including  officers,  non-employee  directors,
     consultants or any subsidiary of the Company.  Non-statutory  stock options
     can only be granted to  consultants  that have rendered a bona fide service
     to the Company,  so long as the service is not in connection with the offer
     or sale of  securities  in a capital  raising  transaction.  The  number of
     shares of common stock  reserved  for  issuance  under the Plan is 500,000,
     subject  to  adjustment  in the  event of a stock  split,  stock  dividend,
     recapitalization or similar change in the Company's capital structure.

     Incentive  stock  options must be granted  prior to ten years from the date
     the Plan was initially adopted by the Board of Directors.  The option price
     for shares  issued as incentive  stock  options  shall not be less than the
     fair market value of the Company's common stock at the date of grant unless
     the option is granted to an individual who, at the date of the grant,  owns
     more than 10% of the total  combined  voting  power of all  classes  of the
     Company's stock (the "Principal Stockholder").  Then the option price shall
     be at least  110% of the fair  market  value  at the  date  the  option  is
     granted.  No  incentive  stock  option  granted  under  the  Plan  shall be
     exercisable  after ten years from its grant date.  If the  incentive  stock
     option is granted to a Principal  Stockholder  then the exercise  period is
     five years from the date of grant.  Every  incentive  stock option  granted
     under  the Plan  shall be  subject  to  earlier  termination  as  expressly
     provided for in the Plan.

     The option price for shares  issued under the  non-statutory  stock options
     shall be determined at the sole  discretion of the Board of Directors,  but
     may not be less than 85% of the fair market value of the  Company's  common
     stock at the date of grant. A non-statutory  stock option granted under the
     Plan  may be of such  duration  as  shall  be  determined  by the  Board of
     Directors.


NOTE 10 - RELATED PARTIES

     Due from Stockholder

     At December  31, 2004 the  majority  stockholder  had  advances  due to the
     Company that accrue interest at 4% per annum.  These advances are repayable
     within the next twelve months.



                                      F-16

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 10 - RELATED PARTIES - continued

     Due from Affiliate

     During 2001 the Company entered into a  sale-leaseback  transaction with an
     entity owned by the majority stockholder of the Company. The Company sold a
     building for approximately $170 and received approximately $113 in cash and
     a note  receivable  for $57,  which was paid in full  during the year ended
     December 31, 2003. No gain or loss was recorded on this transaction, as the
     book value of the building  equaled the fair market value.  The Company has
     agreed to exercise its option to rent this  property  through  December 31,
     2005 at approximately $18 annually with an option to renew the lease for an
     additional  two  years  ending  December  31,  2007.  This  lease  has been
     classified as an operating lease.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

     Lease commitments

     The  Company  leases  certain  office  and  manufacturing  space  under two
     noncancellable operating leases expiring at December 31, 2005 and March 31,
     2007. Rent expense, including municipal taxes and utilities associated with
     the leases  approximated  $59 and $52,  respectively,  for the years  ended
     December 31, 2004 and 2003.

     At December 31, 2004, total minimum rentals under noncancellable  operating
     leases with an initial or remaining term lease term of one year or more are
     as follows:

                Year Ending
                December 31:
                ------------
                    2005                                         $      59
                    2006                                                59
                    2007                                                59
                                                                 ---------
                                                                 $     177
                                                                 =========

     Legal proceedings

     A  Customer  has  brought an action in the Tel Aviv  District  Court for an
     unspecified  monetary  amount  against one of the  Company's  suppliers,  a
     subcontractor  of the  supplier and Enertec,  alleging  that the  materials
     supplied were defective and caused the Customer to replace the materials at
     a substantial  financial expense.  Enertec filed a defense claim that there
     is no cause of action  against  them as Enertec  is only the local  Israeli
     sales representative and did not make any implied or express representation
     or warranty to the Customer  regarding the  suitability  of its  materials.
     Management believes that the chance of losing this suit is remote,  intends
     to defend this action  vigorously  and does not believe that it will have a
     materially adverse impact on the Company's operations and liquidity.


                                      F-17

<PAGE>


                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
               (In Thousands, Except Share and Per Share Amounts)


NOTE 12 - CONCENTRATIONS

     The Company had deposits with commercial financial institutions,  which, at
     times,  may exceed the FDIC  insured  limits of $100 in the United  States.
     Management has placed these funds in high quality  institutions in order to
     minimize the risk. Cash held in Israel at December 31, 2004 was $124.

     At December 31, 2004 the Company had three  customers  that  accounted  for
     approximately 62% of accounts receivable.  For the years ended December 31,
     2004 and 2003  approximately  43% and 51%,  respectively,  of the Company's
     sales were to two and three customers, respectively.

NOTE 13- SEGMENT AND GEOGRAPHIC INFORMATION

     Information about the Company's assets in different geographic locations at
     December 31, 2004 is shown below  pursuant to the  provisions  of SFAS 131,
     "Disclosures About Segments of an Enterprise and Related Information."

                  Total assets:
                    Israel                                       $   6,173
                    United States                                        0
                                                                 ---------
                                                                 $   6,173
                                                                 =========


                                      F-18