**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, 2006**




**o
      TRANSITION REPORT UNDER
      SECTION 13 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
            27-0016420(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)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 is not required to file reports pursuant to Section
      13


or
      15(d)
      of the Exchange Act. o




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 o




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




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




State
      issuer's revenues for its most recent fiscal year. $7,839,000




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the average high and low price of
      such
      common equity as of March 20, 2007, was $1,827,440




As
      of
      March 21, 2007, 2007, the issuer had 6,483,000 outstanding shares of Common
      Stock.




**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**




Transitional
      Small Business Disclosure Format (check one): Yes o No x





**TABLE
      OF CONTENTS**





PagePART
                IItem
                1.
            Description
                of Business
            
            1Item
                2.
            Description
                of Property
            
            9Item
                3.
            Legal
                Proceedings
            
            10Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            10PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters
            11Item
                6.
            Management's
                Discussion and Analysis or Plan of Operation
            11Item
                7.
            Financial
                Statements
            
            15Item
                8.
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            15Item
                8A.
            Controls
                and Procedures
            
            15Item
                8B.
            Other
                Information
            
            16PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) of the Exchange Act
            16Item
                10.
            Executive
                Compensation
            
            17Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            18Item
                12.
            Certain
                Relationship and Related Transactions
            20Item
                13.
            Exhibits
            
            20Item
                14.
            Principal
                Accountant Fees and Services
            21SIGNATURES
            
            
            22







**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS.**




Lapis
      Technologies Inc. was formed in Delaware on January 31, 2002 under the name
      Enertec Electronics, Inc. and has 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 73% equity interest.
      We
      are manufacturers and distributors of various military and airborne systems,
      simulators, automatic test equipment (ATE), electronic components and products
      relating to power supplies, converters and related power conversion products,
      .
      Where the context requires, references to "we" "us" or "our" throughout this
      document include reference to Enertec Electronics and Enertec
      Systems.




Our
      revenues are derived from two main sources, the military and the commercial
      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. In the commercial market we market and
      distribute test systems, power supplies and other electronic components
      manufactured b y
      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




**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") (73%), and Harry Mund (27%), our President and Chief
      Executive Officer of Enertec Electronics Limited. The President and Chief
      Executive Officer of Enertec Systems is Harry Mund, and the Chief Operating
      Officer is Zvika Avni. Enertec Systems commenced operations on January 1,
      2002.




**ENERTEC
      ELECTRONICS**




Enertec
      Electronics is responsible for:




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




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




1


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 or distribution agreements with various
      international power supply manufacturers. These manufacturers granted us 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. With some of these manufactures we have agreements that the supply
      manufacturers will not promote their products directly within Israel.
      Furthermore, 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 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.




Enertec
      Electronics is focusing its efforts almost exclusively on developing its
      business within the power supplies and power supply testing equipment arena.




**ENERTEC
      SYSTEMS**




Enertec
      Systems is responsible for designing, developing and manufacturing of various
      military systems for airborne, land and seaborne applications - for example,
      electronic systems used in aircrafts such as power supplies, laser drivers,
      mission computers and control systems for motor and pumps, radio transceivers,
      altitude measuring devices, ground systems for missile control and
      sub-assemblies, which are parts of a system developed with a customer's
      specifications. We also design and manufacture test systems for electronics
      manufacturers in the military industry based on their specifications for the
      test and ground support of missiles, aircrafts and other various defense
      systems.




Through
      our subsidiaries we customize power supplies, create military systems 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. Enertec Systems exclusively
      manufactures customized military related products. Enertec Systems also meets
      the stringent security clearance requirements for the most sensitive defense
      programs we are involved.




Our
      quality control systems are compliant with ISO9001:2000.




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.




2


The
      ISO9001:2000 quality assurance model is made up of a combination of quality
      system requirements.




The
      key
      requirements are that an organization should:




·
            Determine
                the needs and expectations of customers and other interested
                parties;




·
            Establish
                policies, objectives and a work environment necessary to motivate
                the
                organization to satisfy these
                needs;




·
            Design,
                resource and manage a system of interconnected processes necessary
                to
                implement the policy and attain the
                objectives;




·
            Measure
                and analyze the adequacy, efficiency and effectiveness of each process
                in
                fulfilling its purpose and objectives; and




·
            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 typically
      involves:




·
            Planning
                the quality initiative and obtaining executive
                sponsorship;




·
            Establishing
                the quality policy for the
                organization;




·
            Designing
                and planning the Quality Management System (QMS), usually based on
                international standards;




·
            Establishing
                the quality organization, developing the quality manual and structure
                of
                quality records;




·
            Determining
                the scope of implementation;




·
            Assuring
                quality plans;




·
            Reviewing
                deliverables and determining any
                actions;




·
            Auditing
                quality records;




·
            Defining
                areas for process improvement; and




·
            Managing
                the improvement program.




**NEW
      PRODUCTS**




**ENERTEC
      SYSTEMS**




During
      2004 , Enertec Systems, 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. In 2005 and 2006 Enertec Systems continued
      this focus almost exclusively.




During
      2004 we marketed a new line of ruggedized Command and Control mobile stations
      of
      modular architecture, allowing adaptation/customization to various applications
      for which we received orders for several sets in 2005 .During 2006, we delivered
      several unit for qualification and integration. Following this integration
      we
      will deliver the rest of the units during 2007 and we expect many more follow
      up
      orders over the next eighteen months.




Over
      the
      last twelve months of 2005, we started selling ruggedized mission computers
      for
      combat vehicles. We have already delivered three different prototypes to I.A.I.
      (Israeli Aircraft Industry) who intends to replace their computers  previously manufactured in-house and active in the field for many years with
      upated modern design models from a new outsourced supplier. These first units
      that we delivered, have successfully passed all qualification and validation
      tests. As a result of the success of the first prototypes, in 2006 we have
      received new order for three new prototypes for three different products for
      delivery during 2007. We anticipate  receiving
      several production orders, each order comprising of a batch of about 40 pcs
      each
      model, to fulfill IAI's need for their replacements over the following 2-3
      years.




We
      introduced in 2005 a new line of military grade Power Distribution Units for
      use
      in airborne, shipborne and ground applications. We have already received the
      first batch of orders generating about $800,000 in revenues. The first set
      was
      submitted to stringent electrical and environmental qualification tests
      scheduled for completion in the first quarter of 2007. Further units are
      scheduled for deliveries during 2007 and new orders are expected for about
      30-40
      sets with deliveries over the next four years.


3


We
      introduced a new test system for the helicopter's flight computer and the other
      avionics units which generated an order for the first unit in 2004. This system
      was designed and built during 2005 and during 2006 we began the testing with
      the
      various units it will be integrated with. We expect to deliver the first order
      during the first quarter of 2007. We are expecting its successful launch to
      generate several follow up orders within the next twelve months of about 10
      additional units for deliveries during 2007 and 2008.




During
      2004 we also started to design a small airborne multiple-output power supply
      specially designed for attack payloads. It uses a proprietary technology that
      was developed in-house implementing 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 has already passed the stringent military screening tests.
      As
      of the end of 2005, we received our first orders in the amount of $240,000
      and
      part of this order has been delivered during the 4th quarter of 2005. During
      2006 delivered about 100 pcs and received orders for about 200 pcs.




During
      2005 we introduced a laser system and driver for Airborne Targeting
      Pods , utilizing laser designation of targets. This is a new entry into the field
      of
      high-tech, high accuracy and high power military lasers. Our innovative and
      unique design is based on a state of the art high-power laser diode which
      provides high accuracy and long range detection and tracking of targets. This
      project is a turn-key product from the initial electronic and mechanical design
      up to the production and delivery of the complete system. We have received
      an order for the first systems with a delivery date staggered over 2006 and
      2007. The first 4 prototypes have been delivered during 2006 and following
      the
      successful qualification tests we expect to deliver additional 25 pcs during
      the  second
      quarter of 2007.




During
      2005 we introduced a Ground Control System for airborne attack platforms. The
      system receives data from aircrafts and transmits it in real time. The design
      was based on an upgraded version of one of ours previous design already proven
      in the field. We received several orders in the amount of $240,000 and delivered
      them during 2006.




By
      the
      end of 2005 we have introduced a Simulation and Test System for a highly
      classified defense project. This technologically complex design is being
      outsourced for the first time, and so was very tentative in progress, however
      we
      have already delivered the first batch in December of 2005 resulting in revenues
      of about $1,250,000 with a record lead-time of 3 months. During 2006 we received
      an additional order of about $1,000,000 which has also been delivered.
      As a result of our success we expect new orders of about same size each during
      2007 and the following years.




During
      2006 have introduced several new products :




A
      Generic
      Test and Validation  System
      for new anti-tank missiles. This system incorporates state of the art hardware
      and software designs and is used for the tests and validation of about 30
      different modules of the missile. The first systems were ordered in the amount
      of about $1.4 Million dollars with scheduled delivery of the first unit during
      2007 . During
      2006 have received additional order of about $300,000 for the implementation
      of
      upgrades. This test system for anti-tank missiles , could
      generate orders for a couple of units a year for approximately the next ten
      years.




A
      Control
      System for airborne attack platforms for naval application. The system receives
      data from aircrafts and transmits it in real time. The design was based on
      upgraded versions of previous designs already proven in the field. We have
      already received first order for several units scheduled for delivery during
      2007.




Generic
      System for Simulation and Test of multiple stage missiles. This very complex
      high technology system simulates each stage of the missile and performs a
      comprehensive suite of test. The first order was received during 2006, which
      will generate revenues of several hundreds of dollars. During 2007 we expect
      to
      deliver two additional systems.




**ENERTEC
      ELECTRONICS**




During
      2004, we completed 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. In 2005, 1500 units were ordered and 2,000 units were ordered
      during 2006.




We
      introduced the first samples of DC/DC converters for military CDU (Command
      Display Units) in the fourth quarter of 2004. These samples were followed with
      orders for 1500 pcs which were delivered over the course of 2005 and for 1700
      pcs delivered during 2006.




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. This successful launch resulted in more than 200 units
      in
      follow-up orders in 2005 and 100 pcs during 2006 .




4


During
      2005 we introduced several new products with long expected lifecycles, which
      are
      described below:




We
      designed a compact, and economical optimized cost/performance redundant power
      supply for data communication application. The first samples were delivered
      during 2005 and have already resulted in a follow up order for several hundreds
      units to be delivered over 2007.




We
      released and delivered 200 industrial-grade power supplies for air-conditioning
      systems. The potential follow up for the next eighteen months is in the range
      of
      3000-5000 additional units. There are no follow-up orders, this product was
      outsourced to a turn-key manufacturer in China.




We
      designed a customized external power supply for military note-book computers
      which will be installed by our customers to the US military within the army,
      navy, air-force etc. The first 25 power supplies have already been delivered
      and
      successfully passed all the stringent military qualification tests, followed
      by
      orders for additional 260 pcs during 2006.




New
      projects introduced in 2006:




We
      have
      introduced a new multiple output customized power supply for outdoor wireless
      application and have submitted for UL safety approvals. Upon receiving this
      approval we expect orders for several hundreds units during 2007.




We
      have
      introduced a new medical grade 250W power supply and already received the first
      order for samples from a big manufacturer of medical equipment.




We
      have
      introduced a new line of 150W dc/dc military converters. We have already
      received orders for first 75 units from four different manufacturers of defense
      systems




**MARKETING
      STRATEGIES**




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




·
            Military




·
            Telecommunications;




·
            Medical;




·
            Industrial.




We
      currently sell only to Israeli companies that, in turn, incorporate our
      components into their products for resale to the global markets. However, in
      the
      future we anticipate creating some kind of platform to market Enertec Systems'
      products to U.S. companies as well as creating a manufacturing base within
      the
      United States so as to benefit from U.S. 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 seminars, exhibitions and shows four to six times
      a
      year. A substantial part of the business is from our existing customers. Many
      companies have engaged us from their inception, and have implemented our custom
      designed solutions. Many of our customers rely on us for technical services,
      products and support, and consider us to be their own "power supply department"
      and "ATE systems department". Since 2004  we
      have
      been a "systems house" of military systems, making turn-key projects from design
      to production on behalf of our customers.




We
      also
      derive a considerable percentage of our business from word-of-mouth referrals.
      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 twenty years, including
      eight years prior to the formation of Enertec Electronics, when business was
      conducted under the name "Enertec International."




Over
      the
      next 24 months, we plan on continuing our aggressive marketing efforts. Part
      of
      our success within Enertec Systems has been to anticipate the needs of our
      clients, invest in R&D and to start working on products that we believe they
      will need thus gaining an edge on our competition in our time to market.
      Furthermore, 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 as well as some of the core components.


5




By
      continuously diversifying into new and more complex products, Enertec Systems
      has been able to set itself apart from its competition. In 2006, following
      the
      trend we started in 2004, we decided to increase our suite of custom products
      based on our proprietary design and technology. These products are core
      components of several long term military programs spearheaded by our customers,
      with expected purchase lifecycles over periods of up to 10 years.




At
      Enertec Systems the competitive edge lies with the sophistication and the
      complex nature of the products. Enertec Electronics however, maintains its
      competitive advantage primarily through its range of products, their pricing,
      cost effective adaptation to the customers' needs and the strong technical
      application support provided to customers.




**MARKET
      CONDITIONS**




**Enertec
      Systems**




During
      2005, the local military market improved significantly resulting in many new
      orders received which contributed to a backlog of military products totaling
      $4.5 million dollars. This trend continued through 2006 resulting in a further
      increase in the backlog, which as of the year ended December 31, 2006 totaled
      $6.182 Million dollars.




Manufacturers
      that sell defense 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's simulators and support systems is estimated at $100
      to
      $200 million annually. We have about 5% 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
      and
      support 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. We are actively
      working to increase our product portfolio. During 2006 have introduced several
      new military products implemented in high volume long term defense programs.




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.




**Enertec
      Electronics**




The
      worldwide market for high-tech, telecommunications, and Internet related
      products affects the Electronics Division's power supplies sales. The overall
      market started to improve, during 2005 resulting in an increase of sales to
      this
      sector and this trend continued during 2006. 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
      than our competitors, 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.




6


**CUSTOMERS**




Our
      customers are mostly local Israeli manufacturers of electronic systems from
      different segments of the electronics industry, within the military, industrial,
      commercial, medical, and telecommunications fields. Due to this level of
      diversification of our customers, we are not that dependent on any one specific
      market segment; so our 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 realized that several
      Rafael divisions were receiving an increasingly high number of new orders as
      a
      result of their aggressive marketing around the world but that they had not
      increased their technical and manufacturing staff to accommodate this growth.
      We
      positioned ourselves to become their outsourcing team for their new orders
      in
      the areas of design, engineering and production. We increased our investment
      in
      R&D that resulted in new designs and products that enabled us to
      successfully bid on a large number of projects. During 2004, we focused our
      efforts in diversifying our sales across other technologies, for example avionic
      equipment and combat stations. This resulted in increased sales to Rafael
      comprising approximately 25% of our total sales in 2004 as compared to 10%
      in
      2003. By the end of 2005 Rafael became our major customer representing
      approximately 40% of our total sales.




Investing
      in R&D has given us an edge with our time to market which resulted in
      several agreements, with Rafael bringing out products utilizing our systems
      within long project cycles, in many cases up to 10 years. This has created
      a
      significant increase in the backlog of orders from Rafael. By
      the
      end of 2006 Rafael accounted for 32.1% of our total sales.




In
      2004
      Israeli Aircraft Industry (IAI) accounted for approximately 18% of our sales.
      During 2005, IAI started to design and manufacture a range of new products
      for
      which we have been asked to provide Test Equipment, Simulators and Support
      Systems We have received several new orders for the first units delivered during
      2006 and have worked on a large number of new proposals which  have
      resulted in an increase of our sales to IAI's as a percentage of our total
      sales
      in 2006 to 16.6%.




The
      rest
      of our sales are pretty much evenly spread between our other main customers:
      Elbit, El-Op and Tadiran Spectralink, at the military field and a very large
      number of customers at the commercial field.




**BACKLOG**




As
      of
      December 31, 2006, we had a backlog of orders for our products and services
      in
      the amount of approximately $6,917,000; as compared to a backlog of
      approximately $4,500,000 as of December 31, 2005. The increase of approximately
      54% in the backlog as of December 31 2006 compared to December 31 2005 is mainly
      due to our efforts to introduce new products to Rafael and IAI. During the
      second half of 2005 and during 2006 our success resulted in a significant
      increase in orders for military systems in particular a big increase in orders
      from several of Rafael's divisions.




The
      orders included in the December 31, 2006 backlog figure are as follows:




**Enertec
      Systems**




$4,365,000
            
            representing
                airborne power supplies, laser systems, flight computers
                and test systems for avionics and military
                systems1,390,000
            
            representing
                test systems for IAI missiles and avionic systems202,000
            
            representing
                airborne power supplies and test systems for infra-red
                payloads217,000
            
            representing
                data link test equipment.8,000
            
            representing
                medical systems$6,182,000
            
            TOTAL
                backlog for Enertec Systems





**Enertec
      Electronics**





$735,000
            
            This
                figure includes a variety of orders forcommercial,
                telecom, medical, industrial and military off-the-shelf
                power supplies as well as several orders forstandard
                test equipment for both the commercial and militaryindustry.





**COMPETITION**




**ENERTEC
      SYSTEMS**




Our
      chief
      source of competition for Enertec Systems is our clients themselves. Most of
      our
      clients have done their own testing systems 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, and Rada Electronic
      Industries ltd.


7




**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 Advice Electronics Ltd.,EDCO,Nemic
      Lambda,Dan-El, Bruno InternationalAppletec Ltd., Migvan Technologies Ltd.,
      Boran
      Technologies Ltd., Telkoor Power Supplies Ltd.,  Nisko
      and
      Horizon Electronics Ltd.




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




·
            Our
                power supplies are good quality, economically priced , and are backed
                bya
                good level of technical expertize engineers, who have an understanding
                of
                our customer's requirements, allowing us to provide cost-effective
                solutions.




·
            We
                have comprehensive experience in power supply test equipment , which
                enables our sales people to propose the most cost-effective testing
                solutions, incorporating the highest grade of software and the most
                sophisticated hardware.




·
            We
                maintain a strong technical team that provides solutions to our customers'
                needs within our target niche.




·
            Our
                products are sold in diversified activity fields, namely commercial,
                industrial, military, medical, systems and
                components.




Our
      products have been incorporated into several high volume production projects
      with long-term purchasing agreements of up to two years. Since our customers'
      products are sold intermittently but in high volume, our customers place
      long-term orders with us to cover their production needs over a period of
      several months to up to a year to ensure delivery in a timely fashion.
      Additionally, we  are
      a
      major supplier to
      several providers of telecom, datacom, video on demand and video conferencing.
      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 perhaps cheaper
      competitor's product because they would have to resubmit the product for
      re-approval with the new component inside.




**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.


8




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.




**EMPLOYEES**




As
      of
      December 31, 2006, Enertec Electronics had 11employees and Enertec Systems
      had
      51 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 $399,000 and $379,000 for the twelve
      months ended December 31, 2006 and 2005, respectively, which equates to
      approximately 5.1% and 5.2% of revenues, respectively, for both periods. These
      expenditures have adequately satisfied our research and development
      requirements.




The
      increase of our R&D expenditures as compared to 2005 is a result of our
      strategic move to develop new technologies such as airborne high power laser
      targeting systems and other classified technologies which allowed us to form
      long term strategic alliances with several big military programs.




**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 sales.




**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.




**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.





9


Our
      Haifa
      plant is 400 square meters and includes a production hall and management
      offices. We lease this property for $27,165 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.




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 $35,960 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 eight to ten 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.




In
      our
      10-KSB for the fiscal year ended December 31, 2005, which was filed with the
      Securities and Exchange Commission on March 31, 2006, we reported that On April
      16, 2002, Orckit Communications (the “Plaintiff”) 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. Orkit obtained default judgments against Gaia
      Converter, and Alcyon Production Systems. Enertec Electronics was joined in
      the
      action as a local Israeli distributor of the Gaia Converter products. The
      Plaintiff has withdrawn its action against Enertec.




**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.


10




**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
                2006
            
            Fiscal
                2005Fiscal
                Quarter
            
            High
            
            Low
            
            High
            
            LowFirst
                Quarter Ended March 31
            
            $
            1.11
            
            $
            1.01
            
            $
            1.11
            
            $
            1.11Second
                Quarter Ended June 30
            
            $
            1.11
            
            $
            1.01
            
            $
            1.11
            
            $
            0.25Third
                Quarter Ended September 30
            
            $
            1.11
            
            $
            1.01
            
            $
            0.40
            
            $
            0.40Fourth
                Quarter Ended December 31
            
            $
            1.11
            
            $
            1.01
            
            $
            1.05
            
            $
            0.40




**HOLDERS**




As
      of
      March 21, 2007, we had 6,483,000 shares of common stock outstanding and such
      shares were held by approximately 42 stockholders of record. The transfer agent
      of our common stock is Continental Stock Transfer and Trust Company.




**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.




**RECENT
      SALES OF UNREGISTERED SECURITIES**




During
      the fiscal year ended December 31, 2006 we did not issue any securities without
      registration under the Securities Act of 1933, as amended (the "Securities
      Act").




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




**FORWARD-LOOKING
      STATEMENTS**




The
      information in this annual report contains forward-looking statements. 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




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**




Our
      cash
      balance at Dec 31, 2006 has decreased compared to the cash balance at Dec
      21,2005 As of December 31, 2006, our cash balance was $7,000 as compared to
      $78,000 at December 31, 2005. The decrease in cash was mainly due to the
      increase in the time needed to collect our accounts. Total current assets at
      December 31, 2006 were $8,047,000 as compared to $6,601,000 at December 31,
      2005. The increase in current assets is mainly due to the increase in accounts
      receivables and an increase in inventories




Our
      accounts receivable at December 31, 2006 was $4,677,000 as compared to
      $3,712,000 at December 31, 2005. This increase is attributable to an increase
      in
      sales of $570,000 in 2006 as compared to the sales of 2005,an increase in
      collection time and the decrease in USD/Shekel exchange rate since the
      receivables are in Shekels. The USD/shekel exchange rates decreased by 8.21%
      from 4.603 as of Dec 2005 to 4.225 as of Dec 2006.




As
      of
      December 31, 2006 our working capital was $1,310,000 as compared to $1,087,000
      at December 31, 2005. The increase in the working capital is mainly due to
      a
      larger increase in receivables and inventories than the increase in total bank
      debt and in accounts payable.




Bank
      Leumi and Bank Hapoalim have extended us a combined total bank debt of
      $4,139,000 in 2006 as opposed to $3,316,000 at December 31,2005. This debt
      is
      made up of a number of different components: short-term debt, 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 $3,352,000of total
      debt based on our pledge of $2,600,000 of our working capital and customers'
      receivables due from Israeli Aircraft Industry, Rafael and Tadiran Spectralink
      Ltd , and $752,000 by the pledge of some of the financial assets of our
      president, Harry Mund. Bank Hapoalim has provided us with $788,000 of total
      debt
      based on our pledging of $543,000 of our customers' receivables due from USR,
      Expand Tadiran Spectralink Ltd and Rad and $245,000 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, 2006 consisted of $271,000
      compared to $118,000 at December 31, 2005. Our total short-term loans consisted
      of $2,061,000 of short-term loans and $271,000 of current portion of long-term
      debt broken down as follows:




$282,000
      due March 2007, $144,000 due April 2007, $417,000 due June 2007, $1,225,000
      due
      July 2007, $192,000 due September 2007, $72,000 due December 2007.




At
      December 31, 2006, our total bank debt was $4,139,000 as opposed to $3,316,000
      at December 31, 2005. These funds were borrowed as follows:




$2,332,000
      which includes the current portion of long term debt, as various short term
      bank
      loans due through 2007, $318,000 of long-term debt due through March 2010 and
      $1,489,000 borrowed using our bank lines of credit. As a result, we increased
      the amount borrowed for the year ended December 31, 2006 by $823,000 from
      $3,316,000. The increase in bank debt is mainly due to the increase in account
      receivables and the decrease in USD/Shekel exchange rate since the loans are
      in
      Shekels. The USD/shekel exchange rates decreased by 8,21%, from 4,603 as of
      Dec
      2005 to 4,225 as of Dec 2006.




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, 2006 we are
      current with all of our bank debt and compliant with all the terms of our bank
      debt.




At
      December 31, 2006, Mr. Mund had receivables from the Company in the amount
      of
      $6,000 as compared to $6,620 at December 31, 2005. ****


12




**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, 2006 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,2005




For
      the
      fiscal year ended December 31, 2006 we had total revenue of $7,839,000 compared
      to revenue of $7,269,000 for the fiscal year ended December 31, 2005. The
      increase in revenue of $570,000, or 7.8% is due to:




1.The
      overall improvement of the market in particular in field of the
      high-tech,telecomm and internet related products resulting in an increase in
      sales to these sectors.




2.The
      revenues for the 2006 includes a grant of approx $100,000 from the Government
      of
      Israel to partially cover the cost of salaries of the employees who have not
      been able to work as a consequence of the closure during the war in the North
      of
      Israel. Our subsidiaries are located in Carmiel and Haifa Bay area which have
      been under heavy missiles attacks and were closed during most of July-Aug 2006.




Gross
      profit totaled $ $2,163,000 for the fiscal year ended December 31, 2006 as
      compared to $2,008,000 for the fiscal year ended December 31, 2005, an increase
      of $ $155,000 or 7.7%. Gross profit as a percentage of sales for the fiscal
      year
      ended December 31, 2006 was 27.6% as compared to 27.6% for the fiscal year
      ended
      December 31, 2005. The increase in gross profit is mainly due to the increase
      in
      sales.




Total
      operating expenses are comprised of R&D costs, selling, general and
      administrative expenses. Operating expenses for the fiscal years ended December
      31, 2006 and 2005 were $1,735,000 and $1,770,000 respectively, a decrease of
      $35,000 or 2.0%. The
      decrease in operating expenses is attributable to the following factors:




increased
      R&D spending of $20,000; increased marketing and selling expenses of $30,000
      as a result of our efforts to develop the market for our new products and a
      decrease in G&A expenses of $85,000 mainly due to decreased professional
      services expenses.


13




We
      experienced a loss of $115,000 in the fiscal year ended December 31, 2006
      compared to a loss of $48,000 in the fiscal year ended December 31, 2005. This
      decrease in net income in the amount of $67,000 or 140% is mainly due to the
      increase of $109,000 in interest expenses and increase of $131,000 in provisions
      for income tax ,partly compensated by the increase in income from operations
      of
      $190,000.




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.




For
      the
      fiscal year ended December 31, 2006, Enertec Electronics' revenue, costs of
      sales and gross profits were $3,262,000, $2,602,000 and $660,000 respectively,
      and $2,734,000, $2,048,000, and $686,000 respectively for the fiscal year ended
      December 31, 2005. Revenue increased $528,000  or
      19.3%.
      Costs of sales increased approximately by $554,000 or 27.1% Gross profit
      decreased by $26,000 or 3.8% due to higher cost of sales.




For
      the
      twelve months ended December 31, 2006, revenues, costs of sales and gross
      profits from Enertec Systems 2001 were $4,577,000 and $3,075,000 and $1,502,000
      respectively, and $4,535,000, $3,213,000 and $1,322,000 respectively for twelve
      months ended December 31, 2005. Compared to 2005, revenue increased by $42,000
      or  0.9%
      as a
      result of the successful penetration to new customers with new
      products.




Cost
      of
      sales decreased approximately $138,000  or  4.3%  due
      to
      increase in sales of some of the products introduced previously.  The
      manufacturing cost of repeat orders is typically lower as compared to the cost
      of first orders previously received. Gross Profit increased by $180,000 or
      13.6%
      due to lower cost of sales involved with manufacturing of repeat orders December
      31, 2006, we had two customers that accounted for approximately 69.9% of
      accounts receivable. For the years ended December 31, 2006 and 2005,
      approximately 48.7% and 57% of our sales were to two 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, 2006 and
      2005 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
      mainly of salaries. Research and development cost for the years ended December
      31, 2006 and 2005 were approximately $399,000 and $379,000,
      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, 2005 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, 2005. The
      carrying value of the long-term debt approximate fair value at December 31,
      2005
      based upon debt terms available for companies under similar terms.




14


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 beginning on page F-1 and is hereby incorporated by
      reference.




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




**N/A**




**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: (1) accumulated and communicated to our management, including
      our Chief Executive Officer and Chief Financial Officer, as appropriate to
      allow
      timely decisions regarding required disclosure; and (2) recorded, processed,
      summarized and reported, within the time periods specified in the Commission's
      rules and forms. There was no change to our internal controls or in other
      factors that could affect these controls during the period covered by this
      report that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





15


**ITEM
      8B. OTHER INFORMATION.**




None.




**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
            
            PositionHarry
                Mund
            
            59
            
            Chairman
                of the Board, Chief Executive Officer,President
                and SecretaryMiron
                Markovitz
            
            59
            
            Director,
                Chief Financial Officer and PrincipalAccounting
                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.




**DIRECTOR
      COMPENSATION:**




During
      2006, our directors did not receive any compensation for serving on our board.




**SIGNIFICANT
      EMPLOYEES**




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




ZVI
      AVNI,
      age 45, 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 73
      % and
      Harry Mund (27%) and continues to be responsible for the design and manufacture
      of the Automatic Test Systems and military systems. Mr. Avni graduated from
      Haifa Technion Institute of Technology in 1982 and earned a degree as a
      Practical Electronic Engineer.


16




YAAKOV
      OLECH, age 5 7 ,
      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.




DR.
      ALEXANDER VELICHKO, age 60, 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, C/O Ira Strassberg, Rogoff and Company, 275 Madison Avenue, NY,
      NY,
      10016. Our telephone number is (212) 937-3580.




SECTION
      16(A) BENEFICIAL OWNERSHIP COMPLIANCE




We
      do not
      have affiliated persons required to file reports under Section 16(a) of the
      Exchange Act.




**ITEM
      10. EXECUTIVE COMPENSATION.**




**EXECUTIVE
      COMPENSATION**




**SUMMARY
      COMPENSATION TABLE**




The
      following information is furnished for the years ended December 31, 2006 and
      2005 for our principal executive officer. No executive officer other than Mr.
      Mund received total annual compensation in excess of $100,000, during fiscal
      2006 and 2005.









Name
                and Principal Position
            
            Year
            
            Salary
              $
            
            Bonus
              $
            
            Stock
                Awards
              $
            
            Option
                Awards
              $
            
            Non-Equity
                Incentive Plan Compensation
              $
            
            Nonqualified
                Deferred Compensation Earnings
              $
            
            All
                Other Compensation
              $
            
            Total
              $Harry
                Mund
            
            
            2006
            
            $
            288,000
            
            
            ____
            
            
            ____
            
            
            ____
            
            
            ______
            
            
            _______
            
            $
            38,000
            *
            
            326,050Chief
                Executive Officer and President
            
            
            2005
            
            $
            261,000
            
            
            0
            
            
            ____
            
            
            0
            
            
            ______
            
            
            0
            
            
            40,000
            *
            $
            301,000







*Represents
      compensation in lieu of accrued vacation and recreation days pursuant to Company
      policies. In Israel it is customary to offer financial compensation in lieu
      of
      vacation and recreation days (days set aside for employees to enjoy recreational
      activities)







17





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




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      following table sets forth certain information, as of March 21, 2007 with
      respect to the beneficial ownership of the outstanding common stock by (i)
      each
      person known by us to be the beneficial owner of more than 5% of our common
      stock; (ii) each of our directors; (iii) each of our executive officers;
      and




(iv)
      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. The
      address for each of the below persons is c/o Enertec Electronics Limited, 27
      Rechov Ha'Mapilim, Kiriat Ata, Israel, P.O. Box 497, Kiriat Motzkin 26104,
      Israel.





Name
                of Beneficial Owner
            
            Number
                of Shares
              Beneficially
                Owned *
            
            Percentage
              Ownership
                *Harry
                Mund
            
            
            4,750,000
            
            
            73.3
            %Miron
                Markovitz
            
            
            9,000
            
            
            *
            %Zvi
                Avni
            
            
            1,000,000
            
            
            15.4
            %All
                Directors and Executive Officers
            
            
            4,759,000
            
            
            73.44
            %as
                a Group (2 persons)




·
            Applicable
                percentage ownership is based on 6,483,000 shares of common stock
                outstanding as of March 21, 2007, together with securities exercisable
                or
                convertible into shares of common stock within 60 days of March 21,
                2007
                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 21, 2007 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.




**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, 2006.




18





EQUITY
      COMPENSATION PLAN INFORMATION





Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted
                average exercise price of outstanding options, warrants and
                rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a)(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            -0-
            
            
            -0-
            
            
            500,000Equity
                compensation plans not approved by security holders
            
            
            -0-
            
            
            -0-
            
            
            -0-Total
            
            
            -0-
            
            
            -0-
            
            
            500,000




**2002
      STOCK OPTION PLAN**




We
      adopted, subject to stockholder approval, our 2002 Stock Option Plan on October
      16, 2002. Our stockholders approved the 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.





19


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
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.**




Our
      management believes the terms of each of the below transactions are at least
      as
      favorable as could be obtained from unrelated third parties.




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. There are no written agreements setting forth
      repayment terms. The parties have orally agreed that the amount outstanding
      is
      due on demand. As of December 31, 2006, the amount of the loan outstanding
      was
      $72,186.




Enertec
      Electronics rents the building's office and manufacturing space from Mund
      Holding Limited for $27,165 annually for twenty-four months ending December
      31,
      2007. Neither of our directors are independent.




**ITEM
      13. EXHIBITS.**





Exhibit
                Number
            
            Description3.1
            
            Certificate
                of Incorporation of Enertec Electronics, Inc. filedJanuary
                31, 2002 (Incorporated by reference to our registrationstatement
                on Form SB-2 (File No. 333-100979), filed with theSecurities
                and Exchange Commission on November 4, 2002)3.2
            
            Certificate
                of Amendment of Enertec Electronics, Inc. filedApril
                23, 2002 (Incorporated by reference to our registrationstatement
                on Form SB-2 (File No. 333-100979), filed with theSecurities
                and Exchange Commission on November 4, 2002)3.3
            
            Certificate
                of Amendment of Opal Technologies, Inc. filedOctober
                17, 2002 (Incorporated by reference to our registrationstatement
                on Form SB-2 (File No. 333-100979), filed with theSecurities
                and Exchange Commission on November 4, 2002)3.4
            
            By-Laws
                of Lapis Technologies, Inc. (Incorporated by referenceto
                our registration statement on Form SB-2 (File No.333-100979),
                filed with the Securities and Exchange Commissionon
                November 4, 2002)10.1
            
            Letter
                dated February 22, 2005 confirming the terms of sharepurchase
                (Incorporated by reference to our current report onForm
                8-K filed with the Securities and Exchange Commission onAugust
                23, 2005)14.1
            
            Code
                of Ethics (Incorporated by reference to our annual reporton
                Form 10-KSB for the fiscal year ended December 31, 2003,filed
                with the Securities and Exchange Commission on June 28,2004)16.1
            
            Letter
                from Rogoff & Company dated April 1, 2004 (Incorporatedby
                reference to our current report on Form 8-K filed with theSecurities
                and Exchange Commission on July 6, 2004)21.1
            
            List
                of Subsidiaries31.1
            
            Certification
                by Chief Executive Officer, required by Rule13a-14(a)
                or Rule 15d-14(a) of the Exchange Act31.2
            
            Certification
                by Chief Financial Officer, required by Rule13a-14(a)
                or Rule 15d-14(a) of the Exchange Act32.1
            
            Certification
                by Chief Executive Officer, required by Rule13a-14(b)
                or Rule 15d-14(b) of the Exchange Act and Section 1350of
                Chapter 63 of Title 18 of the United States Code32.2
            
            Certification
                by Chief Financial Officer, required by Rule13a-14(b)
                or Rule 15d-14(b) of the Exchange Act and Section 1350of
                Chapter 63 of Title 18 of the United States
                Code





20




**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 $12,185
      and
      $11,500 for the years ended December 31, 2006 and 2005,
      respectively.




**AUDIT-RELATED
      FEES**




We
      incurred fees of $24,200  and
      28,853 for the years ended December 31, 2006 and 2005, 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, 2006 and December 31, 2005,
      respectively. The services for which such fees were paid consisted of filing
      our
      tax returns for 2006 and 2005.




**ALL
      OTHER FEES**




We
      did
      not incur any fees for other professional services rendered by our principal
      accountants during the years ended December 31, 2006 and December 31,
      2005.




**AUDIT
      COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES**




Our
      Board
      of Directors acts as our audit committee, and consults with respect to audit
      policy, choice of auditors, and approval of out of the ordinary financial
      transactions.





21


**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.**





Date:
                March 30, 2007
            By:
            /s/
                Harry MundHarry
                MundChief
                Executive Officer





Date:
                March 30, 2007
            By:
            /s/
                Miron MarkovitzMiron
                MarkovitzChief
                Financial Officer andPrincipal
                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
            
            Chief
                Executive Officer and Chairman of the Board
            
            March
                30, 2007Harry
                Mund/s/
                  Miron Markovitz
            
            Director,
                Chief Financial Officer and Principal Accounting Officer
            
            March
                30, 2007Miron
                Markovitz





22


**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, 2006 ,
      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, 2006, 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 29, 2007Casarea,
              Israel





**LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          BALANCE SHEET**
 **(In
          Thousands, Except Share Amounts)**
  December
                    31,2006**ASSETS**Current
                    Assets:Cash
                    and cash equivalents
                
                $
                7Accounts
                    receivable
                
                
                4,677Inventories
                
                
                2,969Prepaid
                    expenses and other current assets
                
                
                406Due
                    from stockholder
                
                
                (12
                )Total
                    Current Assets
                
                
                8,047Property
                    and equipment, net
                
                
                299Deferred
                    income taxes
                
                
                22$
                8,368**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    Liabilities:Bank
                    line of credit
                
                $
                1,489Short
                    term bank loans
                
                
                2,061Current
                    portion of term loans
                
                
                271Accounts
                    payable and accrued expenses
                
                
                2,767Due
                    to affiliates
                
                
                149Income
                    taxes payable
                
                
                -Total
                    Current Liabilities
                
                
                6,737Term
                    loans, net of current portion
                
                
                318Severance
                    payable
                
                
                847,139Commitments
                    and contingenciesMinority
                    interest
                
                
                333Stockholders'
                    Equity:Preferred
                    stock; $.001 par value, 5,000,000 shares authorized, none issued
                
                
                -Common
                    stock; $.001 par value, 100,000,000 shares authorized, 6,483,000shares
                    issued and outstanding
                
                
                6Additional
                    paid-in capital
                
                
                78Accumulated
                    other comprehensive loss
                
                
                (30
                )Retained
                    Earnings
                
                
                842Total
                    Stockholders' Equity
                
                
                896$
                8,368
  The
          accompanying notes are an integral part of these financial
          statements.
  F-2
  **LAPIS
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF INCOME**
 **(In
          Thousands, Except Earnings Per Share and Share
          Amounts)**
 Years
                      EndedDecember
                      31,2006
                  
                  2005Sales
                  
                  
                  7,839
                  
                  
                  7,269Cost
                      of sales
                  
                  
                  5,676
                  
                  
                  5,261Gross
                      profit
                  
                  
                  2,163
                  
                  
                  2,008Operating
                      Expenses:Research
                      and development expenses
                  
                  
                  399
                  
                  
                  379Selling
                      expenses
                  
                  
                  110
                  
                  
                  80General
                      and administrative
                  
                  
                  1,226
                  
                  
                  1,311Total
                      operating expenses
                  
                  
                  1,735
                  
                  
                  1,770Income
                      from operations
                  
                  
                  428
                  
                  
                  238Other
                      Income (Expense):Interest
                      expense, net
                  
                  
                  (378
                  )
                  
                  (269
                  )Other
                      income
                  
                  
                  6
                  
                  
                  -Total
                      other income (expense)
                  
                  
                  (372
                  )
                  
                  (269
                  )Income
                      (loss) before provision for income taxes and minority interest
                  
                  
                  56
                  
                  
                  (31
                  )Provision
                      for income taxes
                  
                  
                  134
                  
                  
                  3Minority
                      interest
                  
                  
                  (37
                  )
                  
                  (14
                  )Net
                      loss
                  
                  $
                  (115
                  )
                  $
                  (48
                  )Basic
                      net loss per share
                  
                  $
                  (0.02
                  )
                  $
                  (0.01
                  )Basic
                      weighted average common shares outstanding
                  
                  
                  6,483,000
                  
                  
                  5,902,178
  The
          accompanying notes are an integral part of these financial
          statements.
 F-3
  **LAPIS
          TECHNOLOGY, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
            (LOSS)**
 **YEARS
              ENDED DECEMBER 31, 2006 AND 2005**
 **(In
                Thousands, Except Share Amounts)**
 AccumulatedAdditional
                  
                  Other
                  
                  
                  
                  TotalCommon
                      Stock
                  
                  Paid-in
                  
                  Comprehensive
                  
                  Retained
                  
                  Stockholders'
                  
                  ComprehensiveShares
                  
                  Amount
                  
                  Capital
                  
                  Loss
                  
                  Earnings
                  
                  Equity
                  
                  IncomeBalance,
                      January 1, 2005
                  
                  
                  5,483,000
                  
                  
                  5
                  
                  
                  78
                  
                  
                  (121
                  )
                  
                  990
                  
                  
                  952Foreign
                      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  1
                  
                  
                  
                  
                  
                  1
                  
                  
                  1Acqusition
                      of additional interest in subsidiary
                  
                  
                  1,000,000
                  
                  
                  1
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1Net
                      income
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (48
                  )
                  
                  (48
                  )
                  
                  (48
                  )Balance,
                      December 31, 2005
                  
                  
                  6,483,000
                  
                  
                  6
                  
                  
                  78
                  
                  
                  (120
                  )
                  
                  942
                  
                  
                  906
                  
                  $
                  (47
                  )Foreign
                      currency translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  90
                  
                  
                  15
                  
                  
                  105
                  
                  $
                  105Net
                      income (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (115
                  )
                  
                  (115
                  )
                  
                  (115
                  )Balance,
                      12-31-06
                  
                  
                  6,483,000
                  
                  
                  6
                  
                  
                  78
                  
                  $
                  (30
                  )
                  $
                  842
                  
                  $
                  896
                  
                  $
                  (10
                  )
  The
          accompanying notes are an integral part of these financial
          statements.
 F-4
  **LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            STATEMENTS OF CASH FLOWS**
 **(In
              Thousands)**
 Years
                    EndedDecember
                    31,2006
                
                2005Cash
                    flows from operating activities:Net
                    income
                
                
                (115
                )
                $
                (48
                )Adjustments
                    to reconcile net income to net cashused
                    in operating activities:Depreciation
                    and amortization
                
                
                84
                
                
                148Minority
                    interest
                
                
                59
                
                
                (153
                )Gain
                    on sale of property and equipment
                
                
                (10
                )
                
                -Deferred
                    income tax
                
                
                (6
                )
                
                4Change
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (965
                )
                
                (1,168
                )Inventories
                
                
                (534
                )
                
                (161
                )Prepaid
                    expenses and other current assets
                
                
                (30
                )
                
                81Accounts
                    payable and accrued expenses
                
                
                564
                
                
                814Income
                    taxes payable
                
                
                -
                
                
                (179
                )Severance
                    payable
                
                
                26
                
                
                (1
                )Net
                    cash used in operating activities
                
                
                (927
                )
                
                (663
                )Cash
                    flows from investing activities:Proceeds
                    from sale of property and equipment
                
                
                69
                
                
                -Purchase
                    of property and equipment
                
                
                (130
                )
                
                (46
                )Decrease
                    in due from stockholder
                
                
                4
                
                
                355Decrease
                    in due from affiliates
                
                
                82
                
                
                83Net
                    cash (used in) provided by investing activities
                
                
                25
                
                
                392Cash
                    flows from financing activities:Increase
                    (decrease) in bank line of credit, net
                
                
                180
                
                
                607Proceeds
                    from long term debt
                
                
                3,880
                
                
                2,926Repayment
                    of long-term debt
                
                
                (3,237
                )
                
                (3,244
                )Net
                    cash provided by financing activities
                
                
                823
                
                
                289Effects
                    of exchange rates on cash
                
                
                8
                
                
                (64
                )Increase
                    (decrease) in cash
                
                
                (71
                )
                
                (46
                )Cash,
                    beginning of period
                
                
                78
                
                
                124Cash,
                    end of period
                
                $
                7
                
                $
                78
  The
          accompanying notes are an integral part of these financial
          statements.
 F-5
  **LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(In
          Thousands)**
 Years
                    EndedDecember
                    31,2006
                
                2005Supplemental
                    disclosure of cash flow information:Cash
                    paid during the period for:Interest
                
                $
                372
                
                $
                269Income
                    taxes
                
                $
                201
                
                $
                96Supplemental
                    disclosure of non-cash financing activities:Common
                    stock issued for services
                
                $
                -
                
                $
                -
  The
          accompanying notes are an integral part of these financial
          statements.
 F-6
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 200 6
 
 (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.
 
 NOTE
          2 -
          BASIS OF PRESENTATION
 
 The
          accompanying consolidated financial statements present the results of operations
          of the Company for the years ended December 31, 2006 and 2005 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-7
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (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, 2006 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
                      yearsMachinery
                      and equipment
                  
                  
                  10
                      yearsFurniture
                      and fixtures
                  
                  
                  14
                      yearsTransportation
                      equipment
                  
                  
                  7
                      yearsComputer
                      equipment
                  
                  
                  3
                      years
 
 F-8
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (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, 2006.
 
 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, 2006
          and
          2005 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, 2005 and 2004 the Company did not issued any stock options.
  F-9
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (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, 2006 and 2005 were
          approximately $399 and $379, 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, 2005
          and 2004 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, 2006.
  Minority
          Interest
 
 Minority
          interest represents the minority stockholders' proportionate share of the
          equity
          of the Company's subsidiary at December 31, 2006. 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, 2006
          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, 2006. The
          carrying value of the long-term debt approximate fair value at December
          31, 2006
          based upon debt terms available for companies under similar terms.
  F-10
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (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.
 
 In
          December 2004, the Financial Accounting Standards Board (“FASB”) issued
          Statement No. 153 “Exchange of Non-monetary Assets - an amendment of APB Opinion
          No. 29”. Statement 153 eliminates the exception for nonmonetary exchanges of
          similar productive assets and replaces it with a general exception for
          exchanges
          of nonmonetary assets that do not have commercial substance, defined as
          transactions that are not expected to result in significant changes in
          the cash
          flows of the reporting entity. This standard, which is effective for exchanges
          of nonmonetary assets occurring in fiscal periods beginning after June
          15, 2005,
          is not applicable to the Company’s current operations.
  F-11
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 NOTE
          3 -
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 In
          December 2004, FASB issued Statement No. 123 (revised 2004), “Share-Based
          Payment” (SFAS 123 (revised 2004), effective for public entities that file as
          small business issuers as of the beginning of the first interim or annual
          reporting period that begins after December 15, 2005. This Statement is
          a
          revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,”
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. SFAS 123 (revised 2004) eliminates
          the
          alternative to use Opinion No. 25’s intrinsic value method of accounting that
          was provided in Statement 123 as originally issued. Under Opinion 25, issuing
          stock options to employees generally resulted in recognition of no compensation
          cost. This Statement requires entities to recognize the cost of employee
          services received in exchange for awards of equity instruments based on
          the
          grant-date fair value of those awards (with limited exceptions). Recognition
          of
          that compensation cost helps users of financial statements to better understand
          the economic transactions affecting an entity and to make better resource
          allocation decisions. The Company is required to adopt Statement 123 (revised
          2004) as of January 1, 2006, and does not expect this statement to have
          a
          material effect on its results of operations.
 
 In
          May
          2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a
          Replacement of APB Opinion No. 20 (Accounting Changes) and FASB No. 3 (Reporting
          Accounting Changes in Interim Financial Statements),” that changes requirements
          for the accounting for and reporting of a change in accounting principle.
          This
          Statement requires retrospective application to prior periods’ financial
          statements of changes in accounting principle unless it is impracticable
          to
          determine either the period-specific effects or the cumulative effect of
          the
          change. When it is impracticable to determine the period-specific effects
          of an
          accounting change on one or more individual prior periods presented, this
          Statement requires that the new accounting principle be applied to the
          balances
          of assets and
          liabilities as of the beginning of the earliest period for which retrospective
          application is practicable and that a corresponding adjustment be made
          to the
          opening balance of retained earnings (or other appropriate components of
          equity
          or net assets in the statement of financial position) for that period rather
          than being reported in an income statement. When it is impracticable to
          determine the cumulative effect of applying a change in accounting principle
          to
          all prior periods, this Statement requires that the new accounting principle
          be
          applied as if it were adopted prospectively from the earliest date practicable.
 
 Statement
          154 is effective for accounting changes and error corrections made in fiscal
          years beginning after December 15, 2005 (calendar year 2006). Early adoption
          is
          permitted.
  F-12
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 NOTE
          3 -
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 In
          July 2006, the FASB issued Interpretation No. 48, “Accounting for
          Uncertainty in Income Taxes - An Interpretation of FASB Statement 109,” (“FIN
          48”). FIN 48 prescribes a comprehensive model as to how a company should
          recognize, measure, present and disclose in its financial statements uncertain
          tax positions that the company has taken or expects to take on a tax return.
          The
          adoption of FIN 48 is effective January 1, 2007. The Company has not yet
          determined what the effect will be, if any, on their financial
          statements.
 
 In
          September 2006, the Financial Accounting Standards Board (“FASB”) issued
          SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
          Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
          132(R),” (“FAS 158”). Among other things, FAS 158 requires companies to
          prospectively recognize a net liability or asset and to report the funded
          status
          of their defined benefit pension and other postretirement benefit plans
          on their
          balance sheets, with an offsetting adjustment to accumulated other comprehensive
          income; such recognition will not affect the Company’s statement of income. The
          adoption of FAS 158 is effective for the year ending December 31, 2006. The
          Company has not yet determined what the effect will be, if any, on their
          financial statements.
 
 Management
          does not believe that any other recently issued, but not yet effective
          accounting pronouncements, if adopted, would have a material effect on
          the
          accompanying consolidated financial statements.
  NOTE
            4 -
            INVENTORIES
 
 Inventories
            consist of the following at December 31, 2006:
 Raw
                      materials
                  
                  $
                  936Work
                    in process
                  
                  
                  1,819Finished
                      goods
                  
                  
                  214$
                  2,969
   F-13
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 NOTE
          5 -
          PROPERTY AND EQUIPMENT
 
 Property
          and equipment consists of the following at December 31, 2006:
 Leasehold
                      improvements
                  
                  $
                  111Machinery
                      and equipment
                  
                  
                  6Furniture
                      and fixtures
                  
                  
                  194Transportation
                      equipment
                  
                  
                  227Computer
                      equipment
                  
                  
                  369907Less
                      accumulated depreciation and amortization
                  
                  
                  (608
                  )$
                  299
  **NOTE
          6 - INCOME TAXES**
  The
          provision for income taxes consists of the following for the years ended
          December 31:
 2006
                  
                  2005Current:
                  
                  $
                  138
                  
                  $
                  7ForeignDeferred:
                  
                  
                  (4
                  )
                  
                  (4
                  )Foreign$
                  134
                  
                  $
                  3
   F-14
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 NOTE
          6 -
          INCOME TAXES - (continued)
 
 At
          December 31, 2006, the Company has a net operating loss carryforward of
          approximately $330 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, 2006 the Company’s wholly owned Israeli subsidiary has a deferred
          tax asset of approximately $22, 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 , 2006:
 Severancepayable
                  
                  $
                  84Net
                      operating loss carryforward
                  
                  
                  330Valuation
                      allowance
                  
                  
                  (
                      392
                  )Deferred
                      tax assets
                  
                  $
                  22
 
 F-15
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (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:
 2006
                  
                  2005Federal
                      statutory rate
                  
                  
                  34.0
                  %
                  
                  34.0
                  %Valuation
                      Allowance
                  
                  
                  (34.0
                  )
                  
                  (34.0
                  )Effect
                      of foreign taxes
                  
                  
                  31.3
                  
                  
                  0.031.3
                  %
                  
                  0.0
                  %
  NOTE
          7 -
          LONG-TERM DEBT
 
 Long-term
          debt consists of the following at December 31, 2006:
 Bank
                      line of credit due December 31, 2006at
                      8.7 % per annum
                  
                  $
                  1,489Short-term
                      bank loans, payable withintwelve
                      months at rates ranging from6.5
                      % per annum and 8.5% per annum
                  
                  
                  2,061Term
                      loans, due between March 2007 andMarch
                      2010 at rates ranging from 5.0%per
                      annum and 8.0% per annum
                  
                  
                  5904,140Less
                      current portion of term loans
                  
                  
                  3,822$
                  318
  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,
          2006:
 Year
                      Ended2007
                  
                  $
                  2,3322008
                  
                  
                  02009
                  
                  
                  62010
                  
                  
                  313$
                  2,651
   F-16
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 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.
  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.
  F-17
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 NOTE
          9 -
          STOCK OPTION PLAN - continued
 
 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 may be of such duration as shall
          be
          determined by the Board of Directors.
 
 NOTE
          10 -
          RELATED PARTIES
 
 Due
          to
          Stockholder
 
 At
          December 31, 2006 the majority stockholder had advances due to the Company
          of $6
          that accrue interest at 4% per annum. These advances are repayable within
          the
          next twelve months.
  F-18
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (In
          Thousands, Except Share and Per Share Amounts)
 
 NOTE
          11 -
          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 $57, which was paid in full during the year ended December 31, 2003.
          No gain
          or loss was recorded on this transaction, as the book value of the building
          equaled the fair market value. The Company has agreed to exercise its option
          to
          rent this property through December 31, 2007 at approximately **$** **27** **** annually
          with an option to renew the lease for an additional two years ending December
          31, 2009 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, 2007 and March 31, 2007. Rent
          expense,
          including municipal taxes and utilities associated with the leases approximated
          $63 and $59, respectively, for the years ended December 31, 2006 and
          2005.
 
 At
          December 31, 2006, total minimum rentals under noncancellable operating
          leases
          with an initial or remaining term lease term of one year or more are as
          follows:
 Year
                      EndingDecember
                      31:2006
                  
                  $
                  59**2007**
                  
                  **$**
                  **63**
 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 Electronics, 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. The
          Plaintiff has withdrawn its action against Enertec Electronic s.
  F-19
  LAPIS
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 (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, 2006 was $7.
 
 At
          December 31, 2006 the Company had three customers that accounted for
          approximately 70% of accounts receivable. For the years ended December
          31, 2006
          and 2005 approximately 48.7% and 57%, respectively, of the Company's sales
          were
          to two customers, respectively **.**
 
 NOTE
          13-
          SEGMENT AND GEOGRAPHIC INFORMATION
 
 Information
          about the Company's assets in different geographic locations at December
          31,
          2006 is shown below pursuant to the provisions of SFAS 131, “Disclosures About
          Segments of an Enterprise and Related Information.”
 Total
                      assets:Israel
                  
                  $
                  8,546United
                      States
                  
                  
                  1,037$
                  9,583
  F-20