<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A
                                      NO. 1

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)

/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the fiscal year ended               December 31, 1996
                          -----------------------------------------------

                                       OR

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

For the transition period from                     to
                              ---------------------  ---------------------

                          Commission file number 1-8707

                         PEC Israel Economic Corporation
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Maine                                          13-1143528
-------------------------------------              ----------------------------
  (State or other jurisdiction                          (I.R.S. employer
of incorporation or organization)                      identification no.)

511 Fifth Avenue, New York, New York                          10017
----------------------------------------           ----------------------------
(Address of principal executive offices)                    (Zip code)

Registrant's telephone number, including area code      (212) 687-2400
                                                   -------------------------

Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of each exchange
       Title of each class                             on which Registered
----------------------------------------             -----------------------

Common Stock (Par Value $1.00 Per Share)             New York Stock Exchange
--------------------------------------------------------------------------------

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

                                      None
--------------------------------------------------------------------------------
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES   X    NO
                                             ------     ------

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. / /


<PAGE>


         The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 24, 1997 was approximately
$100,288,000. Such aggregate market value was computed on the basis of the
closing price of the Common Stock of the registrant on the New York Stock
Exchange on that date. See Part II, Item 5, "Market for the Registrant's Common
Stock and Related Stockholder Matters."

         As of March 24, 1997, 18,508,388 shares of Common Stock were
outstanding.


<PAGE>


         The Registrant, PEC Israel Economic Corporation ("PEC" or the
"Company"), hereby (i) amends (A) Item 8 of Part II of PEC's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K") by adding
thereto the financial statements of Scitex Corporation Ltd. as at and for the
year ended December 31, 1996, which begins on the next page and (B) Items
14(a)(2)(c) and 14(a)(2)(d) of Part IV of the 1996 Form 10-K by renumbering such
Items as Items 14(a)(2)(d) and 14(a)(2)(e), respectively, and (ii) inserts the
following as Item 14(a)(2)(c) of Part IV of the 1996 Form 10-K between Item
14(a)(2)(b) and Item 14(a)(2)(d) (as renumbered) of Part IV of the 1996 Form
10-K:


(a)(2)(c)     Financial statement schedules filed in response to Item 14(d)
              pursuant to Rule 3-09 of Regulation S-X:

              Scitex Corporation Ltd. and Subsidiaries:
                   Report of Independent Auditors.

                   Consolidated Balance Sheets as at December 31, 1996 and 1995.

                   Consolidated Statements of Income (Loss) for the years ended
                   December 31, 1996, 1995 and 1994.

                   Consolidated Statements of Changes in Shareholders' Equity
                   for the years ended December 31, 1996, 1995 and 1994.

                   Consolidated Statements of Cash Flows for the years ended
                   December 31, 1996, 1995 and 1994.

                   Notes to the Consolidated Financial Statements.


<PAGE>


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)

                     1996 CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)

                     1996 CONSOLIDATED FINANCIAL STATEMENTS




                                TABLE OF CONTENTS



<TABLE>
<CAPTION>

                                                               Page
                                                               ----
<S>                                                            <C>
REPORT OF INDEPENDENT AUDITORS                                  2
CONSOLIDATED FINANCIAL STATEMENTS:
 Balance sheets                                                 3
 Statements of income (loss)                                    4
 Statements of changes in shareholders' equity                  5
 Statements of cash flows                                      6-7
 Notes to financial statements                                 8-31

</TABLE>


            The amounts are stated in U.S. dollars ($) in thousands.


                                 ---------------
                            -------------------------
                                 ---------------


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the shareholders of

SCITEX CORPORATION LTD.


We have audited the consolidated balance sheets of Scitex Corporation Ltd. (the
"Company") and its subsidiaries at December 31, 1996 and 1995 and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

Our audits were performed in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are free
of material misstatement, whether caused by an error in the financial statements
or by misleading information included therein. 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 the Company's Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a fair basis for our opinion.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries at December 31, 1996 and 1995 and the results of their operations,
the changes in shareholders' equity and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with accounting
principles generally accepted in the United States.



Tel-Aviv, Israel                                 Kesselman & Kesselman
                                          Certified Public Accountants (Isr.)
February 13, 1997
 (except for notes 9b(2) and (3), as to
 which the date is March 11)


                                       2

<PAGE>


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                               December 31
                                                        --------------------------
                                                             1996      1995
                                                           -------   -------
                                                        U. S. dollars in thousands
                                                        --------------------------
<S>                                                       <C>        <C>
                        Assets
CURRENT ASSETS (note 14):
    Cash and cash equivalents                               90,050    92,326
    Short-term investments                                  45,103    62,480
                                                           -------   -------
       T o t a l cash and short-term investments           135,153   154,806
    Trade receivables (net of allowance
       for doubtful accounts of $ 52,252,000 at
       December 31, 1996 and $ 45,900,000 at
       December 31, 1995)                                  155,493   298,974
    Other receivables                                       34,783    33,403
    Inventories:
       Systems and components (note 3)                     118,826   121,716
       Spare parts and supplies                             57,577    58,706
    Prepaid expenses                                         5,993     4,883
    Deferred income taxes (note 12d)                        15,763    30,542
                                                           -------   -------
       T o t a l current assets                            523,588   703,030

INVESTMENTS AND OTHER NON-CURRENT
    ASSETS (notes 4 and 14)                                 15,114    17,892

PROPERTY, PLANT AND EQUIPMENT (note 5):
    Cost                                                   256,040   250,412
    L e s s - accumulated depreciation and amortization    170,118   152,042
                                                           -------   -------
                                                            85,922    98,370
GOODWILL AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization (note 6)                           80,110   101,539
                                                           -------   -------
                                                           704,734   920,831
                                                           -------   -------
                                                           -------   -------

</TABLE>


                          s/ D. TADMOR        ) Chairman of the Board
                      ----------------------- )  of Directors
                            Dov Tadmor



                          s/ Y. CHELOUCHE     ) President, Chief Executive
                      ----------------------- )  Officer and Director
                         Yoav Z. Chelouche


                                       3

<PAGE>


<TABLE>
<CAPTION>

                                                                  December 31
                                                           --------------------------
                                                               1996        1995
                                                             --------    --------
                                                           U. S. dollars in thousands
                                                           --------------------------
<S>                                                          <C>          <C>
           Liabilities and shareholders' equity

CURRENT LIABILITIES (note 14):
    Short-term bank credit and current maturities
       of long-term liabilities                                   826       2,386
    Trade payables                                             50,457      61,452
    Accrued liabilities and other (note 7)                    152,228     155,588
                                                             --------    --------
           T o t a l current liabilities                      203,511     219,426
LONG-TERM LIABILITIES, net of current maturities (note 14)        496         424
                                                             --------    --------
           T o t a l liabilities                              204,007     219,850

COMMITMENTS AND CONTINGENT LIABILITIES (note 9)

SHAREHOLDERS' EQUITY (note 10):
    Ordinary shares of NIS 0.12 par value
       (authorized - December 31, 1996 and 1995 -
       48,000,000 shares; issued and outstanding -
       December 31, 1996 and 1995 - 42,808,518 shares)          6,187       6,187
    Capital surplus                                           359,577     360,891
    Currency translation adjustments                            1,130         888
    Unrealized loss on marketable securities
       available for sale (note 4(b))                         (10,061)     (5,853)
    Retained earnings                                         143,894     338,868
                                                             --------    --------
           T o t a l shareholders' equity                     500,727     700,981
                                                             --------    --------
                                                              704,734     920,831
                                                             --------    --------
                                                             --------    --------

</TABLE>


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


                                       3

<PAGE>


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<TABLE>
<CAPTION>


                                                               Year ended December 31
                                                          --------------------------------
                                                            1996        1995        1994
                                                          --------    --------    --------
                                                              U.S. dollars in thousands
                                                               (except per share data)
                                                          --------------------------------
<S>                                                       <C>         <C>         <C>
REVENUES (note 15a):
 Sales                                                     520,264     576,410     576,475
 Service                                                   123,434     117,745     103,398
 Supplies                                                   51,350      36,132      24,265
                                                          --------    --------    --------
   T o t a l  revenues                                     695,048     730,287     704,138
COST OF REVENUES:
 Cost of sales                                             316,769     306,681     252,527
 Cost of service                                           123,795      98,785      72,294
 Cost of supplies                                           23,383      16,548      11,319
                                                          --------    --------    --------
   T o t a l  cost of revenues                             463,947     422,014     336,140
                                                          --------    --------    --------
GROSS PROFIT                                               231,101     308,273     367,998
RESEARCH AND DEVELOPMENT COSTS -
  net (note 15b)                                            72,795      73,662      73,258
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (note 15c)    270,562     254,570     214,205
AMORTIZATION OF GOODWILL AND OTHER
  INTANGIBLE ASSETS)                                        16,221      12,347       9,454
RESTRUCTURING COSTS (note 11)                               56,100      22,000
                                                          --------    --------    --------
OPERATING INCOME (LOSS)                                   (184,577)    (54,306)     71,081
FINANCIAL INCOME - net (note 15d)                            4,683       9,929       5,465
OTHER INCOME (EXPENSES) - net                                 (239)     (2,475)      2,774
                                                          --------    --------    --------
INCOME (LOSS) BEFORE TAXES ON INCOME                      (180,133)    (46,852)     79,320
TAXES ON INCOME (TAX BENEFIT) (note 12)                     (1,700)    (13,464)     11,736
SHARE IN INCOME (LOSSES) OF EQUITY
  INVESTMENTS - net (note 4)                                   154      (1,123)     (3,834)
                                                          --------    --------    --------
NET INCOME (LOSS)                                         (178,279)    (34,511)     63,750
                                                          --------    --------    --------
                                                          --------    --------    --------
EARNINGS (LOSS) PER SHARE (note 1n)                       $  (4.16)   $  (0.81)   $   1.49
                                                          --------    --------    --------
                                                          --------    --------    --------
WEIGHTED AVERAGE NUMBER OF SHARES
  OUTSTANDING - IN THOUSANDS (note 1n)                      42,809      42,800      42,762
                                                          --------    --------    --------
                                                          --------    --------    --------

</TABLE>


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


                                       4

<PAGE>


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                    Unrealized loss on
                                                  Ordinary  Capital    Currency         marketable         Retained      Total
                                                   shares   surplus   translation   securities available   earnings   shareholders'
                                                                      adjustments        for sale         (note 10c)     equity
                                                  --------  -------   -----------   --------------------  ----------  -------------
                                                                                U. S. dollars in thousands
                                                  ---------------------------------------------------------------------------------
<S>                                                 <C>     <C>         <C>               <C>              <C>          <C>
BALANCE AT JANUARY 1, 1994                          6,181   355,598       341                               354,139      716,259
CHANGES DURING 1994:
Net income                                                                                                   63,750       63,750
Employee stock options exercised and paid               6      *640                                                          646
Surplus arising from employee stock options                   1,427                                                        1,427
Currency translation adjustments                                          194                                                194
Unrealized loss on marketable securities
    available for sale                                                                    (10,289)                       (10,289)
Dividend ($ 0.52 per share)                                                                                 (22,252)     (22,252)
                                                   ------   -------     -----             -------           -------      -------
BALANCE AT DECEMBER 31, 1994                        6,187   357,665       535             (10,289)          395,637      749,735
CHANGES DURING 1995:
Loss                                                                                                        (34,511)     (34,511)
Employee stock options exercised and paid                      *366                                                          366
Surplus arising from employee stock options                   2,860                                                        2,860
Currency translation adjustments                                          353                                                353
Unrealized gain on marketable securities
    available for sale                                                                      4,436                          4,436
Dividend ($ 0.52 per share)                                                                                 (22,258)     (22,258)
                                                   ------   -------     -----             -------           -------      -------
BALANCE AT DECEMBER 31, 1995                        6,187   360,891       888              (5,853)          338,868      700,981
CHANGES DURING 1996:
Loss                                                                                                       (178,279)    (178,279)
Elimination of surplus in respect of
 employee stock options due to forfeiture,
 net of surplus arising from employee stock
 options                                                     (1,314)                                                      (1,314)
Currency translation adjustments                                          242                                                242
Unrealized loss on marketable securities
    available for sale                                                                     (4,208)                        (4,208)
Dividend ($ 0.39 per share)                                                                                 (16,695)     (16,695)
                                                   ------   -------     -----             -------           -------      -------

BALANCE AT DECEMBER 31, 1996                        6,187   359,577     1,130             (10,061)          143,894      500,727
                                                   ------   -------     -----             -------           -------      -------
                                                   ------   -------     -----             -------           -------      -------

</TABLE>


                        * Net of share issuance expenses.

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


                                       5

<PAGE>


(Continued - 1)
                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                             Year ended December 31
                                                       ---------------------------------
                                                         1996        1995        1994
                                                       --------    --------    --------
                                                           U.S dollars in thousands
                                                       ---------------------------------
<S>                                                    <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                     (178,279)    (34,511)     63,750
 Adjustments to reconcile net income or loss to net
  cash provided by or used in operating activities:
  Share in losses (income) and write off of equity
   investments - net                                       (155)      5,387       3,834
  Depreciation and amortization                          49,196      43,359      34,500
  Acquired in-process research and development                                    7,766
  Gain on sale of equity investments                                             (3,103)
  Compensation expense (income) resulting from
   employee stock options                                (1,314)        663       1,427
  Gain on sale and increase in value of short-term
   investments - net                                       (893)     (5,279)     (1,088)
  Deferred income taxes - net                            12,882     (12,810)     (4,747)
  Loss on disposal of fixed assets                        8,424
  Provision for impairment of intangible assets          18,200
  Changes in operating assets and liabilities:
   Decrease (increase) in trade receivables
    (including non-current portion)                     145,976     (27,662)    (24,280)
   Decrease (increase) in other receivables              (1,380)    (16,043)      5,482
   Increase (decrease) in trade payables                (10,995)      2,461      (3,438)
   Increase (decrease) in accrued liabilities and        (1,495)     17,902      17,522
    other
   Decrease (increase) in inventories                     2,077      (7,078)    (33,098)
   Decrease (increase) in prepaid expenses               (1,110)        830        (709)
 Other items - net                                          753         486        (228)
                                                       --------    --------    --------
 Net cash provided by (used in) operating activities     41,887     (32,295)     63,590

CASH FLOWS FROM INVESTING ACTIVITIES:
 Acquisition of consolidated subsidiaries *                         (50,737)    (21,374)
 Additional amount paid in respect of acquisition of
  consolidated subsidiary                                (7,000)     (7,000)     (7,000)
 Purchase of property, plant and equipment              (31,176)    (39,515)    (36,515)
 Proceeds from sale of fixed assets                       2,224       3,254       2,566
 Purchase of intangible assets                               (6)       (146)       (219)
 Equity and other investments                            (2,815)                 (4,806)
 Sale of equity investments                                                       4,187
 Purchase of short-term investments                     (27,431)   (396,678)   (367,488)
 Sale of short-term investments                          45,701     470,078     365,422
                                                       --------    --------    --------
 Net cash used in investing activities                  (20,503)    (20,744)    (65,227)
                                                       --------    --------    --------
Subtotal - forward                                       21,384     (53,039)     (1,637)

</TABLE>


                                       6

<PAGE>


(Concluded - 2)


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                Year ended December 31
                                                           ----------------------------------
                                                             1996        1995        1994
                                                           --------    --------    --------
                                                                U.S dollars in thousands
                                                           ----------------------------------
<S>                                                         <C>         <C>         <C>
Subtotal - brought forward                                   21,384     (53,039)     (1,637)

CASH FLOWS FROM FINANCING ACTIVITIES:
 Employee stock options exercised and paid                                  366         646
 Increase in long-term liabilities                              627          70
 Discharge of long-term liabilities                            (347)        (40)       (105)
 Increase (decrease) in short-term bank credit               (1,679)      1,551        (308)
 Dividends paid                                             (22,261)    (22,256)    (22,239)
                                                           --------    --------    --------
 Net cash used in financing activities                      (23,660)    (20,309)    (22,006)
                                                           --------    --------    --------
NET DECREASE IN CASH AND CASH EQUIVALENTS                    (2,276)    (73,348)    (23,643)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
 YEAR                                                        92,326     165,674     189,317
                                                           --------    --------    --------
CASH AND CASH EQUIVALENTS AT END OF YEAR                     90,050      92,326     165,674
                                                           --------    --------    --------
                                                           --------    --------    --------

* Acquisition of consolidated subsidiaries:
   Working capital (excluding cash and cash equivalents)                  3,370       2,378
   Property, plant and equipment - net                                    3,667         916
   Goodwill and other intangible assets - net                            42,977      10,314
   Investments and other non-current assets                                 723
   Acquired in-process research and development                                       7,766
                                                                       --------    --------
                                                                         50,737      21,374
                                                                       --------    --------
                                                                       --------    --------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - cash paid during the year for:
 Interest                                                     2,271       3,883       2,724
                                                           --------    --------    --------
                                                           --------    --------    --------
 Income taxes                                                 7,795      12,497      17,277
                                                           --------    --------    --------
                                                           --------    --------    --------

</TABLE>


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


                                       7

<PAGE>


                             SCITEX CORPORATION LTD.
                            (An Israeli Corporation)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

         The significant accounting policies, applied on a consistent basis, are
as follows:

         a.   General:

              1)   Nature of Operations

                   Scitex Corporation Ltd. (the "Company") is an Israeli
                   corporation which designs, manufactures and markets digital
                   visual information communication systems for the graphic
                   arts, printing and video markets.

              2)   Functional currency

                   The currency of the primary economic environment in which the
                   operations of the Company and most of its subsidiaries are
                   conducted is the U.S. dollar ("dollar"); thus, the dollar is
                   the functional currency of the Company and most of its
                   subsidiaries.

                   For the Company and its subsidiaries whose functional
                   currency is the dollar, transactions and balances denominated
                   in dollars are presented at their original amounts. Gains and
                   losses arising from non-dollar transactions and balances are
                   included in the determination of net income or loss.

                   The financial statements of certain subsidiaries and an
                   entity in which the Company has an equity investments, whose
                   functional currency is their local currency, are translated
                   into dollars in accordance with the principles set forth in
                   Statement No. 52 of the Financial Accounting Standards Board
                   of the United States ("FASB") - "Foreign Currency
                   Translation". Assets and liabilities are translated using
                   year end rate of exchange; results of operations are
                   translated at average exchange rates. The resulting aggregate
                   translation adjustments are reported as a component of
                   shareholders' equity.

                   Condensed nominal Israeli currency data are presented in note
                   17.


                                       8

<PAGE>


              3)   Use of estimates in the preparation of financial statements

                   The preparation of financial statements in conformity with
                   generally accepted accounting principles ("GAAP") requires
                   management to make estimates and assumptions that affect the
                   reported amounts of assets and liabilities and disclosure of
                   contingent assets and liabilities at the dates of the
                   financial statements and the reported amounts of revenue and
                   expenses during the reporting years. However, the Company
                   participates in highly competitive markets that are
                   characterized by aggressive pricing practices, downward
                   pressures on gross margins, short product life cycles, rapid
                   technological advances, variable demand patterns on the part
                   of consumers, and changes in the creditworthiness of the
                   Company's customer base. As a result of the dynamic nature of
                   the Company's principal markets, it is at least reasonably
                   possible that the estimates used by the Company to determine
                   its various reserves will be materially different from the
                   actual amounts or results, which could have a materially
                   adverse effect on the Company's results of operations and
                   financial condition in the near term.

              4)   Accounting principles

                   The financial statements are prepared in accordance with US
                   GAAP.

         b.   Principles of consolidation

              The consolidated financial statements include the accounts of the
              Company and its subsidiaries, all of which are wholly-owned.

              Intercompany balances and transactions have been eliminated.

         c.   Cash equivalents

              The Company considers all highly liquid debt instruments purchased
              with a maturity of three months or less to be cash equivalents.
              Bank deposits with a maturity of more than three months but less
              than one year are included in short-term investments.

         d.   Investments in marketable securities

              Marketable securities classified as "trading securities" are
              stated at market value. The change in market value of these
              securities is included in financial income or expenses.

              An investment in quoted shares of a company, classified as
              "available for sale securities" is stated at market value. The
              difference between the market value of the shares and their cost
              is recorded as a separate component of shareholders' equity.


                                        9

<PAGE>


         e.   Inventories

              Inventories are valued at the lower of cost or market. Cost is
              determined as follows: components and supplies - on the moving
              average basis; labor and overhead - on the basis of actual
              manufacturing costs.

         f.   Equity investments

              These investments are accounted for by the equity method.

         g.   Property, plant and equipment

              These assets are stated at cost and are depreciated by the
              straight-line method over their estimated useful life.

              Annual rates of depreciation are as follows:

<TABLE>
<CAPTION>


                                                 %
                                               -----
<S>                                       <C>
Machinery and equipment                   10-33 (mainly 20)
Building                                  4
Office furniture and equipment            6-20 (mainly 20)
Motor vehicles                            15-25 (mainly 15)

</TABLE>

              Leasehold improvements are amortized by the straight-line method
              over the term of the lease or the estimated useful life of the
              improvements, whichever is shorter.

         h.   Goodwill and other intangible assets

              Goodwill, representing the difference between the cost of the
              investment in consolidated subsidiaries and the fair value of
              their underlying net assets at the time of acquisition, and
              acquired goodwill are amortized by the straight-line method over a
              period of 5-15 years (mainly 7-10 years).

              Acquired technology and other intangible assets are amortized by
              the straight-line method over a period of 3-13 years (mainly 3-5
              years).

              The Company examines the realizability of goodwill and other
              intangible assets and the appropriateness of their amortization
              periods, based on the estimated future undiscounted cash flows
              derived from those assets. Any impairment loss is recognized in
              the income statement.

         i.   Recognition of revenue:

              1)   Sale of systems

                   The Company recognizes revenue from sale of its products upon
                   shipment. Cost of sales includes an estimate of costs
                   associated with installation, warranty and training.


                                       10

<PAGE>


              2)   Service revenue

                   Service revenue is recognized ratably over the contractual
                   period or as services are performed.

              3)   Sale of supplies

                   The Company recognizes revenue from sale of supplies upon
                   shipment.

         j.   Research and development

              Research and development costs are charged to income as incurred.
              Participation received for development of approved projects is
              recognized as a reduction of expenses as the related cost is
              incurred (see also note 9a(1)).

         k.   Allowance for doubtful accounts

              The allowance is partly determined for specific accounts doubtful
              of collection and partly based on statistical analysis of past
              experience.

         l.   Income taxes

              Deferred income taxes are provided for temporary differences
              between the assets and liabilities as measured in the financial
              statements and for tax purposes, at the tax rates expected to be
              in effect when these differences reverse.

              The Company may incur an additional tax liability in the event of
              an intercompany dividend distribution; no additional tax has been
              provided, since it is the Company's policy not to distribute
              dividends which would result in additional tax liability.

              Taxes which would apply in the event of disposal of investments in
              subsidiaries and other investees have not been taken into account
              in computing the deferred taxes, as it is the Company's policy to
              hold these investments for the long term.

         m.   Derivatives

              Gains and losses on hedges of existing assets or liabilities are
              recognized in income commensurate with the results from those
              assets or liabilities. Gains and losses related to qualifying
              hedges of firm commitments or anticipated transactions are
              deferred and included as part of the measurement of the results of
              the underlying hedged transactions.

         n.   Earnings (loss) per share

              Earnings (loss) per share are computed based on the weighted
              average number of shares outstanding during each year. Stock
              options under key employee share incentive and stock option plans
              have been excluded from the computation because the dilutive
              effect of such options is immaterial.


                                       11

<PAGE>


         o.   Reclassification

              Certain prior years' amounts have been reclassified to conform
              with the 1996 presentation.

NOTE 2 - ACQUISITIONS:

One.     In September 1995, the Company acquired all of the shares of Abekas
         Video Systems, Inc., a U.S. corporation, and substantially all of the
         assets and certain liabilities of Abekas Video Systems Ltd., a U.K.
         corporation (hereafter collectively - Abekas) for an aggregate
         consideration of $ 51,432,000 in cash (including $ 1,432,000 - costs
         related to the acquisition).

An amount of $ 42,977,000 out of the total acquisition cost was attributed to
goodwill and other intangible assets and is being amortized over their estimated
useful lives.

In October 1995, Abekas (which develops, manufactures and markets video
manipulation devices used in high-end video postproduction and broadcast
applications) was merged into Scitex Digital Video, Inc. (hereafter -SDV) - a
wholly-owned subsidiary in the U.S., formerly known as ImMIX, Inc. (see b.
below).

Two.     In September 1994, the Company acquired all of the operations of the
         ImMIX division of a U.S. corporation (which consist of the development,
         manufacturing and marketing of non-linear digital video editing
         systems) in consideration of $ 21,607,000 in cash (including
         $607,000-costs related to the acquisition).

An amount of $ 7,766,000 out of the total acquisition cost was attributed to
in-process research and development. Upon acquisition, the technological
feasibility of the in-process research and development had not yet been
established and the technology being developed had no alternative future use.
Therefore, the amount was charged to research and development costs. An amount
of $10,314,000 was attributed to goodwill and other intangible assets and is
being amortized over their estimated useful lives.


NOTE 3 - INVENTORIES - SYSTEMS AND COMPONENTS:

<TABLE>
<CAPTION>

                                                          December 31
                                                      -------------------
                                                        1996        1995
                                                      -------     -------
                                                         $ in thousands
                                                      -------------------
<S>                                                   <C>         <C>
         Components for manufacturing of systems       53,932      44,320
         Work in process                               14,553      21,826
         Finished products                             50,341      55,570
                                                      -------     -------
                                                      118,826     121,716
                                                      -------     -------
                                                      -------     -------

</TABLE>


                                       12

<PAGE>


NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS:

<TABLE>
<CAPTION>

                                                                 December 31
                                                             ------------------
                                                              1996       1995
                                                             ------     ------
                                                               $ in thousands
                                                             ------------------
<S>                                                          <C>        <C>
        Equity investments:
         Joint venture company (a)                            3,442      3,799
         Other                                                1,709
        Available for sale investment (b)                     4,778      8,986
        Non-current receivables                               1,095      3,933
        Deferred income taxes (note 12d)                      2,035        225
        Limited partnership - related party - at cost                      650
        Shares at cost and other                              2,055        299
                                                             ------     ------
                                                             15,114     17,892
                                                             ------     ------
                                                             ------     ------

</TABLE>


         (a)  Joint venture company:

              1)   This item represents an investment in a 50%-owned joint
                   venture company in Japan, composed as follows:

<TABLE>
<CAPTION>

                                                   December 31
                                                ----------------
                                                1996        1995
                                                -----      -----
                                                 $ in thousands
                                                ----------------
<S>                                             <C>        <C>
         Cost                                   1,922      1,922
         Cumulative currency translation
          adjustments                           1,892      2,404
         Cumulative share in losses - net        (372)      (527)
                                                -----      -----
                                                3,442      3,799
                                                -----      -----
                                                -----      -----

</TABLE>


              2)   The Company has provided guarantees for bank credit received
                   by the joint venture company - $ 13.5 million at December 31,
                   1996 and 1995.

         (b)  Available for sale investment

              The Company owns shares in Truevision, Inc. (hereafter-
              Truevision), a U.S. corporation, purchased in a private placement
              and through a market transaction for a total consideration of
              $14,839,000. The shares are traded in the United States. The
              investment, stated at market value, represents approximately 14%
              and 15% of Truevision's ordinary share capital at December 31,
              1996 and 1995, respectively.


                                       13

<PAGE>


NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

         Grouped by major classifications, the assets are composed as follows:

<TABLE>
<CAPTION>

                                                         Accumulated depreciation and
                                          C o s t               amortization
                                       ----------------- ----------------------------
                                         December 31             December 31
                                       ----------------- ----------------------------
                                        1996      1995         1996      1995
                                       -------   -------      -------   -------
                                        $ in thousands          $ in thousands
                                       ----------------- ----------------------------
<S>                                    <C>       <C>          <C>       <C>
      Machinery and equipment          185,284   187,732      126,658   115,196
      Building (including land)          8,755     8,755        1,364     1,086
      Leasehold improvements            27,160    24,977       22,369    19,705
      Office furniture and equipment    30,140    23,988       17,248    13,559
      Motor vehicles                     4,701     4,960        2,479     2,496
                                       -------   -------      -------   -------
                                       256,040   250,412      170,118   152,042
                                       -------   -------      -------   -------
                                       -------   -------      -------   -------

</TABLE>

         Depreciation and amortization of property, plant and equipment totaled
         $ 32,975,000, $ 30,433,000 and $ 24,308,000 in 1996, 1995 and 1994,
         respectively.


NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS:

<TABLE>
<CAPTION>

                                                         December 31
                                                      -----------------
                                                       1996      1995
                                                      -------   -------
                                                       $ in thousands
                                                      -----------------
<S>                                                   <C>       <C>
         Original amount:
          Goodwill in consolidated subsidiaries and
           acquired goodwill                          *98,704   112,709
          Acquired technology and other intangible
           assets                                      20,509    26,010
                                                      -------   -------
                                                      119,213   138,719
         L e s s - accumulated amortization:
          Goodwill in consolidated subsidiaries and
           acquired goodwill                          *30,109    31,432
          Acquired technology and other intangible
           assets                                       8,994     5,748
                                                      -------   -------
                                                       39,103    37,180
                                                      -------   -------
                                                       80,110   101,539
                                                      -------   -------
                                                      -------   -------

</TABLE>


*   In 1996, an amount of $ 18,200,000 - representing the amortized balance of
    goodwill arising from the acquisition of a subsidiary - was written off (see
    also note 1m). The amount of write-off was included among restructuring
    costs as detailed in note 11.


                                       14

<PAGE>


NOTE 7 - ACCRUED LIABILITIES AND OTHER:

<TABLE>
<CAPTION>

                                                           December 31
                                                        ----------------
                                                         1996      1995
                                                        -------  -------
                                                          $ in thousands
                                                        ----------------
<S>                                                     <C>      <C>
         Employees and related liabilities               27,766   32,999
         Taxes on income, net of advances                 7,296   20,675
         Advances from customers                         11,285   13,132
         Allowance in respect of sales financed
          by third parties (see note 9b(1))              20,933   12,604
         Accrued restructuring costs (see note 11)       23,124   12,182
         Other accrued expenses and sundry               61,824   63,996
                                                        -------  -------
                                                        152,228  155,588
                                                        -------  -------
                                                        -------  -------

</TABLE>


NOTE 8 - EMPLOYEE RIGHTS UPON RETIREMENT:

One.     Virtually the entire liability for severance pay for Israeli employees,
         pursuant to Israeli law and employment agreements, is funded with
         severance pay and pension funds and with policies issued by insurance
         companies (principally with an affiliate of two of the major
         shareholders of the Company) for which the Company makes monthly
         payments. Since the control and management of these funds is
         independent of the Company, the amounts funded are not reflected in the
         balance sheets. The amounts not funded as above are included among
         accrued liabilities.

Two.     The U.S. subsidiaries offer a 401(k) matching plan to all eligible
         employees. The U.S. subsidiaries' matching contribution ranges from 50%
         to 200% of a participant's contribution, depending upon years of
         service, up to a maximum of 3% of a participant's qualifying earnings.

Three.   Substantially all of the European subsidiaries make contributions to
         pension plans administered by insurance companies. Since the control
         and management of these funds are independent of the European
         subsidiaries, the amounts funded are not included in the balance
         sheets. The amounts not funded are included among accrued liabilities.

Four.    Severance pay, pension and defined contribution plan expenses totaled
         $ 16,414,000, $ 18,130,000 and $ 17,090,000 in 1996, 1995 and 1994,
         respectively. In addition, employee termination benefits in the amounts
         of $ 18,000,000 and $ 17,000,000 in 1996 and 1995, respectively, were
         included in restructuring costs (see note 11).


                                       15

<PAGE>


NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES:

One.     Commitments:

         1)   Royalty commitments:

              (a)  The Company is committed to pay royalties to the Government
                   of Israel on proceeds from sale of products in the research
                   and development of which the Government participates by way
                   of grants, up to the amount of the grants received (in
                   dollar terms); for certain projects, which were approved
                   prior to January 1, 1994, the limit is up to 150% of the
                   grants received. At the time the participations were
                   received, successful development of the related projects was
                   not assured. Through December 31, 1995, royalty rates varied
                   from 2% to 3%. As from January 1, 1996, under the Research
                   and Development Encouragement Regulations which were
                   published in June 1996, the royalty rates were changed to
                   3%-6%.

                   At December 31, 1996, the maximum contingent royalty payable
                   is $43 million.

              (b)  The Company is obligated to pay royalties to certain parties,
                   based on agreements which allow it to use technologies
                   developed by these parties. Such royalties are based on the
                   revenues from sales of products which incorporate these
                   technologies or on quantities of such products sold.

         2)   Lease commitments

              Most of the premises occupied by the Company and its subsidiaries
              are rented under various lease agreements. Most of the premises in
              Israel are leased from an affiliate of two of the major
              shareholders of the Company.

                   Minimum lease commitments of the Company and its subsidiaries
                   under the above leases (net of amounts provided in "accrued
                   restructuring costs") at rates in effect in December 1996,
                   are as follows:

<TABLE>
<CAPTION>

                                                           $ in thousands
                                                         -------------------
<S>                    <C>                                    <C>
                       Year ending December 31:
                           1997                               13,262
                           1998                               10,059
                           1999                                8,244
                           2000                                7,345
                           2001                                7,342
                           2002 and thereafter                34,716

</TABLE>

                   The rental payments for the premises in Israel, which
                   constitute approximately 26% of the above amounts, are
                   payable in Israeli currency linked partially to the Israeli
                   consumer price index (hereafter - the Israeli CPI), and
                   partially to the dollar.


                                       16

<PAGE>


                   Rental expense totaled $ 16,523,000, $ 14,499,000 and $
                   13,436,000 in 1996, 1995 and 1994, respectively; in 1996, an
                   additional amount of $ 9,600,000 is included in restructuring
                   costs (see Note 11).

Two.     Contingent liabilities:

         1)   Certain subsidiaries of the Company have entered into agreements
              with third-party financing companies (hereafter - the agreements)
              under which long-term financing (generally five years) is provided
              to customers in connection with the purchase of the Company's
              equipment.

                   Under the terms of the agreements, the third-party financing
                   companies have recourse against the subsidiaries in an amount
                   equal to either a fixed amount established at the time of
                   financing or a percentage of the outstanding balance,
                   including interest, owed by the customers to the financing
                   company. Commencing 1996, the Company provides letters of
                   credit to the major financing company in amounts equivalent
                   to 30% of the original amount of the transactions.

                   During the years ended December 31, 1996, 1995 and 1994,
                   approximately $ 90,500,000, $ 113,200,000 and $ 148,800,000,
                   respectively, of revenues were financed under these
                   agreements. At December 31, 1996, the subsidiaries were
                   contingently liable to the financing companies for
                   approximately 16%-20% of the outstanding balance of $ 247
                   million, subject to estimated default rates, remarketing
                   proceeds and other factors, as described in the agreements.

                   The subsidiaries have established provisions ($ 20,933,000
                   and $ 12,604,000 at December 31, 1996 and 1995, respectively)
                   for potential losses which may be incurred in the event of
                   default under the agreements. The level of provisions is
                   determined based upon an analysis of the individual
                   transactions and past experience.

         2)   The Company and certain of its present and former officers and
              directors are defendants in a class action lawsuit, filed in
              December 1995 in the United States, alleging violations of certain
              provisions of federal securities law with respect to certain
              reports of the Company's results of operations during the period
              May 1994 to November 1995. The Company has and continues to
              believe that the claims asserted have no merit.

                   In March 1997, the Company entered into a settlement, subject
                   to court approval, a substantial portion of which would be
                   covered by its insurance carrier. The settlement, net of
                   insurance coverage, is not material and has been accrued in
                   the accompanying financial statements.


                                       17

<PAGE>


         3)   In April and May of 1996, four lawsuits with similar allegations
              (which purport to be class actions) were filed against the
              Company, a number of the Company's current and former directors
              and certain other individuals. The suits generally allege that the
              defendants breached fiduciary duties to the Company's shareholders
              in responding to a purported offer to buy the Company. The Company
              has and continues to believe that the claims asserted have no
              merit.

                   In March 1997, the Company entered into a settlement, subject
                   to court approval, for the payment of the plaintiffs' legal
                   fees and expenses, a substantial portion of which would be
                   covered by its insurance carrier, as well as agreement to
                   certain other conditions regarding the composition of the
                   Board of Directors and committees thereof. The settlement,
                   net of insurance coverage, is not material and has been
                   accrued in the accompanying financial statements.

         4)   Lawsuits have been lodged against the Company in the ordinary
              course of business. The Company intends to defend itself
              vigorously against those lawsuits. Management does not expect that
              the Company will incur substantial expenses in respect thereof;
              therefore, no provision has been made for the lawsuits.


NOTE 10 - SHAREHOLDERS' EQUITY:

One.     Authorized, issued and outstanding shares:

         1)   The Company's shares are traded in the United States on The Nasdaq
              Stock Market under the symbol SCIXF.

         2)   The number of shares stated as issued and outstanding (42,808,518
              ordinary shares at December 31, 1996 and 1995) does not include
              unpaid 43,950 ordinary shares - which were allotted to a trustee
              in the implementation of a share option plan. These shares, until
              paid, have no voting rights or rights to cash dividends and
              accordingly are not treated as outstanding for accounting
              purposes.

Two.     Share incentive and stock option plans:

         1)   The Company has two current share incentive and stock option plans
              - the Scitex Israel Key Employee Share Incentive Plan 1991, mainly
              for officers and other key employees of the Company, and the
              Scitex International Key Employee Stock Option Plan 1991 (As
              Amended, 1995), mainly for officers and other key employees of
              non-Israeli subsidiaries. Option awards may be granted under the
              Plans up to September 2001. The maximum term of an option may not
              exceed ten years.

                   The exercise price per share under each plan is determined by
                   a committee, which consists of members of the Board of
                   Directors, subject to guidelines determined by the Board.


                                       18

<PAGE>


                   The difference, if any, between the quoted market price of
                   the shares on the date of the award of the options and the
                   exercise price of such options is charged to income over the
                   expected service periods (usually - four years). The amount
                   of the difference is correspondingly credited to capital
                   surplus.

         2)   The Company accounts for its share incentive and stock option
              plans (the "plans") using the treatment prescribed by Accounting
              Principles Board Opinion No. 25 - "Accounting for Stock Issued to
              Employees" ("APB 25"). Under APB 25, compensation cost for
              employee stock option plans is measured using the intrinsic value
              based method of accounting.

                   In October 1995, the FASB issued Statement No. 123 -
                   "Accounting for Stock-Based Compensation" ("SFAS 123"). This
                   Statement, effective as of the 1996 financial statements,
                   established a fair value based method of accounting for an
                   employee stock option or similar equity instrument, and
                   encourages adoption of such method of accounting for stock
                   compensation plans. However, it also allows companies to
                   continue to account for those plans using the accounting
                   treatment prescribed by APB 25.

                   The Company has elected to continue applying the provisions
                   of APB 25 and has accordingly complied with the disclosure
                   requirements set forth in SFAS 123 for companies electing to
                   apply APB 25.

                   Had compensation cost for the Company's plans been determined
                   based on the fair value at the grant dates for awards granted
                   during 1996 (in 1995 no awards were granted) under the plans
                   consistent with the method of SFAS 123, the Company's loss
                   and loss per share for 1996 would have increased to the
                   pro-forma amounts indicated below:

<TABLE>
<CAPTION>

                                                          As reported   Pro-forma
                                                          -----------   ---------
<S>                                                        <C>          <C>
                        Loss - in thousands of dollars     (178,279)    (180,124)
                                                          -----------   ---------
                                                          -----------   ---------
                        Loss per share - in dollars           (4.16)       (4.21)
                                                          -----------   ---------
                                                          -----------   ---------

</TABLE>

         3)   The total number of options authorized under the plans is as
              follows:

<TABLE>
<CAPTION>

                                                             December 31
                                                        ---------------------
                                                          1996         1995
                                                        ---------   ---------
                                                          Number of options
                                                        ---------------------
<S>                                                     <C>         <C>
                        Available for future awards     1,299,750   1,972,525
                        Granted                         2,389,350   1,716,575
                        Exercised and paid                 60,900      60,900
                                                        ---------   ---------
                                                        3,750,000   3,750,000
                                                        ---------   ---------
                                                        ---------   ---------

</TABLE>


                                       19

<PAGE>

         The options granted are exercisable in purchase of shares as follows:

<TABLE>
<CAPTION>

                                                             December 31
                                                        ----------------------
                                                          1996        1995
                                                        ---------   ---------
                                                           Number of shares
                                                        ----------------------
<S>                                                     <C>         <C>
                        At balance sheet date             907,261     902,649
                        During first year thereafter      691,100     461,398
                        During second year thereafter     179,864     289,228
                        During third year thereafter      502,311      63,300
                        During fourth year thereafter     108,814
                                                        ---------   ---------
                                                        2,389,350   1,716,575
                                                        ---------   ---------
                                                        ---------   ---------
</TABLE>

                   The rights to exercise options are generally conditional upon
                   continuous employment by the Company.

         4)   A summary of the status of the Company's plans at December 31,
              1996, 1995 and 1994, and changes during the years ended on those
              dates, is presented below:

<TABLE>
<CAPTION>

                                                Year  ended  December 31
                             ----------------------------------------------------------------
                                    1996                 1995                  1994
                             --------------------  ------------------    --------------------
                                         Weighted            Weighted               Weighted
                                         average             average                average
                                         exercise            exercise               exercise
                               Number     price    Number     price      Number      price
                             ---------- --------- --------- ---------   ---------  ---------
                                            $                   $                      $
<S>                           <C>         <C>     <C>         <C>       <C>          <C>
Options outstanding at
 beginning of year            1,716,575   20.75   1,970,975   20.75     1,873,800    21.53
Changes during the year:
 Granted                      1,596,250   14.72                           500,250    18.31
 Exercised                                          (19,000)  19.75
 Forfeited                     (923,475)  18.86    (235,400)  20.83      (403,075)   21.31
                              ---------  ------   ---------  ------     ---------   ------
Options outstanding at end
 of year                      2,389,350   17.46   1,716,575   20.75     1,970,975    20.75
                              ---------  ------   ---------  ------     ---------   ------
                              ---------  ------   ---------  ------     ---------   ------
Options exercisable at end
 of year                        907,261   20.84     902,649   21.89       325,390    23.05
                              ---------  ------   ---------  ------     ---------   ------
                              ---------  ------   ---------  ------     ---------   ------
</TABLE>

                   The weighted average fair value of options granted during
                   1996 is $ 3.22

                   The fair value of each option grant is estimated on the date
                   of grant using the Black-Scholes option-pricing model with
                   the following weighted average assumptions: dividend yield of
                   $ 0.39 per share for all years (based on the actual 1996
                   dividend); expected volatility of 14.44%; risk-free interest
                   rates of 5.5%; and expected lives of 2.17 years.

                                       20

<PAGE>

         5)   The following table summarizes information about options
              outstanding at December 31, 1996:

<TABLE>
<CAPTION>

                          Options  outstanding                   Options exercisable
                ---------------------------------------------  ------------------------
     Range of        Number           Weighted       Weighted     Number       Weighted
     exercise    outstanding at   average remaining  average   exercisable at   average
      prices      December 31,    contractual life   exercise   December 31,   exercise
                      1996                            price        1996          price
--------------- ---------------   ----------------- ---------  --------------  ---------
        $                             years             $                          $
<S>                <C>                <C>             <C>         <C>            <C>
     14 to 15      1,269,250           9.1            14.72        23,500        14.38
     17 to 20        885,150           7.2            19.18       648,811        19.30
     25 to 26        234,950           5.1            25.73       234,950        25.73
                   ---------                                      -------
                   2,389,350           8.0            17.46       907,261        20.84
                   ---------                                      -------
                   ---------                                      -------

</TABLE>

Three.   Retained earnings

         The distribution of cash dividends in the amount of approximately
         $ 126,000,000 out of retained earnings of $ 143,894,000 as of December
         31, 1996 would subject the Company to payment of 15% or 20% tax on the
         amount distributed, effectively reducing the dividend distribution by
         the amount of the tax (see note 12a(1)).

NOTE 11 - RESTRUCTURING COSTS

         In 1996 and 1995, the Company recorded restructuring charges of $ 56.1
         million and $ 22.0 million, respectively. The restructuring consisted
         of a series of planned actions within the Graphic Arts Group (the
         "Group") to address changes in market conditions and were aimed at
         restoring the Group to profitability. The 1995 restructuring charge
         primarily involved a workforce reduction of approximately 250
         employees. The 1996 charge consists of a planned workforce reduction of
         approximately 400 employees (mainly in the U.S., Europe and Israel),
         the closing of certain facilities in the U.S. and Europe and the
         disposition of assets that are no longer required due to changes in
         plans. In addition, goodwill impairment was recognized for the effect
         of decisions regarding certain product lines. Most of the restructuring
         activities are expected to be completed during 1997.

         The components of the 1996 and 1995 restructuring charges are as
         follows:

<TABLE>
<CAPTION>

                                                   Year ended
                                                   December 31
                                                 ----------------
                                                  1996      1995
                                                 ------    ------
                                                  $ in thousands
                                                 ----------------
<S>                                              <C>       <C>
              Employee termination benefits      18,000    17,000
              Facility closure and excess
               purchase commitments              12,200
              Goodwill impairment                18,200
              Other asset write downs             7,700     5,000
                                                 ------    ------
                                                 56,100    22,000
                                                 ------    ------
                                                 ------    ------

</TABLE>

                                       21

<PAGE>

         Movement in accrued restructuring costs during 1995 and 1996 was as
         follows:

<TABLE>
<CAPTION>


                                                Employee     Facility
                                               termination   closure
                                                benefits     and other     Total
                                               -----------   ---------    -------
                                                         $ in thousands
                                               ----------------------------------
<S>                                             <C>          <C>          <C>
              1995:
               Restructuring charges             17,000                    17,000
               Payments during 1995              (4,818)                   (4,818)
                                                -------                   -------
               Balance at December 31, 1995      12,182                    12,182

              1996:
               Restructuring charges             18,000      12,200        30,200
               Payments during 1996             (16,740)     (1,118)      (17,858)
               Adjustments                                   (1,400)       (1,400)
                                                -------      ------       -------
               Balance at December 31, 1996      13,442       9,682        23,124
                                                -------      ------       -------
                                                -------      ------       -------

</TABLE>


         Although the Company believes that the restructuring activities were
         necessary, no assurance can be given that these restructuring actions
         will be successful or that similar actions will not be required in the
         future.


NOTE 12 - TAXES ON INCOME:

One.     The Company and its Israeli subsidiaries:

         1)   Tax benefits under the Law for the Encouragement of Capital
              Investments, 1959

                   The Company's production facilities in Israel have been
                   granted "approved enterprise" status under the above law. The
                   main benefit arising from such status is the reduction in tax
                   rates on income derived from "approved enterprises". The
                   Company is also a "foreign investors' company" as defined by
                   that law and as such is entitled to a ten-year period of
                   benefits and to an additional reduction in tax rates to 15%
                   or 20% (based on the percentage of foreign shareholding in
                   each tax year).

                   For "approved enterprises", income derived therefrom is tax
                   exempt for a period of four years out of the ten-year period
                   of benefits. Based on the percentage of foreign shareholding
                   in the Company, income derived during the remaining six years
                   of benefits is taxable at the rate of 15% or 20% (as
                   described above). The period of benefits relating to the
                   "approved enterprises" will expire in the years 1997 through
                   2001.


                                       22

<PAGE>


                   In the event of distribution of cash dividends from income
                   which was tax exempt as above, the Company would have to pay
                   the 15% or 20% tax in respect of the amount distributed.

                   The approved portion of production facilities of the Company
                   approximates 74% in 1996, 76% in 1995, and 89% in 1994.

                   The entitlement to the above benefits is conditional upon the
                   Company's fulfilling the conditions stipulated by the above
                   law, regulations published thereunder and the instruments of
                   approval for the specific investments in "approved
                   enterprises". In the event of failure to comply with these
                   conditions, the benefits may be cancelled and the Company may
                   be required to refund the amount of the benefits, in whole or
                   in part, with the addition of interest.

         2)   Measurement of results for tax purposes under the Income Tax
              (Inflationary Adjustments) Law, 1985 (hereafter - the Inflationary
              Adjustments Law)

                   Under this law, results for tax purposes are measured in real
                   terms, in accordance with the changes in the Israeli CPI, or
                   in the exchange rate of the dollar for a "foreign investment
                   company". The Company and its Israeli subsidiaries elected to
                   measure their results on the basis of the changes in the
                   Israeli CPI.

         3)   Tax benefits under the Law for the Encouragement of Industry
              (Taxes), 1969

                   The Company is an "industrial company" as defined by this law
                   and as such is entitled to certain tax benefits, mainly
                   accelerated depreciation of machinery and equipment as
                   prescribed by regulations published under the Inflationary
                   Adjustments Law, the right to claim public issuance expenses
                   and amortization of patents and other intangible property
                   rights as a deduction for tax purposes.

         4)   Tax rates applicable to income from other sources in Israel

                   Income not eligible for "approved enterprise" benefits
                   mentioned in (1) above is taxed at the regular rate: 1996 and
                   thereafter - 36%; 1995 - 37%; 1994 - 38%.

Two.     Non-Israeli subsidiaries:

         1)   Non-Israeli subsidiaries are taxed based upon tax laws in their
              countries of residence.

         2)   The U.S. subsidiaries file a consolidated tax return in the United
              States. Therefore, the tax provision is calculated on a
              consolidated tax return basis.

Three.   Carryforward tax losses and deductions

                   Carryforward tax losses and deductions of the Company and its
                   subsidiaries approximated $ 197 million at December 31, 1996.
                   Substantially all of the carryforward amounts have no
                   expiration date.


                                       23

<PAGE>

Four.    Deferred income taxes:

<TABLE>
<CAPTION>

                                                                  December 31
                                                               ----------------
                                                                1996      1995
                                                               ------    ------
                                                                $ in thousands
                                                               ----------------
<S>                <C>                                         <C>       <C>
              1)   Provided in respect of the following:
                   Allowance for doubtful accounts             20,647    18,013
                   Carryforward tax losses                     32,974     9,918
                   Inventories                                  7,696     4,091
                   Accrued liabilities and deferred income      8,785     7,424
                   Other                                        3,971     2,311
                                                               ------    ------
                                                               74,073    41,757
                   L e s s - valuation allowance               56,398    11,200
                                                               ------    ------
                                                               17,675    30,557
                                                               ------    ------
                                                               ------    ------

              2)   Deferred taxes are included in the
                   balance sheets as follows:
                   Current assets                              15,763    30,542
                   Non-current assets                           2,035       225
                   Long-term liabilities                         (123)     (210)
                                                               ------    ------
                                                               17,675    30,557
                                                               ------    ------
                                                               ------    ------
</TABLE>

         3)   As stated in a(1) above, most of the Company's income is tax
              exempt due to the approved enterprise status granted to the
              Company's production facilities. The Company has decided to
              permanently reinvest the amount of the said tax exempt income, and
              not to distribute such income as dividends. Accordingly, no
              deferred income taxes have been provided in respect of the said
              tax exempt income.

Five.    Taxes on income (tax benefit) included in the income statements:

         1)   As follows:

<TABLE>
<CAPTION>

                                                  Year ended December 31
                                               -----------------------------
                                                 1996     1995        1994
                                               -------   -------     -------
                                                     $ in thousands
                                               -----------------------------
<S>                                            <C>       <C>         <C>
               Current:
                Israeli                          3,353    (3,894)     4,865
                Non-Israeli                    (17,935)    3,240     11,618
                                               -------   -------     -------
                                               (14,582)     (654)    16,483
               Deferred, see d. above:
                Israeli                             42    (4,877)       263
                Non-Israeli                     12,840    (7,933)    (5,010)
                                               -------   -------     -------
                                                12,882   (12,810)    (4,747)
                                               -------   -------     -------
                                                (1,700)  (13,464)    11,736
                                               -------   -------     -------
                                               -------   -------     -------
</TABLE>

                                       24

<PAGE>

         2)   Following is a reconciliation of the theoretical tax expense
              (benefit), assuming all income is taxed at the regular tax rate
              applicable to Israeli corporations (see a(4) above) and the actual
              tax expense:

<TABLE>
<CAPTION>
                                                         Year ended December 31
                                                      ------------------------------
                                                        1996       1995        1994
                                                      --------    -------    -------
                                                              $ in thousands
                                                      ------------------------------
<S>                                                   <C>        <C>         <C>
         Income (loss) before taxes on income         (180,133)   (46,852)    79,320
                                                      --------    -------    -------
                                                      --------    -------    -------
         Theoretical tax (tax benefit) on the
             above amount                              (64,848)   (17,335)    30,142
         L e s s - effect of lower tax rate for
             "approved enterprises"                     22,127      9,057     (5,522)
                                                      --------    -------    -------
                                                       (42,721)    (8,278)    24,620
         Increase (decrease) in taxes resulting
             from different tax rates - net             (2,608)      (855)     1,433
         Increase in taxes resulting from
             permanent differences - primarily
             non-deductible amortization and
             other expenses                              3,141      4,808      3,347
         Reversal of prior years' income tax
             provisions                                 (1,600)   (14,748)
         Change in valuation allowance                  45,198      7,129        493
         Decrease in taxes arising from
             differences between non-dollar
             currencies income and dollar
             income - net*                              (3,110)    (1,520)   (18,157)
                                                      --------    -------    -------
         Actual tax expense (benefit)                   (1,700)   (13,464)    11,736
                                                      --------    -------    -------
                                                      --------    -------    -------
         Per share effect of "approved                $  (0.52)  $  (0.21)   $  0.13
             enterprise" benefits                     --------    -------    -------
                                                      --------    -------    -------
</TABLE>

*   Resulting mainly from the difference between the changes in the Israeli CPI
    (the basis for computation of taxable income of the Company and its Israeli
    subsidiaries, see a(2) above) and the changes in the exchange rate of the
    Israeli currency relative to the dollar.

Six.     Income (loss) before taxes on income:
<TABLE>
<CAPTION>
                           Year ended December 31
                       -----------------------------
                         1996        1995      1994
                       --------    -------    ------
                               $ in thousands
                       -----------------------------
<S>                    <C>         <C>        <C>
         Israeli        (83,058)   (33,546)   77,705
         Non-Israeli    (97,075)   (13,306)    1,615
                       --------    -------    ------
                       (180,133)   (46,852)   79,320
                       --------    -------    ------
                       --------    -------    ------
</TABLE>

Seven.   Tax assessments

              The Company has received final tax assessments through the 1990
              tax year.

              The tax returns of the U.S. subsidiaries and the main European
              subsidiary have been audited by the tax authorities through the
              1991 tax year.

                                       25
<PAGE>

NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

One.     General

              The Company operates internationally, which gives rise to
              significant exposure to market risks, mainly from changes in
              foreign exchange rates. Derivative financial instruments
              (hereafter - derivatives) are utilized by the Company to reduce
              these risks. The Company does not hold or issue financial
              instruments for trading purposes.

              The Company is exposed to losses in the event of non-performance
              by counterparties to financial instruments, but it does not expect
              any counterparties to fail to meet their obligations, since the
              counterparties are major Israeli and European banks and major U.S.
              brokers. The Company does not require or place collaterals for
              these financial instruments.

Two.     Foreign exchange risk management

              The Company enters into forward exchange contracts and purchases
              currency options to hedge existing non-dollar assets and
              liabilities as well as certain firm sale and purchase
              commitments.The Company also purchases currency options to hedge
              anticipated sales planned for the coming year, which are expected
              to be denominated in non-dollar currencies. The Company writes
              currency options as part of its hedging policy. The terms of all
              of these currency derivatives are shorter than one year.

              The net premiums paid for currency options are presented in the
              balance sheets among prepaid expenses and charged to financial
              expenses over the terms of the options.

              The amounts relating to foreign currency derivatives are as
              follows:
<TABLE>
<CAPTION>
                                                                      Notional amount
                                                                     -----------------
                                                                        December 31
                                                                     -----------------
                                                                       1996     1995
                                                                     -------   -------
                                                                        $ in millions
                                                                     -----------------
S>                                                                     <C>      <C>
              Forward contracts - for conversion of non-dollar
               currencies into dollars                                  86       149
                                                                     -------   -------
                                                                     -------   -------
              Options purchased                                         -,-       32
                                                                     -------   -------
                                                                     -------   -------
              Options written                                           -,-       36
                                                                     -------   -------
                                                                     -------   -------
</TABLE>

Three.   Concentrations of credit risk

              At December 31, 1996 and 1995, the Company held cash and cash
              equivalents in the total amount of $ 90,050,000 and $ 92,326,000,
              respectively, most of which were deposited with major Israeli,
              European and U.S. banks. Most of the marketable securities held by
              the Company are debt securities of the U.S. Treasury, the
              Government of Israel and highly rated corporations. Therefore, the
              Company does not anticipate any credit losses in respect of these
              items.

                                       26

<PAGE>


              Most of the Company's sales are made in the United States and in
              Europe, to a large number of customers. Consequently, the exposure
              to concentrations of credit risks relating to individual customer
              receivables is limited. The Company performs ongoing credit
              evaluations of its customers and generally does not require
              collateral from its customers in Europe and in the United States.
              In respect of certain sales to customers in emerging economies,
              the Company requires letters of credit.

Four.    Fair value of financial instruments

              The financial instruments of the Company and its subsidiaries
              consist mainly of non-derivative assets: cash and cash
              equivalents, short and long-term investments, current and
              non-current accounts receivable, and non-derivative liabilities:
              short-term bank credit, accounts payable and accrued liabilities
              and long-term liabilities.

              In view of their nature, the fair value of the financial
              instruments included in working capital of the Company is usually
              identical or close to their carrying amount. The fair value of
              non-current receivables and long-term liabilities also
              approximates their carrying value, since they bear interest at
              rates close to the prevailing market rates.

              The fair value and the carrying amount of derivatives at December
              31, 1996 and 1995 was approximately $(1.0) million and $1.2
              million, respectively. The fair value of the derivatives generally
              reflects the estimated amounts that the Company would receive or
              pay upon termination of the contracts at the reporting dates.


NOTE 14 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:

<TABLE>
<CAPTION>

                                    December 31, 1996     December 31, 1995
                                 ---------------------- ----------------------
                                  Assets   Liabilities   Assets    Liabilities
                                 --------  ------------ -------   ------------
                                     $ in thousands        $ in thousands
                                 ---------------------- ----------------------
<S>                               <C>        <C>        <C>          <C>
Israeli currency (a):
 Unlinked                          10,939    15,583       9,749      20,533
                                  -------    ------     -------      ------
                                  -------    ------     -------      ------
 Linked (b)                         1,057                    72
                                  -------               -------
                                  -------               -------
Other non-dollar currencies (c)   116,797    50,566     196,030      50,698
                                  -------    ------     -------      ------
                                  -------    ------     -------      ------

</TABLE>


         (a)  The above does not include balances in Israeli currency linked to
              the dollar.

         (b)  To the Israeli CPI.

         (c)  As to hedging transactions entered into by the Company in order to
              maintain the dollar value of net assets in non-dollar currencies -
              see note 13.

                                       27

<PAGE>

NOTE 15 - SELECTED INCOME STATEMENT DATA:

One.     Revenues:

         1)   Geographic area segment data

                   The following data present revenues and operating income
                   (loss) according to the geographic location in which the
                   revenues and operating income (loss) were generated.

                   Unaffiliated customers are customers outside the Company and
                   its consolidated subsidiaries.

                   Identifiable assets are those assets employed in, or
                   associated with, generating those revenues.

<TABLE>
<CAPTION>
                                                                                              Total
                                  Israel and other  United States  Europe  Eliminations    consolidated
                                  ----------------  -------------  ------  ------------    ------------
                                                           $ In thousands
                                  ---------------------------------------------------------------------
<S>                                  <C>             <C>           <C>       <C>             <C>
Year ended December 31, 1996:
 Revenues from unaffiliated
  customers                          *103,049        **276,662     177,465                    557,176
 Inter-area revenues from
  unaffiliated customers               15,590          122,200          82                    137,872
                                     --------        ---------     -------                   --------
 T o t a l revenues from              118,639          398,862     177,547                    695,048
   unaffiliated customers
 Intercompany revenues
   between geographical areas         115,503           45,808         709   (162,020)
                                     --------        ---------     -------   --------        --------
                                      234,142          444,670     178,256   (162,020)        695,048
                                     --------        ---------     -------   --------        --------
                                     --------        ---------     -------   --------        --------
 Operating income (loss)              (97,531)         (69,167)    (23,214)     5,335        (184,577)
                                     --------        ---------     -------   --------        --------
                                     --------        ---------     -------   --------        --------
Year ended December 31, 1995:
 Revenues from unaffiliated
  customers                          *105,595        **302,564     257,028                    665,187
 Inter-area revenues from
  unaffiliated customers                  627           64,065         408                     65,100
                                     --------        ---------     -------                   --------
 T o t a l revenues from
  unaffiliated customers              106,222          366,629     257,436                    730,287
 Intercompany revenues
  between geographical areas          206,640           57,700         117   (264,457)
                                     --------        ---------     -------   --------        --------
                                      312,862          424,329     257,553   (264,457)        730,287
                                     --------        ---------     -------   --------        --------
                                     --------        ---------     -------   --------        --------
 Operating income (loss)              (61,376)           4,670      (4,347)     6,747         (54,306)
                                     --------        ---------     -------   --------        --------
                                     --------        ---------     -------   --------        --------
Year ended December 31, 1994:
 Revenues from unaffiliated
  customers                           *93,373        **354,010     223,803                    671,186
 Inter-area revenues from
  unaffiliated customers                2,607           30,345                                 32,952
                                     --------        ---------     -------                   --------
 T o t a l revenues from
  unaffiliated customers               95,980          384,355     223,803                    704,138
 Intercompany revenues
  between geographical areas          219,727           28,344         345   (248,416)
                                     --------        ---------     -------   --------        --------
                                      315,707          412,699     224,148   (248,416)        704,138

 Operating income (loss)               54,575           (1,374)      5,209     12,671          71,081
                                     --------        ---------     -------   --------        --------
                                     --------        ---------     -------   --------        --------
</TABLE>

                                       28

<PAGE>

*   Mainly export sales to a 50%-owned joint venture company in Japan
    aggregating $ 56,604,000, $ 57,725,000 and $ 52,665,000 in 1996, 1995 and
    1994.

**  Including sales to a 50%-owned joint venture company in Japan aggregating $
    5,661,000, $ 2,681,000 and $ 1,581,000 in 1996, 1995 and 1994, respectively.

<TABLE>
<CAPTION>
                                      December 31
                                    -----------------
                                     1996      1995
                                    -------   -------
                                     $ in thousands
                                    -----------------
<S>                                 <C>       <C>
         Identifiable assets:
          Israel and other          236,893   230,910
          United States             334,230   457,993
          Europe                    133,611   231,928
                                    -------   -------
                                    704,734   920,831
                                    -------   -------
                                    -------   -------
</TABLE>

<TABLE>
<CAPTION>
                                                       Year ended December 31
                                                     --------------------------
                                                      1996      1995     1994
                                                     -------   -------  -------
                                                           $ in thousands
                                                     --------------------------
<S>                                                  <C>       <C>      <C>
         2)   Revenues by destination:
                   United States                     284,143   302,992  356,467
                   Europe                            238,679   296,269  243,540
                   Japan                             110,211    71,504   60,849
                   Other                              62,015    59,522   43,282
                                                     -------   -------  -------
                                                     695,048   730,287  704,138
                                                     -------   -------  -------
                                                     -------   -------  -------
Two.     Research and development costs - net:
                   Expenses incurred*                 84,344    83,545   82,551
                   L e s s - royalty-bearing
                     participations from the
                   Government of Israel
                     (note 9a(1)(a))                  11,549     9,883    9,293
                                                     -------   -------  -------
                                                      72,795    73,662   73,258
                                                     -------   -------  -------
                                                     -------   -------  -------
                   * Including acquired in-process
                     research and development                             7,766
                                                                        -------
                                                                        -------
Three.   Selling, general and administrative
                   expenses:
                   Selling                           124,182   135,821  141,674
                   General and administrative*       146,380   118,749   72,531
                                                     -------   -------  -------
                                                     270,562   254,570  214,205
                                                     -------   -------  -------
                                                     -------   -------  -------
                   * Including net change in
                     allowance for doubtful
                     accounts and direct
                     write-off of bad debts           70,235    46,800    8,600
                                                     -------   -------  -------
                                                     -------   -------  -------
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>

                                                          Year ended December 31
                                                          ----------------------
                                                          1996     1995    1994
                                                          -----   ------  ------
                                                             $ in thousands
                                                          ----------------------
<S>                                                       <C>     <C>     <C>
Four.    Financial income - net:
              Income:
                   Interest                               6,648   11,074  11,032
                   Realized and unrealized gain on
                    trading marketable securities -
                    net                                     893    3,741     601
                   Non-dollar currency gains and
                    losses - net                          1,071
                                                          -----   ------  ------
                                                          8,612   14,815  11,633
              Expenses:
                   Interest                               1,846    3,079   2,550
                   Bank charges                           1,012      935     948
                   Cost of hedging transactions           1,071      352   2,373
                   Non-dollar currency gains and
                    losses - net                                     520     297
                                                          -----   ------  ------
                                                          3,929    4,886   6,168
                                                          -----   ------  ------
                                                          4,683    9,929   5,465
                                                          -----   ------  ------
                                                          -----   ------  ------
</TABLE>

NOTE 16 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES:

One.     The Company and its subsidiaries have concluded financial transactions
         with related parties, mainly banks, in the ordinary course of business.

Two.     The Company has conducted foreign currency transactions with an
         affiliate of two of its shareholders.

Three.   The Company has purchased certain insurance policies from insurance
         companies which are affiliates of two of the Company's major
         shareholders. The insurance premium paid was $ 2,500,000 in each of the
         years 1996, 1995 and 1994.

Four.    Sales to related parties (not including a 50%-owned joint venture
         company in Japan) in 1996, 1995 and 1994 aggregated $ 1,404,000,
         $ 7,200,000 and $ 2,400,000, respectively.

Five.    The Company had trade receivables from a 50%-owned joint venture
         company in Japan totalling $ 15,659,000 and $ 24,258,000 at December
         31, 1996 and 1995, respectively.

Six.     See also notes 8, 9a(2) and 15a.

                                       30

<PAGE>


NOTE 17 - NOMINAL DATA OF THE COMPANY

         a.   Balance sheet data


<TABLE>
<CAPTION>

                                                            Nominal NIS in thousands
                                                            ------------------------
                                                                  December 31
                                                            ------------------------
                                                               1996         1995
                                                            ---------    ---------
<S>                                                         <C>          <C>
                                  Assets
             Current assets:
              Cash and cash equivalents                        90,336      103,278
              Short-term investments                          122,690      168,462
                                                            ---------    ---------
               T o t a l cash and short-term
                investments                                   213,026      271,740

              Accounts receivable:
               Trade                                           60,688      101,999
               Consolidated Companies                       1,474,683    1,445,783
               Government of Israel                            15,421       42,094
               Other receivables                               28,727       35,022
               Inventories                                    122,832      117,910
               Prepaid expenses                                 2,532        3,038
                                                            ---------    ---------
                                                            1,917,909    2,017,586
             Investment and other non-current assets:
              Investment in consolidated companies            619,455      846,063
              Investment in associated companies and in
               limited partnership                             14,152        6,059
              Other investment                                 47,253       42,988
              Deferred income taxes                               719          706
              Long-term receivables                                             48
                                                            ---------    ---------
                                                              681,579      895,864

             Property, plant and equipment:
              Cost                                            220,952      203,323
              L e s s  - accumulated depreciation and
               amortization                                   144,508      119,448
                                                            ---------    ---------
                                                               76,444       83,875

             Goodwill and other intangible assets, net of
              accumulated amortization                         23,972       30,967
                                                            ---------    ---------
                                                            2,699,904    3,028,292
                                                            ---------    ---------
                                                            ---------    ---------
</TABLE>

                                       31
<PAGE>


<TABLE>
<CAPTION>

                                                            Nominal NIS in thousands
                                                            ------------------------
                                                                  December 31
                                                            ------------------------
                                                               1996         1995
                                                            ---------    ---------
<S>                                                         <C>          <C>
                   Liabilities and shareholders' equity
              Current liabilities:
               Short-term bank credit and current
                maturities of long-term liabilities             2,209        3,389
               Accounts payable and accruals:
                Trade                                          52,748       77,877
                Consolidated companies                        828,142      557,463
                Other                                         230,422      273,017
                                                            ---------    ---------
                                                            1,113,521      911,746
               Capital note                                       410          410
                                                            ---------    ---------
                T o t a l  - commitments                    1,113,931      912,156
              Shareholders' equity                          1,585,973    2,116,136
                                                            ---------    ---------
                                                            2,699,904    3,028,292
                                                            ---------    ---------
                                                            ---------    ---------

</TABLE>

         b.   Statement of operations data:

<TABLE>
<CAPTION>

                                                            Nominal NIS in thousands
                                                            ------------------------
                                                               1996         1995
                                                            ---------    ---------
<S>                                                          <C>         <C>
              Revenues from sales and service                 659,859    1,024,592
              Cost of sales and service                       597,699      645,395
                                                            ---------    ---------
              Gross profit                                     62,160      379,197
              Research and development costs - net            141,488      156,655
                                                            ---------    ---------
                                                              (79,328)     222,542
              Selling, general and administrative
               expenses                                       167,221      304,064
                                                            ---------    ---------
              Operating loss                                 (246,549)     (81,522)
              Financial income - net                           56,941       34,263
              Other expenses -net                             (19,159)      (4,487)
                                                            ---------    ---------
              Loss before taxes on income                    (208,767)     (51,746)
              Taxes on income                                     152      (10,726)
                                                            ---------    ---------
              Loss from operations of
               the company                                   (208,919)     (41,020)
              Share in income (losses) of equity
               investments - net                             (267,432)       9,785
                                                            ---------    ---------
              Net income (loss) - nominal                    (476,351)     (31,235)
                                                            ---------    ---------
                                                            ---------    ---------

</TABLE>

                                       32

<PAGE>


         c.   Changes in shareholders' equity:

<TABLE>
<CAPTION>

                                                              Nominal NIS in thousands
                                                     -----------------------------------------
                                                      Share    Capital   Retained
                                                     capital   surplus   earnings      Total
                                                     -------   -------   ---------   ---------
<S>                                                   <C>      <C>       <C>         <C>
              Balance at January 1, 1995              5,135    640,665   1,561,514   2,207,314
              Changes during 1995:
               Net income (loss)                                           (31,235)    (31,235)
               Employee stock options exercised
                and paid                                  2      7,987                   7,989
               Dividend                                                    (68,110)    (68,110)
               Exchange difference in value of
                dividend declared in 1994                                      178         178
                                                     -------   -------   ---------   ---------
              Balance at December 31, 1995            5,137    648,652   1,462,347   2,116,136

              Changes during 1996:
               Net income (loss)                                          (476,351)   (476,351)
               Dividend                                                    (54,062)    (54,062)
               Exchange differences in value of
                dividend declared in 1995                                      250         250
                                                     -------   -------   ---------   ---------
              Balance at December 31, 1996            5,137    648,652     932,184   1,585,973
                                                     -------   -------   ---------   ---------
                                                     -------   -------   ---------   ---------

</TABLE>


                                 ---------------
                              --------------------
                                 ---------------


                                       33

<PAGE>



         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                  PEC Israel Economic Corporation

                                  By:   s/ JAMES I. EDELSON
                                     --------------------------------
DATE: July 30, 1999                       James I. Edelson
                                     EXECUTIVE VICE PRESIDENT AND
                                             SECRETARY