================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 20-F

[ ]   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR(g) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                                       OR
[x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       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 0-28884

                                   ELTEK LTD.
              (Exact name of Registrant as specified in its charter
               and translation of Registrant's name into English)
                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

   4 DREZNER STREET, SGOOLA INDUSTRIAL ZONE, P.O. BOX 159, PETACH TIKVA 49101,
                                     ISRAEL
                    (Address of principal executive offices)

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:
                       ORDINARY SHARES, NIS 0.6 PAR VALUE
                                (Title of Class)

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

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

         ORDINARY SHARES, PAR VALUE NIS 0.6 .................. 5,491,711
                            (as of December 31, 2004)

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 which financial statement item the registrant has elected
to follow:

                             Item 17 [x] Item 18 [ ]

This Annual Report on Form 20-F is incorporated by reference into our Form S-8
Registration Statements File Nos. 333-12012 and 333-123559.

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<PAGE>

                                  INTRODUCTION

      Eltek Ltd., incorporated in 1970 under the laws of the State of Israel,
develops, manufactures, markets and sells printed circuit boards, or PCBs,
including High Density Interconnect, or HDI, multi-layered and flex-rigid boards
for the telecommunications, defense and aerospace and medical technology
industries. Our principal customers include manufacturers of defense and
aerospace equipment, medical equipment, telecom and networking equipment and
industrial equipment, as well as contract electronic manufacturers. Our ordinary
shares are listed on the NASDAQ SmallCap Market (symbol: ELTK). Our European
manufacturing and marketing subsidiary named Kubatronik Leiterplatten GmbH, or
Kubatronik, is located in Geislingen Germany and is our only active subsidiary.
As used in this annual report, the terms "we," "us" and "our" mean Eltek Ltd.
and its subsidiaries, unless otherwise indicated.

      Except for the historical information contained in this annual report, the
statements contained in this annual report are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, as amended, with respect to our
business, financial condition and results of operations. Such forward-looking
statements reflect our current view with respect to future events and financial
results. We urge you to consider that statements which use the terms
"anticipate," "believe," "do not believe," "expect," "plan," "intend,"
"estimate," "anticipate" and similar expressions are intended to identify
forward-looking statements. We remind readers that forward-looking statements
are merely predictions and therefore inherently subject to uncertainties and
other factors and involve known and unknown risks that could cause the actual
results, performance, levels of activity, or our achievements, or industry
results, to be materially different from any future results, performance, levels
of activity, or our achievements expressed or implied by such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Except as
required by applicable law, including the securities laws of the United States,
we undertake no obligation to publicly release any update or revision to any
forward-looking statements to reflect new information, future events or
circumstances, or otherwise after the date hereof. We have attempted to identify
significant uncertainties and other factors affecting forward-looking statements
in the Risk Factors section that appears in Item 3.D. "Key Information- Risk
Factors"

      Our consolidated financial statements appearing in this annual report are
prepared in New Israeli Shekels, or NIS, and in accordance with generally
accepted accounting principles in Israel, or Israeli GAAP, which vary in certain
significant respects from generally accepted accounting principles in the United
States, or U.S. GAAP, as described in Note 28 to the consolidated financial
statements. All references in this annual report to "dollars" or "$" are to U.S.
dollars and all references in this annual report to "NIS" are to New Israeli
Shekels. Amounts stated in dollars in this report, except where the context
otherwise indicates, have been translated from NIS at a specified rate solely
for convenience and should not be construed as representations that the NIS
amount actually represents such dollar amount or could be converted into dollars
at the rate indicated. The translations of NIS amounts into dollars appearing
throughout this annual report have been made at the representative rate of
exchange on December 31, 2004 of NIS 4.308 = $1.00, as published by the Bank of
Israel. See Item 3.A. "Key Information -- Selected Financial Data -- Exchange
Rate Information".

                                       ii

<PAGE>

      Statements made in this annual report concerning the contents of any
contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms.
If we filed any of these documents as an exhibit to this annual report or to any
registration statement or annual report that we previously filed, you may read
the document itself for a complete description of its terms.

                                     - iii -

<PAGE>

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                         Page No.
                                                                                                         --------
<S>                                                                                                        <C>
PART I ...............................................................................................      1
         ITEM 1.       IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS .........................      1
         ITEM 2.       OFFER STATISTICS AND EXPECTED TIMETABLE .......................................      1
         ITEM 3.       KEY INFORMATION ...............................................................      1
                  A.   SELECTED FINANCIAL DATA .......................................................      1
                  B.   CAPITALIZATION AND INDEBTEDNESS ...............................................      4
                  C.   REASONS FOR THE OFFER AND USE OF PROCEEDS .....................................      4
                  D.   RISK FACTORS ..................................................................      4
         ITEM 4.       INFORMATION ON THE COMPANY ....................................................     16
                  A.   HISTORY AND DEVELOPMENT OF THE COMPANY ........................................     16
                  B.   BUSINESS OVERVIEW .............................................................     17
                  C.   ORGANIZATIONAL STRUCTURE ......................................................     21
                  D.   PROPERTY, PLANTS AND EQUIPMENT ................................................     22
         ITEM 5.       OPERATING AND FINANCIAL REVIEW AND PROSPECTS ..................................     23
                  A.   OPERATING RESULTS .............................................................     26
                  B.   LIQUIDITY AND CAPITAL RESOURCES ...............................................     33
                  C.   RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ................................     37
                  D.   TREND INFORMATION .............................................................     37
                  E.   OFF-BALANCE SHEET ARRANGEMENTS ................................................     38
                  F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS .................................     38
         ITEM 6.       DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ....................................     39
                  A.   DIRECTORS AND SENIOR MANAGEMENT ...............................................     39
                  B.   COMPENSATION ..................................................................     42
                  C.   BOARD PRACTICES ...............................................................     42
                  D.   EMPLOYEES .....................................................................     50
                  E.   SHARE OWNERSHIP ...............................................................     51
         ITEM 7.       MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS .............................     55
                  A.   MAJOR SHAREHOLDERS ............................................................     55
                  B.   RELATED PARTY TRANSACTIONS ....................................................     57
                  C.   INTERESTS OF EXPERTS AND COUNSEL ..............................................     57
         ITEM 8.       FINANCIAL INFORMATION .........................................................     57
                  A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION .......................     57
                  B.   SIGNIFICANT CHANGES ...........................................................     58
         ITEM 9.       THE OFFER AND LISTING .........................................................     58
                  A.   OFFER AND LISTING DETAILS .....................................................     58
                  B.   PLAN OF DISTRIBUTION ..........................................................     59
                  C.   MARKETS .......................................................................     59
                  D.   SELLING SHAREHOLDERS ..........................................................     59
                  E.   DILUTION ......................................................................     60
                  F.   EXPENSE OF THE ISSUE ..........................................................     60
         ITEM 10.      ADDITIONAL INFORMATION ........................................................     60
</TABLE>

                                      - iv -

<PAGE>

<TABLE>
<S>                                                                                                        <C>
                  A.   SHARE CAPITAL .................................................................     60
                  B.   MEMORANDUM AND ARTICLES OF ASSOCIATION ........................................     60
                  C.   MATERIAL CONTRACTS ............................................................     63
                  D.   EXCHANGE CONTROLS .............................................................     63
                  E.   TAXATION ......................................................................     63
                  F.   DIVIDEND AND PAYING AGENTS ....................................................     75
                  G.   STATEMENT BY EXPERTS ..........................................................     75
                  H.   DOCUMENTS ON DISPLAY ..........................................................     76
                  I.   SUBSIDIARY INFORMATION ........................................................     76
         ITEM 11.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS ....................     76
         ITEM 12.      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ........................     77
PART II ..............................................................................................     77
         ITEM 13.      DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ...............................     77
         ITEM 14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS...     77
         ITEM 15.      CONTROLS AND PROCEDURES .......................................................     77
         ITEM 16.      [RESERVED] ....................................................................     78
         ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT ..............................................     78
         ITEM 16B.     CODE OF ETHICS ................................................................     78
         ITEM 16C.     PRINCIPAL ACCOUNTING FEES AND SERVICES ........................................     78
         ITEM 16D.     EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE ....     79
         ITEM 16E.     PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS .....     79
PART III .............................................................................................     79
         ITEM 17.      FINANCIAL STATEMENTS ..........................................................     79
         ITEM 18.      FINANCIAL STATEMENTS ..........................................................     80
         ITEM 19.      EXHIBITS ......................................................................     80
</TABLE>

                                       - v -

<PAGE>

                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

      Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

      Not applicable.

ITEM 3. KEY INFORMATION

A.    SELECTED FINANCIAL DATA

      The following table presents selected consolidated financial data as of
the dates and for each of the periods indicated. You should read the selected
consolidated financial data set forth below together with Item 5. "Operating and
Financial Review and Prospects" as well as our consolidated financial statements
and notes thereto appearing elsewhere in this annual report.

      The selected consolidated financial data as of December 31, 2004 and 2003
and for the three years ended December 31, 2004 have been derived from our
audited consolidated financial statements and notes thereto included elsewhere
in this annual report. The selected consolidated financial data as of December
31, 2002, 2001 and 2000 and for the fiscal year ended December 31, 2001 and the
nine-month period ended December 31, 2000 have been derived from our audited
consolidated financial statements and notes thereto which are not included in
this annual report.

      Our consolidated financial statements have been audited by the firm of
Somekh Chaikin, an independent registered public accounting firm in Israel, a
member firm of KPMG International. Our consolidated financial statements have
been prepared in accordance with Israeli GAAP, which vary in certain significant
respects from U.S. GAAP, as described in Note 28 to the financial statements.

                                        1

<PAGE>

                   STATEMENT OF CONSOLIDATED OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                                                                      CONVENIENCE
                                                                                                                      TRANSLATION
                                                                                                                      INTO DOLLARS
                                                -------------------------------------------------------------------   ------------
                                                NINE MONTHS
                                                   ENDED
                                                  DEC. 31,                           YEAR ENDED DECEMBER 31,
                                                -----------   --------------------------------------------------------------------
                                                  2000(1)         2001          2002          2003          2004          2004
                                                -----------   -----------   -----------   -----------   -----------   ------------
                                                                       (In thousands, except per share data)
                                                ----------------------------------------------------------------------------------
<S>                                             <C>           <C>           <C>           <C>           <C>           <C>
Israeli GAAP:
Revenues ....................................   NIS 107,616   NIS 119,920   NIS 108,035   NIS 108,303   NIS 125,002   $     29,015

Cost of revenues ............................       (78,173)     (101,335)     (106,458)     (102,643)     (109,998)       (25,533)
                                                -----------   -----------   -----------   -----------   -----------   ------------
Gross profit ................................        29,443        18,585         1,577         5,660        15,004          3,482
Research and development income
   (expenses), net ..........................          (356)         (398)         (116)           18            --             --
Selling, general and
   administrative expenses ..................       (12,817)      (14,273)      (15,152)      (14,996)      (18,265)        (4,240)
Amortization of goodwill ....................            --          --            (292)         (584)         (593)          (138)
                                                -----------   -----------   -----------   -----------   -----------   ------------
Operating income (loss) .....................        16,270         3,914       (13,983)       (9,902)       (3,854)          (896)
Financial expenses, net .....................        (1,192)       (1,799)       (1,443)       (2,989)       (2,948)          (684)
                                                -----------   -----------   -----------   -----------   -----------   ------------
Income (loss) before other income
   (expenses), net ..........................        15,078         2,115       (15,426)      (12,891)       (6,802)        (1,580)
Other income (expenses),
   net ......................................            25           718           290           (20)           52             12
                                                -----------   -----------   -----------   -----------   -----------   ------------
Income (loss) before tax benefit
   (expenses) ...............................        15,103         2,833       (15,136)      (12,911)       (6,750)        (1,568)
Tax benefit (expenses) ......................            --            --          (380)         (194)          713            166
                                                -----------   -----------   -----------   -----------   -----------   ------------
Income (loss) after tax benefit (expenses) ..        15,103         2,833       (15,516)      (13,105)       (6,037)        (1,402)
Minority share in subsidiary's net results ..            --            --          (198)          118           182             42
                                                -----------   -----------   -----------   -----------   -----------   ------------
Net income (loss) ...........................   NIS  15,103   NIS   2,833    NIS(15,714)  NIS (12,987)  NIS  (5,855)  $     (1,360)
                                                ===========   ===========   ===========   ===========   ===========   ============
Basic and diluted earnings (loss) per NIS
   1 par value of the share capital(2).......   NIS    5.08   NIS    0.96      NIS(5.36)  NIS   (3.61)  NIS   (1.36)  $      (0.32)
                                                ===========   ===========   ===========   ===========   ===========   ============
Total par value of shares used to compute
   basic and diluted net earnings (loss)
   per NIS 1 par value of share .............         2,980         2,932         2,932         3,569         4,131          4,131
                                                ===========   ===========   ===========   ===========   ===========   ============
U.S. GAAP:

Net income (loss) ...........................   NIS  15,103   NIS   2,833   NIS (15,422)  NIS (12,403)  NIS  (5,376)  $     (1,248)
Basic earnings (loss)
   per share ................................   NIS    3.16   NIS    0.59   NIS   (3.16)  NIS   (2.54)  NIS   (0.98)  $      (0.23)
                                                ===========   ===========   ===========   ===========   ===========   ============
Weighted average number of shares
   used in basic EPS calculation ............         4,778         4,825         4,886         4,886         5,492          5,492
                                                ===========   ===========   ===========   ===========   ===========   ============
Diluted earnings (loss) per share ...........   NIS    3.08   NIS    0.58     NIS (3.16)  NIS   (2.54)  NIS   (0.98)  $      (0.23)
                                                ===========   ===========   ===========   ===========   ===========   ============
Weighted average number of shares
   used in diluted EPS calculation ..........         4,903         4,884         4,886         4,886         5,492          5,492
                                                ===========   ===========   ===========   ===========   ===========   ============
</TABLE>

----------
(1) The company changed its fiscal year beginning in fiscal 2000 to a year
ending on December 31.

(2) Ordinary shares of a par value of NIS 0.6 each

                                        2

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                   CONVENIENCE
                                                                                                                   TRANSLATION
                                                                                                                   INTO DOLLARS
                                             -------------------------------------------------------------------   ------------
                                                                     AS AT DECEMBER 31,
                                             -------------------------------------------------------------------   ------------
                                               2000(1)         2001          2002          2003          2004          2004
                                             -----------   -----------   -----------   -----------   -----------   ------------
<S>                                          <C>           <C>           <C>           <C>           <C>           <C>
CONSOLIDATED BALANCE SHEETS DATA:
Israeli GAAP:
Working capital (deficit) ................   NIS   8,450   NIS   7,712   NIS  (4,521)  NIS (10,059)  NIS (10,786)  $     (2,503)
Total assets .............................        95,376       106,570       105,831        88,624        80,441         18,673
Long-term liabilities excluding
   current maturities ....................        11,709        16,016        21,725        14,632         7,735          1,795
Shareholders' equity .....................        42,692        46,094        30,919        19,397        14,991          3,481

US GAAP:
Total assets .............................   NIS  95,376   NIS 106,570   NIS 106,123   NIS  89,540   NIS  82,039   $     19,043
Shareholders' equity .....................        42,692        46,094        31,211        20,273        16,475          3,824
</TABLE>

----------
(1) The company changed its fiscal year beginning in fiscal 2000 to a year
ending on December 31.

                                        3

<PAGE>

EXCHANGE RATE INFORMATION

      The following tables sets forth, for the periods and dates indicated,
certain information regarding the Bank of Israel representative rate of exchange
for dollars, expressed in NIS per one dollar.

<TABLE>
<CAPTION>
PERIOD                               AVERAGE (1)    HIGH     LOW    PERIOD END
------                               -----------   -----    -----   ----------
<S>                                    <C>          <C>     <C>       <C>
Year ended December 31, 2000 .....     4.069        4.170   4.008     4.041
Year ended December 31, 2001 .....     4.219        4.416   4.067     4.416
Year ended December 31, 2002 .....     4.736        4.994   4.437     4.737
Year ended December 31, 2003 .....     4.512        4.924   4.283     4.379
Year ended December 31, 2004 .....     4.483        4.634   4.308     4.308
</TABLE>

----------
(1) Calculated based on the average of the representative exchange rates on the
last business day of each month during the relevant period.

<TABLE>
<CAPTION>
PERIOD                                         HIGH    LOW
------                                        -----   ------
<S>                                           <C>     <C>
December 2004 .............................   4.374   4.308
January 2005 ..............................   4.414   4.352
February 2005 .............................   4.392   4.357
March 2005 ................................   4.379   4.299
April 2005 ................................   4.395   4.360
May 2005 ..................................   4.416   4.348
</TABLE>

At June 28, 2005, the representative rate of exchange was NIS4.567 = $1.00, as
published by the Bank of Israel.

B.    CAPITALIZATION AND INDEBTEDNESS

      Not applicable.

C.    REASONS FOR THE OFFER AND USE OF PROCEEDS

      Not applicable.

D.    RISK FACTORS

      INVESTING IN OUR ORDINARY SHARES INVOLVES A HIGH DEGREE OF RISK AND
UNCERTAINTY. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE INVESTING IN OUR ORDINARY SHARES. OUR BUSINESS, PROSPECTS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO
ANY OF THE FOLLOWING RISKS. IN THAT CASE, THE VALUE OF OUR ORDINARY SHARES COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

                                        4

<PAGE>

RISKS RELATING TO OUR BUSINESS AND MARKET

WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY NOT BE ABLE TO RETURN TO
PROFITABLE OPERATIONS.

      In the year ended December 31, 2004 we recorded a net loss of NIS 5.9
million ($1.4 million) and at December 31, 2004 our accumulated deficit was NIS
86.5 million ($20.1 million). Although our management has adopted a plan to
improve our profitability, which includes focusing on products with high
margins, expanding our market to non-Israeli customers, mainly in Europe (with
the support of our subsidiary in Germany) and the United States, and
cost-cutting of production expenses, no assurance can be given that we will be
able to return to profitability or maintain profitable operations thereafter.

RAPID CHANGES IN THE ISRAELI AND INTERNATIONAL ELECTRONICS INDUSTRIES AND
RECESSIONARY PRESSURE MAY CONTINUE TO ADVERSELY AFFECT OUR BUSINESS.

      Our principal customers include manufacturers of defense and aerospace
equipment, medical equipment, telecom and networking equipment and industrial
equipment, as well as distributors and contract electronic manufacturers. These
industry segments, as well as the electronics industry as a whole, are subject
to rapid technological changes and products obsolescence. Discontinuance or
modification of products containing PCBs manufactured by us could have a
material adverse effect on us. In addition, the electronics industry,
particularly the defense and aerospace industries and the medical equipment
industries, which accounted for approximately 35% and 23% respectively of our
sales in the fiscal year ended December 31, 2004, is subject to sharp economic
cycles. Recessionary pressures and other events leading to excess production
capacity or a general downturn in the electronics industry, such as cuts in
medical care expenses, as was experienced by us from 2001 until 2003, have
resulted in intensified price competition, reduced margins and a decrease in
unit volume. As a result, our financial condition and results of operations had
been adversely affected. There can be no assurance that a weakness in the
Israeli and International electronic markets will not adversely affect our
operating results and financial condition.

BECAUSE COMPETITION IN THE PCB MARKET IS INTENSE, OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.

      The global PCB industry is highly fragmented and is intensely competitive.
It is characterized by rapidly changing technology, frequent new product
introductions and rapidly changing customer requirements. In the Israeli market
we mainly compete with PCB Technologies Ltd., Melta Ltd. and several smaller
local PCB manufacturers, as well as with major international PCB exporters,
mainly from the United States, Europe and Asia. Such exporters include Ruwel
Werke GmbH, HannStar Board Corp., Vertex Precision Electronics Inc., Nan-Ya PCB
Corp., Unitech Printed Circuit Corp., Tyco Printed Circuit Group, Dynamic
Details Inc. (prior to the dissolution of its British plant in 2005), Oriental
Printed Circuits Ltd. and Dae Duck Electronics Comp. Ltd. In the European market
we mainly compete with Ruwel Werke GmbH, Advanced Circuit Boards NV and Dynamic
Details Inc. (prior to the dissolution of its British plant in 2005). In the
United States market we mainly compete with Tyco Printed Circuit Group. Most of
these competitors have significantly greater financial, technical and marketing
resources than us. From the second quarter of fiscal 2001 through the 2003
fiscal year, we experienced increased price competition mainly in the rigid PCB
segment, particularly from our local competitors and to a lesser extent from
U.S., European and Asian based PCB manufacturers, due to the continued recession
in the Israeli and international electronics industry, which had resulted in
reduced demand for our products. During the last years PCB manufacturers in the
Far-East (mainly in China) have made significant investments in their PCB
production capacity, mainly for rigid PCBs. As a result of this increased
production capacity, together with the recession in the international
electronics industry from 2001 through 2003, many PCB manufacturers in Europe
and the United States ceased their production activities and our current
competition in the rigid PCB segment is mainly from PCB manufacturers based in
the Far-East, that have substantially lower production costs than us. Continued
competitive pressures could cause us to lose market share. During 2002 and 2003,
we suffered from a significant price erosion that had had a material adverse
affect on our operating results. There can be no assurance that we will be able
to compete successfully against current or future competitors or that
competition will not have a material adverse effect on our future revenues and,
consequently, on our business, operating results and financial condition.

                                        5

<PAGE>

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY.

      Our quarterly results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future. Our future operating results
will depend on many factors, including (but not limited to) the following:

      o     the size and timing of significant orders and their fulfillment;

      o     demand for the products produced by our customers;

      o     competition with our products;

      o     plant utilization;

      o     changes in currency fluctuation of the NIS against the U.S. dollar
            and the Euro;

      o     yields in the manufacturing process;

      o     timing of expenditures based on projections of future sales;

      o     availability of raw materials;

      o     the length of our sales cycles;

      o     changes in our strategy; and

      o     changes in seasonal trends and general domestic and international
            economic and political conditions.

      Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and it is likely that our future operating results will
be adversely affected by these or other factors.

                                        6

<PAGE>

      Quarterly sales and operating results are also difficult to forecast
because quarterly sales and operating results are dependent, almost exclusively,
on the volume and timing of orders during the quarter and our customers
generally operate with a short delivery cycle and expect delivery of a
significant portion of our production within twenty working days. The delivery
of such orders is subject to the number of available working days during the
quarter, which can fluctuate significantly from quarter to quarter due to
holidays and vacations. Certain prototype and pre-production runs require even
shorter turn around times stemming from customers' product launches and design
changes. In addition, there are often sudden increases, decreases or
cancellations of orders for which there are commitments, which further
characterize the electronics industry and the companies that operate in it. The
industry practice is to make such changes without forfeiture, except for the
time and materials expended on the order.

      Our business involves highly complex manufacturing processes that are
subject to periodic failure. Process failures have occurred in the past and have
resulted in delays in product shipments. There is no assurance that process
failures will not occur in the future. Further, our expenses are, in significant
part, relatively fixed in the short-term. If revenue levels fall below
expectations, our net income is likely to be disproportionately adversely
affected because a proportionately smaller amount of the expenses varies with
our revenues. There can be no assurance that we will be able to be profitable on
a quarterly or annual basis in the future. An ongoing pattern of cancellations,
reductions in orders and delays could have a material adverse effect on our
results of operations. Due to all of the foregoing, we cannot predict revenues
for any future quarter with any significant degree of accuracy. Accordingly, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Although we have experienced revenue growth in the third and fourth
quarters of 2004, we may not be able to generate increased revenues in the
future.

WE MAY ENCOUNTER DIFFICULTY IN REALIZING THE POTENTIAL FINANCIAL OR STRATEGIC
BENEFITS OF FUTURE BUSINESS ACQUISITIONS AND INVESTMENTS.

      We believe that the acquisition of and the investment in new subsidiaries
could assist us in reaching our goals of focusing on the high end of the PCB
market, and in expanding our exports mainly into Europe and the United States.
Any acquisition or investment would present risks commonly encountered in the
acquisition of or investment in other businesses. The following are examples of
such risks, one or more of which may apply to any such acquisition or
investment:

      o     difficulty in combining the technology, operations or work force of
            the acquired business;

      o     adverse effects on our reported operating results under Israeli GAAP
            due to the amortization of goodwill associated with acquisitions;

      o     diversion of management attention from running our existing
            business; and

      o     increased expenses, including compensation expenses resulting from
            newly-hired employees.

                                        7

<PAGE>

OUR RESULTS MAY BE ADVERSELY AFFECTED BY PRODUCT LIABILITY CLAIMS.

      The sale and support of our products may entail the risk of product
liability claims, which are likely to be substantial in light of the use of our
products in business-critical applications. In the past we were involved in a
costly litigation relating to allegedly defective products. If such suits are
brought against us in the future, our business, results of operations and
financial condition may be adversely affected.

TECHNOLOGICAL CHANGE MAY ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR PRODUCTS.

      Technological change in the PCB industry is rapid and continual. To
satisfy customers' needs for increasingly complex products, PCB manufacturers
must continue to develop improved manufacturing processes, provide innovative
solutions and invest in new facilities and equipment. To the extent we determine
that new technologies and equipment are required to remain competitive, the
acquisition and implementation of such technologies and equipment are likely to
require significant capital investment. There is no assurance that this capital
will be available to us in the future for the acquisition or implementation of
new technologies and equipment or that any new manufacturing processes developed
by us will become or remain commercially viable. As a result, there can be no
assurance we will be able to maintain our current technological position.
Furthermore, the PCB industry may in the future encounter competition from new
technologies that may reduce demand for PCBs or may render existing technology
less competitive or obsolete. There can be no assurance our future process
development efforts will be successful or that the emergence of new
technologies, industry standards or customer requirements will not render our
technology, equipment or processes obsolete or uncompetitive.

WE DEPEND ON OUR KEY CUSTOMERS AND THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS
WOULD RESULT IN A LOSS OF SIGNIFICANT AMOUNT OF OUR REVENUES.

      Our top ten customers accounted for 40.5% and 46% of our revenues in the
fiscal years ended December 31, 2003 and December 31, 2004, respectively. During
the fiscal year ended December 31, 2004, our principal customer accounted for
12.3% of our total revenues. We expect that a significant portion of our future
revenues will continue to be dependent on a small number of customers. There can
be no assurance that our principal customers will continue to purchase products
from us at current levels or that if we are unable to retain such customers we
would be able to attract sufficient new business to compensate for their loss.

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO
US.

      Our working capital requirements and cash flow provided by our operating
and financing activities are likely to vary greatly from quarter to quarter,
depending on the following factors:

      o     the timing of orders and deliveries;

      o     the purchase of new equipment;

                                        8

<PAGE>

      o     the build-up of inventories;

      o     the payment terms offered to our customers;

      o     the payment terms offered by our suppliers; and

      o     approval of the current or additional lines of credit and long-term
            loans from our banks.

      As of March 31, 2005, we had revolving lines of credit aggregating NIS
12.9 million ($3.0 million) with our banks, of which NIS 11.6 million ($2.7
million) will be available to us until at least March 31, 2006, subject to
certain conditions. The entire amount of our line of credit was outstanding as
of March 31, 2005. As of March 31, 2005, we also had NIS 11.2 million ($2.6
million) of long-term loans. We cannot assure you that these credit facilities
will remain available to us in the future. Furthermore, under certain
circumstances our banks may require us to accelerate the repayment of our credit
facilities. All of our assets are pledged as security for our liabilities to our
banks, whose consents are required for any future pledge of such assets.
Financial covenants in respect of our credit facilities and long-term loans
require us to maintain the higher of shareholders' equity of NIS 20.0 million
($4.6 million) or 20% of our total assets according to the loan from Israel
Discount Bank Ltd., or Discount Bank, and to maintain the higher of
shareholders' equity of NIS 17.0 million ($3.9 million) or 20% of our total
assets, according to the loan from Bank Leumi LeIsrael Ltd., or Leumi Bank. For
these purposes, shareholders' equity includes our outstanding convertible note
and excludes prepaid expenses. As of December 31, 2003, we were in compliance
with such covenants. However, on March 31, 2004, we were in breach of such
covenants and therefore negotiated with our banks and were granted a temporary
waiver, reducing our covenants to the higher of shareholders' equity of NIS 12
million ($2.8 million) or 15% of our total assets until the release of our
December 31, 2004 earnings (i.e. between March - June 2005). The waiver of Leumi
Bank was subject to the repayment by us of NIS 1.5 million ($348,000) over a 15
month period (from October 1, 2004 to December 31, 2005). In March 2005, the
banks agreed to extend the temporary covenants. Leumi Bank agreed to extend the
temporary covenants until the release of our June 30, 2005 earnings, following
which and until the release of our December 31, 2005 earnings (i.e. between
March - June 2006), Leumi Bank agreed to set the shareholders' equity threshold
to not less than NIS 16 million ($3.7 million). In accordance with the Discount
Bank extension of the temporary covenants, we are required to maintain the
higher of shareholders' equity of NIS 13 million ($3 million) or 15% of our
total assets until the release of our December 31, 2005 earnings. Upon the
release of our December 31, 2005 earnings, we are required to comply with our
original covenant terms. As of December 31, 2004 and March 31, 2005, we were in
compliance with the terms of such temporary covenants. Our management has
programs and projects in place in order to continue to meet these terms. We
cannot assure you that we will be able to maintain compliance with such
covenants in the future.

      To the extent that the funds generated from our operations and from our
existing capital resources are insufficient to fund our operating and financial
requirements, we may be required to raise additional funds through public or
private financing or other sources. There can be no assurance that such
additional financing will be available or that, if available, it will be
obtained on terms favorable to us. Any equity or debt financings, if available
at all, may cause dilution to our then-existing shareholders. If additional
funds are raised through the issuance of equity securities, the net tangible
book value per share of our ordinary shares may decrease and the percentage
ownership of then current shareholders may be diluted. We do not have any
committed sources of additional financing, and there can be no assurance that
additional financing, if necessary, will be available on commercially reasonable
terms, if at all. If adequate funds are not available on terms acceptable to us,
we may be required to delay, scale back or eliminate certain aspects of our
operations and our business, financial condition and results of operations would
be materially and adversely affected.

                                        9

<PAGE>

OUR OPERATING MARGINS MIGHT BE AFFECTED AS A RESULT OF PRICE CHANGES OF OUR
PRINCIPAL RAW MATERIALS.

      Our suppliers decreased their prices in 2002, 2003 and 2004 for the
principal raw materials, laminates and photo-chemical films that we use in the
manufacture of PCBs. However, such decreases were partially offset by the
devaluation of the NIS primarily against the dollar and the Euro. Based on the
current trends of the raw materials market, we expect that our suppliers will
increase their prices in 2005. Although to date our operating margins have not
been significantly affected by such price changes and NIS devaluation, we cannot
assure you that future price changes in raw materials will not materially affect
our profitability.

WE MAY ENCOUNTER DIFFICULTIES WITH OUR INTERNATIONAL OPERATIONS AND SALES THAT
MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR SALES AND PROFITABILITY.

      We are based in Israel and Germany and generate a large percentage of our
sales in Europe. Our sales in Europe in the fiscal year ended December 31, 2004
accounted for 38.4% of our revenues, of which 42% was generated in Germany. Our
sales in Europe in the fiscal years ended December 31, 2003 and December 31,
2002 accounted for 28.5% and 19.9% of our revenues, respectively. In June 2002,
we entered into an agreement to acquire 76% of Kubatronik, a privately held
German PCB manufacturer. Although we intend to continue to expand our
international operations and commit significant management time and financial
resources to developing direct and indirect international sales and support
channels, we cannot be certain that we will be able to maintain or increase
international market demand for our products. To the extent that we cannot do so
in a timely manner, our business, operating results and financial condition may
be adversely affected.

      International operations are subject to inherent risks, including the
following:

      o     the impact of possible recessionary environments in multiple foreign
            markets;

      o     unexpected changes in regulatory requirements and complying with a
            wide variety of foreign laws;

      o     tariffs and other trade barriers;

      o     difficulties and costs of staffing and managing foreign operations;
            and

      o     political and economic instability.

                                       10

<PAGE>

      However, such factors have not had a material adverse effect on our
business, results of operations or financial condition to date. If for any
reason exchange or price controls or other restrictions on the conversion of
foreign currencies were imposed, our business could be adversely affected.

      We may be adversely affected by fluctuations in currency exchange rates
because our revenues and expenses are incurred in various currencies, primarily
the NIS, U.S. dollar and the Euro. In the fiscal year ended December 31, 2001,
we engaged in currency hedging transactions, hedging the Euro against the U.S.
dollar and the NIS, in an attempt to reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations. We did not engage
in currency hedging transactions in 2002, 2003 and 2004, but have engaged a
consulting company to advise us with regard to currency hedging measures. There
can be no assurance that we will enter into any hedging transactions in the
future or that such transactions, if entered into, will materially reduce the
effect of fluctuations in foreign currency exchange rates on our results of
operations. In addition, if for any reason exchange or price controls or other
restrictions on the conversion of foreign currencies into NIS were imposed, our
business could be adversely affected. Although exposure to currency fluctuations
to date has not had a material adverse effect on our business, there can be no
assurance such fluctuations in the future will not have a material adverse
effect on revenues from sales and, consequently our business, operating results
and financial condition.

IF WE ARE FOUND TO BE IN VIOLATION OF ENVIRONMENTAL LAWS, WE COULD BE LIABLE FOR
DAMAGES AND COSTS OF REMEDIAL ACTIONS, WHICH MAY AFFECT OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION.

      We use certain materials in our manufacturing processes that are
classified as hazardous substances. Proper waste disposal and environmental
regulations are major considerations for PCB manufacturers because metals and
chemicals classified as hazardous substances are used in the manufacturing
process. We believe we are substantially in compliance with all material
environmental laws and regulations. Since May 2003, our environmental management
system has been ISO 14001 certified. This certification was based on successful
implementation of environmental management requirements and includes ongoing
monitoring of our processes, raw materials and products. The certification is
subject to periodic compliance audits conducted by the Israeli Institute of
Standards. If, in the future, we are found to be in violation of environmental
laws, we could be liable for damages and costs of remedial actions and could
also be subject to revocation of permits necessary to conduct our business or
any part thereof. Any such revocation could require us to cease production,
which could have a material adverse effect on our financial condition and
results of operations. We are also subject to laws relating to the storage, use
and disposal of hazardous materials, as well as air quality regulations.
Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with a violation.
For example, environmental regulations enacted in Israel in September 2000,
provide that a company that is found to have discharged water containing
contaminates will be liable for quadruple the amount normally charged for its
water consumption. Moreover, according to the same regulations, manufacturing
plants are required to reduce the quantity of the wastewater discharged by them
by 90% within four years. To be exempted from such legislation, a plant will
have to show the Israeli Ministry of the Environment that a partial or complete
decrease in the quantity of wastewater is not feasible. Since 1996 we have
undertaken various actions to reduce the use of water in our manufacturing
facilities. We believe that we have materially complied with the September 2000
regulations, but no assurance can be given that such compliance will be
sufficient.

                                       11

<PAGE>

COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.

      Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities
and Exchange Commission regulations and NASDAQ Stock Market rules, are creating
uncertainty for companies such as ours. We are committed to maintaining high
standards of corporate governance and public disclosure. As a result, we have
invested and intend to further invest such resources as are reasonably necessary
to comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities, which
could harm our operating results and business prospects.

RISK FACTORS RELATED TO OUR ORDINARY SHARES

OUR SHARE PRICE HAS BEEN VOLATILE IN THE PAST AND MAY CONTINUE TO BE SUSCEPTIBLE
TO SIGNIFICANT MARKET PRICE AND VOLUME FLUCTUATIONS IN THE FUTURE.

      Our ordinary shares have experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some of
which are beyond our control:

      o     quarterly variations in our operating results;

      o     operating results that vary from the expectations of securities
            analysts and investors;

      o     changes in expectations as to our future financial performance,
            including financial estimates by securities analysts and investors;

      o     announcements of technological innovations or new products by us or
            our competitors;

      o     announcements by us or our competitors of significant contracts,
            acquisitions, strategic partnerships, joint ventures or capital
            commitments;

      o     changes in the status of our intellectual property rights;

      o     announcements by third parties of significant claims or proceedings
            against us;

      o     additions or departures of key personnel;

      o     future sales of our ordinary shares; and

      o     stock market price and volume fluctuations.

                                       12

<PAGE>

      Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations or political events or hostilities in or surrounding Israel, could
adversely affect the market price of our ordinary shares.

WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET IF WE FAIL TO MEET ITS
MAINTENANCE REQUIREMENTS.

      We must comply with certain NASDAQ SmallCap Market maintenance
requirements in order to maintain the listing of our ordinary shares on the
NASDAQ SmallCap Market. Currently we comply with all of the requirements but we
cannot assure you that we will be able to fulfill the maintenance requirements
in the future. Should we fail to fulfill such requirements, our ordinary shares
will be delisted from the NASDAQ SmallCap Market and transferred to the NASDAQ
Bulletin Board.

WE DO NOT INTEND TO PAY DIVIDENDS.

      We have never declared or paid any cash dividends on our ordinary shares.
We currently intend to retain any future earnings to finance operations and
expand our business and, therefore, do not expect to pay any dividends in the
foreseeable future.

RISKS RELATING TO OUR OPERATIONS IN ISRAEL

CONDUCTING BUSINESS IN ISRAEL ENTAILS SPECIAL RISKS.

      We are incorporated under the laws of the State of Israel, and our offices
and our production facilities are located in, the State of Israel. Accordingly,
we are directly influenced by the political, economic and military conditions
affecting Israel. Specifically, we could be adversely affected by any major
hostilities involving Israel, a full or partial mobilization of the reserve
forces of the Israeli army, the interruption or curtailment of trade between
Israel and its present trading partners, or a significant downturn in the
economic or financial condition of Israel.

      Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has been
a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or any future armed conflict, political instability or
violence in the region may have a negative effect on our business condition,
harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries that restrict business with Israel
or Israeli companies. Restrictive laws or policies of those countries directed
towards Israel or Israeli businesses had, and may in the future continue to
have, an adverse impact on our operations, our financial results or the
expansion of our business. No predictions can be made as to whether or when a
final resolution of the area's problems will be achieved or the nature thereof
and to what extent the situation will impact Israel's economic development or
our operations.

                                       13

<PAGE>

POLITICAL TRADE RELATIONS COULD LIMIT OUR ABILITY TO SELL OR BUY
INTERNATIONALLY.

      We could be adversely affected by the interruption or reduction of trade
between Israel and its trading partners. Some countries, companies and
organizations continue to participate in a boycott of Israeli firms and others
doing business with Israel or with Israeli companies. To date, these measures
have not had a material adverse affect on our business. However, there can be no
assurance that restrictive laws, policies or practices towards Israel or Israeli
businesses will not have an adverse impact on our business.

OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATION OF OUR
PERSONNEL TO PERFORM MILITARY SERVICE.

      Many of our directors, officers and employees in Israel are obligated to
perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or
war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a
significant period of one or more of our executive officers or key employees or
a significant number of other employees due to military service. Any disruption
in our operations could adversely affect our business.

THE ECONOMIC CONDITIONS IN ISRAEL HAVE NOT BEEN STABLE IN RECENT YEARS.

      In recent years, Israel has gone through a period of recession in economic
activity, resulting in low growth rates and growing unemployment. Despite
positive trends in the Israeli economy in 2004, our operations in the local
market, primarily in the rigid PCB segment, have continued to be adversely
affected by the economic conditions in Israel and could be further affected if
the economic conditions in Israel deteriorate. In addition, due to significant
economic measures proposed by the Israeli Government, there have been several
general strikes and work stoppages in 2003 and 2004, affecting all banks,
airports and ports. These strikes have had an adverse effect on the Israeli
economy and on our business, including our ability to deliver products to our
customers and to import raw materials.

OUR RESULTS OF OPERATIONS MAY BE HARMED IF THE RATE OF INFLATION IN ISRAEL
EXCEEDS THE RATE OF DEVALUATION OF THE NIS AGAINST THE U.S. DOLLAR AND THE EURO.

     In the fiscal years ended December 31, 2003 and 2004 approximately 48% and
51%, respectively, of our expenses were in U.S. dollars, Euros, dollar-linked
NIS or Euro-linked NIS and virtually most of the remaining expenses were in
non-linked NIS. Our expenses, which are denominated in U.S. dollars and Euros or
paid in Israeli currency linked to the dollar-NIS exchange rate and the Euro-NIS
exchange rate, are influenced by the extent to which any inflation in Israel is
not offset (or is offset on a lagging basis) by the devaluation of the NIS in
relation to the dollar and the Euro. We believe that the rate of inflation in
Israel has not had a material adverse effect on our business to date. However,
our dollar and Euro costs in Israel will increase if inflation in Israel exceeds
the devaluation of the NIS against the dollar and the Euro, or if the timing of
such devaluation lags behind inflation in Israel. Over time, the NIS has been
devalued against foreign currencies, generally reflecting inflation rate
differentials. Likewise, our operations could be adversely affected if we are
unable to guard against currency fluctuations in the future.

                                       14

<PAGE>

SERVICE AND ENFORCEMENT OF LEGAL PROCESS ON US AND OUR DIRECTORS AND OFFICERS
MAY BE DIFFICULT TO OBTAIN.

      Service of process upon our directors and officers and the Israeli experts
named herein, all of whom reside outside the United States, may be difficult to
obtain within the United States. Furthermore, since substantially all of our
assets, all of our directors and officers and the Israeli experts named in this
annual report are located outside the United States, any judgment obtained in
the United States against us or these individuals or entities may not be
collectible within the United States.

      There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE DIFFICULT AN ACQUISITION OF
US, WHICH COULD PREVENT A CHANGE OF CONTROL AND THEREFORE DEPRESS THE PRICE OF
OUR SHARES.

      Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control
of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because
of these provisions of Israeli law.

THE RIGHTS AND RESPONSIBILITIES OF OUR SHAREHOLDERS ARE GOVERNED BY ISRAELI LAW
AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS
UNDER U.S. LAW.

      We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our memorandum of association,
articles of association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, each shareholder of an Israeli company
has a duty to act in good faith in exercising his or her rights and fulfilling
his or her obligations toward the company and other shareholders and to refrain
from abusing his power in the company, including, among other things, in voting
at the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable in shareholder votes on, among other things,
amendments to a company's articles of association, increases in a company's
authorized share capital, mergers and interested party transactions requiring
shareholder approval. In addition, a controlling shareholder of an Israeli
company or a shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote or who has the power to appoint or prevent the
appointment of a director or officer in the company has a duty of fairness
toward the company. However, Israeli law does not define the substance of this
duty of fairness. Because Israeli corporate law has undergone extensive revision
in recent years, there is little case law available to assist in understanding
the implications of these provisions that govern shareholder behavior.

                                       15

<PAGE>

ITEM 4. INFORMATION ON THE COMPANY

A.    HISTORY AND DEVELOPMENT OF THE COMPANY

      We were incorporated under the laws of the State of Israel on January 1,
1970. We are a public limited liability company under the Israeli Companies Law
5759-1999 and operate under this law and associated legislation. Our registered
offices and principal place of business are located at 4 Drezner Street, Sgoola
Industrial Zone, Petach Tikva 49101, Israel, and our telephone number is
972-3-939-5025. Our address on the Internet is www.eltekglobal.com. The
information on our website is not incorporated by reference into this annual
report.

      We manufacture and supply technologically advanced circuitry solutions for
use in sophisticated and compact electronic products. We provide specialized
services and are a solution provider in the PCB business, mainly in Israel and
in Europe. PCBs are platforms that conduct an electric current among active and
passive microelectronics components, microprocessors, memories, resistors and
capacitors and are integral parts of the products produced by high-technology
industries. Our focus is on short run quick-turnaround, prototype,
pre-production and low to medium volume runs of high-end PCB products for high
growth, advanced electronics applications.

      We design and develop innovative manufacturing solutions pursuant to
complex interconnect requirements of original equipment manufacturers, and
provide our customers with a wide range of custom designed PCBs, including
complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry
(flex and flex-rigid boards) made of glass epoxy and high-performance
substrates. To complement our quick-turnaround, prototype, pre-production and
low to medium volume production capability and provide our customers with single
source service, we also act as an agent for the importation of PCBs from the Far
East when customers require high volume production runs.

      In July 2000, we adopted a plan for the investment of approximately $7.0
million over a two-year period for the purchase of equipment and facilities in
order to create the capacity and capability to offer our customers the new
state-of-the-art PCB technology known as high density interconnect, or HDI. This
technology enables manufacturers to produce PCBs with line width and spaces as
narrow as 2-3 mils and hole diameters of 3 to 6 mils. As part of this
investment, we have purchased and leased several key machines, including a laser
drilling system for microvia holes, a laser direct imaging system for
transferring conductor images as narrow as 2 mils, upgraded our plating lines
for enhanced capacity and capability, and acquired a vacuum press, flying probe
electrical testers, an automated optical inspection system, an exposure system,
a laser plotter and an horizontal line for black oxide substitution using the
Alpha Prep process. We began to supply PCBs utilizing the HDI technology to
select customers in August 2000. We completed this investment plan in 2002.

                                       16

<PAGE>

      In 2004, we continued to focus on the sale of flex-rigid, high density
interconnect, or HDI, and special different base materials PCBs. Such products
accounted for approximately $17.3 million or 61% of our total sales in the
fiscal year ended December 31, 2004 as compared to approximately $12.9 million
or 52% of our total sales in the fiscal year ended December 31, 2003.

      In June 2002, we acquired 76% of Kubatronik, a privately held German PCB
manufacturer, for approximately 2.6 million Euros. The remaining 24% of
Kubatronik is held by Mr. Alois Kubat, its founder. Kubatronik specializes in
manufacturing short run and prototype boards, including multi-layer, flex-rigid
and HDI boards. Its customers include companies engaged in the production of
industrial equipment, defense and aerospace equipment, telecom and networking
equipment and computer and data storage equipment as well as contract electronic
manufacturers. This acquisition facilitated our entry into the German market,
while complementing our existing relationships throughout the rest of Europe. We
believe that this acquisition will continue to provide us additional sales and
marketing channels. In July 2003 we appointed a new General Manager for
Kubatronik and in October 2003, Mr. Kubat retired from Kubatronik (see Item 5B,
"Operating and Financial Review and Prospects - Liquidity and Capital
Resources").

B.    BUSINESS OVERVIEW

INDUSTRY OVERVIEW

      PCBs are constructed from a variety of raw materials. PCBs can be
double-sided or multi-layered and made of rigid, flexible or flex-rigid
materials. In essence, they are platforms that conduct electric current among
active and passive microelectronics components, microprocessors, memories,
resistors and capacitors. Photographic type processes transfer the images of the
electrical circuit onto the layers, and chemical processes etch these lines on
the boards. There are several broad categories of PCBs:

      o   RIGID PCBs. Rigid PCBs are the core product of the industry and can
be found in virtually every electronics device. The layer count of these
products generally ranges from one to thirty-two layers.

      o   FLEXIBLE AND FLEX-RIGID PCBs. Flexible boards are thin,
light-weight circuits used to interconnect other circuit boards and electronic
devices within electronic equipment. Flex-rigid boards are composed of rigid
parts and flexible layers. They generally range from two to thirty layers.
Flex-rigid boards provide solutions for electronic systems that impose space and
shape restrictions and for systems in which reliability of connectivity is
crucial. These products are often found in military applications (primarily
avionics), medical and measurement equipment and the automotive industry, among
other uses.

      o   BACKPLANES. Backplanes are large, high-density circuit
boards with design features such as tight tolerance finished hole sizes that
require precise process controls. These products are commonly known as
"motherboards" on which connectors are mounted to receive and interconnect other
PCBs and can be found primarily in telecommunications applications.

      PCB manufacturers can generally be classified based on two parameters,
product sophistication and service sophistication. Product sophistication is
evident in the capability of a PCB manufacturer to offer products with higher
layer counts and more complex construction, as well as in the line width and the
spacing of lines on the circuit boards. The new state-of-the-art HDI technology
enables manufacturers to produce PCBs with line width and spaces as narrow as
2-3 mils and hole diameters of 3 to 6 mils.

                                       17

<PAGE>

MANUFACTURING AND ENGINEERING PROCESSES

      In the PCB industry, significant investments in equipment are necessary to
maintain technological competitiveness. During the five years ended December 31,
2004, we invested approximately $11.8 million for these purposes (not including
the investments of Kubatronik).

      MANUFACTURING CAPABILITIES. We have the capability to manufacture PCBs
with layer counts in excess of 30 layers, blind and buried vias and designs
using materials as thin as 0.002 inches. We established our HDI advanced
capabilities after a two-year period of research and development, followed by a
significant investment in HDI production capacity. As of August 31, 2000, we
began to supply HDI products to selected customers. We are able to produce short
runs of five to thirty PCBs within three to five working days, a few hundred
units within ten working days and are capable of producing such number of boards
within five working days when production line scheduling permits. In the fiscal
year ended December 31, 2004, approximately 43% of our manufactured products
were ordered for delivery in less than 20 working days, of which approximately
9% were ordered for delivery within six to ten working days and approximately 4%
in less than five working days. The recent trend of short time delivery orders
as compared to past years is a result of the continued change in our product
mix, from rigid PCBs to flex-rigid, high density interconnect and special
different base material PCBs, which involve a more complex and timely production
process.

      COMPUTER AIDED DESIGN/COMPUTER AIDED MANUFACTURING. We utilize a
state-of-the-art computer aided design system of Frontline Ltd., an Israeli
based company jointly owned by Orbotech Ltd. and Valor Ltd., and can receive
computer aided design data by electronic data transmission. Our computer aided
design workstations perform design rule checks on transmitted designs,
incorporate any customer-specific design modifications and perform
manufacturability enhancements that increase PCB quality.

      ADVANCED FINISHING CAPABILITIES FOR DENSE PACKAGING DESIGNS. We provide a
wide assortment of alternative surface finishes, including hot air solder
leveling, electroless gold over nickel, tin immersion, silver immersion and
Entek, which is produced by Enthone-Omi Inc., for the attachment of components
to PCBs.

      OTHER ADVANCED PROCESS CAPABILITIES. We provide fabrication of dense
multi-layer PCBs. We use advanced inner-layer production line pressing, drilling
equipment and clean room environments to produce technologically advanced
products.

      QUALITY STANDARDS. Our quality management system has been ISO 9001:2000
certified since July 2002 (and prior to such date, was ISO 9002 certified since
January 1995). This certification is based on successful implementation of
quality assurance requirements and includes ongoing monitoring of our business
and periodic compliance audits conducted by the Israeli Institute of Standards.
We have obtained United States Department of Defense Qualified Product List, or
QPL, approval (MIL-PRF-55110F and MIL-P-50884D) for our products. Since 1976 our
Glass Epoxy (FR4) Boards have had UL approval.

                                       18

<PAGE>

SALES, CUSTOMERS AND MARKETING

      SALES. In the fiscal year ended December 31, 2002, December 31, 2003 and
December 31, 2004, the primary industries for which we produced PCBs were
defense and aerospace equipment (42%, 41% and 35% of production, respectively),
medical equipment (20%, 10% and 23% of production respectively), telecom and
networking equipment (20%, 24% and 18% of production, respectively) and
industrial equipment (9%, 13% and 16% of production, respectively) as well as
for contract electronic manufacturers (6%, 6% and 3% of production,
respectively).

      CUSTOMERS. During the fiscal year ended December 31, 2004, we provided
PCBs to approximately 210 customers in Israel and approximately 290 customers
outside of Israel (including Kubatronik's customers). Our customers outside of
Israel are located primarily in Germany and the Scandinavian countries and our
principal customer is located in France. Sales to non-Israeli customers
increased from $6.1 million (24.2% of revenues) in the fiscal year ended
December 31, 2002 to $8.3 million (33% of revenues) in the fiscal year ended
December 31, 2003 to $13.3 million (45.7% of revenues) in the fiscal year ended
December 31, 2004.

      In the fiscal years ended December 31, 2002, 2003 and 2004, our principal
customer accounted for 8.5%, 9.1% and 12.3% of our sales, respectively. Our ten
largest customers accounted for 46%, 40.5% and 46% of our sales in the fiscal
years ended December 31, 2002, 2003 and 2004, respectively. We expect that a
significant portion of our future revenues will continue to be dependent on a
small number of customers.

      MARKETING. We market and sell our products primarily through our direct
sales staff located in Israel, which currently consists of six sales personnel.
The marketing of our products in Europe is generally performed by Kubatronik and
our sales agent in Sweden. We recently initiated marketing efforts in order to
expand our market share to other European countries such as France, Spain and
Italy. In 2004, we continued our marketing efforts in the United States in order
to increase the demand for our flex rigid and HDI PCBs. We currently market our
products in the United States through a sales manger who is supported by six
regional representatives. Since 2001, we market our products in India through a
local sales agent, mainly to government bodies. We also maintain an internal
sales and customer service support system that works with our outside sales
personnel to initiate, promote and maintain our relationships with customers.

      Our strategy is to focus on the high end of the PCB market, mainly in
flex-rigid PCBs, in which margins are significantly better. We also initiated a
program to upgrade our processes by implementing high-quality standards,
employee training and special training activities for clients. We are continuing
to expand our export marketing efforts in Europe, mainly in Germany as well as
in the United States. Marketing efforts include the distribution of promotional
items, seminars for engineers, technical information supplied to business
publications and participation in trade shows and industry conferences.

                                       19

<PAGE>

MATERIALS AND SUPPLIES

      The materials used in the manufacture of PCBs are primarily laminates
(copper clad, with an isolating core separating them), prepregs, photo-chemical
films, chemicals and inks. Most of the materials we use are manufactured in
Europe. Some of the materials are purchased directly from the manufacturer,
while others are purchased from local distributors.

      Although we use a select group of suppliers, the materials used to
manufacture PCBs generally are readily available from multiple suppliers. After
an increase in prices in 2001, our suppliers decreased their prices in 2002,
2003 and 2004 for the principal raw materials we use in the manufacture of PCBs.
However, in certain periods such decrease was partially offset by the
devaluation of the NIS primarily against the U.S. dollar and the Euro. Based on
the current trends of the raw materials market, we expect that our suppliers
will increase their prices in 2005. Although to date our profitability has not
been significantly affected by such price changes and NIS devaluation, we cannot
assure you that future price changes in raw materials will not materially affect
our profitability.

COMPETITION

      The global PCB industry is highly fragmented and intensely competitive,
trends that we believe will continue. In the Israeli market we mainly compete
with PCB Technologies Ltd., Melta Ltd. and several smaller local PCB
manufacturers, as well as with major PCB exporters from the United States,
Europe and Asia. Such exporters include Ruwel Werke GmbH (Germany), HannStar
Board Corp. (Taiwan), Vertex Precision Electronics Inc. (Taiwan), Nan-Ya PCB
Corp. (Taiwan), Unitech Printed Circuit Corp. (Taiwan), Tyco Printed Circuit
Group (United States), Dynamic Details Inc. (United Kingdom) (prior to the
dissolution of its British plant in 2005), Oriental Printed Circuits Ltd. (Hong
Kong) and Dae Duck Electronics Comp. Ltd. (South Korea). In the European market
we mainly compete with Ruwel Werke GmbH (Germany), Advanced Circuit Boards NV
(Belgium) and Dynamic Details Inc. (United Kingdom) (prior to the dissolution of
its British plant in 2005). In the United States market we mainly compete with
Tyco Printed Circuit Group (United States). We compete principally in the market
for complex, rigid multi-layer PCBs. Although capital requirements are a
significant barrier to entry for manufacturing complex PCBs, the basic
interconnect technology is generally not protected by patents or copyrights.
From the second quarter of the 2001 fiscal year through the 2003 fiscal year, we
experienced increased price competition mainly in the rigid PCB segment,
particularly from our local competitors and to a lesser extent from U.S.,
European and Asian based PCB manufacturers, due to continued recession in the
Israeli and international electronics industry, which had resulted in reduced
demand for our products. During the last years, PCB manufacturers in the
Far-East (mainly in China) have made significant investments in their PCB
production capacity, mainly for rigid PCBs. As a result of this increased
production capacity, together with the recession in the international
electronics industry from 2001 through 2003, many PCB manufacturers in Europe
and the United States ceased their production activities and our current
competition in the rigid PCB segment is mainly from PCB manufacturers based in
the Far-East, that have substantially lower production costs than us. Price
competition as well as increased PCB production capacity in the Far-East,
negatively affected our revenues in the two years ended December 31, 2003.
Competitive pressures could cause us to lose market share. From 2002 through
2003 we suffered from price erosion, primarily in the rigid PCB segment, that
had a material adverse affect on our operating results in the two years ended
December 31, 2003.

                                       20

<PAGE>

ENVIRONMENTAL MATTERS

      Since May 2003, our environmental management system has been ISO 14001
certified. This certification was based on successful implementation of
environmental management requirements and includes ongoing monitoring of our
processes, raw materials and products. The certification is subject to periodic
compliance audits conducted by the Israeli Institute of Standards.

      PCB manufacturing requires the use of metals and chemicals classified as
hazardous substances. Water used in the manufacturing process must be treated to
remove metal particles and other contaminates before it can be discharged into
the local sewer systems. Environmental regulations enacted in Israel in
September 2000 provide that a company, which is found discharging water
containing contaminates, will be liable to pay quadruple the amount normally
charged for its water consumption. We operate and maintain effluent water
treatment systems and use approved testing procedures at our manufacturing
facilities. We believe the waste treatment systems at our facilities are
substantially in compliance with all material applicable environmental laws and
regulations. There is no assurance, however, that violations will not occur in
the future. We are also subject to environmental laws and regulations relating
to the storage, use and disposal of chemicals, solid waste and other hazardous
materials, as well as air quality regulations. Environmental laws and
regulations could become more stringent over time, and the costs of compliance
with more stringent laws could be substantial. According to the September 2000
regulations, manufacturing plants are required to reduce the quantity of the
wastewater discharged by them by 90% within four years. To be exempted from such
legislation, an owner of a plant would have to show the Israeli Ministry of the
Environment that a partial or complete decrease in the quantity of wastewater is
not feasible. Since 1996, we have undertaken various actions to reduce the use
of water in our manufacturing facilities. We believe that we have materially
complied with the September 2000 regulations, but no assurance can be given that
such compliance will be sufficient.

INTELLECTUAL PROPERTY RIGHTS

      Our success depends in part on our proprietary techniques and
manufacturing expertise, particularly in the area of complex multi-layer and
flex-rigid PCBs. Like many companies in the PCB segment of the electronics
industry, we do not hold any patents and rely principally on trade secret
protection of our intellectual property. We believe that, because of the rapid
pace of technological change in the electronics industry, the legal protections
for our products are less significant factors in our success than the knowledge,
ability and experience of our employees, the frequency of product enhancements
and the timeliness and quality of support services that we provide.

C.    ORGANIZATIONAL STRUCTURE

      In June 1999, we established Eltek Europe Ltd., as a wholly owned
subsidiary incorporated in the United Kingdom, to manage our marketing
activities in Europe. Since July 31, 2002, Eltek Europe Ltd. is inactive and the
marketing activities in Europe are currently managed from Israel and Germany.

                                       21

<PAGE>

      In May 2002, we established En-Eltek Netherlands 2002 B.V., a wholly owned
subsidiary incorporated in the Netherlands, in connection with our acquisition
of a 76% interest in Kubatronik. Kubatronik is a PCB manufacturer that
specializes in short run and prototype boards, including multi-layer, flex-rigid
and HDI boards. Its customers include companies engaged in the production of
industrial equipment, defense and aerospace equipment, telecom and networking
equipment and computer and data storage equipment as well as contract electronic
manufacturers. Mr. Alois Kubat, Kubatronik's founder, holds the remaining 24%
interest in such company. See Item 5B. "Operating and Financial Review and
Prospects -Liquidity and Capital Resources."

D.    PROPERTY, PLANTS AND EQUIPMENT

LEASED FACILITIES

      Our executive offices, as well as our design, production, storage and
shipping facilities, aggregating approximately 90,000 square feet, are located
in an industrial building in the Sgoola Industrial Zone of Petach Tikva, Israel.
The lease for our facilities expires in December 31, 2011. A lease for an
adjoining 10,000 square feet parking area expires on December 31, 2006. In the
fiscal year ended December 31, 2004, we paid NIS 2.3 million ($535,000) in rent
for these premises.

      Kubatronik's executive offices as well as its design, production, storage
and shipping facilities, aggregating approximately 15,000 square feet, are
located in an industrial building in Geislingen, Germany. The lease for their
facilities expires in June 30, 2008. A lease for an adjoining 8,000 square feet
parking area expires on December 31, 2010. In the fiscal year ended December 31,
2004, Kubatronik paid NIS 482,000 ($112,000) in rent for these premises.

LEASED EQUIPMENT

      We lease manufacturing equipment from Orbotech Ltd. under two operating
lease agreements, pursuant to which as of December 31, 2004 we are obligated to
pay a total amount of NIS 6.1 million ($1.4 million), through February 2010. Our
monthly lease expense under these two agreements is approximately NIS 120,000
($28,000), linked to the U.S. dollar.

      We lease additional manufacturing equipment under two operating lease
agreements, pursuant to which as of December 31, 2004 we are obligated to pay a
total amount of NIS 1.5 million ($354,000), through March 2007. Our monthly
lease expense under these two agreements is approximately NIS 76,000 ($18,000),
linked to the Swiss Franc in one agreement and the Euro in the other.

      Kubatronik leases manufacturing equipment under two operating lease
agreements, pursuant to which as of December 31, 2004 Kubatronik is obligated to
pay a total amount of 105,000 Euros ($143,000), through January 2008. Our
monthly lease expense under these two agreements is approximately 5,300 Euros
($7,200).

                                       22

<PAGE>

INVESTMENT IN EQUIPMENT AND INFRASTRUCTURE

      In 2003, we invested NIS 3.8 million ($881,000) in capital expenditures.
Almost all of our capital expenditures were allocated to the purchase of
production and manufacturing equipment (mainly for Kubatronik) in the amount of
NIS 3.0 million ($693,000) and leasehold improvements in the amount of NIS
607,000 ($141,000).

      In 2004, we invested NIS 1.5 million ($341,000) in capital expenditures.
Almost all of our capital expenditures were allocated to the purchase of
production and manufacturing equipment (mainly for our company) in the amount of
NIS 1.1 million ($250,000) and leasehold improvements in the amount of NIS
306,000 ($71,000).

      In 2005, we intend to invest approximately NIS 4.3 million ($1 million) in
capital expenditures, most of which we intent to allocate to the purchase of
production and manufacturing equipment (mainly for our company).

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

      The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto included elsewhere in
this annual report. The following discussion contains forward-looking
statements.

CRITICAL ACCOUNTING POLICIES

      We have identified the policies below as critical to the understanding of
our financial statements. The application of these policies requires management
to make estimates and assumptions that affect the valuation of assets and
expenses during the reporting period. There can be no assurance that actual
results will not differ from these estimates.

      The significant accounting policies described in Note 2 of our
consolidated financial statements, which we believe to be most important to
fully understand and evaluate our financial condition and results of operation
under generally accepted accounting principles, are discussed below.

      Our financial statements have been prepared in accordance with Israeli
GAAP, which vary in certain significant respects from U.S. GAAP, as described in
Note 28 to the financial statements.

      INVENTORIES

      Inventories are recorded at the lower of cost or market value. The cost of
raw materials is determined on a moving average basis. The cost of work-in
process and completed products is determined on a direct production cost, plus
allocated indirect expenses, all of which are on an average basis. If actual
market conditions are less favorable than those projected by us or if there is
no future demand for part or all of our inventories, we will need to write-off
the affected inventories. This could result in an increase of our operating
expenses. At December 31, 2004, our inventories amounted to NIS 13.6 million
($3.2 million).

                                       23

<PAGE>

      IMPAIRMENT IN VALUE OF ASSETS

      Since January 1, 2003, we have applied the Israel Accounting Standards
Board, or IASB, Accounting Standard No. 15, "Impairment in Value of Assets", to
ensure that our assets in the consolidated balance sheet are not stated at an
amount exceeding their recoverable value, which is the higher of the net sales
price and the usage value, which is the present value of the estimated future
cash flows expected to derive from the use and realization of the asset. This
standard which is based on International Accounting Standard No. 36, applies to
all of our assets in the consolidated balance sheet, except for tax assets and
monetary assets. Likewise this Standards prescribes the presentation and
disclosure principles for assets that have declined in value. When the carrying
value of an asset in the consolidated balance sheet exceeds its recoverable
amount, we recognize an impairment loss equal to the difference between the book
value of the asset and its recoverable value. A loss in recognized in this
manner will be reversed only if changes have occurred in the estimates used in
determining the recoverable value of the asset, from the date on which the last
impairment loss was recognized.

      PROPERTY AND EQUIPMENT

     Assets are recorded at cost. Depreciation on property and equipment is
calculated on the straight-line method over the estimated useful lives of the
assets. Annual rates of depreciation range from 3% to 33% per year. Under
Israeli GAAP, in accordance with Standard No. 15, certain procedures must be
applied in order ensure that our property and equipment in our consolidated
balance sheet are not presented at an amount which is in excess of our
recoverable value, which is the higher of the net selling price or the present
value of the estimated future cash flows expected to be derived from use and
disposal of our property and equipment. If in the future the carrying value of
our property and equipment do not meet the requirements of Standard No. 15, we
may be required to accelerate the depreciation or write-off part of our property
and equipment. This could result in an increase of our operating expenses. At
December 31, 2004, our property and equipment amounted to NIS 31.6 million ($7.3
million).

      GOODWILL

     Our goodwill as of December 31, 2004 is the surplus of our investment in
Kubatronik over the acquired part of its net assets. Under Israeli GAAP,
goodwill is amortized periodically on a straight-line basis over ten years.
Under U.S. GAAP, goodwill is no longer amortized but evaluated for impairment in
accordance with SFAS No. 142. If our future revenues, operating expenses or
other assumptions made in order to determine fair value of goodwill are less
favorable than our estimates, we may be required to accelerate the amortization
or write-off the goodwill associated with the Kubatronik acquisition. At
December 31, 2004, such goodwill amounted to NIS 4.7 million ($1.1 million).

RECENT ACCOUNTING PRONOUNCEMENTS

      RECENT ACCOUNTING PRONOUNCEMENTS IN ISRAEL

      In July 2004, the IASB published Accounting Standard No. 19, "Taxes on
Income." The Standard provides that a liability for deferred taxes is to be
recorded for all temporary differences subject to tax, except for a limited
number of exceptions. In addition, a deferred tax asset is to be recorded for
all temporary differences that may be deducted, losses for tax purposes and tax
benefits not yet utilized, if it is anticipated that there will be taxable
income against which they can be offset, except for a limited number of
exceptions. The new Standard applies to financial statements for periods
beginning on January 1, 2005. The Standard provides that it is to be implemented
by means of a cumulative effect of a change in accounting method. We believe
that the impact of the Standard on our results of operations, financial position
and cash flows will not be material.

                                       24

<PAGE>

      RECENT ACCOUNTING PRONOUNCEMENTS IN THE UNITED STATES

      On December 16, 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 123 (revised 2004), "Share-Based Payment", or SFAS 123(R), which
is a revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to
the approach described in SFAS 123. However, SFAS 123 permitted, but did not
require, share-based payments to employees to be recognized based on their fair
values while SFAS 123(R) requires all share-based payments to employees to be
recognized based on their fair values. SFAS 123(R) also revises, clarifies and
expands guidance in several areas, including measuring fair value, classifying
an award as equity or as a liability and attributing compensation cost to
reporting periods. The new standard will be effective for us commencing January
1, 2006.

      SFAS 123(R) permits companies to adopt its requirements using one of the
following two methods:

      1.    The "modified prospective" method, in which compensation cost is
            recognized commencing with the effective date (i) based on the
            requirements of SFAS 123(R) for all share-based payments granted
            after the effective date and (ii) based on the requirements of SFAS
            123 for all awards granted to employees prior to the effective date
            of SFAS 123(R) that remain unvested at the effective date.

      2.    The "modified retrospective" method, which includes the requirements
            of the modified prospective method described above, but also permits
            entities to restate based on the amounts previously recognized under
            SFAS 123, for purposes of pro forma disclosures either (i) all prior
            periods presented or (ii) the prior interim period of the year of
            adoption.

      As permitted by SFAS 123, we currently account for share-based payments to
employees using APB 25, the intrinsic value method, and, as such, recognize no
compensation cost for employee stock options. Accordingly, the adoption of the
SFAS 123(R) fair value method will have significant impact on our results of
operations, although it will have no impact on our overall financial position.
The impact of the adoption of SFAS 123(R) cannot be predicted at this time, as
it depends on levels of share-based payments for future grant.

      In June 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections", or SFAS 154. SFAS 154
replaces APB Opinion No. 20, "Accounting Changes" and SFAS 3, "Reporting
Accounting Changes in Interim Financial Statements." SFAS 154 requires that a
voluntary change in an accounting principle be applied retrospectively with all
prior period financial statements presented in accordance with the new
accounting principle. SFAS 154 also requires that a change in method of
depreciating or amortizing a long-lived non-financial asset be accounted for
prospectively as a change in estimate, and correction of errors in previously
issued financial statements should be termed a "restatement". SFAS 154 is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005. The implementation of SFAS 154 is not
expected to have a material impact on our consolidated financial statements.

                                       25

<PAGE>

A.    OPERATING RESULTS

      The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of our total revenues:

<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED DECEMBER 31,
                                               -------------------------------
                                                 2002       2003        2004
                                               -------    --------   ---------
<S>                                            <C>        <C>        <C>
Revenues ...................................     100.0%      100.0%     100.0%
Cost of revenues ...........................     (98.5)      (94.8)     (88.0)
                                               -------    --------   --------
Gross profit ...............................       1.5         5.2       12.0
Research and development costs,  net .......      (0.1)          *         --
Selling, general and administrative
  expenses .................................     (14.0)      (13.8)     (14.6)
Amortization of goodwill ...................      (0.3)       (0.5)      (0.5)
                                               -------    --------   --------
Operating loss .............................     (12.9)       (9.1)      (3.1)
Financial expenses, net ....................      (1.4)       (2.8)      (2.3)
Other income (expenses), net ...............       0.3           *          *
                                               -------    --------   --------
Loss before tax benefit (expenses) .........     (14.0)      (11.9)      (5.4)
Tax benefit (expenses) .....................      (0.4)       (0.2)       0.6
                                               -------    --------   --------
Loss after tax benefit (expenses) ..........     (14.4)      (12.1)      (4.8)
Minority share in subsidiary's net results..      (0.2)        0.1        0.1
                                               -------    --------   --------
Net loss ...................................     (14.6)      (12.0)      (4.7)
                                               =======    ========   ========
</TABLE>

* Less than 0.1%

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

      REVENUES. Revenues increased by 15.4% to NIS 125 million ($29.0 million)
in the fiscal year ended December 31, 2004 from NIS 108.3 million ($25.1
million) in the fiscal year ended December 31, 2003. The increase in revenues
primarily reflects the growth of our sales in Europe, which increase was
partially offset by a decrease in our sales to local customers. We believe that
our revenues will increase slightly in 2005.

      COST OF REVENUES. Cost of revenues increased by 7.2% to NIS 110.0 million
($25.5 million) in the fiscal year ended December 31, 2004 from NIS 102.6
million ($23.8 million) in the fiscal year ended December 31, 2003. The decrease
in cost of revenues as a percentage of revenues primarily reflects the
implementation of our strategic plan to concentrate our efforts in the high-end
PCB market that provides higher margins and our cost-cutting measures. We
believe that our cost of revenues as a percentage of revenues will decrease
slightly in 2005.

                                       26

<PAGE>

      GROSS PROFIT. Gross profit increased by 265% to NIS 15.0 million ($3.5
million) in the fiscal year ended December 31, 2004 from NIS 5.7 million ($1.3
million) in the fiscal year ended December 31, 2003. The increase in gross
profits as a percentage of revenues primarily reflects increased margins as a
result of the concentration of our efforts in the high-end PCB market, mainly
flex-rigid PCBs. We believe that our gross profit as a percentage of revenues
will increase slightly in 2005.

      RESEARCH AND DEVELOPMENT INCOME, NET. We generally do not engage in
research and developments efforts. During the years 1999 to 2001, we were a
member of a consortium of companies operating in the electronic equipment
industry that engaged in research and development under the supervision of the
Office of the Chief Scientist of the Ministry of Industry and Trade of the State
of Israel, or the Chief Scientist. The consortium ended its activities as of
July 31, 2001. In 2003, after the consortium was discontinued, a surplus amount
of money was distributed among its members. We received NIS 18,000 ($4,000) from
the distribution that was recorded as income in 2003. We did not record research
and development income or expense in 2004.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 21.8% to NIS 18.3 million ($4.2 million) in
the fiscal year ended December 31, 2004 from NIS 15.0 million ($3.5 million) in
the fiscal year ended December 31, 2003. The increase primarily reflects growth
in payroll and related benefits expenses and costs of professional services.

      AMORTIZATION OF GOODWILL. Amortization of goodwill was NIS 593,000
($138,000) in the fiscal year ended December 31, 2004 and NIS 584,000 ($136,000)
in the fiscal year ended December 31, 2003. Goodwill reflects the goodwill
arising from our acquisition of Kubatronik.

      OPERATING LOSS. As a result of the foregoing, we had an operating loss of
NIS 3.9 million ($896,000) in the fiscal year ended December 31, 2004 compared
to an operating loss of NIS 9.9 million ($2.3 million) in fiscal year ended
December 31, 2003.

      FINANCIAL EXPENSES, NET. Financial expenses, net were NIS 2.9 million
($684,000) in the fiscal year ended December 31, 2004 and NIS 3.0 million
($694,000) in the fiscal year ended December 31, 2003. Financial expenses, net
in the fiscal year ended December 31, 2004 were primarily attributable to
short-term credit and bank charges, expenses on long-term loans and exchange
rate expenses net.

      OTHER INCOME (EXPENSES), NET. We had other income, net of NIS 52,000
($12,000) in the fiscal year ended December 31, 2004 as compared to other
expenses, net of NIS 20,000 ($5,000) in the fiscal year ended December 31, 2003.
Other income, net in the fiscal year ended December 31, 2004 was attributable to
gain on disposals of fixed assets, net, which was partially offset by legal
expenses that were not in the ordinary course of business.

      TAXES BENEFIT (EXPENSES). We recorded a tax benefit of NIS 713,000
($166,000) in the fiscal year ended December 31, 2004 from a deferred tax asset
due to carry-forward losses of Kubatronik that we expect to realize in the
foreseeable future. In the fiscal year ended December 31, 2003, Kubatronik
recorded taxes on income of NIS 194,000 ($45,000).

                                       27

<PAGE>

      MINORITY SHARE IN SUBSIDIARY'S NET RESULTS. Minority share in subsidiary's
net results reflects the minority's interest of NIS 182,000 ($42,000) in
Kubatronik's net loss in the fiscal year ended December 31, 2004 as compared to
the minority interest of NIS 118,000 ($27,000) in Kubatronik's net loss in the
fiscal year ended December 31, 2003.

      NET LOSS. As a result of the foregoing, we incurred a net loss of NIS 5.9
million ($1.4 million) in the fiscal year ended December 31, 2004 as compared to
a net loss of NIS 13.0 million ($3.0 million) in the fiscal year ended December
31, 2003

FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
2002

      REVENUES. Revenues slightly increased to NIS 108.3 million ($25.1 million)
in the fiscal year ended December 31, 2003 from NIS 108 million ($25.1 million)
in the fiscal year ended December 31, 2002. The increase in revenues primarily
reflects the inclusion of 12 months of Kubatronik's revenues in 2003 compared to
approximately seven months in 2002. The increase was offset by the decrease in
local market revenues.

      COST OF REVENUES. Cost of revenues decreased by 3.6% to NIS 102.6 million
($23.8 million) in the fiscal year ended December 31, 2003 from NIS 106.5
million ($24.7 million) in the fiscal year ended December 31, 2002. The decrease
in cost of revenues as a percentage of revenues primarily reflects the reduction
in raw material usage, reduced payroll expenses and the influence of the high
margins obtained by Kubatronik.

      GROSS PROFIT. Gross profit increased by 259% to NIS 5.7 million ($1.3
million) in the fiscal year ended December 31, 2003 from NIS 1.6 million
($366,000) in the fiscal year ended December 31, 2002. The increase in gross
profits as a percentage of revenues primarily reflects the cost-cutting actions
that were undertaken to improve our profitability and the increased contribution
by Kubatronik.

      RESEARCH AND DEVELOPMENT INCOME (EXPENSES), NET. We generally do not
engage in research and developments efforts. During the years 1999 to 2001, we
were a member of a consortium of companies operating in the electronic equipment
industry that engaged in research and development under the supervision of the
Office of the Chief Scientist of the Ministry of Industry and Trade of the State
of Israel, or the Chief Scientist. The consortium ended its activities as of
July 31, 2001. Unapproved reimbursements from the Chief Scientist relating to
our research and development expenses arising from our participation in the
consortium were debited in 2001 in the amount of NIS 116,000 ($27,000) and were
included in our research development expenses in 2002. In 2003, after the
consortium had been discontinued, a surplus amount of money was distributed
among its members. We received NIS 18,000 ($4,000) from the distribution that
was recorded as income in 2003.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by 1.0% to NIS 15.0 million ($3.5 million) in
the fiscal year ended December 31, 2003 from NIS 15.2 million ($3.5 million) in
the fiscal year ended December 31, 2002. The decrease reflects the cost-cutting
actions that were undertaken to improve our profitability. The decrease was
partially offset by the inclusion of a full year of Kubatronik's expenses in
2003 compared to approximately seven months in 2002.

                                       28

<PAGE>

      AMORTIZATION OF GOODWILL. Amortization of goodwill increased by 100% to
NIS 584,000 million ($136,000) in the fiscal year ended December 31, 2003 from
NIS 292,000 ($68,000) in the fiscal year ended December 31, 2002. The increase
reflects 12 months of goodwill amortization in the year ended December 31, 2003
as compared to approximately seven months in the year ended December 31, 2002.

      OPERATING LOSS. As a result of the foregoing, we had an operating loss of
NIS 9.9 million ($2.3 million) in fiscal year ended December 31, 2003 compared
to an operating loss of NIS 14.0 million ($3.2 million) in fiscal year ended
December 31, 2002.

      FINANCIAL EXPENSES, NET. Financial expenses, net increased to NIS 3.0
million ($694,000) in the fiscal year ended December 31, 2003 from NIS 1.4
million ($335,000) in the fiscal year ended December 31, 2002. The increase
primarily reflects the impact of the deflation in Israel during the fiscal year
ended December 31, 2003 as compared to the 6.5% rate of inflation in the fiscal
year ended December 31, 2002.

      OTHER INCOME (EXPENSES), NET. We had other expenses, net of NIS 20,000
($5,000) in the fiscal year ended December 31, 2003 as compared to other income
net of NIS 290,000 ($67,000) in the fiscal year ended December 31, 2002. Other
expenses, net in the fiscal year ended December 31, 2003 were attributable to a
provision that we recorded in respect to customer indemnification and customs
charges. This amount was partially offset by gain on disposals of fixed assets.

      TAX EXPENSES. We recorded taxes on income of NIS 194,000 ($45,000) in the
fiscal year ended December 31, 2003 as compared to NIS 380,000 ($88,000) in the
fiscal year ended December 31, 2002. The decrease primarily reflects the net
loss of Kubatronik in the fiscal year ended December 31, 2003, as a result of
which Kubatronik recorded a tax benefit in 2003 of NIS 159,000 ($37,000) that
was partially offset by taxes incurred by En-Eltek Netherlands 2002 B.V. in 2003
on dividends distributed by Kubatronik in 2002.

      MINORITY SHARE IN SUBSIDIARY'S NET RESULTS. Minority share in subsidiary's
net results reflects the minority's interest of NIS 118,000 ($27,000) in
Kubatronik's net loss in the fiscal year ended December 31, 2003 as compared to
the minority interest of NIS 198,000 ($46,000) in Kubatronik's net income for
the period beginning on the date of acquisition and ended December 31, 2002.

      NET LOSS. As a result of the foregoing, we incurred a net loss of NIS 13.0
million ($3.0 million) in the fiscal year ended December 31, 2003 as compared to
a net loss of NIS 15.7 million ($3.6 million) in the fiscal year ended December
31, 2002.

QUARTERLY RESULTS OF OPERATIONS

      The following table sets forth certain unaudited quarterly financial
information in NIS and expressed as a percentage of revenues for each of our
last eight quarters. The data has been prepared on a basis consistent with our
audited consolidated financial statements included elsewhere in this annual
report, consisting only of normal recurring accruals, that we consider necessary
for a fair presentation. The operating results for any quarter are not
necessarily indicative of results for any future periods.

                                       29

<PAGE>

<TABLE>
<CAPTION>
                                                                            QUARTER ENDED (UNAUDITED)
                                                ------------------------------------------------------------------------------------
                                                                  2003                                        2004
                                                ----------------------------------------    ----------------------------------------
                                                MAR. 31    JUN. 30    SEP. 30   DEC. 31    MAR. 31    JUN. 30    SEP. 30    DEC. 31
                                                -------    -------    -------   -------    -------    -------    -------    -------
                                                                                 (NIS IN THOUSANDS)
                                                ------------------------------------------------------------------------------------
<S>                                             <C>        <C>       <C>        <C>        <C>        <C>        <C>        <C>
ISRAELI GAAP:
Revenues ....................................    28,076     25,496    27,085     27,646     30,314     27,102     32,569     35,017
Cost of revenues ............................   (26,882)   (24,367)  (25,076)   (26,318)   (26,845)   (26,135)   (28,780)   (28,238)
                                                -------    -------   -------    -------    -------    -------    -------    -------
Gross profit ................................     1,194      1,129     2,009      1,328      3,469        967      3,789      6,779
Research and development income, net ........        18          -         -          -          -          -          -          -
Selling, general and administrative
   expenses .................................    (4,088)    (3,519)   (3,814)    (3,575)    (4,629)    (4,547)    (4,043)    (5,046)
Amortization of goodwill ....................      (127)      (127)     (153)      (177)      (147)      (147)      (147)      (152)
                                                -------    -------   -------    -------    -------    -------    -------    -------
Operating income (loss) .....................    (3,003)    (2,517)   (1,958)    (2,424)    (1,307)    (3,727)      (401)     1,581
Financial income (expenses), net ............      (473)        28    (1,429)    (1,115)    (1,152)      (664)      (674)      (458)
Other income (expenses), net ................         5         24       134       (183)       (17)       (12)        68         13
                                                -------    -------   -------    -------    -------    -------    -------    -------
Income (loss) before tax benefit
   (expenses)................................    (3,471)    (2,465)   (3,253)    (3,722)    (2,476)    (4,403)    (1,007)     1,136
Tax benefit (expenses) ......................      (126)       (58)       83        (93)       (55)        55          -        713
                                                -------    -------   -------    -------    -------    -------    -------    -------
Income (loss) after tax benefit (expenses)...    (3,597)    (2,523)   (3,170)    (3,815)    (2,531)    (4,348)    (1,007)     1,849
Minority share in subsidiary's net results...       (46)       (22)       31        155        (31)        69         74         70
                                                -------    -------   -------    -------    -------    -------    -------    -------
Net income (loss) ...........................    (3,643)    (2,545)   (3,139)    (3,660)    (2,562)    (4,279)      (933)     1,919
                                                =======    =======   =======    =======    =======    =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                             QUARTER ENDED (UNAUDITED)
                                                 -----------------------------------------------------------------------------------
                                                                   2003                                        2004
                                                 ----------------------------------------    ---------------------------------------
                                                                        (AS A PERCENTAGE OF TOTAL REVENUES)
                                                 -----------------------------------------------------------------------------------
                                                 MAR. 31   JUN. 30    SEP. 30    DEC. 31   MAR. 31    JUN. 30    SEP. 30    DEC. 31
                                                 -------   -------    -------    -------   -------    -------    -------    -------
<S>                                              <C>       <C>        <C>        <C>       <C>        <C>        <C>        <C>
ISRAELI GAAP:
Revenues .....................................     100.0%    100.0%     100.0%     100.0%      100%       100%       100%       100%
Cost of revenues .............................     (95.7)    (95.6)     (92.6)     (95.2)    (88.6)     (96.4)     (88.4)     (80.6)
                                                 -------   -------    -------    -------   -------    -------    -------    -------
Gross profit .................................       4.3       4.4        7.4        4.8      11.4        3.6       11.6       19.4
Research and development income, net .........         *         -          -          -         -          -          -          -
Selling, general and administrative expenses..     (14.6)    (13.8)     (14.1)     (12.9)    (15.2)     (16.8)     (12.4)     (14.4)
Amortization of goodwill .....................      (0.4)     (0.5)      (0.5)      (0.6)     (0.5)      (0.5)      (0.4)      (0.4)
Operating income (loss) ......................     (10.7)     (9.9)      (7.2)      (8.7)     (4.3)     (13.7)      (1.2)       4.6
Financial income (expenses), net .............      (1.7)      0.1       (5.3)      (4.0)     (3.8)      (2.5)      (2.1)      (1.3)
Other income (expenses), net .................         *       0.1        0.5       (0.7)     (0.1)         *        0.2          *
                                                 -------   -------    -------    -------   -------    -------    -------    -------
Income (loss) before tax benefit (expenses)...     (12.4)     (9.7)     (12.0)     (13.4)     (8.2)     (16.2)      (3.1)       3.3
Tax benefit (expenses) .......................      (0.4)     (0.2)       0.3       (0.4)     (0.2)       0.2          -        2.0
                                                 -------   -------    -------    -------   -------    -------    -------    -------
Income (loss) after tax benefit (expenses)....     (12.8)     (9.9)     (11.7)     (13.8)     (8.4)     (16.0)      (3.1)       5.3
Minority share in subsidiary's net results....      (0.2)     (0.1)       0.1        0.6      (0.1)       0.2        0.2        0.2
                                                 -------   -------    -------    -------   -------    -------    -------    -------
Net income (loss) ............................     (13.0)    (10.0)     (11.6)     (13.2)     (8.5)     (15.8)      (2.9)       5.5
                                                 =======   =======    =======    =======   =======    =======    =======    =======
</TABLE>

* Less than 0.1%

                                       30

<PAGE>

CONDITIONS IN ISRAEL

      We are incorporated under the laws of the State of Israel, and our
principal executive offices and manufacturing and research and development
facilities are located in, the State of Israel. Accordingly, we are directly
influenced by political, economic and military conditions affecting Israel.
Specifically, we could be adversely affected by any major hostilities involving
Israel, a full or partial mobilization of the reserve forces of the Israeli
army, the interruption or curtailment of trade between Israel and its present
trading partners, and a significant downturn in the economic or financial
condition of Israel.

POLITICAL CONDITIONS

      Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity, has led to security and
economic problems for Israel. Since September 2000, there has been a marked
increase in violence, civil unrest and hostility, including armed clashes,
between the State of Israel and the Palestinians, and acts of terror have been
committed inside Israel and against Israeli targets in the West Bank and Gaza.
There is no indication as to how long the current hostilities will last or
whether there will be any further escalation. Any further escalation in these
hostilities or any future armed conflict, political instability or violence in
the region may have a negative effect on our business condition, harm our
results of operations and adversely affect our share price. Furthermore, there
are a number of countries that restrict business with Israel and with Israeli
companies. Restrictive laws or policies of those countries directed towards
Israel or Israeli businesses had, and may in the future continue to have, an
adverse impact on our operations, our financial results or the expansion of our
business. No predictions can be made as to whether or when a final resolution of
the area's problems will be achieved or the nature thereof and to what extent
the situation will impact Israel's economic development or our operations.

      In addition, many of our directors, officers and employees in Israel are
obligated to perform annual reserve duty in the Israeli Defense Forces and may
be called for active duty under emergency circumstances at any time. If a
military conflict or war arises, these individuals could be required to serve in
the military for extended periods of time. Our operations could be disrupted by
the absence for a significant period of one or more of our executive officers or
key employees or a significant number of other employees due to military
service. Any disruption in our operations could adversely affect our business.

      To date, no executive officer or key employee was recruited for military
service for any significant time period. Any further deterioration of the
hostilities between Israel and the Palestinian Authority into a full-scale
conflict might require more significant military reserve service by some of our
employees, which may have a material adverse effect on our business.

                                       31

<PAGE>

ECONOMIC CONDITIONS

      In recent years, the Israeli economy has gone through a period of
recession in economic activity, resulting in low growth rates and growing
unemployment. Despite positive trends in the Israeli economy in 2004, our
operations in the local market, primarily in the rigid PCB segment, have
continued to be adversely affected by the economic conditions in Israel and
could be further affected if the economic conditions in Israel deteriorate. In
addition, due to significant economic measures proposed by the Israeli
Government, there have been several general strikes and work stoppages in 2003
and 2004, affecting all banks, airports and ports. These strikes have had an
adverse effect on the Israeli economy and on our business, including our ability
to deliver products to our customers and to import raw materials.

TRADE RELATIONS

      Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a member of the World Trade Organization and is a
signatory to the General Agreement on Tariffs and Trade, which provides for
reciprocal lowering of trade barriers among its members. In addition, Israel has
been granted preferences under the Generalized System of Preferences from the
United States, Australia, Canada and Japan. These preferences allow Israel to
export products covered by such programs either duty-free or at reduced tariffs.

      Israel and the European Union Community concluded a Free Trade Agreement
in July 1975 which confers certain advantages with respect to Israeli exports to
most European countries and obligates Israel to lower its tariffs with respect
to imports from these countries over a number of years. In 1985, Israel and the
United States entered into an agreement to establish a Free Trade Area. The Free
Trade Area has eliminated all tariff and specified non-tariff barriers on most
trade between the two countries. On January 1, 1993, an agreement between Israel
and the European Free Trade Association, known as EFTA, established a free-trade
zone between Israel and the EFTA nations. In November 1995, Israel entered into
a new agreement with the European Union, which includes redefinement of rules of
origin and other improvements, including providing for Israel to become a member
of the research and technology programs of the European Union. In recent years,
Israel has established commercial and trade relations with a number of other
nations, including China, India, Russia, Turkey and other nations in Eastern
Europe and Asia.

EFFECTIVE CORPORATE TAX RATE

      Israeli companies are generally subject to corporate tax on taxable income
at the rate of 35% for the 2004 tax year, 34% for the 2005 tax year, 32% for the
2006 tax year and 30% for the 2007 tax year and thereafter. The Israeli
government recently announced a new tax reform, pursuant to which the corporate
tax rate is expected to be reduced gradually during the following years up to
25% in 2010, but such tax reform has not yet been enacted. Certain of our
production facilities have been granted the status of an "approved enterprise"
under the Law for the Encouragement of Capital Investments, 1959, as amended.
Subject to certain time limitations, income derived from such approved
enterprise will be subject to corporate tax of up to 25%. For additional
information see Item 10E. "Additional Information - Taxation - Tax Benefits
Under the Law for the Encouragement of Capital Investments, 1959" and Note 24 to
our financial statements.

                                       32

<PAGE>

      As of December 31, 2004, we had approximately NIS 68.3 million ($15.9
million) in tax loss carry-forwards, which can be offset against future income
without time limitation. We can not be reasonably assured as to our ability to
utilize the tax asset attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and our loss carry-forwards in the foreseeable future.
Therefore we have not recorded a deferred tax asset in respect of these
differences and loss carry-forwards. In the fiscal year ended December 31, 2004,
we recorded a deferred tax asset in respect of Kubatronik's tax loss
carry-forwards.

IMPACT OF CURRENCY FLUCTUATION AND OF INFLATION

      For many years prior to 1986, the Israeli economy was characterized by
high rates of inflation and devaluation of the Israeli currency against the
dollar and other currencies. However, since the institution of the Israeli
Economic Program in 1985, inflation, while continuing, has been significantly
reduced and the rate of devaluation has substantially diminished. Because
governmental policies in Israel linked exchange rates to a weighted basket of
foreign currencies of Israel's major trading partners, the exchange rate between
the NIS and the dollar remained relatively stable during reported periods.

      The following table sets forth, for the periods indicated, (i) devaluation
of the NIS against the most important currencies for our business, the U.S.
dollar, and the Euro, and (ii) inflation as reflected in changes in the Israeli
consumer price index.

<TABLE>
<CAPTION>
                                           FISCAL YEAR
                                       ENDED DECEMBER 31,
                           --------------------------------------
                           2000     2001     2002    2003    2004
                           ----     ----     ----    ----    ----
<S>                        <C>       <C>     <C>     <C>      <C>
U.S. dollar ............   (2.7)%    9.3%     7.3%   (7.6)%   1.6%
Euro ...................   (9.9)     3.8     27.2    11.3     6.2%
Israeli consumer price
index ..................    0.0      1.4      6.5    (1.9)    1.2%
</TABLE>

      Since most of our sales are quoted in U.S. dollars and in Euro and most of
our expenses are incurred in NIS, our results could be adversely affected by a
change in the rate of inflation in Israel when such change is not offset (or is
offset on a lagging basis) by a corresponding devaluation of the NIS against the
U.S. dollar and the Euro. Since 2002, we have not used any hedging instruments
in order to protect ourselves from currency fluctuation and inflation risks,
though we may use them in the future.

B.    LIQUIDITY AND CAPITAL RESOURCES

      Historically, we have financed our operations through cash generated by
operations, shareholder loans, funds generated by our initial public offering in
1997 (approximately $5.8 million) and long-term and short-term bank loans and
borrowings under available credit facilities.

      Our principal commitments consist of obligations outstanding under bank
loans and credit facilities, suppliers' credit, and operating leases.

                                       33

<PAGE>

      We expended approximately NIS 1.5 million ($341,000) for capital
expenditures in the fiscal year ended December 31, 2004 and approximately NIS
3.8 million ($881,000) in the fiscal year ended December 31, 2003. In the fiscal
years ended December 31, 2004 and 2003, our capital expenditures were mainly
related to our investments in production and manufacturing equipment and
leasehold improvements. We do not presently have any commitments for significant
capital spending expenditures or capitalized leases.

     In June 2002, we acquired 76% of Kubatronik for approximately 2.6 million
Euros. The remaining 24% of Kubatronik is held by Mr. Alois Kubat. Pursuant to
the agreement under which we acquired our interest in Kubatronik, as amended on
May 4, 2005, following the termination of Mr. Kubat's employment with Kubatronik
and prior to December 31, 2007, Mr. Kubat will have the right to require us to
purchase, and we will have the right to require Mr. Kubat (or his permitted
transferee) to sell to us, Mr. Kubat's entire holdings in Kubatronik. The price
for Mr. Kubat's entire holdings in Kubatronik will not be less than 552,000
Euros and will not exceed 920,000 Euros, subject to certain price adjustments
set forth in the agreement (inlcuding, among other things, accrual of annual
interest at the rate of LIBOR + 1% from December 31, 2004). Mr. Kubat retired in
October 2003. Under Israeli GAAP, our right to purchase the remaining 24% of
Kubatronik has no accounting consequences. Under U.S. GAAP, such an instrument
should be marked to market every reporting period, in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (see Note 28 of
our financial statements, "Effect of Significant Differences Between Generally
Accepted Principles in Israel and the United States").

      Net cash provided by operating activities was NIS 7.9 million ($1.8
million) for the fiscal year ended December 31, 2004. This amount was primarily
attributable to fixed assets depreciation of NIS 13.4 million ($3.1 million), an
increase in other liabilities and accrued expenses of NIS 2.5 million
($569,000), a decrease in other receivables and prepaid expenses of NIS 1.3
million ($294,000), an increase in trade payables of NIS 1.2 million ($277,000)
and amortization of goodwill of NIS 593,000 ($138,000). This amount was
partially offset by our net loss of NIS 5.9 million ($1.4 million), an increase
in trade receivables of NIS 4.0 million ($926,000), a deferred tax asset that we
recorded in the amount of NIS 753,000 ($175,000) and an increase in inventories
of NIS 379,000 ($88,000). Net cash provided by operating activities was NIS 6.6
million ($1.5 million) for the fiscal year ended December 31, 2003. This amount
was primarily attributable to fixed assets depreciation of NIS 14.9 million
($3.5 million), a decrease in trade receivables of NIS 5.7 million ($1.3
million), amortization of goodwill of NIS 584,000 ($136,000) and an increase in
other liabilities and accrued expenses of NIS 391,000 ($91,000). This amount was
partially offset by our net loss of NIS 13.0 million ($3.0 million), the
inflationary impact on long-term debt of NIS 706,000 ($164,000), an increase in
inventories of NIS 632,000 ($147,000) and a decrease in trade payables of NIS
503,000 ($117,000).

      Net cash used in investing activities was NIS 1.3 million ($297,000) in
the fiscal year ended December 31, 2004 and NIS 3.5 million ($811,000) in the
fiscal year ended December 31, 2003. The decrease in investing activities in the
fiscal year ended December 31, 2004 was primarily attributable to a decrease of
NIS 2.3 million ($540,000) in fixed assets acquisitions.

                                       34

<PAGE>

      Net cash used in financing activities was NIS 6.9 million ($1.6 million)
in the fiscal year ended December 31, 2004, which was primarily attributable to
a net decrease of NIS 6.9 million ($1.6 million) in long-term and short-term
credit from our banks. Net cash used in financing activities was NIS 5.3 million
($1.2 million) in the fiscal year ended December 31, 2003, which was primarily
attributable to a net decrease of NIS 7.5 million ($1.7 million) in long-term
and short-term credit from our banks which was partially offset by the issuance
of convertible note in the amount of NIS 2.2 million ($503,000).

      As of December 31, 2004, we had NIS 4.3 million ($992,000) in cash and
cash equivalents and working deficit of NIS 10.8 million ($2.5 million), as
compared to NIS 4.4 million ($1.0 million) in cash and cash equivalents and
working deficit of NIS 10.1 million ($2.3 million) at December 31, 2003.

      As of December 31, 2004, the following revolving lines of credit (all of
which will be available to us until at least March 31, 2006, subject to certain
conditions, unless otherwise indicated) and long-term loans were outstanding.

      o     a revolving line of credit of approximately NIS 4.6 million ($1.1
            million) with Bank Hapoalim B.M. Of such amount, NIS 474,000
            ($110,000) was linked to the dollar and NIS 4.1 million ($952,000)
            was not linked.

      o     long-term loans from Bank Hapoalim B.M. aggregating NIS 4.1 million
            ($951,000). Of such amount, NIS 1.8 million ($412,000) was linked to
            the Israeli consumer price index, NIS 1.3 million ($296,000) was
            linked to the dollar and NIS 1.0 million ($243,000) was not linked.

      o     a revolving line of credit of approximately NIS 3.6 million
            ($826,000) with Israel Discount Bank Ltd. Of such amount NIS 560,000
            ($130,000) was linked to the dollar and NIS 3.0 million ($696,000)
            was not linked.

      o     long-term loans from Israel Discount Bank Ltd. in the aggregate
            amount of NIS 7.4 million ($1.7 million). Of such amount, NIS 1.5
            million ($345,000) was linked to the Israeli consumer price index,
            NIS 4.5 million ($1.0 million) was linked to the dollar and NIS 1.4
            million ($323,000) was not linked.

      o     a revolving line of credit of approximately NIS 5.0 million ($1.2
            million) with Bank Leumi LeIsrael Ltd. Of such amount NIS 491,000
            ($114,000) was linked to the dollar and NIS 4.5 million ($1.0
            million) was not linked. In accordance with agreements with Bank
            Leumi LeIsrael Ltd., the dollar linked credit line will be repaid in
            six equal monthly payments during the six months period ending June
            30, 2005, and an additional NIS 1.0 million ($232,000) will be
            repaid in six equal monthly payments during the six months period
            ending December 31, 2005.

      o     long-term loans from Bank Leumi LeIsrael Ltd. in the aggregate
            amount of NIS 1.5 million ($355,000). Of such amount, NIS 902,000
            ($209,000) was linked to the Israeli consumer price index and NIS
            628,000 ($146,000) was linked to the dollar.

                                       35

<PAGE>

      Our credit lines bear annual interest ranging from 6.15% to 6.7% for
non-linked credit and 3.9% to 5.15% for credit which was linked to the dollar.
Our long-term loans bear annual interest ranging from 5.95% to 7.05% for
long-term loans which were linked to the Israeli consumer price index, 3.90% to
4.55% for long-term loans which were linked to the dollar and 6.45% to 6.7% for
non-linked long-term loans.

     The borrowings from our banks are secured by specific liens on certain
assets, by a first priority floating charge on the rest of our assets and by a
fixed lien on goodwill (intangible assets) and insurance rights (rights to
proceeds on insured assets in the event of damage). In addition, the agreements
with our banks prohibit us from selling or otherwise transferring any assets
except in the ordinary course of business or from placing a lien on our assets
without the banks' consent. Financial covenants in respect of our credit
facilities and long-term loans require us to maintain the higher of
shareholders' equity of NIS 20.0 million ($4.6 million) or 20% of our total
assets according to the loan from Israel Discount Bank Ltd., or Discount Bank,
and to maintain the higher of shareholders' equity of NIS 17.0 million ($3.9
million) or 20% of our total assets, according to the loan from Bank Leumi
LeIsrael Ltd., or Leumi Bank. For these purposes, shareholders' equity includes
our outstanding convertible note and excludes prepaid expenses. As of December
31, 2003, we were in compliance with such covenants. However, on March 31, 2004
we were in breach of such covenants and therefore negotiated with our banks and
were granted a temporary waiver, reducing our covenants to the higher of
shareholders' equity of NIS 12 million ($2.8 million) or 15% of our total assets
until the release of our December 31, 2004 earnings (i.e. between March - June
2005). The waiver of Leumi Bank was subject to the repayment by us of NIS 1.5
million ($348,000) over a 15 month period (from October 1, 2004 to December 31,
2005). In March 2005, the banks agreed to extend the temporary covenants. Leumi
Bank agreed to extend the temporary covenants until the release of our June 30,
2005 earnings, following which and until the release of our December 31, 2005
earnings (i.e. between March - June 2006), Leumi Bank agreed to set the
shareholders' equity threshold to not less than NIS 16 million ($3.7 million).
In accordance with the Discount Bank extension of the temporary covenants, we
are required to maintain the higher of shareholders' equity of NIS 13 million
($3 million) or 15% of our total assets until the release of our December 31,
2005 earnings. Upon the release of our December 31, 2005 earnings, we are
required to comply with our original covenant terms. As of December 31, 2004 and
March 31, 2005, we were in compliance with the terms of such temporary
covenants. Our management has programs and projects in place in order to
continue to meet these terms. We cannot assure you that we will be able to
maintain compliance with such covenants in the future.

      In June 2004, although not achieving the work plan goals for 2003, the
banks agreed to extend our revolving credit until June 30, 2005, and in March
2005, the banks agreed to further extend our revolving credit until March 31,
2006.

                                       36

<PAGE>

     In 2003, we negotiated a new financing plan with our banks and controlling
shareholder. Pursuant to this financing plan the banks agreed to postpone 60% of
our current outstanding repayments, in the amount of NIS 3.4 million ($800,000)
for ten months with Discount Bank (from June 1, 2003 to March 31, 2004) and for
12 months with Bank Hapoalim B.M., or Hapoalim Bank, and Leumi Bank (from July
1, 2003 to June 30, 2004). Hapoalim Bank and Discount Bank agreed that their
share in the aggregate outstanding amount equal to NIS 2.6 million ($611,000)
will be paid in 33 installments beginning on July 1, 2004 and Leumi Bank agreed
that the repayment of its share in the aggregate outstanding amount equal to NIS
814,000 ($189,000) will be required on or after July 1, 2004. In 2004, Leumi
Bank agreed that such outstanding amount owed to it will also be paid in 36
installments beginning on July 14, 2004. As part of this financing plan, we
signed a factoring agreement with U Bank Ltd. (formerly Investec Bank (Israel)
Ltd.), or U Bank, pursuant to which we are entitled to $1.0 million factoring
facilities, in consideration for the assignment to U Bank of an equal amount of
our accounts receivable. The use of these factoring facilities by us is subject
to the consent of our banks, which initially was provided until June 30, 2004,
and following two extensions, our banks have provided their consent until March
31, 2006. Also see Item 7.B., "Major Shareholders and Related Party Transactions
- Related Party Transactions."

      We expect to finance our entire capital budget from operational cash
flow, revolving bank credit lines and long-term bank loans, supplier financing
and capital contribution from our controlling shareholder. We believe that the
availability of our revolving lines of credit, long-term bank loans and cash
flow from operations will provide us with sufficient working capital to fund our
operational and capital requirements through December 31, 2005.

C.    RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

      We generally do not engage in research and development.

      However, in the past we participated as a member of a consortium of
companies operating in the electronic equipment industry in a research and
development project under the supervision of the Office of the Chief Scientist
of the Israeli Ministry of Industry & Trade, or the Office of the Chief
Scientist. The consortium ended its activities as of July 31, 2001.

      Additionally, in 2005, we were granted membership in OptiPac, a consortium
within the framework of the MAGNET program of the Office of the Chief Scientist.
The OptiPac mission is to develop generic electro-optical packaging technologies
that are critically important in optical fiber based telecommunication systems,
and to wide array of industries and applications. Under the terms of the
consortium, each member of the consortium will be provided with an advance for
its research and development costs for a specific research and development
project assigned to it by the consortium. The Office of the Chief Scientist
reimburses 66% of such approved research and development expenses. These
reimbursements are contingent upon our submitting periodic reports prepared in
accordance with the requirements of the Office of the Chief Scientist, but are
not contingent upon royalties or any future payments being made by us.

D.    TREND INFORMATION

      From the second quarter of 2001 through the second quarter of 2004, we
experienced a downturn in the demand for our PCB products as a result of a
slowdown in technology spending, price competition and increased PCB production
capacity in the Far-East. The downturn in the demand for our products during
this period was particularly among our customers from the telecom and networking
industries. Customers from these industries accounted for approximately 20% of
our revenues in the last four fiscal years, as compared to approximately 40% of
our revenues in the preceding fiscal years. The period of downturn was
characterized by demand for our special products and prototypes, while demand
for recurring orders decreased due to the continued slowdown in technology
expenditures.

                                       37

<PAGE>

      From the third quarter of the fiscal year ended December 31, 2002 through
the second quarter of 2004, we suffered a further decline in our activities as a
result of the termination of three projects that we were involved in. Since we
had not engaged in any major new projects, we were forced to compete for market
share, particularly in the local market. This competition caused significant
price erosion that has negatively affected us.

      Since the third quarter of 2004, we have experienced growth in our
revenues, primarily as a result of the implementation of our new strategy to
focus our marketing efforts in the high end of the PCB market, mainly in the
flex-rigid PCB market. In addition, we have been engaged in a new project with
our major customer and are developing new business relationships with customers
from abroad.

      Our backlog at December 31, 2004 was approximately $5.2 million compared
to a backlog of approximately $3.2 million at December 31, 2003. We include in
our backlog all purchase orders scheduled for delivery within the next 12
months, although the majority of the backlog typically is scheduled for delivery
within 45 days. The majority of the backlog at December 31, 2004 was delivered
by March 31, 2005, at which time our backlog was approximately $3.0 million. For
a variety of reasons, including the timing of orders, delivery intervals,
customer and product mix and the possibility of customer changes in delivery
schedules, backlog as of any particular date may not be a reliable measure of
sales for any succeeding period. Cancellation charges generally vary depending
upon the time of cancellation and, therefore, substantially all of our backlog
may be subject to cancellation without penalty.

E.    OFF-BALANCE SHEET ARRANGEMENTS

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

F.    TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     The following table summarizes our minimum contractual obligations and
commercial commitments, as of December 31, 2004 and the effect we expect them to
have on our liquidity and cash flow in future periods.

<TABLE>
<CAPTION>
                                                                    PAYMENTS DUE BY PERIOD
                                                                      NIS (IN THOUSANDS)
                                                  --------------------------------------------------------
                                                           LESS THAN 1                           MORE THAN
         CONTRACTUAL OBLIGATIONS                   TOTAL      YEAR       1-3 YEARS   3-5 YEARS    5 YEARS
-----------------------------------------------   ------   -----------   ---------   ---------   ---------
<S>                                               <C>         <C>         <C>          <C>         <C>
Short-term bank credit ........................   12,925      12,925          --          --          --
Long-term debt obligations ....................   14,547       6,664       7,883          --          --
Capital lease obligations .....................      648         278         370          --          --
Operating lease obligations ...................   32,461       6,781      11,777       7,758       6,145
Other contractual obligations .................    1,226         427         388         388          23
Purchase obligations ..........................    3,335       3,335          --          --          --
Other long-term liabilities reflected on the
   company's balance sheet under Israeli GAAP..    1,048          --          --          --       1,048
Total .........................................   66,190      30,410      20,418       8,146       7,216

</TABLE>

                                       38

<PAGE>

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.    DIRECTORS AND SENIOR MANAGEMENT

      Our articles of association provide for a board of directors consisting of
no less than three and no more than nine members or such other number as may be
determined from time to time at a general meeting of shareholders, and the
number of directors must be odd. Our board of directors is currently composed of
seven directors.

      Our executive officers are responsible for our day-to-day management. The
executive officers have individual responsibilities established by our chief
executive officer and by the board of directors.

      Set forth below are the name, age, principal position and a biographical
description of each of our directors and executive officers:

<TABLE>
<CAPTION>
NAME                                   AGE   POSITION
----                                   ---   --------
<S>                                     <C>  <C>
Nissim Gilam........................    66   Chairman of the Board of Directors
Arieh Reichart......................    51   President and Chief Executive Officer
Amnon Shemer........................    46   Vice President, Finance and Chief Financial Officer
Dan Eshed...........................    54   Senior Vice President, Subsidiaries
Moshe Leibovich.....................    48   Vice President, Marketing and Sales
Eli Dvora...........................    49   Vice President,  Operations
David Banitt........................    53   Independent Director
Jack Bigio..........................    41   Director
Revital Degani......................    49   Outside Director
Joseph Maiman.......................    59   Director
Eliyaho Tov.........................    61   Outside Director
Joseph Yerushalmi ..................    67   Director
</TABLE>

      Messrs. Joseph A. Maiman and Nissim Gilam, Class III directors, will serve
as directors until our 2005 general annual meeting of shareholders. Mr. Joseph
Yerushalmi, a Class I director, will serve as a director until our 2006 general
annual meeting of shareholders. Messrs. David Banitt and Jack Bigio, Class II
directors, will serve as directors until our 2007 annual general meeting of
shareholders. Ms. Revital Degani and Mr. Eliyaho Tov will serve as outside
directors pursuant to the provisions of the Israeli Companies Law for a
three-year term until our 2006 annual general meeting of shareholders, following
which the service of Ms. Degani as an outside director may not be extended and
service of Mr. Tov as an outside director may be renewed for only one additional
three-year term.

                                       39

<PAGE>

      NISSIM GILAM has served as chairman of our board of directors since
December 1, 1998, he has served as a director since January 1996 and previously
held office as a director and our chief executive officer during the period
January 1990 through March 1991. Since April 2002, Mr. Gilam is self-employed.
From September 1993 until March 2002, Mr. Gilam served as managing director of
Ney Agencies Ltd., an Israeli company engaged as a sales agent of raw materials
and machinery sold by trading companies. From September 1987 through September
1993, Mr. Gilam served as vice president-finance of Merhav M.N.F. Ltd., an
Israeli company that constructs turnkey projects in, among other fields,
refineries, energy and agriculture.

      ARIEH REICHART joined us in September 1984 and assumed the position of
president and chief executive officer in May 1991. Mr. Reichart holds a B.A.
degree in Economics and an M.B.A. from Bar-Ilan University.

      AMNON SHEMER joined us in March 2004 as vice president-finance and chief
financial officer. Prior to joining us and since January 2003, Mr. Shemer was
managing director of Mea Control Transfer Ltd., a company that provides
investment banking services. From June 1995 until August 2002, Mr. Shemer was
vice president of finance for Mentergy Ltd., a publicly-traded company that
provides e-learning solutions and satellite communications services. Mr. Shemer
holds a B.A. in Economics and Business Administration from Bar-Ilan University
and an M.A. degree in Economics from Bar-Ilan University.

      DAN ESHED joined us in April 1987 as a production manager. During his
employment Mr. Eshed served as operation manager, senior vice president -
technology and infrastructure and was appointed senior vice president -
subsidiaries in February 2005. Mr. Eshed holds a B.Sc. degree in Management and
Industrial Engineering from Ben Gurion University.

      MOSHE LEIBOVICH joined us in November 2003 as vice president marketing and
sales. From February 1996 until November 2003, Mr. Leibovich served as marketing
and sales manager of Ophir Optronics Ltd., an Israeli company engaged in infra
red optical components and subassemblies. Prior to joining Ophir Optronics Ltd.
and since January 1994, Mr. Leibovich served as technical marketing and sales
manager of A.I. Gil Import Ltd., an Israeli company engaged as the
representative of Eveready Battery Company, Inc. in Israel.

      ELI DVORA joined us in 1993 after our merger with TPC Ltd. and served as
our Comptroller until August 1997. From September 1997 until February 1998, Mr.
Dvora was self-employed. In March 1998, Mr. Dvora rejoined us and was appointed
our vice president - operations in August 1999. Mr. Dvora holds a B.A. degree in
Economics and an M.B.A. degree, both from Bar Ilan University.

      DAVID BANITT, an independent director, has served as a director since
March 1997. From August 2001 until May 2005, Mr. Banitt served as chief
executive officer of Nano-OR Ltd. an Israeli start-up company engaged in the
development of electro-optics systems. Prior to joining Nano-OR Ltd. and since
January 2001, Mr. Banitt was self-employed. From September 1997 until January
2001, Mr. Banitt served as President of Exsight Electro Optical Systems Ltd., an
Israeli start-up company engaged in the development of electro-optics systems
for the printed circuit boards industry. From 1993 until 1997, Mr. Banitt served
as general manager of Nitzanim Initiative Center. Prior thereto, Mr. Banitt
served as Vice President of Marketing of Optrotech Ltd., an Israeli company that
provides optical inspection systems to the printed circuit boards industry. Mr.
Banitt holds a B.Sc. degree in Electronics Engineering from Tel Aviv University.

                                       40

<PAGE>

     JACK BIGIO has served as a director since May 2000. Since May 2002, Mr.
Bigio has served as the president and chief executive officer of Ampal American
- Israel Corporation. From July 1995 until April 2002, Mr. Bigio served as vice
president-operations and finance of Merhav M.N.F. Ltd., an Israeli company that
constructs turnkey projects in, among other fields, refineries, energy and
agriculture. Prior thereto he served as an economist and executive assistant to
the president of Merhav M.N.F. Ltd. for five years. Mr. Bigio holds a B.A.
degree in Economics and Business Administration and an M.B.A. degree, both from
The Hebrew University of Jerusalem.

      REVITAL DEGANI has served as an outside director since December 2000.
Since January 2003, Ms. Degani has served as the CEO of Bakara Handasit Ltd, an
Israeli company engaged in engineering control and building inspection and
surveying. Ms. Degani was an attorney for 19 years. From January 2000 until
December 2002, Ms. Degani was self-employed. From April 1995 until December
1999, Ms. Degani was in-house counsel of Reved Ltd., an Israeli company whose
shares trade on the Tel Aviv Stock Exchange, that is engaged in engineering and
construction of residential and commercial buildings. Ms. Degani received her
qualification as a lawyer and has been a member of the Israel Bar since 1981.
Ms. Degani holds a B.A. degree in Law from Tel Aviv University.

     JOSEPH MAIMAN has served as a director since July 1988. Mr. Maiman has
served as president of Merhav M.N.F. Ltd. since August 1972. Since January 2002,
Mr. Maiman has served as the chairman of the board of directors of Israel 10
Channel Ltd. and since April 2002 Mr. Maiman has served as the chairman of the
board of directors of Ampal American - Israel Corporation, a public holding
company that trades on the NASDAQ Stock Market. Mr. Maiman holds a B.A. degree
in Economics from University of Texas and an M.A. degree in Economics from
Cornell University.

      ELIYAHO TOV was appointed as an outside director in December 2003. Since
November 1999, Mr. Tov has been a freelance consultant as an economic advisor
and management advisor. Mr. Tov serves as a director of several other companies.
From 1973 to September 1999, Mr. Tov served as a senior economist of The Israel
Corporation Ltd. and during such period served as a director of several
companies within The Israel Corporation Ltd. group. Mr. Tov holds a B.A. degree
in Economics and Political Science and an M.A. degree in Business Management
from the Hebrew University in Jerusalem.

      JOSEPH YERUSHALMI has served as a director since December 2003. Since
January 1996, Mr. Yerushalmi has served as a senior vice president in charge of
the projects of Merhav M.N.F Ltd. From 1992 to 1996, Mr. Yerushalmi served as
vice president for projects of Israel Chemicals Ltd. During such time he also
served as chairman and director for several of Israel Chemicals Ltd.'s
subsidiaries. From 1989 to 1992, Mr. Yerushalmi was a visiting Professor at the
University of Pittsburgh and a consultant to industry in energy related
projects. Mr. Yerushalmi holds a Ph.D. in Chemical Engineering from the City
University of New York. From 1969 to 1977, he was a member of the Faculty of
Chemical Engineering of the City College of New York rising to the rank of Full
Professor in 1976.

                                       41

<PAGE>

B.    COMPENSATION

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

<TABLE>
<CAPTION>
                                                                    PENSION,
                                               SALARIES, FEES,     RETIREMENT
                                              COMMISSIONS AND     AND SIMILAR
                                                  BONUSES           BENEFITS
                                              ----------------   ------------
<S>                                               <C>              <C>
All directors and executive officers
as a group, consisting of twelve persons          $889,000         $137,000
</TABLE>

      During the fiscal year ended December 31, 2004, we paid each of our
outside and independent directors an annual fee of NIS 15,760 ($3,658) and a per
meeting attendance fee of NIS 1,000 ($232). During such period we paid Nissim
Gilam, chairman of our board of directors, a management fee ranging of $3,500
per month, and reimbursed him for various expenses that he incurred in
connection with his service as chairman of the board of directors in an annual
amount of NIS 13,800 ($3,200).

      As of December 31, 2004, our directors and executive officers as a group,
consisting of twelve persons, held options to purchase an aggregate of 128,000
ordinary shares. Of such options, options to purchase 108,000 ordinary shares
have an exercise price of $4.375 and will expire in July 2005, and options to
purchase 20,000 ordinary shares have an exercise price of $1.14 and will expire
in November 2009. The options vest over a three-year period. All of the options
were issued under our 2000 Stock Option Plan. See - "Share Ownership - Stock
Option Plans."

C.    BOARD PRACTICES

ELECTION OF DIRECTORS

      Pursuant to our articles of association, the board of directors is divided
into three classes (other than outside directors). Generally, at each annual
meeting of shareholders one class of directors is elected for a term of three
years by a vote of the holders of a majority of the voting power represented and
voting at such meeting. All the members of our board of directors (except the
outside directors as detailed below) may be reelected upon completion of their
term of office.

      We do not follow the requirements of the NASDAQ Marketplace Rules with
regard to the nomination process of directors, and instead, we follow Israeli
law and practice, in accordance with which our directors are recommended by our
board of directors for election by our shareholders. See below in this Item 6C.
"Directors, Senior Management and Employees - Board Practices - NASDAQ
Marketplace Rules and Home Country Practices."

                                       42

<PAGE>

INDEPENDENT AND OUTSIDE DIRECTORS

      The Israeli Companies Law requires Israeli companies with shares that have
been offered to the public in or outside of Israel to appoint at least two
outside directors. Outside directors must be Israeli residents, unless the
company's shares have been offered to the public outside of Israel or have been
listed on a stock exchange outside of Israel. No person may be appointed as an
outside director if, at the time of the appointment or during the two years that
preceded the appointment, the person or the person's relative, partner, employer
or a entity of which he is a controlling shareholder had an interest in the
company, in a person who was a controlling shareholder of the company at the
time of the appointment, or in another entity. The term "interest" includes an
employment relationship; a business or professional relationship maintained on a
regular basis; control; and service as an officer, excluding service as an
outside director of a company that is offering its shares to the public for the
first time.

      A director of one company may not be appointed as an outside director of
another company if, at the time of the appointment, a director of the other
company serves as an outside director of the first company. Furthermore, no
person may be appointed as an outside director if he is an employee of the
Israeli Securities Authority or a stock exchange in Israel.

      No person may serve as an outside director if the person's position or
other activities create, or may create, a conflict of interest with the person's
responsibilities as an outside director or may otherwise interfere with the
person's ability to serve as an outside director. If, at the time an outside
director is to be appointed, all current members of the board of directors are
of the same gender, then the outside director must be of the other gender.

      According to the recent amendment to the Israeli Companies Law, at least
one of the outside directors must be an accounting and financial expert, and the
others must be professional experts, as such terms will be defined in the future
by the Minister of Justice, at which time this requirement will become
effective.

      Outside directors are elected by shareholders. The shareholders voting in
favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the company who voted on the matter. This
minority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders who vote against their election represent 1%
or less of all of the voting rights in the company. Outside directors serve for
a three-year term, which may be renewed for only one additional three-year term.
Outside directors can be removed from office only by the same special percentage
of shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company.

      Any committee of the board of directors must include at least one outside
director and the audit committee must include all of the outside directors. An
outside director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with such service.

                                       43

<PAGE>

      In addition, the NASDAQ Marketplace Rules currently require us to have at
least two independent directors on our board of directors and to establish an
audit committee. In general, under new NASDAQ Marketplace Rules promulgated
pursuant to the Sarbanes-Oxley Act of 2002, effective as of July 31, 2005, a
majority of our board of directors must qualify as independent directors within
the meaning of the NASDAQ Marketplace Rules and our audit committee must have at
least three members and be comprised only of independent directors each of whom
satisfies the respective "independence" requirements of the Securities and
Exchange Commission and NASDAQ. However, we do not follow the requirements of
the NASDAQ Marketplace Rules with regard the NASDAQ requirement to maintain a
majority of independent directors (as defined under the NASDAQ Marketplace
Rules). Instead, we follow Israeli law and practice, in accordance with which we
are required to appoint two outside directors (within the meaning of the Israeli
Companies Law) to our board of directors. In addition, we have the mandated
three independent directors, within the meaning of the Securities and Exchange
Commission, on our audit committee. See below in this Item 6C. "Directors,
Senior Management and Employees - Board Practices - NASDAQ Marketplace Rules and
Home Country Practices."

      Our board of director has determined that Ms. Degani and Mr. Tov qualify
both as independent directors under the Securities and Exchange Commission and
NASDAQ requirements and as outside directors under the Israeli Companies Law
requirements. Our board of director has further determined that Mr. Banitt
qualifies as an independent director under the Securities and Exchange
Commission and NASDAQ requirements.

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

      The Israeli Companies Law codifies the fiduciary duties that "office
holders," including directors and executive officers, owe to a company. An
office holder's fiduciary duties consist of a duty of care and a duty of
loyalty. The duty of care requires an office holder to act at a level of
competence at which a reasonable office holder in the same position would employ
under the same circumstances. The duty of loyalty requires an officer holder to
act in good faith and in the company's interest, including, avoiding any act
that involves a conflict of interest between the office holder's position in the
company and any other position or his personal affairs; avoiding any act that
involves competition with the company's business; avoiding exploiting a business
opportunity of the company in order to obtain personal gain for the office
holder or another person; and disclose to the company any information and
documents that relate to its affairs, which the officer holder received by
virtue of his position in the company. Each person listed as a director or
executive officer in the table under "Item 6.A. Directors, Senior Management and
Employees -- Directors and Senior Management" above is an office holder. Under
the Israeli Companies Law, all arrangements as to compensation of office holders
who are not directors require approval of our board of directors, and the
compensation of office holders who are directors must be approved by our audit
committee, board of directors and shareholders.

                                       44

<PAGE>

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

      The Israeli Companies Law also provides that an extraordinary transaction
with a controlling shareholder or in which a controlling shareholder of the
company has a personal interest (including private offerings in which a
controlling shareholder has a personal interest) and a transaction with a
controlling shareholder or his relative regarding terms of service and
employment, must be approved by the audit committee, the board of directors and
shareholders. The shareholder approval for such transactions must include at
least one-third of the shareholders who have no personal interest in the
transaction who voted on the matter. The transaction can be approved by
shareholders without this one-third approval, if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than one percent of the voting rights in the
company.

      However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law and
amended in January 2002, certain transactions between a company and its
controlling shareholder(s) and certain transaction with its director(s)
regarding terms of compensation do not require shareholder approval.

      In addition, directors' compensation and employment arrangements do not
require the approval of the shareholders if both the audit committee and the
board of directors agree that such arrangements are for the benefit of the
company. If the director or the office holder is a controlling shareholder of
the company then, the employment and compensation arrangements of such director
or office holder do not require the approval of the shareholders providing
certain criteria is met.

      The above relief will not apply if one or more shareholder, holding at
least 1% of the issued and outstanding share capital of the company or of the
company's voting rights, objects to the grant of such relief, provided that such
objection is submitted to the company in writing not later than seven (7) days
from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.

                                       45

<PAGE>

      The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold greater than a
45% interest in the company, unless there is another shareholder holding more
than a 45% interest in the company. These requirements do not apply if, in
general, the acquisition (1) was made in a private placement that received
shareholder approval as a private placement that its purpose is to grant the
purchaser a 25% or greater interest in the company if there is not already a 25%
or greater shareholder of the company, or a 45% interest in the company if there
is not another shareholder holding a 45% interest in the company, (2) was from a
25% or greater shareholder of the company which resulted in the acquiror
becoming a 25% or greater shareholder of the company, or (3) was from a
shareholder holding more than a 45% interest in the company which resulted in
the acquiror becoming a holder of more than a 45% interest in the company.

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

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

EXCULPATION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS

      The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his duty
of loyalty, but may, if permitted by its articles of association, exculpate in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care. However, a company may not
exculpate in advance a director from his liability to the company with respect
to a breach of his duty of care in the event of distributions. Our articles of
association allow us to exculpate any office holder from his or her liability to
us for breach of duty of care, to the maximum extent permitted by law, before or
after the occurrence giving rise to such liability.

      Additionally, the Israeli Companies Law provides that a company may, if
permitted by its articles of association, enter into a contract for the
insurance of the liability of any of its office holders with respect to an act
performed by him in his capacity as an office holder, for: a breach of his duty
of care to us or to another person; breach of his duty of loyalty to us,
provided that the office holder acted in good faith and had reasonable cause to
assume that his act would not prejudice our interests; or a financial liability
imposed upon him in favor of another person. Our articles of association provide
that, subject to any restrictions imposed by applicable law, we may procure,
and/or undertake to procure, insurance covering any past or present or future
office holder against any liability which he or she may incur in such capacity,
including insurance covering us for indemnifying such office holder, to the
maximum extent permitted by law.

                                       46

<PAGE>

      Further, the Israeli Companies Law permits a company, if its articles of
association so provide, to indemnify an office holder for acts or omissions
committed in his or her capacity as an office holder of the company for:

      o     a financial obligation imposed on the office holder in favor of
            another person by any judgment, including a settlement or an
            arbitrator's award approved by a court;

      o     reasonable litigation expenses, including attorney's fees, incurred
            by the office holder as a result of an investigation or proceeding
            instituted against him by a competent authority, provided that such
            investigation or proceeding concluded without the filing of an
            indictment against him or the imposition of any financial liability
            in lieu of criminal proceedings, or concluded without the filing of
            an indictment against him and a financial liability was imposed on
            him in lieu of criminal proceedings with respect to a criminal
            offense that does not require proof of criminal intent; and

      o     reasonable litigation expenses, including attorney's fees, expended
            by such office holder or charged to him or her by a court: (a) in a
            proceeding instituted against him or her by or on behalf of the
            company or by another person, (b) in a criminal charge from which he
            or she was acquitted, or (c) in criminal proceedings in which he or
            she was convicted of a crime which does not require proof of
            criminal intent.

      The Israeli Companies Law provides that a company's articles of
association may permit the company to indemnify an office holder following a
determination to this effect made by the company after the occurrence of the
event in respect of which the office holder will be indemnified. It also
provides that a company's articles of association may permit the company to
undertake in advance to indemnify an office holder, provided that the
undertaking is limited to types of events, which, in the opinion of the
company's board of directors, are, at the time of giving the undertaking,
foreseeable due to our company's activities and to an amount or standard that
the board of directors has determined is reasonable under the circumstances. Our
articles of association provide that we may undertake to indemnify in advance an
office holder, in accordance with the conditions set under applicable law,
against any liabilities he or she may incur in such capacity, provided that such
undertaking is limited with respect to categories of events that can be expected
as determined by our board of directors when authorizing such undertaking, and
with respect to such amounts determined by our board of directors as reasonable
in the circumstances. Furthermore, under our articles of association, we may
indemnify any past or present office holder, in accordance with the conditions
set under any law, with respect to any past occurrence, whether or not we are
obligated under any agreement to indemnify such office holder in respect of such
occurrence.

      These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor exculpate an office holder, nor enter into an insurance contract which would
provide coverage for any monetary liability of an office holder, incurred as a
result of certain improper actions.

                                       47

<PAGE>

      Pursuant to the Israeli Companies Law, exculpation of, procurement of
insurance coverage for, and an undertaking to indemnify or indemnification of,
our office holders must be approved by our audit committee and our board of
directors and, if the office holder is a director, also by our shareholders.

      We have agreed to indemnify our office holders to the fullest extent
permitted by law. We currently maintain directors and officers liability
insurance with a per claim and aggregate coverage limit of $7.5 million, and in
accordance with the approval of our shareholders at our 2004 annual general
meeting, we may increase such policy to provide coverage of $10.0 million. Under
our current directors and officers liability insurance policy, losses will be
paid in accordance with the following order of priority: first, on behalf of
officers and directors, for all loss that they will be obligated to pay as a
result of a claim made against them; thereafter, on our behalf, for all loss
that an officer or director will be obligated to pay as a result of a claim made
against them, to the extent that we are required or permitted by law to
indemnify our officers and directors; and thereafter, on our behalf, for all
loss that we will be obligated to pay as a result of a securities claim made
against us.

DIRECTORS' SERVICE CONTRACTS

      Except for a monthly fee of $3,500 that we pay to the chairman of our
board of directors and his reimbursement for various expenses incurred by him in
connection with his service as chairman of the board of directors in an annual
amount of up to NIS 18,000 ($4,200), we do not have any service contracts with
our directors. Our directors are not entitled to any benefits upon termination
of their service as our directors.

AUDIT COMMITTEE

      Our audit committee, which was established in accordance with Section 114
of the Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, assists our board of directors in overseeing the accounting and
financial reporting processes of our company and audits of our financial
statements, including the integrity of our financial statements, compliance with
legal and regulatory requirements, our independent registered public
accountants' qualifications and independence, the performance of our internal
audit function and independent registered public accountants, finding any
defects in the business management of our company for which purpose the audit
committee may consult with our independent auditors and internal auditor,
proposing to the board of directors ways to correct such defects, approving
related-party transactions as required by Israeli law, and such other duties as
may be directed by our board of directors.

      Our audit committee consists of three board members who satisfy the
respective "independence" requirements of the Securities and Exchange
Commission, NASDAQ and Israeli Law for audit committee members. Our audit
committee is currently composed of Ms. Revital Degani and Messrs. David Banitt
and Eliyaho Tov. The audit committee meets at least once each quarter.

      The responsibilities of the audit committee also include approving
related-party transactions as required by law. Under Israeli law an audit
committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two
outside directors are serving as members of the audit committee and at least one
of the outside directors was present at the meeting in which an approval was
granted.

                                       48

<PAGE>

COMPENSATION COMMITTEE

      Our board of directors established a compensation committee, which is
responsible for the administration of our: (i) 1996 Stock Option Plan; and (ii)
2000 Stock Option Plan (see Item 6.E., "Directors, Senior Management and
Employees - Share Ownership - Stock Option Plans"). Messrs. Tov and Gilam are
the current members of our compensation committee. Under the Israeli Companies
Law, the compensation committee may advise our board of directors with regard to
the grant of options, however the actual grant of options must be approved by
our board of directors. The grant of options to our office holders requires the
approval of our audit committee and board of directors, and, if the office
holder is a director, also by our shareholders.

EXECUTIVE COMMITTEE

      Our board of directors established an executive committee, which is
responsible for monitoring the implementation of the plan to improve our
profitability that was adopted by our management, and recommending to our board
of directors future strategies for our company and monitoring their
implementation. Messrs. Gilam, Banitt, Tov and Degani are the current members of
our executive committee. Our executive committee meets approximately once a
month with our Chief Executive Officer.

INTERNAL AUDIT

      The Israeli Companies Law also requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Israeli Companies Law's independence
requirements may not be appointed as an internal auditor. The role of the
internal auditor is to examine, among other things, the compliance of the
company's conduct with applicable law and orderly business practice. Mr. Daniel
Shapira serves as our internal auditor.

NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES

      NASDAQ Marketplace Rule 4350, or Rule 4350, was recently amended to permit
foreign private issuers, such as our company, to follow certain home country
corporate governance practices without the need to seek individual exemptions
from NASDAQ. Instead, a foreign private issuer must provide NASDAQ with a letter
from outside counsel in its home country certifying that the issuer's corporate
governance practices are not prohibited by home country law. On June 9, 2005, we
provided NASDAQ with a notice of non-compliance with Rule 4350. We do not comply
with the following requirements of Rule 4350, and instead follow Israeli law and
practice in respect of such requirements:

      o     The requirement to maintain a majority of independent directors, as
            defined under the NASDAQ Marketplace Rules. Instead, we follow
            Israeli law and practice which requires that we appoint at least two
            outside directors, within the meaning of the Israeli Companies Law,
            to our Board of Directors. In addition, we have the mandated three
            independent directors, within the meaning of the Securities and
            Exchange Commission, on our audit committee. See above in this Item
            6C. "Directors, Senior Management and Employees - Board Practices -
            Independent and Outside Directors."

                                       49

<PAGE>

      o     The requirements regarding the directors nominations process.
            Instead, we follow Israeli law and practice in accordance with which
            our directors are recommended by our board of directors for election
            by our shareholders. See above in this Item 6C. "Directors, Senior
            Management and Employees - Board Practices - Election of Directors."

      o     The requirement regarding the quorum for any meeting of the holders
            of common stock. Instead, we follow Israeli law and practice which
            provides that, unless otherwise provided by a company's articles of
            association, the quorum required for a general meeting of
            shareholders is at least two shareholders present who hold, in the
            aggregate, 25% of the company's voting rights. Our articles of
            association provide that the quorum required for an ordinary meeting
            of shareholders consists of at least two shareholders present in
            person or represented by proxy who hold or represent, in the
            aggregate, at least 40% of the voting rights of the issued share
            capital. See Item 10A. "Additional Information - Share Capital -
            Annual and Extraordinary Meetings of Shareholders."

D.    EMPLOYEES

      As of December 31, 2004, we employed 261 full-time employees in Israel, of
which 150 were employed in manufacturing services, 34 in process and product
engineering, 30 in quality assurance and control, 12 in marketing and sales and
35 in finance, accounting, information service and administration.

      As of December 31, 2003, we employed 244 full-time employees in Israel, of
which 135 were employed in manufacturing services, 35 in process and product
engineering, 31 in quality assurance and control, 10 in marketing and sales and
33 in finance, accounting, information service and administration. On May 1,
2003 we laid off about 15% of our employees at such time, mainly from our
production lines.

      As of December 31, 2002, we employed 294 full-time employees in Israel, of
which 158 were employed in manufacturing services, 49 in process and product
engineering, 38 in quality assurance and control, 12 in marketing and sales and
37 in finance, accounting, information service and administration.

      In addition, as of December 31, 2004, our German subsidiary employed 32
full-time employees and nine part-time employees, 32 full-time employees and two
part-time employees at December 31, 2003 and 33 full-time employees and three
part-time employees at December 31, 2002.

      We are subject to various Israeli labor laws, general collective
bargaining agreements entered into, from time to time, between the Histadrut
(General Federation of Labor in Israel) and the Manufacturers Association, as
well as specific and local agreements and arrangements. Such laws, agreements,
and arrangements cover the wages and employment conditions of our employees,
including length of the workday, minimum daily wages for professional workers,
contribution to pension fund, insurance for work related accidents, procedures
for dismissing employees, determination of severance pay, benefit programs and
annual leave. We generally provide our employees with benefits and working
conditions beyond the required minimums.

                                       50

<PAGE>

      Some of our officers, key employees and certain of our other employees are
party to individual employment agreements. We have entered into a non-disclosure
and non-competition agreement with some of our executive officers. All of our
officers and employees are subject to confidential and proprietary information
provisions set forth in our Code of Business Conduct and Ethics.

      Pursuant to Israeli law, we are legally required to pay severance benefits
upon certain circumstances, including the retirement or death of an employee or
the termination of employment of an employee without due cause. Some of our
employees are covered by life and pension insurance policies providing customary
benefits to employees, including retirement and severance benefits. Most of our
employees are covered by pension funds providing similar benefits. We contribute
between 12.0% and 13.3% of base wages to such plans and employees contribute
between 5.0% to 5.5% of base wages. We also contribute between 5.0% and 7.5% of
base wages to certain "professional advancement" funds for managers, engineers
and others and such employees contribute 2.5% of base wages. Our contribution
and employee contributions are not limited, however, a company's contribution
above certain specified maximum amounts are taxable income to the employee.
Israeli employers and employees are required to pay predetermined sums to the
National Insurance Institute, which is similar to the United States Social
Security Administration. In the fiscal year ended December 31, 2004, the
aggregate payments to the National Insurance Institute amounted to approximately
13.56% of wages (limited to a maximum wage of NIS 34,820 ($8,083)), with the
employee contributing on average 7.84 % (of which approximately 4.01% relates to
payments for national health insurance) and the employer contributing the
remainder. All such contributions to the National Insurance Institute are
subject to minimum amount.

E.    SHARE OWNERSHIP

BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

      The following table sets forth certain information as of June 20, 2005
regarding the beneficial ownership by each of our directors and executive
officers:

<TABLE>
<CAPTION>
                                             Number of Ordinary
                                                    Shares              Percentage of
Name                                        Beneficially Owned (1)      Ownership (2)
----                                        -----------------------     -------------
<S>                                              <C>                        <C>
Joseph Maiman .........................          1,736,547(3)               25.8%
Arieh Reichart ........................            115,515(4)                2.1%
Nissim Gilam ..........................             30,000(4)                   *
Eli Dvora .............................             23,500(5)                   *
Dan Eshed..............................                 --                    --
Moshe Leibovich........................                 --                    --
Amnon Shemer ..........................                 --                    --
David Banitt...........................                 --                    --
Jack Bigio.............................                 --                    --
Revital Degani.........................                 --                    --
Eliyaho Tov............................                 --                    --
Joseph Yerushalmi .....................                 --                    --
</TABLE>

-------------
*     Less than 1%

                                       51

<PAGE>

(1)   Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or
      investment power with respect to securities. Ordinary shares relating to
      options or convertible note currently exercisable or exercisable within 60
      days of the date of this table are deemed outstanding for computing the
      percentage of the person holding such securities but are not deemed
      outstanding for computing the percentage of any other person. Except as
      indicated by footnote, and subject to community property laws where
      applicable, the persons named in the table above have sole voting and
      investment power with respect to all shares shown as beneficially owned by
      them.

(2)   The percentages shown are based on 5,602,511 ordinary shares issued and
      outstanding as of June 20, 2005.

(3)   Includes 1,136,803 ordinary shares currently issuable upon exercise of a
      convertible note at $0.33 per share, by Merhav M.N.F. Ltd., an Israeli
      private company controlled by Mr. Maiman. Also includes 571,993 ordinary
      shares held of record by Integral International Inc., a Panama corporation
      and 27,751 ordinary shares held of record by Integral International Inc.'s
      wholly owned subsidiary, A. Sariel Ltd. Mr. Maiman, a director, is the
      controlling shareholder of Integral International Inc. and its wholly
      owned subsidiary, A. Sariel Ltd. Mr. Maiman may be deemed to be the
      beneficial owner of the aggregate 599,744 ordinary shares held directly by
      Integral International Inc. and A. Sariel Ltd.

(4)   Includes 30,000 ordinary shares subject to currently exercisable options
      granted under our 2000 Stock Option Plan, having an exercise price of
      $4.375 per share, which options expire in July 2005.

(5)   Subject to currently exercisable options granted under our 2000 Employee
      Stock Option Plan, having an exercise price of $4.375 per share, which
      options expire in July 2005.

STOCK OPTION PLANS

1996 STOCK OPTION PLAN

      Under our 1996 Stock Option Plan, or the 1996 Plan, options to purchase an
aggregate of 474,000 ordinary shares may be granted to our directors and
employees. Ordinary shares underlying any options, which terminate, expire or
otherwise cease to exist, will become available for future grants under the 1996
Plan.

                                       52

<PAGE>

      The 1996 Plan is currently administered by our compensation committee. The
compensation committee is authorized to determine, among other things, to whom
options may be granted, the number of ordinary shares to which an option may
relate, the exercise price for each share, the vesting period of the option, and
the terms, conditions and restrictions thereof; to construe and interpret the
1996 Plan and any options; to prescribe, amend and rescind rules and regulations
relating to the 1996 Plan; and to make all other determinations deemed necessary
or advisable for the administration of the 1996 Plan, all subject to the terms
of the 1996 Plan and applicable law.

      The exercise price of options granted under the 1996 Plan may not be less
than 85% of the fair market value of our ordinary share on the date of grant and
the options will expire on the fifth anniversary of the day of grant. Generally,
the options will vest ratably over a three-year period and may not be exercised
for a period of one year from the date of grant. The exercise price for the
options is payable in NIS at the representative exchange rate as published on
the date of payment, subject to certain adjustments for mergers,
recapitalizations, stock splits and similar transactions.

      Upon the occurrence of any ordinary shares split, reverse ordinary shares
split, distribution of bonus shares, recapitalization or rights offerings or
other substantially similar corporate transaction or event, we will make such
equitable changes or adjustments necessary to the number of shares subject to
each outstanding option in order to prevent dilution or enlargement of the
optionee's rights.

      As of June 20, 2005, options for the purchase of 107,999 ordinary shares
had been granted under the 1996 Plan (excluding options that expired without
being exercised) and were exercised, of which, options to purchase 104,666
ordinary shares at an exercise price of $1.375 per share and options to purchase
3,333 ordinary shares at an exercise price of $1.75 per share. There are no
options currently outstanding under the 1996 Plan. Options for the purchase of
366,001 ordinary shares are available for future grant under the 1996 Plan. Of
the options granted under the 1996 Plan (excluding options that expired without
being exercised), options for the purchase of 14,000 ordinary shares were
granted to our officers, all of which have been exercised.

2000 STOCK OPTION PLAN

      Our 2000 Stock Option Plan, or the 2000 Plan, authorizes the grant of
options to purchase up to 750,000 ordinary shares. Employees, officers,
directors and consultants of our company and its subsidiaries are eligible to
participate in the 2000 Plan. Awards under the 2000 Plan may be granted in the
forms of incentive stock options as provided in Section 422 of the U.S. Internal
Revenue Code of 1986, as amended, non-qualified stock options, options granted
pursuant to Section 102 of the Israeli Tax Ordinance and options granted
pursuant to Section 3.9 of the Israeli Tax Ordinance. The 2000 Plan has a term
of ten years and will terminate on July 31, 2010. No award of options may be
made after such date.

      The compensation committee administers the 2000 Plan. Subject to the
provisions of the 2000 Plan and applicable law, the compensation committee has
the authority, in its sole discretion, to:

                                       53

<PAGE>

      o     propose to grant awards under the 2000 Plan and recommend to the
            board of directors the persons to whom such awards be granted;

      o     determine the form, terms and conditions of the written stock option
            agreement evidencing the option, including the type of option and
            the number of shares to which it pertains, the option price, the
            option period and its vesting schedule, and exercisability of the
            option in special cases (such as death, retirement, disability and
            change of control);

      o     prescribe the form and provisions of the notice of exercise and
            payment of the option;

      o     nominate a trustee for options issued under Section 102 of the
            Israeli Tax Ordinance;

      o     adjust any or all of the number and type of shares that thereafter
            may be made the subject of options, the number and type of shares
            subject to outstanding options, and the grant or exercise price with
            respect to any option, or, if deemed appropriate, make provision for
            a cash payment to the holder of any outstanding option in order to
            prevent dilution or enlargement of the benefits or potential
            benefits intended to be made available under the 2000 Plan in the
            event of any dividend or other distribution, recapitalization, stock
            split, reverse stock split, reorganization, merger, consolidation,
            split-up, spin-off, combination, repurchase, or exchange of shares
            or other securities;

      o     interpret the provisions of the 2000 Plan; and

      o     prescribe, amend, and rescind rules and regulations relating to the
            2000 Plan or any award thereunder as it may deem necessary or
            advisable.

      Neither the board of directors nor the compensation committee may, without
the consent of the optionee, alter or in any way impair the rights of such
optionee under any award previously granted. Neither the termination of the 2000
Plan nor the change of control of our company (except to the extent provided in
the 2000 Plan) will affect any option previously granted.

      The option price per share may not be less than 100% of the fair market
value of such share on the date of the grant; provided, however, that in the
case of an award of an incentive stock option made to a 10% owner, the option
price per share may not be less than 110% of the fair market value (as such term
is defined in the 2000 Plan) of such share on the date of the award. Generally
the options vest ratably over a three-year period.

      An option may not be exercisable after the expiration of five (5) years
from the date of its award. No option may be exercised after the expiration of
its term.

      Options are not assignable or transferable by the optionee, other than by
will or the laws of descent and distribution, and may be exercised during the
lifetime of the optionee only by the optionee or his or her guardian or legal
representative; provided, however, that during the optionee's lifetime, the
optionee may, with the consent of the compensation committee transfer without
consideration all or any portion of his options to members of the optionee's
immediate family (as defined in the 2000 Plan), a trust established for the
exclusive benefit of members of the optionee's immediate family, or a limited
liability company in which all members are members of the optionee's immediate
family.

                                       54

<PAGE>

         As of June 20, 2005, options for the purchase of 412,933 ordinary
shares had been granted under the 2000 Plan (excluding options that expired
without being exercised), of which, options to purchase 392,933 ordinary shares
have an exercise price of $4.375 per share and options to purchase 20,000
ordinary shares have an exercise price of $1.14 per share. Of such options,
options to purchase 110,800 ordinary shares have been exercised at an exercise
price of $4.375 per share. Options to purchase 274,033 ordinary shares will
expire in July 2005, options to purchase 8,100 ordinary shares will expire in
May 2006 and options to purchase 20,000 ordinary shares will expire in November
2009. Options to purchase 282,133 ordinary shares are currently exercisable.
Options for the purchase of 337,067 ordinary shares are available for future
grant under the 2000 Plan. Of the options granted under the 2000 Plan (excluding
options that expired without being exercised), options to purchase 128,000
ordinary shares were granted to our executive officers and the chairman of our
board of directors, of which options to purchase 83,500 ordinary shares are
currently exercisable and options to purchase 24,500 ordinary shares have been
exercised.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.    MAJOR SHAREHOLDERS

      The following table sets forth certain information as of June 20, 2005
regarding the beneficial ownership by all shareholders known to us to own
beneficially 5% or more of our ordinary shares:

<TABLE>
<CAPTION>
                                         Number of Ordinary
                                               Shares                  Percentage of
Name                                    Beneficially Owned (1)         Ownership (2)
----                                  -------------------------        -------------
<S>                                         <C>                            <C>
Joseph Maiman ....................          1,736,547 (3)                  25.8%
Merhav M.N.F. Ltd.................          1,136,803 (4)                  16.9%
Integral International Inc........            599,744 (5)                  10.7%
</TABLE>

-----------
(1)   Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or
      investment power with respect to securities. Ordinary shares relating to
      options or convertible notes currently exercisable or exercisable within
      60 days of the date of this table are deemed outstanding for computing the
      percentage of the person holding such securities but are not deemed
      outstanding for computing the percentage of any other person. Except as
      indicated by footnote, and subject to community property laws where
      applicable, the persons named in the table above have sole voting and
      investment power with respect to all shares shown as beneficially owned by
      them.

(2)   The percentages shown are based on 5,602,511 ordinary shares issued and
      outstanding as of June 20, 2005.

(3)   Includes 1,136,803 ordinary shares currently issuable upon exercise of a
      convertible note at $0.33 per share, by Merhav M.N.F. Ltd., an Israeli
      private company controlled by Mr. Maiman. Also includes 571,993 ordinary
      shares held of record by Integral International Inc., a Panama
      corporation, and 27,751 ordinary shares held of record by Integral
      International Inc.'s wholly owned subsidiary, A. Sariel Ltd. Mr. Maiman, a
      director, is the controlling shareholder of Integral International Inc.
      and its wholly owned subsidiary, A. Sariel Ltd. Mr. Maiman may be deemed
      to be the beneficial owner of the aggregate 599,744 ordinary shares held
      directly by Integral International Inc. and A. Sariel Ltd.

                                       55

<PAGE>

(4)   Issuable upon exercise of a currently convertible note at $0.33 per share,
      by Merhav M.N.F. Ltd., an Israeli private company controlled by Mr.
      Maiman.

(5)   Includes 571,993 ordinary shares held of record by Integral International
      Inc., a Panama corporation, and 27,751 ordinary shares held of record by
      Integral International Inc.'s wholly owned subsidiary, A. Sariel Ltd. Mr.
      Maiman, a director, is the controlling shareholder of Integral
      International Inc. and its wholly owned subsidiary, A. Sariel Ltd. Mr.
      Maiman may be deemed to be the beneficial owner of the aggregate 599,744
      ordinary shares held directly by Integral International Inc. and A. Sariel
      Ltd.

SIGNIFICANT CHANGES IN THE OWNERSHIP OF MAJOR SHAREHOLDERS

      Our principal shareholders do not have different voting rights attached to
their ordinary shares. As at December 31, 2002, 2003 and 2004, Mr. Joseph Maiman
beneficially held 1,395,496, 1,409,896 and 2,015,956 ordinary shares,
respectively, representing approximately 28.6%, 28.9% and 36.7 % of our then
outstanding ordinary shares, respectively. As at December 31, 2002, 2003 and
2004, Integral International Inc. beneficially held 1,068,396, ordinary shares,
representing approximately 21.9%, 21.9% and 19.5% of our then outstanding
shares, respectively.

      During the period of March 24, 2005 through April 6, 2005, Mr. Joseph
Maiman sold 1,416,212 ordinary shares that were beneficially held by him, of
which 606,060 ordinary shares were held of record by Menhav M.N.F. Ltd. an
Israeli private company controlled by him, 468,652 ordinary shares were held of
record by Integral International Inc., a Panama corporation controlled by him,
and 341,500 were held directly by Mr. Maiman. As a result, Mr. Maiman's
ownership interest decreased to 10.7% (excluding 1,136,803 ordinary shares
currently issuable upon exercise of a convertible note).

RECORD HOLDERS

      Based on a review of the information provided to us by our transfer agent,
as of June 27, 2004, there were 26 holders of record of our ordinary shares, of
which 16 record holders holding approximately 87.75% of our ordinary shares had
registered addresses in the United States and eight record holders holding
approximately 30.77% of our ordinary shares had registered addresses in Israel.
These numbers are not representative of the number of beneficial holders of our
shares nor are they representative of where such beneficial holders reside,
since many of these ordinary shares were held of record by brokers or other
nominees (including one U.S. nominee company, CEDE & Co., which held
approximately 86.00% of our outstanding ordinary shares as of such date).

                                       56

<PAGE>

B.    RELATED PARTY TRANSACTIONS

      In 2003, we negotiated a new financing plan with our banks and controlling
shareholder. As part of this financing plan, we issued a convertible note in the
principal amount of $500,000 to Merhav M.N.F. Ltd., or Merhav, an Israeli
private company controlled by our controlling shareholder, Mr. Joseph A. Maiman.
In January 2004, pursuant to the terms of the note, Merhav converted $200,000 of
the amounts due and payable under the note into 606,060 ordinary shares of our
company, and we issued a replacement convertible note to Merhav for the amount
that remained outstanding under the original note at such date, in the principal
amount of $325,312.5. This note will become due on May 15, 2007. The note bears
interest at the rate of 10% per year, compounded on a quarterly basis. Under the
terms of the note, Merhav has the right, at any time, to convert the note and
any accrued interest thereon into ordinary shares of our company at a price of
$0.33 per ordinary share. We may at our sole discretion repay the accrued
interest on the principal amount of the convertible note to Merhav. During 2004,
we recorded interest and exchange rate expenses of NIS 150,000 ($35,000) on the
convertible note.

C.    INTERESTS OF EXPERTS AND COUNSEL

      Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

      See the consolidated financial statements, including the notes thereto,
and the exhibits listed in Item 17 hereof and incorporated herein by this
reference.

LEGAL PROCEEDINGS

      In June 2002, an action was initiated by a former employee, citing an
alleged breach of an agreement for the payment of royalties in exchange for the
use of his invention. The plaintiff is seeking damages of NIS 1.0 million. We
intend to deny liability and to assert that no agreement was entered into
between the parties, no compensation was agreed upon and that the amount of the
claim is baseless. On April 2005, the court referred the parties to mediation
proceedings.

      During the year 2002, one of our customers demanded that we pay
compensation of approximately $250,000 with respect to damages claimed to have
been incurred as a result of the use of defective PCBs that were manufactured
and supplied by us. Although we disagreed with the customer's claim we have
recorded a provision in respect of our deductible amount that is not covered by
our insurance. In the meantime, the claim is being litigated by our insurance
company.

      In February 2004, the Environment Quality Services Company Ltd. in
Ramat-Hovav advised us that it would cease the reception and treatment of
certain liquid waste from our company. As a result, we began legal proceedings
against the Environment Quality Services Company Ltd., the Ministry of
Environment and the Industrial Municipality of Ramat-Hovav. During such
proceedings, the parties reached a temporary agreement that allows us to
continue to send the waste to Ramat-Hovav. Our lawsuit is still pending at
court. Since the claim is still in its early stages, there is no assurance that
the temporary solution will become permanent, nor is it possible to assess the
success of such legal proceedings.

                                       57

<PAGE>

      From time to time, claims arising in the ordinary course of our business
are brought against us. In the opinion of management, no currently existing
claims will have a material adverse effect on our financial position, liquidity
or results of operations.

DIVIDEND DISTRIBUTIONS POLICY

      We have never paid cash dividends to our shareholders. We intend to retain
future earnings for use in our business and do not anticipate paying cash
dividends on our ordinary shares in the foreseeable future. Any future dividend
policy will be determined by our board of directors and will be based upon
conditions then existing, including our results of operations, financial
condition, current and anticipated cash needs, contractual restrictions and
other conditions as the board of directors may deem relevant.

      According to the Israeli Companies Law, a company may distribute dividends
out of its profits, so long as the company reasonably believes that such
dividend distribution will not prevent the company from paying all its current
and future debts. Profits, for purposes of the Israeli Companies Law, means the
greater of retained earnings or earnings accumulated during the preceding two
years, after deducting previous distributions that were not deducted from the
surpluses. In the event cash dividends are declared, such dividends will be paid
in NIS.

B.    SIGNIFICANT CHANGES

      In March 2005, subsequent to the release of our results of operations for
the fiscal year ended December 31, 2004 and the fourth quarter then ended,
options to purchase 110,800 ordinary shares were exercised by our employees,
resulting in a capital contribution of $485,000, which we received at the
beginning of April 2005.

ITEM 9. THE OFFER AND LISTING

A.    OFFER AND LISTING DETAILS

ANNUAL STOCK INFORMATION

      The following table sets forth, for each of the years indicated, the range
of high ask and low bid prices of our ordinary shares on the NASDAQ SmallCap
Market:

<TABLE>
<CAPTION>
YEAR                                                       HIGH        LOW
----                                                     --------   --------
<S>                                                      <C>        <C>
2000..................................................   $ 8.9688   $ 2.2500
2001..................................................   $ 4.6400   $ 1.5000
2002..................................................   $ 1.9100   $ 0.2800
2003..................................................   $ 1.8400   $ 0.3100
2004..................................................   $ 2.8400   $ 0.8200
</TABLE>

                                       58

<PAGE>

QUARTERLY STOCK INFORMATION

      The following table sets forth, for each of the full financial quarters in
the years indicated, the range of high ask and low bid prices of our ordinary
shares on the NASDAQ Stock Market:

<TABLE>
<CAPTION>
                                                           HIGH        LOW
                                                         --------   --------
<S>                                                      <C>        <C>
2003
----
First Quarter.........................................   $  0.430   $  0.310
Second Quarter........................................   $  0.790   $  0.310
Third Quarter.........................................   $  0.990   $  0.500
Fourth Quarter........................................   $  1.840   $  0.620

2004
----
First Quarter.........................................   $  2.840   $  1.190
Second Quarter........................................   $  2.300   $  1.320
Third Quarter.........................................   $  1.800   $  0.950
Fourth Quarter........................................   $  1.710   $  0.820
</TABLE>

MONTHLY STOCK INFORMATION

      The following table sets forth, for each of the most recent six months,
the range of high ask and low bid prices of our ordinary shares on the NASDAQ
Stock Market:

<TABLE>
<CAPTION>
MONTH                                                      HIGH        LOW
-----                                                    --------   --------
<S>                                                      <C>        <C>
December 2004.........................................   $  1.330   $  1.120
January 2005..........................................   $  1.590   $  1.210
February 2005.........................................   $  1.750   $  1.270
March 2005............................................   $  6.400   $  1.500
April 2005............................................   $  4.500   $  2.120
May 2005..............................................   $  3.380   $  1.900
</TABLE>

B.    PLAN OF DISTRIBUTION

      Not applicable.

C.    MARKETS

      Our ordinary shares were listed on the NASDAQ National Market from our
initial public offering on January 22, 1997 until May 19, 1999, at which date
the listing of our ordinary shares was transferred to the NASDAQ SmallCap Market
(symbol: ELTK).

D.    SELLING SHAREHOLDERS

      Not applicable.

                                       59

<PAGE>

E.    DILUTION

      Not applicable.

F.    EXPENSE OF THE ISSUE

      Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.    SHARE CAPITAL

      Not applicable.

B.    MEMORANDUM AND ARTICLES OF ASSOCIATION

      We are registered with the Israeli Registrar of Companies and have been
assigned company number 52-004295-3. Section 2 of our memorandum of association
provides that we were established for the purpose of engaging in the business of
developing, manufacturing, producing, vending, importing, exporting, supplying,
distributing and dealing in printed, multi-layer, flexible, semiconductors
integrated, thick film and hybrid circuits related products, any components or
portions thereof and processors for making same. In addition, the purpose of our
company is to perform various corporate activities permissible under Israeli
law.

THE POWERS OF THE DIRECTORS

      Under the provisions of the Israel Companies Law and our articles of
association, a director cannot participate in a meeting nor vote on a proposal,
arrangement or contract in which he or she is materially interested. In
addition, our directors cannot vote compensation to themselves or any members of
their body without the approval of our audit committee and our shareholders at a
general meeting. See "Item 6C. Directors, Senior Management and Employees -
Board Practices - Approval of Related Party Transactions Under Israeli Law."

      The authority of our directors to enter into borrowing arrangements on our
behalf is not limited, except in the same manner as any other transaction by us.

      Under our articles of association, the service of directors in office is
not subject to any age limitation and our directors are not required to own
shares in our company in order to qualify to serve as directors.

RIGHTS ATTACHED TO SHARES

      Our authorized share capital consists of NIS 30,000,000 divided into
50,000,000 ordinary shares of a nominal value of NIS 0.6 each. All outstanding
ordinary shares are validly issued, fully paid and non-assessable. The rights
attached to the ordinary shares are as follows:

                                       60

<PAGE>

      DIVIDEND RIGHTS. Holders of our ordinary shares are entitled to the full
amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with
respect to any fiscal year only out of the retained earnings, in accordance with
the provisions of the Israeli Companies Law. See "Item 8A. Financial Information
- Consolidated and Other Financial Information - Dividend Distribution." If
after 30 days a dividend has been declared and it is still unclaimed, the
dividend may be invested or otherwise used by us for our own account, as we deem
fit, until such dividend is claimed; and we will not be deemed a trustee in
respect thereof. We are not obliged to pay, and may not pay interest on declared
but unpaid dividends if the shareholders entitled to such dividends fails to
collect the same or to provide us the necessary information for the payment
thereof, or if we are for any other reason unable to pay the dividend to such
shareholder.

      VOTING RIGHTS. Holders of ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders. Such voting
rights may be affected by the grant of any special voting rights to the holders
of a class of shares with preferential rights that may be authorized in the
future.

      An ordinary resolution requires approval by the holders of a majority of
the voting rights represented at the meeting, in person, by proxy or by voting
card and voting thereon. As permitted under the Israeli Companies Law, our
amended and restated articles of association requires only a simple majority of
shareholders present and voting at any shareholders meeting for approval of
actions such as increases in the share capital of the company, share splits and
other recapitalizations. Nevertheless, approval of a special majority,
representing the holders of no less than 75% of the voting rights represented at
the meeting in person, by proxy or by voting card, and voting thereon is
required in order to amend the articles of association.

      Pursuant to our articles of association, our directors are elected at our
annual general meeting of shareholders by a vote of the holders of a majority of
the voting power represented and voting at such meeting. See Item 6C.
"Directors, Senior Management and Employees - Board Practices - Election of
Directors."

      RIGHTS TO SHARE IN OUR PROFITS. Our shareholders have the right to share
in our profits distributed as a dividend and any other permitted distribution.
See this Item 10B. "Additional Information - Memorandum and Articles of
Association - Rights Attached to Shares - Dividend Rights."

      RIGHTS TO SHARE IN SURPLUS IN THE EVENT OF LIQUIDATION. In the event of
our liquidation, after satisfaction of liabilities to creditors, our assets will
be distributed to the holders of ordinary shares in proportion to the nominal
value of their holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future.

      LIMITATIONS ON ANY EXISTING OR PROSPECTIVE MAJOR SHAREHOLDER. See Item 6C.
"Directors and Senior Management - Board Practices - Approval of Related Party
Transactions Under Israeli Law."

                                       61

<PAGE>

CHANGING RIGHTS ATTACHED TO SHARES

      According to our articles of association, in order to change the rights
attached to any class of shares, such change must be adopted by a resolution in
writing by the holders of the majority of the issued shares of such class or by
an ordinary resolution at a separate general meeting of the holders of the
affected class.

ANNUAL AND EXTRAORDINARY MEETINGS OF SHAREHOLDERS

      The board of directors must convene an annual meeting of shareholders at
least once every calendar year, within fifteen months of the last annual
meeting. An extraordinary meeting may be convened by the board of directors, as
it decides or upon a demand of one or more shareholders holding in the aggregate
at least 5.0% of our issued capital. The Israeli Companies Law provides that a
company whose shares are traded on a stock exchange must give notice of a
general meeting of shareholders to its record shareholders at least twenty-one
days prior to the meeting. A shareholder present, in person or by proxy, at the
commencement of a general meeting of shareholders may not seek the cancellation
of any proceedings or resolutions adopted at such meeting on account of any
defect in the notice of such meeting relating to the time or the place thereof.
Shareholders who are registered in our register of shareholders at the record
date may vote at the general meeting of shareholders. The record date is set in
the resolution to convene the general meeting of shareholders, provided that
such date is set between four to twenty-one (4-21) days or, in the event of a
vote by ballots, between four to forty (4-40) days before the date the general
meeting is held.

      The quorum required for an ordinary meeting of shareholders consists of at
least two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, at least 40% of the voting rights of the issued
share capital. A meeting adjourned for lack of a quorum generally is adjourned
to the same day in the following week at the same time and place or any time and
place as the directors unanimously designate in a notice to the shareholders.
The requisite quorum at an adjourned general meeting will be: (i) if the
original meeting was convened upon requisition by shareholders pursuant to the
Israeli Companies Law - the number of shareholders holding the minimum number of
voting shares necessary to make such requisition, present in person or by proxy;
and (ii) in any other case - one or more shareholders, present in person or by
proxy, holding at least one share.

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES IN OUR COMPANY

      Neither our memorandum of association or our articles of association nor
the laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries that are
in a state of war with Israel.

PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY

      The Israeli Companies Law requires that mergers between Israeli companies
be approved by the board of directors and general meeting of shareholders of
both parties to the transaction. The approval of the board of directors of both
companies is subject to such boards' confirmation that there is no reasonable
doubt that after the merger the surviving company will be able to fulfill its
obligations towards its creditors. Each company must notify its creditors about
the contemplated merger. Our articles of association provide that such merger be
approved by an ordinary resolution of the shareholders, as explained above. The
approval of the merger by the general meetings of shareholders of the companies
is also subject to additional approval requirements as specified in the Israeli
Companies Law and regulations promulgated thereunder. See also Item 6C.
"Directors, Senior Management and Employees - Board Practices - Approval of
Related Party Transactions Under Israeli Law."

                                       62

<PAGE>

DISCLOSURE OF SHAREHOLDERS OWNERSHIP

      The Israeli Securities Law and regulations promulgated thereunder do not
require a company whose shares are publicly traded solely on a stock exchange
outside of Israel, as in the case of our company, to disclose its share
ownership.

CHANGES IN OUR CAPITAL

      Changes in our capital are subject to the approval of a simple majority of
shareholders present and voting at any shareholders meeting.

C.    MATERIAL CONTRACTS

      None.

D.    EXCHANGE CONTROLS

      Israeli law and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
"general permit" was issued under the Israeli Currency Control Law, 1978, which
removed most of the restrictions that previously existed under such law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert
Israeli currency into non-Israeli currencies.

      Non-residents of Israel who purchase our ordinary shares will be able to
convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of our ordinary shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided
that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.

E.    TAXATION

GENERAL CORPORATE TAX STRUCTURE

      Israeli companies are subject to "Corporate Tax" at a rate of 35% of
taxable income. However, the effective rate of tax payable by a company which is
qualified under Israeli law as an "Industrial Company" and/or which derives
income from an "approved enterprise" (as further discussed below) may be
considerably lower. See this Item 10E." Additional Information - Taxation - Tax
Benefits Under the Law for the Encouragement of Capital Investments, 1959."

      Israeli companies are generally subject to corporate tax on taxable income
at the rate of 35% for the 2004 tax year, 34% for the 2005 tax year, 32% for the
2006 tax year and 30% for the 2007 tax year and thereafter. The Israeli
government recently announced an additional new tax reform pursuant to which
corporate tax rate is expected to be reduced gradually during the following
years up to 25% in 2010, however this tax reform has not yet been enacted. Such
tax reform might be modified prior to enactment or might not be enacted at all.
Accordingly, we cannot predict the consequences of such expected new tax reform
applicable to our company.

                                       63

<PAGE>

      As of December 31, 2004, we had tax loss carry forwards of approximately
NIS 67.2 million ($15.6 million). Such amount can be offset against future
income without time limitation.

TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES) 1969

      Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, or
the Industry Law, a company qualifies as an "Industrial Company" if it is
resident in Israel and at least 90% of its income in any tax year, determined in
Israeli currency (exclusive of income from defense loans, capital gains,
interest and dividends) is derived from an "Industrial Enterprise" it owns. An
"Industrial Enterprise" is defined for purposes of the Industry Law as an
enterprise whose majority activity in a given tax year is industrial production.

      We believe that we are currently an Industrial Company. An Industrial
Company is entitled to certain tax benefits, including a deduction of the
purchase price of patents or certain other intangible property rights at the
rate of 12.5% per annum.

      The tax laws and regulations dealing with the adjustment of taxable income
for local inflation provide that Industrial Enterprises, such as us, are
eligible for special rates of depreciation deductions. These rates vary in the
case of plant and machinery according to the number of shifts in which the
equipment is being operated and generally range from 20% to 40% on a
straight-line basis, a 30% to 50% on a declining balance basis for equipment
first put into operation on or after June 1, 1989 (instead of the regular rates
which are applied on a straight-line basis).

      Moreover, Industrial Enterprises which are approved enterprises (see
below) can choose between (a) the special depreciation rates referred to above
or (b) accelerated regular rates of depreciation applied on a straight-line
basis in respect of property and equipment, generally ranging from 200% (in
respect of equipment) to 400% (in respect of buildings) of the ordinary
depreciation rates during the first five years of service of these assets,
provided that the depreciation on a building may not exceed 20% per annum.

      Eligibility for benefits under the Industry Law is not contingent upon the
approval of any Government agency. There can be no assurance that we will
continue to so qualify, or will be able to avail ourselves of any benefits under
the Industry Law in the future.

TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

GENERAL

      Certain of our production facilities have been granted approved enterprise
status pursuant to the Law for the Encouragement of Capital Investments, 1959,
as amended, or the Investment Law, which provides certain tax and financial
benefits to investment programs that have been granted such status.

                                       64

<PAGE>

      The Israeli Investment Center has the discretion, within the funding
limits set by the Government budget, to grant the status of an "approved
enterprise" to projects submitted to it if such projects may promote the
objectives of the Investment Law and it is desirable to encourage the
implementation of the project by the grant of the approval.

      The Investment Law provides that capital investments in production
facilities (or other eligible facilities) may, upon application to the Israeli
Investment Center, be designated as an approved enterprise. Each instrument of
approval for an approved enterprise relates to a specific investment program,
delineated both by the financial scope of the investment, including sources of
funds, and by the physical characteristics of the facility or other assets. The
tax benefits available under any instrument of approval relate only to taxable
profits attributable to the specific program and are contingent upon meeting the
criteria set out in the instrument of approval.

      If, as in our case, (i) only a part of a company's taxable income is
derived from an approved enterprise or (ii) a company owns more than one
approved enterprise, the resulting effective corporate tax rate of the company
represents the weighted combination of the various applicable rates. A company
owning a "mixed enterprise" (i.e., a company the income of which is derived from
both an approved enterprise and other sources) generally may not distribute a
dividend that is attributable only to the approved enterprise.

      Subject to certain provisions concerning income subject to the alternative
package of tax benefits (see below), any distributed dividends are deemed
attributable to the entire enterprise, and the effective tax rate represents the
weighted combination of the various applicable tax rates. A company may elect to
attribute dividends distributed by it only to income not subject to the
alternative package of tax benefits.

      As of December 31, 2004, two approved investment programs are applicable
to us. These investments programs are based on the alternative package of tax
benefits track and provide for tax exemption on undistributed earnings derived
from the programs for two years and a reduced tax rate for the remainder of the
benefit period. The benefit period with respect to such programs have not yet
commenced, and will expire no later than 2005 for one of the programs and 2016
for the other. However, the tax benefits with respect to income derived out of
the programs, if any, may not be available to us due to our noncompliance with a
condition prescribed in the certificate of approval. See Note 24 to our
financial statements.

      In March 2005, the government of Israel passed an amendment to the
Investment Law in which it revised the criteria for investments qualified to
receive tax benefits as an approved enterprise. No assurance can be given that
we will, in the future, be eligible to receive additional tax benefits under
this law.

TAX BENEFITS

      Income derived from an approved enterprise is subject to corporate tax at
the reduced rate of 25% (or lower in the case of a qualified "foreign investor's
company" which is at least 49% owned by non-Israeli residents) until the earlier
of (i) seven (or ten in the case of a foreign investor's company) consecutive
years, commencing in the year in which the specific approved enterprise first
generates taxable income (which income is not offset by deductions attributable
to other sources), (ii) 12 years from the year of commencement of production or
(iii) 14 years from the year of approval of the approved enterprise status.
Income derived from an approved enterprise in Zone A, which is approved after
January 1, 1997, is exempt from corporate tax for a period of two years and is
subject to the above rates for the balance of the benefit period.

                                       65

<PAGE>

      A company owning an approved enterprise, which was approved after April 1,
1986, may elect to forego the entitlement to grants and to certain tax benefits
otherwise available under the Investment Law, and apply for an alternative
package of tax benefits. Under the alternative package of tax benefits,
undistributed income from the approved enterprise is fully tax-exempt for a
defined period. The tax exemption for approval granted prior to August 6, 1996
range between 2 and 10 years, depending principally upon the geographic location
within Israel and the type of the approved enterprise. If the certificate of
approval was granted after August 6, 1996, the tax exemption will be based upon
the geographic location of the approved enterprise in Israel. On expiration of
the tax exemption, the approved enterprise is eligible for the beneficial tax
rate (25% or less in the case of a qualified foreign investor's company which is
at least 49% owned by non-Israeli residents) for the remainder of the applicable
period of benefits, as described above.

      Dividends paid out of income derived by an approved enterprise (or out of
dividends received from a company whose income is derived by an approved
enterprise) are generally subject to withholding tax at the rate of 15%
(deductible at source). The rate of 15% is limited to dividends and
distributions out of income derived during the benefits period and actually paid
at any time up to 12 years thereafter. A company which elects the alternative
package of tax benefits will be subject to corporate tax at the otherwise
applicable rate of 25% (or lower in the case of a qualified foreign investor's
company which is at least 49% owned by non Israeli residents) in respect of the
gross amount of the dividend if it pays a dividend out of income derived by its
approved enterprise during the tax exemption period.

      The tax benefits available to an approved enterprise relate only to
taxable income attributable to that specific enterprise and are contingent upon
the fulfillment of the conditions stipulated by the Investment Law, the
regulations published thereunder and the instruments of approval for the
specific investments in the approved enterprises. In the event of our failure to
comply with these conditions, the tax and other benefits could be rescinded, in
whole or in part, and we might be required to refund the amount of the canceled
benefits (including the grants), with the addition of the Israeli consumer price
index linkage differences and interest.

      A company that qualifies as a foreign investor's company is entitled to
further tax benefits relating to its approved enterprises. Subject to certain
conditions, a foreign investor company is a company more than 25% of whose share
capital (in terms of shares, rights to profits, voting and appointment of
directors), and of whose combined share and loan capital, is owned, directly or
indirectly, by persons who are not residents of Israel. Such a company with a
foreign investment of over 25% will be eligible for an extension of the period
of tax benefits for its approved enterprises (up to ten years) and further tax
benefits (a reduced corporate tax rate of 10%-20%) should the foreign investment
reach or exceed 49%. The rate of 15% applicable to dividends is effective for an
unlimited period. No assurance can be given that we currently qualify or will
qualify in the future as a foreign investor's company.

                                       66

<PAGE>

FINANCIAL BENEFITS

      An approved enterprise is also entitled to a grant from the Government of
Israel with respect to investments in certain production facilities located in
designated areas within Israel, provided it did not elect the alternative
package of tax benefits. Grants are available for enterprises situated in
development areas and for high technology or skill-intensive enterprises in
Jerusalem. An investment grant is computed as a percentage of the original costs
of the fixed assets for which approved enterprise status has been granted.

      The termination or substantial reduction of any of the benefits available
under the Investment Law could have a material adverse effect on our future
investments in Israel.

TAXATION UNDER INFLATIONARY CONDITIONS

      The Income Tax (Inflationary Adjustments) Law, 1985, or the Inflationary
Adjustments Law, is intended to neutralize the erosion of capital investments in
business and to prevent tax benefits resulting from deduction of inflationary
expenses. This law applies a supplementary set of inflationary adjustments to
the nominal taxable profits computed under regular historical cost principles.

      The Inflationary Adjustments Law introduced a special tax adjustment for
the preservation of equity based on changes in the Israeli consumer price index,
whereby certain corporate assets are classified broadly into fixed
(inflation-resistant) assets and non-fixed assets. Where shareholders' equity,
as defined in the Inflationary Adjustments Law, exceeds the depreciated cost of
fixed assets (as defined in the Inflationary Adjustment Law), a tax deduction
which takes into account the effect of the annual rate of inflation on such
excess is allowed (up to a ceiling of 70% of taxable income for companies in any
single year, with the unused portion carried forward on a linked basis, without
limit). If the depreciated cost of such fixed assets exceeds shareholders'
equity, then such excess, multiplied by the annual inflation rate, is added to
taxable income. In addition, subject to certain limitations, depreciation of
fixed assets and losses carried forward are adjusted for inflation on the basis
of changes in the Israeli consumer price index.

PURSUANT TO THE INFLATIONARY ADJUSTMENTS LAW TO WHICH WE ARE SUBJECT, RESULTS
FOR TAX PURPOSES ARE MEASURED IN REAL TERMS IN ACCORDANCE WITH THE CHANGES IN
THE ISRAELI CONSUMER PRICE INDEX.

TAX REFORM

      On July 24, 2002, Amendment 132 to the Israeli Tax Ordinance was approved
by the Israeli parliament and came into effect on January 1, 2003. The principal
objectives of the amendment were to broaden the categories of taxable income and
to reduce the tax rates imposed on employee income.

                                       67

<PAGE>

      The material consequences of the amendment applicable to our company
include, among other things, imposing a tax upon all income of Israeli
residents, individuals and corporations, regardless of the territorial source of
the income and certain modifications in the qualified taxation tracks of
employee stock options. Moreover, companies tax at the rate of 25% will be
imposed on dividends that generated from income produced or accrued abroad and
also from dividends generated from abroad.

      The Israeli government recently announced an additional new tax reform to
encourage investments in Israel pursuant to which tax rates on interest,
dividends and capital gain, including capital gain from the sale of securities
listed on a stock exchange, shall be at equable tax rate of 20% for individuals
and 25% for corporate bodies. Likewise, the marginal tax rate on ordinary income
of individuals shall be reduced gradually during the following years from 49% to
44% in 2010. Non-Israeli residents will be tax exempt on capital gain derived
from investment in Israeli companies within the period commencing July 1, 2005
through December 31, 2007, even if the capital gain was derived after such
period and without derogating from any other capital gain tax exemption applying
to non-Israeli resident under Israeli law or under any applicable double tax
treaty. The new tax reform might be modified prior to enactment or might not be
enacted at all. Accordingly, we cannot predict the consequences of such expected
tax reform applicable to our company.

CAPITAL GAINS TAX AND TAXATION OF DIVIDENDS

      Israeli law imposes a capital gains tax on the sale of capital assets. The
law distinguishes between real gain and inflationary surplus. The inflationary
surplus is a portion of the total capital gain that is equivalent to the
increase of the relevant asset's purchase price which is attributable to the
increase in the Israeli consumer price index between the date of purchase and
the date of sale. Foreign residents who purchased an asset in foreign currency
may request that the inflationary surplus will be computed on the basis of the
devaluation of the New Israeli Shekel against such foreign currency. The real
gain is the excess of the total capital gain over the inflationary surplus. The
inflationary surplus accumulated from and after December 31, 1993, is exempt
from any capital gains tax in Israel while the real gain is taxed at the
applicable rate discussed below.

      Dealers in securities in Israel are taxed at regular tax rates applicable
to business income.

      Under the convention between the United States and Israel concerning taxes
on income, Israeli capital gains tax will not apply to the sale, exchange or
disposition of ordinary shares by a person:

      o     who qualifies as a resident of the United States within the meaning
            of the U.S.-Israel tax treaty; and

      o     who is entitled to claim the benefits available under the
            U.S.-Israel tax treaty.

                                       68

<PAGE>

      However, this exemption will not apply, among other cases, if the gain is
attributable to a permanent establishment of such person in Israel, or if the
treaty U.S. resident holds, directly or indirectly, shares representing 10% or
more of our voting power during any part of the 12-month period preceding the
sale, exchange or disposition, subject to specified conditions. In this case,
the sale, exchange or disposition would be subject to Israeli tax, to the extent
applicable. However, under the U.S.-Israel tax treaty, a U.S. resident generally
would be permitted to claim a credit for the taxes against the U.S. federal
income tax imposed on the sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel tax
treaty does not relate to U.S. state or local taxes.

      For residents of other countries, the purchaser of the shares may be
required to withhold capital gains tax on all amounts received for the sale of
our ordinary shares, for so long as the capital gain from such a sale is not
exempt from Israeli capital gains tax, and unless a different rate is provided
in a treaty between Israel and the stockholder's country of residence.

      Under new legislation, which became effective on January 1, 2003, the
capital gain from the sale of shares by non-Israeli residents would be tax
exempt as long as our shares are listed on the NASDAQ SmallCap Market or any
other stock exchange recognized by the Israeli Ministry of Finance, and provided
certain other conditions are met, the most relevant of which are: (A) the
capital gain is not attributed to the foreign resident's permanent establishment
in Israel, and (B) the shares were acquired by the foreign resident after the
company's shares had been listed for trading on the foreign Exchange.

      If the shares were sold by Israeli residents, then (A) for the period
ending December 31, 2002 their sale would be tax exempt so long as (1) the
shares are listed on a stock exchange, such as, in our case, the NASDAQ SmallCap
Market, which is recognized by the Israeli Ministry of Finance, and (2) we
qualified as an industrial company or industrial holding company under the law
for Encouragement of Industry (Taxes) 1969 and (B) for the period commencing
January 1, 2003, the sale of the shares would be subject to a 15% tax if the
shares are listed on a stock exchange recognized by the Israeli Ministry of
Finance. We believe that in 2004, we qualified as an Industrial Company under
the law for Encouragement of Industry (Taxes) 1969. We cannot provide any
assurance that the Israeli tax authorities will agree with the determination
that we qualified as an industrial company in the past or that we will maintain
this qualification or our status as an industrial company.

      If we are delisted, gains from the sale of our ordinary shares will be
subject to capital gains tax at a rate of 25% unless an exemption or other tax
rate applies in accordance with a tax treaty between Israel and the
shareholder's country of residence.

      Under an amendment to the Inflationary Adjustments Law, non-Israeli
corporations might be subject to Israeli taxes on the sale of shares in an
Israeli company which are traded on certain stock markets, including the NASDAQ
SmallCap Market, subject to the provisions of any applicable double taxation
treaty.

      On the distribution of dividends other than bonus shares (stock
dividends), income tax is generally withheld at source at the rate of 25% (or
the lower rate payable with respect to dividends received out of income derived
from approved enterprises; (see "Law for the Encouragement of Capital
Investments, 1959"), unless a double taxation treaty is in effect between Israel
and the shareholder's country of residence which provides for a lower tax rate
in Israel on dividends. The Convention between the State of Israel and the
Government of the United States relating to relief from double taxation, or the
Treaty, provides for a maximum tax of 25% on dividends paid to a resident of the
United States. Dividends paid to an Israeli company by another Israeli company
are not subject to corporate tax, unless received out of income derived from
approved enterprises or unless the dividend stems from income produced or
accrued abroad.

                                       69

<PAGE>

TAXATION OF NON-RESIDENT HOLDERS OF SHARES

      Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest, as well as non-passive income from
services rendered in Israel. On distributions of dividends other than bonus
shares or stock dividends, income tax at the rate of 25% (12.5% for dividends
not generated by an approved enterprise if the non-resident is a U.S.
corporation and holds 10% of our voting power, and 15% for dividends generated
by an approved enterprise) is withheld at source, unless a different rate is
provided in a treaty between Israel and the shareholder's country of residence.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder
of ordinary shares who is a Treaty U.S. Resident will be 25%. However, under the
Investment Law, dividends generated by an approved enterprise are taxed at the
rate of 15%.

FOREIGN EXCHANGE REGULATION

      Non-residents of Israel who purchase ordinary shares and receive
dividends, if any are declared, or any amounts payable upon the dissolution,
liquidation or winding up of our affairs will be able to freely repatriate such
amounts in non-Israeli currencies, pursuant to the general permit issued by the
Controller of Foreign Currency at the Bank of Israel under the Currency Control
Law, 1978, provided that we have withheld Israeli income tax with respect to
such amounts.

      Under the general permit issued by the Controller of Foreign Currency,
Israeli residents, including corporations, may generally purchase securities,
including the ordinary shares, outside of Israel.

STAMP DUTY

      Stamp duty applies in Israel to various types of documents at various
rates, depending primarily on the type of the document and the amount specified
therein. In June 2003, the statute imposing stamp duty was amended. Following
this amendment, the Israeli Tax Authority has increased enforcement of this
statute. The amendment to the statute and the enforcement actions taken by the
Israeli Tax Authority are in legal dispute before the Israeli Supreme Court,
which has not yet ruled on this matter. The outcome of the Supreme Court ruling
is uncertain. In addition, under current legislation the stamp duty statute is
expected to be gradually abolished until its complete cancellation in 2008. To
date, we have not received a demand for payment of stamp duty following this
amendment. Based on advise from our Israeli counsel, we believe that our
exposure to probable costs arising from this law are not material and therefore
no provision related to this law has been included in our financial statements
as of December 31, 2004.

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

      The following is a summary of certain material U.S. federal income tax
consequences that apply to U.S. Holders who hold ordinary shares as capital
assets. This summary is based on the United States Internal Revenue Code of
1986, as amended, or the Code, Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof, and the U.S.-Israel Tax
Treaty, all as in effect on the date hereof and all of which are subject to
change either prospectively or retroactively. This summary does not address all
tax considerations that may be relevant with respect to an investment in
ordinary shares. This summary does not account for the specific circumstances of
any particular investor, such as:

                                       70

<PAGE>

      o     broker-dealers,

      o     financial institutions,

      o     certain insurance companies,

      o     regulated investment companies,

      o     investors liable for alternative minimum tax,

      o     tax-exempt organizations,

      o     non-resident aliens of the U.S. or taxpayers whose functional
            currency is not the U.S. dollar,

      o     persons who hold the ordinary shares through partnerships or other
            pass-through entities,

      o     investors that actually or constructively own, or have owned, 10
            percent or more of our voting shares, and

      o     investors holding ordinary shares as part of a straddle or
            appreciated financial position or a hedging or conversion
            transaction.

      If a partnership or an entity treated as a partnership for U.S. federal
income tax purposes owns ordinary shares, the U.S. federal income tax treatment
of a partner in such a partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of
ordinary shares.

      This summary does not address the effect of any U.S. federal taxation
other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.

      You are urged to consult your tax advisors regarding the foreign and
United States federal, state and local tax considerations of an investment in
ordinary shares.

      For purposes of this summary, a U.S. Holder is:

      o     an individual who is a citizen or, for U.S. federal income tax
            purposes, a resident of the United States;

      o     a corporation or other entity created or organized in or under the
            laws of the United States or any political subdivision thereof;

                                       71

<PAGE>

      o     an estate whose income is subject to U.S. federal income tax
            regardless of its source; or

      o     a trust that (a) is subject to the primary supervision of a court
            within the United States and the control of one or more U.S. persons
            or (b) has a valid election in effect under applicable U.S. Treasury
            regulations to be treated as a U.S. person.

TAXATION OF DIVIDENDS

      The gross amount of any distributions received with respect to ordinary
shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends for U.S. federal income tax purposes, to the extent of our
current and accumulated earnings and profits as determined for U.S. Federal
income tax purposes. You will be required to include this amount of dividends in
gross income as ordinary income. Distributions in excess of our earnings and
profits will be treated as a non-taxable return of capital to the extent of your
tax basis in the ordinary shares, and any amount in excess of your tax basis
will be treated as gain from the sale of ordinary shares. See "--Disposition of
Ordinary Shares" below for the discussion on the taxation of capital gains.
Dividends will not qualify for the dividends-received deduction generally
available to corporations under Section 243 of the Code.

      Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends
are received. A U.S. Holder who receives payment in NIS and converts NIS into
U.S. dollars at an exchange rate other than the rate in effect on such day may
have a foreign currency exchange gain or loss that would be treated as ordinary
income or loss. U.S. Holders should consult their own tax advisors concerning
the U.S. tax consequences of acquiring, holding and disposing of NIS.

      Subject to complex limitations, any Israeli withholding tax imposed on
such dividends will be a foreign income tax eligible for credit against a U.S.
Holder's U.S. federal income tax liability, subject to certain limitations set
out in the Code (or, alternatively, for deduction against income in determining
such tax liability). The limitations set out in the Code include computational
rules under which foreign tax credits allowable with respect to specific classes
of income cannot exceed the U.S. federal income taxes otherwise payable with
respect to each such class of income. Dividends generally will be treated as
foreign-source passive income or financial services income for United States
foreign tax credit purposes. U.S. Holders should note that recently enacted
legislation eliminates the "financial services income" category with respect to
taxable years beginning after December 31, 2006. Under this legislation, the
foreign tax credit limitation categories will be limited to "passive category
income" and "general category income." A U.S. Holder will be denied a foreign
tax credit with respect to Israeli income tax withheld from dividends received
on the ordinary shares to the extent such U.S. Holder has not held the ordinary
shares for at least 16 days of the 30-day period beginning on the date which is
15 days before the ex-dividend date or to the extent such U.S. Holder is under
an obligation to make related payments with respect to substantially similar or
related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. Further, there are
special rules for computing the foreign tax credit limitation of a taxpayer who
receives dividends subject to a reduced tax rate. The rules relating to the
determination of the foreign tax credit are complex, and you should consult with
your personal tax advisors to determine whether and to what extent you would be
entitled to this credit.

                                       72

<PAGE>

      Subject to certain limitations, "qualified dividend income" received by a
noncorporate U.S. Holder in tax years beginning on or before December 31, 2008
will be subject to tax at a reduced maximum tax rate of 15 percent.
Distributions taxable as dividends paid on the ordinary shares should qualify
for the 15 percent rate provided that either: (i) we are entitled to benefits
under the income tax treaty between the United States and Israel (the "Treaty")
or (ii) the ordinary shares are readily tradable on an established securities
market in the United States and certain other requirements are met. We believe
that we are entitled to benefits under the Treaty and that the ordinary shares
currently are readily tradable on an established securities market in the United
States. However, no assurance can be given that the ordinary shares will remain
readily tradable. The rate reduction does not apply unless certain holding
period requirements are satisfied. With respect to the ordinary shares, the U.S.
Holder must have held such shares for at least 61 days during the 121-day period
beginning 60 days before the ex-dividend date. The rate reduction also does not
apply to dividends received from passive foreign investment companies, see
discussion below, or in respect of certain hedged positions or in certain other
situations. The legislation enacting the reduced tax rate contains special rules
for computing the foreign tax credit limitation of a taxpayer who receives
dividends subject to the reduced tax rate. U.S. Holders of ordinary shares
should consult their own tax advisors regarding the effect of these rules in
their particular circumstances.

DISPOSITION OF ORDINARY SHARES

      If you sell or otherwise dispose of ordinary shares, you will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and the
adjusted tax basis in ordinary shares. Subject to the discussion below under the
heading "Passive Foreign Investment Companies," such gain or loss generally will
be capital gain or loss and will be long-term capital gain or loss if you have
held the ordinary shares for more than one year at the time of the sale or other
disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S.-source for purposes of the foreign
tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.

      In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.

      An accrual basis U.S. Holder may elect the same treatment required of cash
basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service,
or the IRS. In the event that an accrual basis U.S. Holder does not elect to be
treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.

                                       73

<PAGE>

PASSIVE FOREIGN INVESTMENT COMPANIES

      For U.S. federal income tax purposes, we will be considered a passive
foreign investment company, or PFIC, for any taxable year in which either (1)
75% or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets, which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.

      Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is based upon the composition of our income and assets from time to time,
there can be no assurances that we will not become a PFIC for any future taxable
year.

      If we are treated as a PFIC for any taxable year, then, unless you elect
either to treat your investment in ordinary shares as an investment in a
"qualified electing fund", or a QEF election, or to "mark-to-market" your
ordinary shares, as described below, dividends would not qualify for the reduced
maximum tax rate, discussed above, and

      o     you would be required to allocate income recognized upon receiving
            certain dividends or gain recognized upon the disposition of
            ordinary shares ratably over the holding period for such ordinary
            shares,

      o     the amount allocated to each year during which we are considered a
            PFIC other than the year of the dividend payment or disposition
            would be subject to tax at the highest individual or corporate tax
            rate, as the case may be, in effect for that year and an interest
            charge would be imposed with respect to the resulting tax liability
            allocated to each such year,

      o     the amount allocated to the current taxable year and any taxable
            year before we became a PFIC would be taxable as ordinary income in
            the current year, and

      o     you would be required to make an annual return on IRS Form 8621
            regarding distributions received with respect to ordinary shares and
            any gain realized on your ordinary shares.

                                       74

<PAGE>

      If you make either a timely QEF election or a timely mark-to-market
election in respect of your ordinary shares, you would not be subject to the
rules described above. If you make a timely QEF election, you would be required
to include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.

      Alternatively, if the ordinary shares are considered "marketable stock"
and if you elect to "mark-to-market" your ordinary shares, you will generally
include in income any excess of the fair market value of the ordinary shares at
the close of each tax year over your adjusted basis in the ordinary shares. If
the fair market value of the ordinary shares had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ordinary shares over its fair market value at that time.
However, such deductions generally would be limited to the net mark-to-market
gains, if any, that you included in income with respect to such ordinary shares
in prior years. Income recognized and deductions allowed under the
mark-to-market provisions, as well as any gain or loss on the disposition of
ordinary shares with respect to which the mark-to-market election is made, is
treated as ordinary income or loss.

BACKUP WITHHOLDING AND INFORMATION REPORTING

      Payments in respect of ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and to U.S. backup withholding
tax at a rate equal to the fourth lowest income tax rate applicable to
individuals which, under current law, is 28%. Backup withholding will not apply,
however, if you (i) are a corporation or come within certain exempt categories,
and demonstrate the fact when so required, or (ii) furnish a correct taxpayer
identification number and make any other required certification.

      Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.

      Any U.S. Holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.

U.S. GIFT AND ESTATE TAX

      An individual U.S. Holder of ordinary shares will be subject to U.S. gift
and estate taxes with respect to ordinary shares in the same manner and to the
same extent as with respect to other types of personal property.

F.    DIVIDEND AND PAYING AGENTS

      Not applicable.

G.    STATEMENT BY EXPERTS

      Not applicable.

                                       75

<PAGE>

H.    DOCUMENTS ON DISPLAY

      We are subject to the reporting requirements of the United States
Securities Exchange Act of 1934, as amended, as applicable to "foreign private
issuers" as defined in Rule 3b-4 under the Exchange Act, and in accordance
therewith, we file annual and interim reports and other information with the
Securities and Exchange Commission.

      As a foreign private issuer, we are exempt from certain provisions of the
Exchange Act. Accordingly, our proxy solicitations are not subject to the
disclosure and procedural requirements of Regulation 14A under the Exchange Act,
transactions in our equity securities by our officers and directors are exempt
from reporting and the "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements as frequently or
as promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we distribute annually to our shareholders an annual report
containing financial statements that have been examined and reported on, with an
opinion expressed by, an independent registered public accounting firm, and we
file reports with the Securities and Exchange Commission on Form 6-K containing
(among other things) press releases and unaudited financial information.

      This annual report and the exhibits thereto and any other document we file
pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference rooms at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024,
Washington, D.C. 20549 and on the Securities and Exchange Commission Internet
site (http://www.sec.gov) and on our website www.eltekglobal.com You may obtain
information on the operation of the Securities and Exchange Commission's public
reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities
and Exchange Commission filings is 0-28884.

      The documents concerning our company which are referred to in this annual
report may also be inspected at our offices located at Sgoola Industrial Zone,
Petach Tikva 49101, Israel.

I.    SUBSIDIARY INFORMATION

      Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

      We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting primarily the interest on
short-term credit lines, long-term loans and our factoring agreement.

                                       76

<PAGE>

FOREIGN CURRENCY EXCHANGE RISK

      Our financial currency is the NIS and our revenues from sales in Israel
are usually linked to the U.S. dollar. We also incur expenses primarily in U.S.
dollars and Euros. While in former years we entered into certain foreign
exchange contracts and we intend to enter into foreign exchange contracts in
2005, in the fiscal year ended December 31, 2004 we did not enter into any such
contracts. We do not expect to use forward contracts for trading purposes in the
future. An increase in foreign currency rates (the U.S. dollar and the Euro) as
against the NIS will generally result in increased revenues and net income.
Similarly, a decrease in foreign currency rates (the U.S. dollar and the Euro)
as against the NIS will generally result in decreased revenues and may have a
negative impact on our net income.

INTEREST RATE RISK

      Our exposure to market risk for changes in interest rates relates
primarily to our short-term credit lines, our non-linked and U.S. dollar linked
long-term loans and our factoring agreement. These are principally denominated
in (i) NIS and bear annual interest ranging from 6.15% to 6.7% as of December
31, 2004; and (ii) U.S. dollars and bear interest ranging from 3.9% to 5.15% as
of December 31, 2004. For purposes of specific risk analysis, we use sensitivity
analysis to determine the impact that market risk exposure may have on the
financial expenses derived from our short-term credit lines, long-term loans and
factoring agreement. Our potential loss over one year that would result from a
hypothetical change of 1% in the interest rate would be approximately $58,000.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      Not applicable.

                                    PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

      None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

      None.

ITEM 15. CONTROLS AND PROCEDURES

      Our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered
by this annual report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by our company in reports that we file or
submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
was made known to them by others within the company, as appropriate to allow
timely decisions regarding required disclosure.

      There were no changes to our internal control over financial reporting
that occurred during the period covered by this annual report on Form 20-F that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

                                       77

<PAGE>

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

ITEM 16.  [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

      Our Board of Directors has determined that Mr. Eliyaho Tov, who serves on
our audit committee, meets the definition of an audit committee financial
expert, as defined in Item 401 of Regulation S-K.

ITEM 16B. CODE OF ETHICS

      We have adopted a code of ethics that applies to our chief executive
officer and all senior financial employees of our company, including the chief
financial officer and the comptroller. The code of ethics is publicly available
on our website at www.eltekglobal.com. Written copies are available upon
request. If we make any substantive amendment to the code of ethics or grant any
waivers, including any implicit waiver, from a provision of the codes of ethics,
we will disclose the nature of such amendment or waiver on our website.

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

      The following table sets forth, for each of the years indicated, the fees
paid to our independent registered public accountants and the percentage of each
of the fees out of the total amount paid to the accountants.

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                      --------------------------------------------------------
                                                 2003                         2004
                                      --------------------------    --------------------------
      Services Rendered                  Fees        Percentages       Fees        Percentages
-----------------------------------   -----------    -----------    -----------    -----------
                                                           (In thousands)
<S>                                   <C>               <C>         <C>               <C>
Audit (1) .........................   NIS 331,000       90.9%       NIS 302,000       95.9%
Audit-related (2) .................        20,000        5.5%                --         --
Tax (3) ...........................        13,000        3.6%            13,000        4.1%
Other (4) .........................            --         --                 --         --
Total .............................   NIS 364,000        100%       NIS 315,000        100%
</TABLE>

----------
(1)   Audit fees consist of services that would normally be provided in
      connection with statutory and regulatory filings or engagements, including
      services that generally only the independent accountant can reasonably
      provide.

(2)   Audit-related fees relate to assurance and associated services that
      traditionally are performed by the independent accountant, including:
      attest services that are not required by statute or regulation; accounting
      consultation and audits in connection with mergers, acquisitions and
      divestitures; employee benefit plans audits; and consultation concerning
      financial accounting and reporting standards.

                                       78

<PAGE>

(3)   Tax fees relate to services performed by the tax division for tax
      compliance, planning, and advice.

PRE-APPROVAL POLICIES AND PROCEDURES

      Our audit committee has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent
registered public accountants, Somekh Chaikin, a member firm of KPMG
International. Pre-approval of an audit or non-audit service may be given as a
general pre-approval, as part of the audit committee's approval of the scope of
the engagement of our independent auditor, or on an individual basis. Any
proposed services exceeding general pre-approved levels also requires specific
pre-approval by our audit committee. The policy prohibits retention of the
independent registered public accountants to perform the prohibited non-audit
functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the
SEC, and also requires the audit committee to consider whether proposed services
are compatible with the independence of the registered public accountants.

ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
          COMMITTEE

      Not applicable.

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
          PURCHASERS

ISSUER PURCHASE OF EQUITY SECURITIES

      Neither we, nor any affiliated purchaser of our company, have purchased
any of our securities during 2004.

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

<TABLE>
<S>                                                            <C>
CONSOLIDATED FINANCIAL STATEMENTS.

Report of Independent Registered Public Accounting Firm..      F-1

Consolidated Balance Sheets .............................      F-2

Consolidated Statements of Operations....................      F-4

Statements of Changes in Shareholders' Equity............      F-5

Consolidated Statements of Cash Flows....................      F-6

Notes to Consolidated Financial Statements...............      F-9
</TABLE>

                                       79

<PAGE>

ITEM 18. FINANCIAL STATEMENTS

      Not applicable.

ITEM 19. EXHIBITS

      Index to Exhibits

<TABLE>
<CAPTION>
Exhibit    Description
-------    ------------
<S>        <C>
  1.1      Memorandum of Association of the Registrant (1)

  1.2      Articles of Association of the Registrant, as amended (4)

  2.1      Specimen of Share Certificate (1)

  4.1      Indemnity Agreement provided to Arieh Reichart dated December 5, 1996 and a schedule of similar indemnity
           agreements provided by the Registrant to its officers and directors (1)

  4.2      1996 Employee Stock Option Plan (1)

  4.3      2000 Stock Option Plan (2)

  4.4      Services Factoring Agreement dated July 8, 2003 (3)

  4.5      Share Purchase Agreement between En-Eltek Netherlands 2000 B.V., Kubatronik-Leiterplatten GmbH, Mr. Alois Kubat,
           Mr. Thomas Kubat and Ms. Heike Heidenreich dated June 10, 2002

  4.6      Extension of Put/Call Option Agreement among En-Eltek Netherlands 2000 B.V. and Mr. Alois Kubat dated May 4, 2005

  8.1      List of Subsidiaries of the Registrant

 10.1      Consent of Somekh Chaikin, a member firm of KPMG International

 12.1      Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
           Act, as amended

 12.2      Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
           Act, as amended

 13.1      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002

 13.2      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002
</TABLE>
                                       80

<PAGE>

----------

(1)   Filed as an exhibit to our registration statement on Form F-1,
      registration number 333-5770, as amended, filed with the Securities and
      Exchange Commission and incorporated herein by reference.
(2)   Filed as an exhibit to our Annual Report on Form 20-F for the year ended
      December 31, 2000 and incorporated herein by reference.
(3)   Filed as an exhibit to our Annual Report on Form 20-F for the year ended
      December 31, 2002 and incorporated herein by reference.
(4)   Filed as an exhibit to our Annual Report on Form 20-F for the year ended
      December 31, 2003 and incorporated herein by reference.

                                       81

<PAGE>

                              S I G N A T U R E S

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

                                  ELTEK LTD.

                                  By: /s/ Arieh Reichart
                                  -----------------------------
                                  Name: Arieh Reichart
                                  Title: President and Chief Executive Officer

                                  By: /s/ Amnon Shemer
                                  -----------------------------
                                  Name: Amnon Shemer
                                  Title: Chief Financial Officer

Dated: June 30, 2005

                                       82
<PAGE>


================================================================================

                                   ELTEK LTD.

                            CONSOLIDATED AND COMPANY
                              FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2004

================================================================================

<PAGE>

                                                                      Eltek Ltd.

CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004
--------------------------------------------------------------------------------

CONTENTS

<TABLE>
<CAPTION>
                                                                                  PAGE
<S>                                                                                <C>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                            F-1

Consolidated and Company Balance Sheets as of December 31, 2004 and 2003           F-2

Consolidated and Company Statements of Operations for each of the years ended
 December 31, 2004, 2003 and 2002                                                  F-4

Consolidated and Company Statements of Changes in Shareholders' Equity for
 each of the years ended December 31, 2004, 2003 and 2002                          F-5

Consolidated and Company Statements of Cash Flows for each of the years ended
 December 31, 2004, 2003 and 2002                                                  F-6

Notes to the Consolidated and Company Financial Statements                         F-9
</TABLE>

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BOARD OF DIRECTORS AND SHAREHOLDERS OF ELTEK LTD.

We have audited the accompanying consolidated and Company balance sheets of
Eltek Ltd. (the "Company") and its subsidiaries as of December 31, 2004 and 2003
and the related consolidated and Company statements of operations, changes in
shareholders' equity, and cash flows, for each of the years in the three years
period ended December 31, 2004. These consolidated and Company financial
statements are the responsibility of the Company's Board of Directors and of its
Management. Our responsibility is to express an opinion on these consolidated
and Company financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 Board of Directors and Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated and Company financial statements, referred to
above present fairly, in all material respects, the consolidated and Company
financial position as of December 31, 2004 and 2003 and the consolidated results
of their operations, changes in their shareholders' equity and their cash flows
for each of the years in the three years period ended December 31, 2004, in
conformity with accounting principles generally accepted in Israel.

As discussed in Note 2B, the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods that ended up to
the aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with Opinions of the Institute of Certified Public
Accountants in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from U.S. generally accepted accounting principles. Information
relating to the nature and effect of such differences is summarized in Note 28
to the consolidated and Company financial statements. As described in Note
28(G)(2) the Company has restated its statements of other comprehensive income
for the year ended December 31, 2003.

Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International

Tel Aviv, Israel, March 14, 2005, except for Note 30, as to which the date is
April 5, 2005

<PAGE>

BALANCE SHEETS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                CONVENIENCE
                                                                                                                TRANSLATION
                                                                                                               CONSOLIDATED
                                                           CONSOLIDATED                   COMPANY                (NOTE 2F)
                                                     -------------------------   -------------------------   ----------------
                                                     DECEMBER 31   DECEMBER 31   DECEMBER 31   DECEMBER 31      DECEMBER 31
                                                         2003          2004         2003          2004             2004
                                                     -----------   -----------   -----------   -----------   ----------------
                                                       ADJUSTED      REPORTED     ADJUSTED      REPORTED
                                              NOTE     AMOUNTS**     AMOUNTS*     AMOUNTS**     AMOUNTS*       (UNAUDITED)
                                              ----   -----------   -----------   -----------   -----------   ----------------
                                                                        NIS IN THOUSANDS                     US$ IN THOUSANDS
                                                     -----------------------------------------------------   ----------------
<S>                                            <C>      <C>           <C>          <C>            <C>            <C>
ASSETS

CURRENT ASSETS

Cash and cash equivalents                        3       4,371         4,274        1,248          2,436            992

Receivables:

  Trade                                          4      19,787        23,835       18,820         22,072          5,533
  Other                                          5       2,262         1,158        2,405***       1,329            269

Inventories                                      6      13,158        13,633       11,618         11,908          3,164
Prepaid expenses                                           693           563          648            454            131
                                                        ------        ------       ------         ------         ------

Total current assets                                    40,271        43,463       34,739         38,199         10,089
                                                        ------        ------       ------         ------         ------

DEFERRED TAXES                                  24           -           753            -              -            175
                                                        ------        ------       ------         ------         ------

LONG-TERM INVESTMENTS                            7           -             -       11,267***      10,674              -
                                                        ------        ------       ------         ------         ------

PROPERTY AND
 EQUIPMENT, NET                                  8      43,381        31,569       38,162         27,485          7,328
                                                        ------        ------       ------         ------         ------

GOODWILL                                       1;9       4,972         4,656            -              -          1,081
                                                        ------        ------       ------         ------         ------

Total assets                                            88,624        80,441       84,168         76,358         18,673
                                                        ======        ======       ======         ======         ======
</TABLE>

*   With respect to discontinuance of adjustment to the effect of inflation as
    from the CPI of December 2003 (see Note 2B)
**  Amounts adjusted to reflect inflation in terms of NIS of December 31, 2003.
*** Reclassified

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

                                      F-2

<PAGE>

                                                                      Eltek Ltd.

BALANCE SHEETS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                CONVENIENCE
                                                                                                                TRANSLATION
                                                                                                               CONSOLIDATED
                                                            CONSOLIDATED                  COMPANY                (NOTE 2F)
                                                     -------------------------   -------------------------   ----------------
                                                     DECEMBER 31   DECEMBER 31   DECEMBER 31   DECEMBER 31      DECEMBER 31
                                                         2003         2004          2003          2004             2004
                                                     -----------   -----------   -----------   -----------   ----------------
                                                       ADJUSTED     REPORTED      ADJUSTED      REPORTED
                                              NOTE     AMOUNTS**    AMOUNTS*      AMOUNTS**     AMOUNTS*        (UNAUDITED)
                                              ----   -----------   -----------   -----------   -----------   ----------------
                                                                      NIS IN THOUSANDS                       US$ IN THOUSANDS
                                                     -----------------------------------------------------   ----------------
<S>                                            <C>     <C>           <C>           <C>           <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Short-term credit and current maturities
 of long-term debts                            10       19,461        19,589        19,461        19,589          4,547
Trade payables                                 11       22,314        23,577        21,146        22,633          5,473
Other liabilities and accrued
 expenses                                      12        8,555        11,083         7,313         9,936          2,572
                                                       -------       -------       -------       -------        -------
Total current liabilities                               50,330        54,249        47,920        52,158         12,592
                                                       -------       -------       -------       -------        -------
LONG-TERM LIABILITIES
Long-term debt, excluding current
 maturities                                    13       13,692         6,687        13,692         6,687          1,552
Employee severance benefits, net               14          940         1,048           864           956            243
                                                       -------       -------       -------       -------        -------
Total long-term liabilities                             14,632         7,735        14,556         7,643          1,795
                                                       -------       -------       -------       -------        -------

Minority interests                                       1,970         1,900             -             -            441
                                                       -------       -------       -------       -------        -------

CONVERTIBLE NOTE                               16        2,295         1,566         2,295         1,566            364
                                                       -------       -------       -------       -------        -------
COMMITMENTS AND CONTINGENT LIABILITIES         15
SHAREHOLDERS' EQUITY                           17
Ordinary shares, NIS 0.6 par value
Authorized 50,000,000 shares, issued and
 outstanding 5,491,711 shares as of
 December 31, 2004 (4,885,651 shares as of
 December 31, 2003)                                     29,334        29,698        29,334        29,698          6,894
Additional paid-in capital                              51,985        52,500        51,985        52,500         12,187
Capital reserves related to loans from
 controlling shareholders                               10,010        10,010        10,010        10,010          2,324
Cumulative foreign currency translation
 adjustments                                             2,004         2,574         2,004         2,574            597
Capital reserves                                         6,685         6,685         6,685         6,685          1,552
Accumulated deficit                                    (80,621)      (86,476)      (80,621)      (86,476)       (20,073)
                                                       -------       -------       -------       -------        -------
Total shareholders' equity                              19,397        14,991        19,397        14,991          3,481
                                                       -------       -------       -------       -------        -------
Total liabilities and shareholders' equity              88,624        80,441        84,168        76,358         18,673
                                                       =======       =======       =======       =======        =======
</TABLE>

<TABLE>
<S>                                     <C>                       <C>
----------------------------------      -----------------------   ----------------------------------
Arieh Reichart                          Amnon Shemer              Nissim Gilam
President, Chief Executive Officer      Chief Financial Officer   Chairman of the board of directors
</TABLE>

Date: March 14, 2005, except for Note 30, as to which the date is April 5, 2005

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

                                      F-3

<PAGE>

                                                                      Eltek Ltd.

STATEMENTS OF OPERATIONS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            CONSOLIDATED
                                                            ----------------------------------------------
                                                             YEAR ENDED      YEAR ENDED       YEAR ENDED
                                                             DECEMBER 31     DECEMBER 31      DECEMBER 31
                                                                2002            2003             2004
                                                            ------------     -----------     -------------
                                                              ADJUSTED        ADJUSTED         REPORTED
                                                     NOTE     AMOUNTS**       AMOUNTS**        AMOUNTS*
                                                     ----   ------------     -----------     -------------
                                                            NIS IN THOUSANDS, (EXCEPT LOSS PER SHARE DATA)
                                                            ----------------------------------------------
<S>                                                   <C>     <C>             <C>              <C>
Revenues                                              18       108,035         108,303          125,002
Cost of revenues                                      19      (106,458)       (102,643)        (109,998)
                                                              --------        --------         --------
Gross profit (loss)                                              1,577           5,660           15,004
Research and development income (expenses), net       20          (116)             18                -
Selling, general and administrative expenses          21       (15,152)        (14,996)         (18,265)
Amortization of goodwill                               9          (292)           (584)            (593)
                                                              --------        --------         --------

Operating loss                                                 (13,983)         (9,902)          (3,854)
Financial expenses, net                               22        (1,443)         (2,989)          (2,948)
                                                              --------        --------         --------

Loss before other income (expenses), net                       (15,426)        (12,891)          (6,802)
Other income (expenses), net                          23           290             (20)              52
                                                              --------        --------         --------

Loss before tax benefit (expenses)                             (15,136)        (12,911)          (6,750)
Tax benefit (expenses)                                24          (380)           (194)             713
                                                              --------        --------         --------

Loss after tax benefit (expenses)                              (15,516)        (13,105)          (6,037)
Company's share in losses of subsidiaries, net         7             -               -                -
Minority share in subsidiary's net results                        (198)            118              182
                                                              --------        --------         --------
Net loss                                                       (15,714)        (12,987)          (5,855)
                                                              ========        ========         ========

Basic and diluted net loss per NIS 1 par
 value of the share capital***                                   (5.36)          (3.61)           (1.36)
                                                              ========        ========         ========

Total par value of shares used to compute basic
 and diluted net loss per NIS 1 par value of
 share                                                           2,932           3,569            4,131
                                                              ========        ========         ========

<CAPTION>
                                                                                                         CONVENIENCE
                                                                                                         TRANSLATION
                                                                                                          (NOTE 2F)
                                                                                                      ----------------
                                                                    COMPANY                             CONSOLIDATED
                                                   ----------------------------------------------     ----------------
                                                     YEAR ENDED     YEAR ENDED      YEAR ENDED           YEAR ENDED
                                                    DECEMBER 31     DECEMBER 31     DECEMBER 31          DECEMBER 31
                                                       2002            2003            2004                 2004
                                                   ------------     -----------     -------------     ----------------
                                                     ADJUSTED        ADJUSTED         REPORTED
                                                     AMOUNTS**       AMOUNTS**        AMOUNTS*           (UNAUDITED)
                                                   ------------     -----------     -------------     ----------------
                                                   NIS IN THOUSANDS, (EXCEPT LOSS PER SHARE DATA)     US$ IN THOUSANDS
                                                   ----------------------------------------------     ----------------
<S>                                                  <C>              <C>             <C>                <C>
Revenues                                              100,545          93,817         108,785             29,015
Cost of revenues                                     (100,978)        (90,803)        (95,331)           (25,533)
                                                     --------         -------         -------            -------
Gross profit (loss)                                      (433)          3,014          13,454              3,482
Research and development income (expenses), net          (116)             18               -                  -
Selling, general and administrative expenses          (13,405)        (11,687)        (15,054)            (4,240)
Amortization of goodwill                                    -               -               -               (138)
                                                     --------         -------         -------            -------

Operating loss                                        (13,954)         (8,655)         (1,600)              (896)
Financial expenses, net                                (1,081)         (2,226)         (2,281)              (684)
                                                     --------         -------         -------            -------

Loss before other income (expenses), net              (15,035)        (10,881)         (3,881)            (1,580)
Other income (expenses), net                             (108)           (108)             43                 12
                                                     --------         -------         -------            -------

Loss before tax benefit (expenses)                    (15,143)        (10,989)         (3,838)            (1,568)
Tax benefit (expenses)                                    (94)             96               -                166
                                                     --------         -------         -------            -------

Loss after tax benefit (expenses)                     (15,237)        (10,893)         (3,838)            (1,402)
Company's share in losses of subsidiaries, net           (477)         (2,094)         (2,017)                 -
Minority share in subsidiary's net results                  -               -               -                 42
                                                     --------         -------         -------            -------
Net loss                                              (15,714)        (12,987)         (5,855)            (1,360)
                                                     ========         =======         =======            =======

Basic and diluted net loss per NIS 1 par
 value of the share capital***                          (5.36)          (3.61)          (1.36)             (0.32)
                                                     ========         =======         =======            =======

Total par value of shares used to compute basic
 and diluted net loss per NIS 1 par value of
 share                                                  2,932           3,569           4,131              4,131
                                                     ========         =======         =======            =======
</TABLE>

*   With respect to discontinuance of adjustment to the effect of inflation as
    from the CPI of December 2003 (see Note 2B)
**  Amounts adjusted to reflect inflation in terms of NIS of December 31, 2003.
*** Ordinary shares of a par value of NIS 0.6 each.

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

                                      F-4

<PAGE>

                                                                      Eltek Ltd.

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONSOLIDATED AND COMPANY)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     CAPITAL
                                                                    RESERVES    CUMULATIVE
                                                                   RELATED TO     FOREIGN
                                 NUMBER OF            ADDITIONAL   LOANS FROM    CURRENCY                               TOTAL
                                 ORDINARY   ORDINARY    PAID-IN    CONTROLLING  TRANSLATION  CAPITAL   ACCUMULATED  SHAREHOLDERS'
                                  SHARES     SHARES     CAPITAL   SHAREHOLDERS  ADJUSTMENTS  RESERVES    DEFICIT       EQUITY
                                 ---------  --------  ----------  ------------  -----------  --------  -----------  -------------
                                               NIS        NIS          NIS          NIS        NIS        NIS            NIS
                                            --------  ----------  ------------  -----------  --------  -----------  -------------
                                                                    (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
                                            -------------------------------------------------------------------------------------
                                                                            ADJUSTED AMOUNTS**
                                            -------------------------------------------------------------------------------------
<S>                              <C>          <C>       <C>          <C>           <C>        <C>        <C>         <C>
BALANCE AS OF DECEMBER 31, 2001  4,885,651    29,334    51,985       10,010            -      6,685      (51,920)     46,094

CHANGES DURING THE YEAR
Cumulative foreign currency
 translation adjustments                 -         -         -            -          539          -            -         539
Net loss                                 -         -         -            -            -          -      (15,714)    (15,714)
                                 ---------    ------    ------       ------        -----      -----      -------     -------

BALANCE AS OF DECEMBER 31, 2002  4,885,651    29,334    51,985       10,010          539      6,685      (67,634)     30,919

CHANGES DURING THE YEAR
Cumulative foreign currency
 translation adjustments                 -         -         -            -        1,465          -            -       1,465
Net loss                                 -         -         -            -            -          -      (12,987)    (12,987)
                                 ---------    ------    ------       ------        -----      -----      -------     -------

BALANCE AS OF DECEMBER 31, 2003  4,885,651    29,334    51,985       10,010        2,004      6,685      (80,621)     19,397

                                                                          REPORTED AMOUNTS*
                                              -----------------------------------------------------------------------------------

CHANGES DURING THE YEAR
Conversion of convertible note     606,060       364       515            -            -          -            -         879
Cumulative foreign currency
 translation adjustments                 -         -         -            -          570          -            -         570
Net loss                                 -         -         -            -            -          -       (5,855)     (5,855)
                                 ---------    ------    ------       ------        -----      -----      -------     -------

BALANCE AS OF DECEMBER 31, 2004  5,491,711    29,698    52,500       10,010        2,574      6,685      (86,476)     14,991
                                 =========    ======    ======       ======        =====      =====      =======     =======

                                                                     IN US$ THOUSANDS (NOTE 2B)
                                              -----------------------------------------------------------------------------------
CONVENIENCE TRANSLATION YEAR
 ENDED DECEMBER 31, 2004
 (UNAUDITED)                     5,491,711     6,894    12,187        2,324          597      1,552      (20,073)      3,481
                                 =========    ======    ======       ======        =====      =====      =======     =======
</TABLE>

*   With respect to discontinuance of adjustment to the effect of inflation as
    from the CPI of December 2003 (see Note 2B)
**  Amounts adjusted to reflect inflation in terms of NIS of December 31, 2003.
*** Ordinary shares of a par value of NIS 0.6 each.

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

                                      F-5

<PAGE>

                                                                      Eltek Ltd.

STATEMENT OF CASH FLOWS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                CONSOLIDATED
                                                                    -----------------------------------------
                                                                     YEAR ENDED     YEAR ENDED     YEAR ENDED
                                                                    DECEMBER 31    DECEMBER 31    DECEMBER 31
                                                                        2002           2003           2004
                                                                    -----------    -----------    -----------
                                                                      ADJUSTED       ADJUSTED        REPORTED
                                                                      AMOUNTS**      AMOUNTS**       AMOUNTS*
                                                                    -----------    -----------    -----------
                                                                                  NIS THOUSANDS
                                                                    -----------------------------------------
<S>                                                                   <C>            <C>           <C>
Net loss                                                              (15,714)       (12,987)       (5,855)

ADJUSTMENTS TO RECONCILE NET LOSS TO NET
 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Inflationary and exchange rate impact on long- term debts                (609)          (706)           12
Depreciation                                                           13,904         14,938        13,428
Amortization of goodwill                                                  292            584           593
Write-off of other assets                                                  26              -             -
Gain on disposal of properties                                           (415)          (200)          (86)
Company's share in losses of subsidiaries, net                              -              -             -
Minority share in subsidiary's net results                                198           (118)         (182)
Increase (decrease) in employee severance benefits, net                   110            (62)          103
Decrease (increase) in trade receivables                                4,052          5,721        (3,988)
Decrease (increase) in other receivables
 and prepaid expenses                                                      20             20         1,265
Decrease (increase) in inventories                                      3,343           (632)         (379)
Increase (decrease) in trade payables                                   3,071           (503)        1,192
Increase (decrease) in other liabilities and accrued expenses          (2,102)           391         2,452
Accrued interest on convertible note                                        -            105           147
Interest and exchange rate differentials relating to subsidiaries,
  net                                                                       -              -             -
Deferred taxes                                                              -              -          (753)
                                                                      -------        -------        ------
Net cash provided by operating activities                               6,176          6,551         7,949
                                                                      -------        -------        ------

<CAPTION>
                                                                                                                    CONVENIENCE
                                                                                                                   TRANSLATION*
                                                                                                                     (NOTE 2F)
                                                                                                                 ----------------
                                                                                     COMPANY                       CONSOLIDATED
                                                                    -----------    -----------    -----------    ----------------
                                                                     YEAR ENDED    YEAR ENDED     YEAR ENDED        YEAR ENDED
                                                                    DECEMBER 31    DECEMBER 31    DECEMBER 31       DECEMBER 31
                                                                        2002          2003           2004              2004
                                                                    -----------    -----------    -----------    ----------------
                                                                      ADJUSTED      ADJUSTED       REPORTED
                                                                      AMOUNTS**     AMOUNTS**       AMOUNTS*       (UNAUDITED)
                                                                    -----------    -----------    -----------    ----------------
                                                                                   NIS THOUSANDS                 US$ IN THOUSANDS
                                                                    -----------------------------------------    ----------------
<S>                                                                   <C>            <C>            <C>              <C>
Net loss                                                              (15,714)       (12,987)       (5,855)          (1,360)

ADJUSTMENTS TO RECONCILE NET LOSS TO NET
 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Inflationary and exchange rate impact on long- term debts                (609)          (706)           12                3
Depreciation                                                           12,941         12,993        11,766            3,117
Amortization of goodwill                                                    -              -             -              138
Write-off of other assets                                                  26              -             -                -
Gain on disposal of properties                                             (8)          (112)          (77)             (20)
Company's share in losses of subsidiaries, net                            477          2,094         2,017                -
Minority share in subsidiary's net results                                  -              -             -              (42)
Increase (decrease) in employee severance benefits, net                    99            (69)           92               24
Decrease (increase) in trade receivables                                3,919          5,557        (3,252)            (926)
Decrease (increase) in other receivables
 and prepaid expenses                                                      62***        (682)***     1,270              294
Decrease (increase) in inventories                                      3,111           (222)         (290)             (88)
Increase (decrease) in trade payables                                   3,189         (1,381)        1,491              277
Increase (decrease) in other liabilities and accrued expenses            (746)           423         2,623              569
Accrued interest on convertible note                                        -            105           147               34
Interest and exchange rate differentials relating to subsidiaries,
  net                                                                     (88)***       (548)***      (764)               -
Deferred taxes                                                              -              -             -             (175)
                                                                      -------        -------        ------           ------
Net cash provided by operating activities                               6,659          4,465         9,180            1,845
                                                                      -------        -------        ------           ------
</TABLE>

*   With respect to discontinuance of adjustment to the effect of inflation as
    from the CPI of December 2003 (see Note 2B)
**  Amounts adjusted to reflect inflation in terms of NIS of December 31, 2003.
*** Reclassified

                                      F-6

<PAGE>

                                                                      Eltek Ltd.

STATEMENT OF CASH FLOWS - CONSOLIDATED AND COMPANY (CONT'D)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                        CONVENIENCE
                                                                                                                        TRANSLATION*
                                                                                                                         (NOTE 2F)
                                                                                                                        ------------
                                                       CONSOLIDATED                             COMPANY                 CONSOLIDATED
                                          ----------------------------------------------------------------------------  ------------
                                          YEAR ENDED   YEAR ENDED   YEAR ENDED   YEAR ENDED   YEAR ENDED   YEAR ENDED   YEAR ENDED
                                          DECEMBER 31  DECEMBER 31  DECEMBER 31  DECEMBER 31  DECEMBER 31  DECEMBER 31  DECEMBER 31
                                             2002          2003        2004         2002         2003         2004          2004
                                          -----------  -----------  -----------  -----------  -----------  -----------  ------------
                                           ADJUSTED     ADJUSTED     REPORTED     ADJUSTED     ADJUSTED     REPORTED
                                           AMOUNTS**    AMOUNTS**    AMOUNTS*     AMOUNTS**    AMOUNTS**    AMOUNTS*    (UNAUDITED)
                                          -----------  -----------  -----------  -----------  -----------  -----------  ------------
                                                                          NIS THOUSANDS                                    US$
                                          ----------------------------------------------------------------------------  ------------
<S>                                        <C>           <C>          <C>          <C>          <C>          <C>          <C>
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in subsidiary                         -            -            -       (11,890)         (5)***      (90)           -
Repayment of loan to subsidiary                  -            -            -         1,133           -            -            -
Acquisition of newly - consolidated
 subsidiary (Annex A)                       (4,259)           -            -             -           -            -            -
Purchase of fixed assets                    (7,963)      (3,797)      (1,470)       (6,959)     (1,631)      (1,189)        (341)
Dividends declared prior to the
 acquisition and paid to the shareholders   (2,644)           -            -             -           -            -            -
Proceeds from sale of fixed assets             453          304          188            15         217          177           44
                                           -------       ------       ------       -------      ------       ------       ------
Net cash used in investing activities      (14,413)      (3,493)      (1,282)      (17,701)     (1,419)      (1,102)        (297)
                                           -------       ------       ------       -------      ------       ------       ------
CASH FLOWS PROVIDED BY (USED IN)
 FINANCING ACTIVITIES:
Increase (decrease) in short- term credit    4,884       (1,388)        (726)        4,841      (1,339)        (726)        (169)
Repayment of long-term loans                (8,614)      (6,116)      (6,164)       (8,614)     (6,116)      (6,164)      (1,431)
Long-term loans received                    11,948            -            -        11,948           -            -            -
Dividend distributions of subsidiary          (625)           -            -             -           -            -            -
Issue of convertible note                        -        2,166            -             -       2,166            -            -
                                           -------       ------       ------       -------      ------       ------       ------
Net cash provided by (used in) financing
 activities                                  7,593       (5,338)      (6,890)        8,175      (5,289)      (6,890)      (1,600)
                                           -------       ------       ------       -------      ------       ------       ------
ADJUSTMENTS FROM TRANSLATION OF FINANCIAL
 STATEMENTS OF AUTONOMOUS UNITS                309          414          126             -           -            -           29
                                           -------       ------       ------       -------      ------       ------       ------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                  (335)      (1,866)         (97)       (2,867)     (2,243)       1,188          (23)
CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD                                   6,572        6,237        4,371         6,358       3,491        1,248        1,015
                                           -------       ------       ------       -------      ------       ------       ------
CASH AND CASH EQUIVALENTS AT END OF
 PERIOD                                      6,237        4,371        4,274         3,491       1,248        2,436          992
                                           =======       ======       ======       =======      ======       ======       ======
</TABLE>

*   With respect to discontinuance of adjustment to the effect of inflation as
    from the CPI of December 2003 (see Note 2B)
**  Amounts adjusted to reflect inflation in terms of NIS of December 31, 2003.
*** Reclassified

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

                                      F-7

<PAGE>

                                                                      Eltek Ltd.

STATEMENTS OF CASH FLOWS - CONSOLIDATED AND COMPANY (CONT'D)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              CONSOLIDATED
                                                              ------------
                                                               YEAR ENDED
                                                               DECEMBER 31
                                                                  2002
                                                              ------------
                                                                ADJUSTED
                                                                AMOUNTS*
                                                              ------------
                                                              NIS THOUSANDS
                                                              ------------
<S>                                                              <C>
ANNEX A - ACQUISITION OF NEWLY CONSOLIDATED SUBSIDIARY

Assets and liabilities of subsidiary at date of acquisition

Working capital (other than cash)                                 2,694
Property and equipment                                           (4,154)
Goodwill                                                         (4,998)
Minority interests                                                2,152
Employees severance benefits                                         47
                                                                 ------

                                                                 (4,259)
                                                                 ======
</TABLE>

ANNEX B - NON CASH INVESTING ACTIVITIES

In May 2002, the Company purchased a computer system for the price of NIS 1,262
thousand by means of a five year long-term loan. The loan is being repaid in 48
monthly installments beginning in May 2003.

Conversion of convertible note into share capital in the amount of NIS 879.

*     Amounts adjusted to reflect inflation in terms of NIS of December 31,
      2003.

                                      F-8

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 1 - GENERAL

      Eltek Ltd. ("the Company") was incorporated in Israel in 1970. The Company
      manufactures and supplies advanced printed circuit boards ("PCB"), complex
      multi-layer back-panels and flex rigid circuit boards for sophisticated
      electronic equipment. The principal markets of the Company are in Israel
      and Europe.

      In June 2002, the Company established a wholly-owned subsidiary, EN-Eltek
      Netherlands 2002 B.V. ("EN-Eltek"), for the purpose of the acquisition of
      Kubatronik Leiterplatten GmbH (see below). All of the excess of the
      consideration over the fair value of Kubatronik's assets and liabilities
      was attributed to goodwill. The Company has two other subsidiaries (Eltek
      Europe and Eltek International), which have been inactive for several
      years.

      The Company incurred losses of approximately NIS 5.9 million in 2004 and
      has a working capital deficit of approximately NIS 14 million as at
      December 31, 2004. Management has taken a series of measures since 2003
      that are intended to put the Company on a positive track, such as a
      reduction in workforce and new finance arrangements with the banks as
      described hereafter.

      In July 2003, the Company finalized a process of restructuring its
      long-term loans and reached a new settlement with its banks: The
      restructuring included the postponement of the repayment of 60% of the
      Company's current maturities of long-term loans for ten months with Israel
      Discount Bank Ltd. ("Discount Bank") (from June 1, 2003 to March 31, 2004)
      and for one year with Bank Hapoalim B.M. ("Bank Hapoalim") and Bank Leumi
      Le-Israel Ltd. ("Leumi Bank") (from July 1, 2003 to June 30, 2004). - The
      postponed repayments recommenced in July 2004. The remaining 40% and the
      interest on the entire principal had been repaid monthly as scheduled.

     In June 2004, the Company, although not achieving the work plan goals for
     2003, was provided an extension of its revolving credit until June 30,
     2005, and in March 2005 the banks agreed to further extend the Company's
     revolving credit until March 31, 2006.

     In June 2003, the Company signed a factoring agreement with U Bank Ltd.
     (formerly Investec Bank (Israel) Ltd.) ("U Bank"), pursuant to which the
     Company is entitled to $ 1.0 million factoring facilities, in consideration
     for the assignment to U Bank of an equal amount of the Company's accounts
     receivable. The use of these factoring facilities by the Company is subject
     to the consent of Discount Bank, Bank Hapoalim and Leumi Bank, which
     initially was provided until June 30, 2004, and following two extensions,
     the banks have provided their consent until March 31, 2006.

     Financial covenants in respect of the Company's credit facilities and
     long-term loans require the Company to maintain the higher of shareholders'
     equity of NIS 20.0 million or 20% of the Company's total assets according
     to the loan from Discount Bank, and to maintain the higher of shareholders'
     equity of NIS 17.0 million or 20% of the Company's total assets, according
     to the loan from Leumi Bank. For these purposes, shareholders' equity
     includes the Company's outstanding convertible note and excludes prepaid
     expenses. As of December 31, 2003, the Company was in compliance with such
     covenants. However, on March 31 2004, the Company was in breach of such
     covenants and therefore negotiated with its banks and was granted a
     temporary waiver, reducing the Company's covenants to the higher of
     shareholders' equity of NIS 12 million or 15% of its total assets until the
     release of the Company's December 31, 2004 earnings (i.e. between March -
     June 2005). The waiver of Leumi Bank was subject to the repayment by the
     Company of NIS 1.5 million over a 15 month period (from October 1, 2004 to
     December 31, 2005). In March 2005, the banks agreed to extend the temporary
     covenants. Leumi Bank agreed to extend the temporary covenants until the
     release of the Company's June 30, 2005 earnings, following which and until
     the release of the Company's December 31, 2005 earnings (i.e. between March
     - June 2006), Leumi Bank agreed to set the shareholders' equity threshold
     to not less than NIS 16 million. In accordance with the Discount Bank
     extension of the temporary covenants, the Company is required to maintain
     the higher of shareholders' equity of NIS 13 million or 15% of its total
     assets until the release of the Company's December 31, 2005 earnings. Upon
     the release of the Company's December 31, 2005 earnings, it is required to
     comply with its original covenant terms. As of December 31, 2004, the
     Company was in compliance with the terms of such temporary covenants. The
     Company's management has programs and projects in place in order to
     continue to meet these terms.

      The Company received an infusion of US$500,000 by means of issuance of a
      convertible note in July 2003, out of which US$ 200,000 was converted into
      ordinary shares during the reporting period (see Note 16).

                                      F-9

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 1 - GENERAL (CONT'D)

      ACQUISITION OF KUBATRONIK LEITERPLATTEN GMBH

      On June 10, 2002, the Company signed a Share Purchase Agreement ("SPA")
      for the purchase of 76% of the shares of Kubatronik - Leiterplatten GmbH
      ("Kubatronik"). The purchase price was (euro) 2.6 million (NIS 11.8
      million as of the date of acquisition).

     Pursuant to the agreement, the seller has the right to require the Company
     to purchase ("Put option"), and the Company has the right to require the
     seller to sell to the Company ("Call option"), the seller's remaining 24%
     interest in Kubatronik. The price for the option is based on the value of
     the acquisition subject to certain price adjustments set forth below, but
     not less than (euro) 552,000 and not to exceed (euro) 920,000. The option
     period was extended until December 31, 2007, (the minimum and the maximum
     amounts of the option price shall increase by the addition of interest at
     the rate of LIBOR + 1% from December 31, 2004). The price adjustment
     mechanism for the Put option is that if the ratio of earnings before tax
     from the revenue ("the Ratio") increases over 23% - for every 1% increase
     the price will increase by 1%. If the Ratio decreases below 23% - for every
     1% decrease the price will decrease by 1.25%.

     The price adjustment mechanism for the Call option is that if the Ratio
     increases over 23% - for every 1% increase the price will increase by 1.5%.
     If the Ratio decreases below 23% - for every 1% decrease the price will
     decrease by 1%.

     All of the above is based on the last audited financial statements of
     Kubatronik as of the date of the seller's termination of employment with
     Kubatronik. The seller terminated his employment in October 2003 and
     through the date of these financial statements did not approach the Company
     to exercise his option.

      The Company has been consolidating the accounts of Kubatronik since June
      10, 2002. The acquisition made by EN-Eltek resulted in the recognition of
      goodwill in the amount of (euro)1.1 million (NIS 5 million as of the date
      of acquisition) - see Note 9.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

     The financial statements have been prepared in accordance with generally
     accepted accounting principles in Israel ("Israeli GAAP"), which vary in
     certain significant respects from generally accepted accounting principles
     in the United States ("U.S GAAP") as described in Note 28.

      A.    DEFINITIONS

      Certain terms used in these financial statements are defined as follows:

      1.    RELATED PARTIES - as defined in Opinion No. 29 of the Institute of
            Certified Public Accountants in Israel ("ICPAI") are:

            (a)   Parties, one of which directly or indirectly -
                  (1)   owns 10% or more of the issued share capital of the
                        other party, or of its voting rights or of the rights to
                        appoint its directors, or
                  (2)   has the right to appoint its Chief Executive Officer
                        ("CEO"), or
                  (3)   acts as its director or CEO.

                                      F-10

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      A.    DEFINITIONS (CONT'D)

      1.    RELATED PARTIES - (cont'd)

            (b)   Any corporate body in which a party mentioned in (a) above
                  owns 25% or more of its issued share capital or of its voting
                  rights or of the rights to appoint its directors.

            (c)   Spouses and minor children of the parties mentioned in (a)
                  above.

      2.    INTERESTED PARTIES - as defined in Section 1 of the Israeli
            Securities Law:

            (a)   The holder of five percent or more of the issued share capital
                  or voting rights of a company, a person who has the right to
                  appoint one or more directors of a company or its CEO, a
                  person serving as the CEO or as a director, an entity in which
                  a person as described above holds twenty five percent or more
                  of its issued share capital or of its voting rights, or has
                  the right to appoint twenty five percent or more of its
                  directors.

            (b)   A subsidiary of a company, other than a nominee company.

                  As applicable to the Company, related parties and interested
                  parties as described above would all constitute related
                  parties under U.S. GAAP as well.

      3.    SUBSIDIARIES - companies whose financial statements are fully
            consolidated with those of the Company, whether directly or
            indirectly.

      4.    CPI - Israeli consumer price index as published by the Israeli
            Central Bureau of Statistics.

      5.    NIS - New Israeli Shekels.

      6.    ADJUSTED AMOUNT - the nominal historical amount adjusted in
            accordance with the provisions of Opinions 23 and 34 and Opinions 36
            and 37.

      7.    REPORTED AMOUNT - The adjusted amount as at the transition date
            (December 31, 2003), with the addition of amounts in nominal values
            that were added after the transition date and less amounts
            eliminated after the transition date.

      8.    ADJUSTED FINANCIAL REPORTING - Financial reporting based on the
            provisions of Opinions 23, 34, 36, 37 and 50.

      9.    NOMINAL FINANCIAL REPORTING - Financial reporting based on reported
            amounts.

                                      F-11

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      B.    FINANCIAL STATEMENTS REPORTED NEW ISRAELI SHEKELS (NIS)

      In October 2001, the Israel Accounting Standards Board ("IASB") published
      Accounting Standard No. 12, "Discontinuance of Adjustment of Financial
      Statements". Pursuant to this standard and in accordance with Accounting
      Standard No. 17 that was published in December 2002, the adjustment of
      financial statements was discontinued as of January 1, 2004. Up to
      December 31, 2003, the Company continued to prepare adjusted financial
      statements in accordance with Opinion No. 36 of the Institute of Certified
      Public Accountants in Israel. The adjusted amounts included in the
      financial statements as at December 31, 2003 constitute the starting point
      for the nominal financial report as of January 1, 2004. The Company has
      implemented the provisions of the standard and has accordingly
      discontinued the adjustments as of January 1, 2004.

      1.    In the past the Company prepared its financial statements on the
            basis of historical cost adjusted for the changes in the CPI. The
            adjusted amounts that are included in the financial statements as at
            December 31, 2003 constitute the starting point for the nominal
            financial report as of January 1, 2004. Any additions made during
            the period are included according to their nominal values.

      2.    Amounts of non-monetary assets do not necessarily reflect their
            realizable value or updated economic value, but only the reported
            amounts of such assets.

      3.    The term "cost" in these financial statements means the reported
            amount of cost.

      4.    All the comparative data for prior periods is stated adjusted to the
            CPI at December 31, 2003.

      Balance sheets:

      a.    Non-monetary items are stated at reported amounts.

      b.    Monetary items are stated in the balance sheet at their nominal
            historical values as at balance sheet date.

      Statement of operations:

      Income and expenses derived from non-monetary items from provisions
      included in the balance sheet are derived from the difference between the
      reported amounts of the opening balance and the reported amounts of the
      closing balance.

                                      F-12

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      C.    KUBATRONIK - AUTONOMOUS FOREIGN COMPANY

      As of January 1, 2004 the Company implemented Accounting Standard No. 13,
      "Effect of Changes in Exchange Rates of Foreign Currency". The standard
      discusses the translation of transactions in foreign currency and the
      translation of financial statements of foreign operations for the purpose
      of including them in the financial statements of the reporting entity. The
      standard provides rules for classifying foreign operations as an
      autonomous foreign investee or as an integrated investee, on the basis of
      the indications described in the standard and the use of discretion, and
      it provides the method for translating the financial statements of
      autonomous foreign investees.

      TRANSACTIONS IN FOREIGN CURRENCY

      Transactions denominated in foreign currency are recorded upon their
      initial recognition according to the exchange rate in effect on the date
      of the transaction. Exchange rate differences arising upon the settlement
      of monetary items or upon reporting the Company's monetary items at
      exchange rates that are different than those by which they were initially
      recorded during the period, or reported in previous financial statements,
      are charged to income or expenses.

      KUBATRONIK -FOREIGN OPERATIONS CLASSIFIED AS AN AUTONOMOUS INVESTEE

      The financial statements of Kubatronik were translated into Israeli
      currency as follows:

      (1)   The assets and liabilities, both monetary and non-monetary, of
            Kubatronik were translated according to the closing exchange rate.
            The goodwill arising upon the acquisition of Kubatronik is treated
            as an asset of Kubatronik, and it is translated according to the
            closing exchange rate.

      (2)   Income and expense items were translated according to the exchange
            rate as at the date of the transaction.

      (3)   All the resulting exchange rate differences are classified as a
            separate item of shareholders' equity until the disposal of the net
            investment.

      D.    PRINCIPLES OF CONSOLIDATION

      1.    The consolidated financial statements include the accounts of the
            Company and its subsidiaries (EN-Eltek, Kubatrunik, Eltek
            International and Eltek Europe).

      2.    All intercompany transactions and balances were eliminated in
            consolidation.

      E.    RATE OF EXCHANGE AND LINKAGE BASES

      1.    Assets and liabilities denominated in, or linked to, foreign
            currencies have been recorded based on the representative exchange
            rate prevailing at balance sheet date as published by the Bank of
            Israel.

      2.    Balances linked to the CPI are recorded pursuant to contractual
            linkage terms of the specific assets and liabilities.

                                      F-13

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      E.    RATE OF EXCHANGE AND LINKAGE BASES (CONT'D)

      3.    Details of the CPI and the representative exchange rates are as
            follows:

<TABLE>
<CAPTION>
                                   ISRAELI   EXCHANGE RATE   EXCHANGE RATE
                                     CPI     OF ONE DOLLAR    OF ONE EURO
                                  --------   -------------   -------------
                                   POINTS         NIS            NIS
                                  --------   -------------   -------------
<S>                               <C>        <C>             <C>
For the period ended:
December 31, 2002                   182.01           4.737           4.970
December 31, 2003                   178.58           4.379           5.533
DECEMBER 31, 2004                   180.74           4.308           5.877

                                          %               %               %
                                  --------   -------------   -------------
Changes during the year ended:
December 31, 2002                     6.50            7.27           27.18
December 31, 2003                    (1.89)          (7.56)          11.33
DECEMBER 31, 2004                     1.21           (1.62)           6.22
</TABLE>

      F.    PRESENTATION IN U.S. DOLLARS FOR CONVENIENCE OF THE READER

      For the convenience of the reader, the consolidated financial statements
      as of December 31, 2004 and for the year then ended have been translated
      into U.S. dollars, using the representative exchange rate as of December
      31, 2004 (U.S. $1 = NIS 4.308). The U.S. dollar amounts presented in these
      financial statements should not be construed as representing amounts
      receivable or payable in dollars or convertible into dollars, unless
      otherwise indicated.

      G.    USE OF ESTIMATES

      The financial statements which were prepared in accordance with generally
      accepted accounting principles, require the Company's management to make
      estimates and assumptions. Actual results may differ from such estimates.

      H.    CASH AND CASH EQUIVALENTS

      Cash equivalents are considered by the Company to be highly-liquid
      investments which include short-term bank deposits with an original
      maturity of three months or less from deposit date and which are not
      encumbered by a lien.

      I.    ALLOWANCE FOR DOUBTFUL ACCOUNTS

      The allowance has been determined specifically for debts the collection of
      which, in Management's opinion, is doubtful.

                                      F-14

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      J.    INVENTORIES

      Inventories are recorded at the lower of cost or market value. Cost is
      determined as follows:

      Raw materials                            - Moving average basis

      Work-in-process and completed products   - Direct production cost, plus
                                                 allocated indirect expenses,
                                                 all of which are on an average
                                                 basis

      K.    PROPERTY AND EQUIPMENT

      1.    Assets are recorded at cost.

      2.    Depreciation on property and equipment is calculated on the
            straight-line method over the estimated useful lives of the assets.

            Annual rates of depreciation are as follows:

<TABLE>
<CAPTION>
                                  MOSTLY   RANGE
                                  ------   -----
                                     %       %
                                  ------   -----
<S>                                 <C>    <C>
Machinery and equipment             15      5-33
Office furniture and equipment       6      5-33
Motor vehicles                      15     15-30
Leasehold improvements              10      3-25
</TABLE>

      L.    INVESTMENTS IN INVESTEE COMPANIES

      The investments in investee companies are presented using the equity
      method.

      The excess of the cost of the investment over the fair value of identified
      assets net of the fair value of identified liabilities (after allocation
      of taxes resulting from temporary differences) as at the date of
      acquisition is recorded as goodwill.

      The Company applies Accounting Standard No. 20 regarding the amortization
      period of Goodwill. Goodwill is systematically amortized over the period
      of its useful life. The amortization period is for 10 years and reflects
      the best possible estimate of the period over which the Company
      anticipates to obtain future economic benefits from the Goodwill.

                                      F-15

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      M.    DEFERRED TAXES

      Income taxes are provided on the basis of the liability method of
      accounting. Under the liability method, deferred tax assets and
      liabilities are recognized for the future tax consequences of differences
      between the carrying amounts of existing assets and liabilities and their
      respective tax bases, as well as tax credit carryforwards. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to
      apply to taxable income in the years when these temporary differences are
      expected to be recovered or settled.

      The Company's management cannot be reasonably assured as to the Company's
      ability to utilize the tax asset attributable to differences between the
      financial statement carrying amounts of existing assets and liabilities
      and their respective tax bases and net operating loss carryforwards in the
      foreseeable future. Therefore, the Company did not record any deferred tax
      asset.

      The Company believes that its subsidiary, Kubatronik will utilize its
      carryforward tax losses and therefore a deferred tax asset has been
      recorded (see Note 1, 24H).

      N.    IMPAIRMENT OF ASSETS

      In February 2002, the IASB published Accounting Standard ("IASB") No. 15 -
      "Impairment in Value of Assets". The Standard provides procedures which a
      company must apply in order to ensure that its assets in the consolidated
      balance sheet, are not presented at an amount which is in excess of their
      recoverable value, which is the higher of the net selling price or the
      present value of the estimated future cash flows expected to be derived
      from use and disposal of the asset. In addition, the Standard provides
      rules for presentation and disclosure with respect to assets whose value
      has declined.

      O.    FACTORING OF FINANCIAL ASSETS

     In June 2003, the Company entered into an accounts receivable factoring
     agreement with U Bank. Under the terms of the agreement, the Company has
     the option to factor receivables, with U Bank on a non-recourse basis,
     provided that U Bank approve the receivables in advance. In some cases, the
     Company continues to be obligated in the event of commercial disputes,
     (such as product defects) unrelated to the credit worthiness of the
     customer. The Company accounts for the factoring of its financial assets in
     accordance with the provisions of SFAS No. 140.

      Since the Company started to enter into such factoring agreements, there
      were no cases in which the Company had to reimburse the bank for accounts
      receivables following business commercial disputes. The Company does not
      expect any reimbursements to take place in the foreseeable future.

      As at December 31, 2004, net trade receivables amounting to NIS 4,200
      thousand were factored (as at December 31, 2003 - NIS 4,318 thousand).

                                      F-16

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      P.    REVENUE RECOGNITION

      The Company recognizes revenues from sales of products upon delivery.
      Commission income is accounted for on the accrual basis.

      Q.    RESEARCH AND DEVELOPMENT

      Research and development costs, net of grants from the Office of the Chief
      Scientist in the Ministry of Industry and Trade of the Government of
      Israel (OCS), are expensed as incurred.

      R.    LOSS PER SHARE

      Loss per share are computed based on the weighted average number of shares
      and share equivalents outstanding during each period, in accordance with
      Opinion No. 55 of the ICPAI.

      S.    EMPLOYEE STOCK OPTION EXPENSES

      The Company applies the intrinsic-value-based method of accounting
      prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
      for Stock Issued to Employees, and related interpretations including FASB
      Interpretation No. 44, Accounting for Certain Transactions involving Stock
      Compensation, an interpretation of APB Opinion No. 25, to account for its
      stock options. Under this method for fixed-plans, compensation expenses
      are recorded on the date of grant only if the current market price of the
      underlying stock exceeded the exercise price. Therefore, the accounting,
      under Israeli GAAP and under U.S. GAAP is identical.

      T.    SEGMENT REPORTING

      Segment reporting is represented according to Accounting Standard No. 11
      of the IASB.

      U.    EFFECTS OF NEW ACCOUNTING STANDARDS PRIOR TO THEIR APPLICATION

      In July 2004, the IASB published Accounting Standard No. 19, "Taxes on
      Income". The Standard provides that a liability for deferred taxes is to
      be recorded for all temporary differences subject to tax, except for a
      limited number of exceptions. In addition, a deferred tax asset is to be
      recorded for all temporary differences that may be deducted, losses for
      tax purposes and tax benefits not yet utilized, if it is anticipated that
      there will be taxable income against which these can be offset, except for
      a limited number of exceptions. The new Standard applies to financial
      statements for periods beginning on January 1, 2005. The Standard provides
      that it is to be implemented by means of a cumulative effect of a change
      in accounting method. In the Company's estimation, the impact of the
      Standard on its results of operations, financial position and cash flows
      will not be material.

                                      F-17

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 3 - CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                        CONSOLIDATED                  COMPANY
                                                 -------------------------    -------------------------
                                                 DECEMBER 31   DECEMBER 31    DECEMBER 31   DECEMBER 31
                                                    2003          2004           2003          2004
                                                 -----------   -----------    -----------   -----------
<S>                                              <C>           <C>            <C>           <C>
NIS                                                      537           260            537           260
U.S. dollars                                             693         1,906            636         1,830
Euro                                                   3,055         2,105             16           343
Others                                                    86             3             59             3
                                                 -----------   -----------    -----------   -----------
                                                       4,371         4,274          1,248         2,436
                                                 ===========   ===========    ===========   ===========
</TABLE>

      As for pledges on assets, see Note 15A.

NOTE 4 - TRADE RECEIVABLES

<TABLE>
<CAPTION>
                                                       CONSOLIDATED                   COMPANY
                                                 -------------------------    -------------------------
                                                 DECEMBER 31   DECEMBER 31    DECEMBER 31   DECEMBER 31
                                                     2003          2004           2003         2004
                                                 -----------   -----------    -----------   -----------
<S>                                              <C>           <C>            <C>           <C>
Israeli customers                                     15,993        10,895         15,993        10,895
Foreign customers                                      4,607        13,502          3,574        11,523
Checks receivable                                        403         1,068            403         1,068
                                                 -----------   -----------    -----------   -----------
                                                      21,003        25,465         19,970        23,486

Allowance for doubtful accounts                       (1,216)       (1,630)        (1,150)       (1,414)
                                                 -----------   -----------    -----------   -----------
                                                      19,787        23,835         18,820        22,072
                                                 ===========   ===========    ===========   ===========
</TABLE>

     As at December 31, 2004 one customer accounted for NIS 6,766 thousand of
     receivables (28.4% of the total consolidated trade receivables balance)
     (Company - 30.7%).
     As at December 31, 2003 one customer accounted for NIS 2,792 thousand of
     receivables (14.1% of total consolidated trade receivables balance)
     (Company - 14.8%).

      As for pledges on assets, see Note 15A.

NOTE 5 - OTHER RECEIVABLES

<TABLE>
<CAPTION>
                                                        CONSOLIDATED                  COMPANY
                                                 -------------------------    -------------------------
                                                 DECEMBER 31   DECEMBER 31    DECEMBER 31   DECEMBER 31
                                                     2003          2004           2003          2004
                                                 -----------   -----------    -----------   -----------
<S>                                              <C>           <C>            <C>           <C>
Employees                                                162           131            157           126
Subsidiaries                                               -             -            597*          338
Commissions and other receivables                        296           120            295           120
Suppliers                                                503           334            495           331
Government of Israel and other
  institutions                                            12           209             11           208
Government of Germany                                    483           364             44           206
Insurance companies                                      806             -            806             -
                                                 -----------   -----------    -----------   -----------
                                                       2,262         1,158          2,405         1,329
                                                 ===========   ===========    ===========   ===========
</TABLE>

* Reclassified

                                      F-18

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 6 - INVENTORIES

<TABLE>
<CAPTION>
                             CONSOLIDATED               COMPANY
                     -------------------------   -------------------------
                     DECEMBER 31   DECEMBER 31   DECEMBER 31   DECEMBER 31
                         2003          2004          2003          2004
                     -----------   -----------   -----------   -----------
<S>                  <C>           <C>           <C>           <C>
Raw materials:
  On hand                  7,522         7,477         6,541         6,530
  In transit                 423           451           423           451
  Work-in-process          3,640         4,232         3,300         3,823
  Completed products       1,573         1,473         1,354         1,104
                     -----------   -----------   -----------   -----------

                          13,158        13,633        11,618        11,908
                     ===========   ===========   ===========   ===========
</TABLE>

NOTE 7 - LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
                                                          COMPANY
                                                 -------------------------
                                                 DECEMBER 31   DECEMBER 31
                                                    2003          2004
                                                 -----------   -----------
<S>                                              <C>           <C>
A.  INVESTMENTS IN SUBSIDIARIES:

Cost of shares and long-term loan (1)                 10,757        10,757
Loans to the subsidiaries                              2,704*        3,558
Accumulated losses                                    (4,198)*      (6,215)
Adjustments from translation of
   financial statements                                2,004         2,574
                                                 -----------   -----------

                                                      11,267        10,674
                                                 ===========   ===========
</TABLE>

(1) Includes long-term loan in the amount of NIS 10,678 thousand for the
    purchase of Kubatronik shares.
*   Reclassified

<TABLE>
<CAPTION>
                                                           COMPANY
                                                 -------------------------
                                                 DECEMBER 31   DECEMBER 31
                                                    2003          2004
                                                 -----------   -----------
<S>                                              <C>           <C>
B.  CHANGES IN THE INVESTMENTS IN SUBSIDIARIES

Balance at the beginning of the year                  11,343        11,267

Changes during the year:
Share in losses                                       (2,094)       (2,017)
Accrued loan interest and investments
   made during the year                                  553           854
Adjustments from the translation of
   financial statements                                1,465           570
                                                 -----------   -----------

Balance at the end of the year                        11,267        10,674
                                                 ===========   ===========
</TABLE>

                                      F-19

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 8 - PROPERTY AND EQUIPMENT, NET

      A.    CONSOLIDATED

<TABLE>
<CAPTION>
                                                DECEMBER 31, 2004
                       --------------------------------------------------------------------
                       MACHINERY AND     LEASEHOLD     MOTOR     OFFICE FURNITURE
                         EQUIPMENT     IMPROVEMENTS   VEHICLES     AND EQUIPMENT     TOTAL
                       -------------   ------------   --------   ----------------   -------
<S>                    <C>             <C>            <C>        <C>                <C>
COST
Balance as of
   December 31, 2003         133,900         27,496      1,474              7,018   169,888
                       -------------   ------------   --------   ----------------   -------
Translation
   adjustments                   955            140         33                290     1,418
Additions                      1,075            306          -                 89     1,470
Disposals                     (1,255)             -       (546)              (456)   (2,257)
                       -------------   ------------   --------   ----------------   -------

Balance as of
   December 31, 2004         134,675         27,942        961              6,941   170,519
                       -------------   ------------   --------   ----------------   -------

ACCUMULATED
   DEPRECIATION
Balance as of
   December 31, 2003         100,760         18,216      1,065              6,466   126,507
Translation
   adjustments                   767             94         28                281     1,170
Depreciation
   during the year            10,998          2,025        157                248    13,428
Disposals                     (1,255)             -       (446)              (454)   (2,155)
                       -------------   ------------   --------   ----------------   -------

Balance as of
   December 31, 2004         111,270         20,335        804              6,541   138,950
                       -------------   ------------   --------   ----------------   -------

NET BALANCE AS OF
   DECEMBER 31, 2004          23,405          7,607        157                400    31,569
                       =============   ============   ========   ================   =======

NET BALANCE AS OF
   DECEMBER 31, 2003          33,140          9,280        409                552    43,381
                       =============   ============   ========   ================   =======
</TABLE>

As for pledges on assets, see Note 15A.

                                      F-20

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 8 - PROPERTY AND EQUIPMENT, NET (CONT'D)

      B.    COMPANY

<TABLE>
<CAPTION>
                                                DECEMBER 31, 2004
                       --------------------------------------------------------------------
                       MACHINERY AND     LEASEHOLD     MOTOR     OFFICE FURNITURE
                         EQUIPMENT     IMPROVEMENTS   VEHICLES     AND EQUIPMENT     TOTAL
                       -------------   ------------   --------   ----------------   -------
<S>                    <C>             <C>            <C>        <C>                <C>
COST
Balance as of
   December 31, 2003         117,255         25,265        862              2,088   145,470
Additions                        888            296          -                  5     1,189
Disposals                          -              -       (477)                 -      (477)
                       -------------   ------------   --------   ----------------   -------

Balance as of
   December 31, 2004         118,143         25,561        385              2,093   146,182
                       -------------   ------------   --------   ----------------   -------

ACCUMULATED
   DEPRECIATION
Balance as of
   December 31, 2003          88,183         16,738        657              1,730   107,308
Depreciation
   during the year             9,614          1,948         82                122    11,766
Disposals                          -              -       (377)                 -      (377)
                       -------------   ------------   --------   ----------------   -------

Balance as of
   December 31, 2004          97,797         18,686        362              1,852   118,697
                       -------------   ------------   --------   ----------------   -------

NET BALANCE AS OF
   DECEMBER 31, 2004          20,346          6,875         23                241    27,485
                       =============   ============   ========   ================   =======

NET BALANCE AS OF
   DECEMBER 31, 2003          29,072          8,527        205                358    38,162
                       =============   ============   ========   ================   =======
</TABLE>

As for pledges on assets, see Note 15A.

                                      F-21

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 9 - GOODWILL

<TABLE>
<CAPTION>
                                                                     CONSOLIDATED
                                                               -------------------------
                                                               DECEMBER 31   DECEMBER 31
                                                                   2003          2004
                                                               -----------   -----------
<S>                                                            <C>           <C>
Balance at the beginning of the year                                 4,973         4,972
Goodwill amortization                                                 (584)         (593)
Translation adjustments                                                583           277
                                                               -----------   -----------

                                                                     4,972         4,656
                                                               ===========   ===========
</TABLE>

NOTE 10 - SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM DEBTS

<TABLE>
<CAPTION>
                                                               CONSOLIDATED AND COMPANY
                                                               -------------------------
                                                  ANNUAL
                                               INTEREST RATE   DECEMBER 31   DECEMBER 31
                                                 31/12/2004        2003          2004
                                               -------------   -----------   -----------
                                                     %
                                               -------------
<S>                                              <C>           <C>           <C>
In NIS (unlinked)                                6.15-6.70          12,100        11,400
In U.S. dollars                                  3.90-5.15           1,551         1,525
Current maturities
   of long-term liabilities to
   Banks (Note 13A)                                                  5,810         6,664
                                                               -----------   -----------
                                                                    19,461        19,589
                                                               ===========   ===========
</TABLE>

As to pledges securing the credit, see Note 15A.

NOTE 11 - TRADE PAYABLES

<TABLE>
<CAPTION>
                                        CONSOLIDATED                    COMPANY
                                  -------------------------    -------------------------
                                  DECEMBER 31   DECEMBER 31    DECEMBER 31   DECEMBER 31
                                     2003           2004          2003          2004
                                  -----------   -----------    -----------   -----------
<S>                               <C>           <C>            <C>           <C>
Israeli suppliers                      12,054        15,516         12,054        15,516
Foreign suppliers                       5,927         4,733          4,759         3,789
                                  -----------   -----------    -----------   -----------
                                       17,981        20,249         16,813        19,305
Checks payable                          4,333         3,328          4,333         3,328
                                  -----------   -----------    -----------   -----------

                                       22,314        23,577         21,146        22,633
                                  ===========   ===========    ===========   ===========
Including current maturities of
   long-term debt related to
   capital leases                         282           278            282           278
                                  ===========   ===========    ===========   ===========
</TABLE>

                                      F-22

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 12 - OTHER LIABILITIES AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                        CONSOLIDATED                    COMPANY
                                  -------------------------    -------------------------
                                  DECEMBER 31   DECEMBER 31    DECEMBER 31   DECEMBER 31
                                     2003           2004          2003          2004
                                  -----------   -----------    -----------   -----------
<S>                               <C>           <C>            <C>           <C>
Accrued payroll and related
   benefits                             3,747         3,825          3,134         3,091
Vacation and other
Vacation and other
   employee benefits                    2,232         2,631          2,099         2,409
Government of Israel and other
   Institutions                           372            19            372            19
Accrued expenses                        1,822         4,041          1,333         3,867
Other liabilities                         382*          567            375           550
                                  -----------   -----------    -----------   -----------

                                        8,555        11,083          7,313         9,936
                                  ===========   ===========    ===========   ===========
</TABLE>

* Reclassified

NOTE 13 - LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES

      CONSOLIDATED AND COMPANY

      A.    BANKS

<TABLE>
<CAPTION>
                                                  ANNUAL
                                               INTEREST RATE   DECEMBER 31   DECEMBER 31
                                                31/12/2004         2003         2004
                                               -------------   -----------   -----------
                                                      %
                                               -------------
<S>                                              <C>           <C>           <C>
LINKAGE TERMS
U.S. dollar                                      3.90-4.55           9,349         6,381
CPI                                              5.95-7.05           6,250         4,160
Unlinked                                         6.45-6.70           3,245         2,440
                                                               -----------   -----------
                                                                    18,844        12,981
Less - current maturities                                           (5,810)       (6,664)
                                                               -----------   -----------
                                                                    13,034         6,317
                                                               ===========   ===========
</TABLE>

      B.    CAPITAL LEASES

<TABLE>
<CAPTION>
                                                  ANNUAL
                                               INTEREST RATE   DECEMBER 31   DECEMBER 31
                                                31/12/2004         2003         2004
                                               -------------   -----------   -----------
                                                      %
                                               -------------
<S>                                                <C>         <C>           <C>
U.S. dollars linked                                2.90                940           648

Less - current maturities                                             (282)         (278)
                                                               -----------   -----------
                                                                       658           370
                                                               ===========   ===========
TOTAL LONG-TERM DEBT                                                13,692         6,687
                                                               ===========   ===========
</TABLE>

                                      F-23

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 13 - LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES (CONT'D)

      CONSOLIDATED AND COMPANY

      C.    The aggregate maturities of long-term debt for each of the five
            years subsequent to December 31, 2004 are as follows:

<TABLE>
<CAPTION>
                                   DECEMBER 31    DECEMBER 31
                                      2003           2004
                                   -----------    -----------
<S>                                <C>            <C>
First year (current maturities)          6,092          6,942
                                   -----------    -----------

Second year                              7,176          5,178
Third year                               5,067          1,509
Fourth year                              1,449              -
Fifth year and thereafter                    -              -
                                   -----------    -----------
                                        13,692          6,687
                                   -----------    -----------

                                        19,784         13,629
                                   ===========    ===========
</TABLE>

      As to pledges securing the loans - see Note 15A.

NOTE 14 - EMPLOYEE SEVERANCE BENEFITS, NET

      1.    The Company participates in a defined contribution pension plan and
            makes regular deposits with a pension fund securing pension rights
            on behalf of most of its non-senior employees. The custody and
            management of the amounts so deposited are independent of the
            Company and the amounts funded are credited to personal accounts of
            the employees. Accordingly, such amounts funded (included in
            expenses on an accrual basis) and the total liability are reflected
            in the balance sheet on a net basis. In respect of its other
            employees, the Company purchases individual insurance policies
            intended to cover the Company's retirement benefits obligations.
            Similar to that stated above regarding the pension plan deposits,
            the amounts paid for the insurance policies are not reflected in the
            balance sheet as such amounts are not under the Company's control.

            In addition, occasionally, the Company makes deposits with a Central
            Severance Pay Fund ("CSPF") in respect of those obligations under
            the Israeli Severance Pay Law which may not be covered in full by
            the above arrangements.

                                      F-24

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 14 - EMPLOYEE SEVERANCE BENEFITS, NET (CONT'D)

      2.    The Company's severance obligation is calculated on the basis of the
            latest monthly salary of each employee multiplied by the number of
            years of employment with the Company. The obligation is partially
            funded.

      3.    Kubatronik owns an insurance policy and makes regular deposits with
            an insurance company for securing pension rights on behalf of one of
            its key employees. Such amounts deposited and the related liability
            are reflected in the consolidated balance sheet.

            In respect of its other employees, Kubatronik does not make any
            deposits for pension or retirement rights since such deposits are
            not required under the German law.

      4.    Details of the provision and amounts funded in respect of CSPF:

<TABLE>
<CAPTION>
                                           CONSOLIDATED                      COMPANY
                                     --------------------------    --------------------------
                                     DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31
                                         2003           2004           2003           2004
                                     -----------    -----------    -----------    -----------
<S>                                  <C>            <C>            <C>            <C>
Liability for employee
   severance benefits                      3,792          4,105          3,622          3,890

Assets held for severance benefits        (2,852)        (3,057)        (2,758)        (2,934)
                                     -----------    -----------    -----------    -----------

Employee severance benefits, net             940          1,048            864            956
                                     ===========    ===========    ===========    ===========
</TABLE>

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES

      A.    1.    The Company has pledged certain assets and the rights to any
                  insurance claims on such assets to secure its indebtedness
                  with banks, as well as floating liens on all of its remaining
                  assets in favor of the banks.

            2.    As a guarantee of the implementation of the approved projects
                  and in compliance with the conditions of the approval (see
                  Note 24A), pledges have been recorded on the Company's assets
                  in favor of the State of Israel.

            3.    The Company has also pledged a computer system to a supplier
                  to secure its indebtedness.

                                      F-25

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

      A.    (CONT'D)

          4.   Financial covenants in respect of the Company's credit facilities
               and long-term loans require the Company to maintain the higher of
               shareholders' equity of NIS 20.0 million or 20% of the Company's
               total assets according to the loan from Discount Bank and to
               maintain the higher of shareholders' equity of NIS 17.0 million
               or 20% of the Company's total assets, according to the loan from
               Leumi Bank. For these purposes, shareholders' equity includes the
               Company's outstanding convertible note and excludes prepaid
               expenses. As of December 31, 2003, the Company was in compliance
               with such covenants. However, on March 31 2004, the Company was
               in breach of such covenants and therefore negotiated with its
               banks and was granted a temporary waiver, reducing the Company's
               covenants to the higher of shareholders' equity of NIS 12 million
               or 15% of its total assets until the release of the Company's
               December 31, 2004 earnings (i.e. between March - June 2005). The
               waiver of Leumi Bank was subject to the repayment by the Company
               of NIS 1.5 million over a 15 month period (from October 1, 2004
               to December 31, 2005). In March 2005, the banks agreed to extend
               the temporary covenants. Leumi Bank agreed to extend the
               temporary covenants until the release of the Company's June 30,
               2005 earnings, following which and until the release of the
               Company's December 31, 2005 earnings (i.e. between March - June
               2006), Leumi Bank agreed to set the shareholders' equity
               threshold to not less than NIS 16 million. In accordance with the
               Discount Bank extension of the temporary covenants, the Company
               is required to maintain the higher of shareholders' equity of NIS
               13 million or 15% of its total assets until the release of the
               Company's December 31, 2005 earnings. Upon the release of the
               Company's December 31, 2005 earnings, it is required to comply
               with its original covenant terms. As of December 31, 2004, the
               Company was in compliance with the terms of such temporary
               covenants. The Company's management has programs and projects in
               place in order to continue to meet these terms.

          5.   In June 2003, the Company signed a factoring agreement with U
               Bank, pursuant to which the Company is entitled to $ 1.0 million
               factoring facilities, in consideration for the assignment to U
               Bank of an equal amount of the Company's accounts receivable. The
               use of these factoring facilities by the Company is subject to
               the consent of Discount Bank, Bank Hapoalim and Leumi Bank, which
               initially was provided until June 30, 2004, and following two
               extensions, the banks have provided their consent until March 31,
               2006.

          6.   The Company has signed a four-year agreement with a consulting
               company to incorporate the "Theory of Constraint" ("TOC") into
               its operation. The purpose is to improve several operational
               measures identified by the Company's Management. Pursuant to the
               agreement in 2004 the Company paid consultation fees and will pay
               bonuses to the consulting company based on its success.

               Until December 31, 2004, the consulting company was not entitled
               to a bonus. The agreement will expire in December 31, 2007.

                                      F-26

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

      B.    1.    In June 2002, an action was initiated by a former employee,
                  citing an alleged breach of an agreement for the payment of
                  royalties in exchange for the use of his invention. The
                  plaintiff is seeking damages of NIS 1.0 million. The Company
                  intends to deny liability and to assert that no agreement was
                  entered into between the parties, no compensation was agreed
                  upon, and that the amount of the claim is baseless. Based on
                  the opinion of the Company's legal counsel, the Company
                  believes that it has good defenses against the claim, and that
                  the outcome of this matter will not have a material adverse
                  effect on its financial position or results of operations.

            2.    In 2002, one of the Company's customers demanded that the
                  Company pay compensation of approximately $250,000 with
                  respect to damages claimed to have been incurred as a result
                  of the use of defective PCB that were manufactured and
                  supplied by the Company. The Company and its insurance company
                  have agreed that according to the insurance policy terms, the
                  insurance company will continue to negotiate the customer
                  demand with its representatives. Although, the Company
                  disagrees with the customer's claim, it has recorded a
                  provision in respect of its deductible amount that is not
                  covered by the Company's insurance. (See also Note 23).

      C.    As of December 31, 2004, the Company and Kubatronik are committed to
            purchase equipment, services and inventories costing approximately
            NIS 3.3 million (Company - NIS 3.2 million).

      D.    1.    The premises occupied by the Company and Kubatronik are leased
                  under operating agreements which expire in December 2011 and
                  June 2008, respectively.

            2.    Two parking areas that serve the employees of the Company and
                  Kubatronik are leased under operating agreements which expire
                  in December 2006 and December 2010, respectively.

            3.    The Company has signed several leasing and maintenance
                  agreements for production equipment with Orbotech Ltd. Of such
                  agreements, two main agreements will expire in June 2008 and
                  February 2010.

            4.    Three production machines are leased under operating
                  agreements which will expire in May 2005, October 2005 and
                  January 2008.

            5.    The Company has signed a leasing agreement for production
                  machine. The agreement will commence in April 2005 and will
                  expire in March 2007

            6.    The Company has signed several other maintenance agreements
                  for production equipment.

            7.    The majority of the Company's vehicles are leased under three
                  years operating agreements.

                  Minimum future payments due under the above agreements are as
                  follows:

<TABLE>
<CAPTION>
                              CONSOLIDATED      COMPANY
                              ------------    -----------
                               DECEMBER 31    DECEMBER 31
                                  2004           2004
                              ------------    -----------
<S>                           <C>             <C>
First year                           7,208          6,443
Second year                          6,533          5,851
Third year                           5,632          4,929
Fourth year                          4,405          4,121
Fifth year and thereafter            9,909          9,888
                              ------------    -----------
                                    33,687         31,232
                              ============    ===========
</TABLE>

                                      F-27

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

      E.    INDEMNIFICATION AGREEMENT

      The Company entered into a new indemnification agreement with its
      directors and officers and undertook to enter into the same agreement with
      future directors and officers, for losses incurred by a director or
      officer that will not exceed the lesser of US$ 2,000,000 or 25% of the
      Company's capital.

      F.    STAMP DUTY

      Stamp duty applies in Israel to various types of documents at various
      rates, depending primarily on the type of the document and the amount
      specified therein. In June 2003, the statute imposing stamp duty was
      amended. Following this amendment, the Israeli Tax Authority has increased
      enforcement of this statute. The amendment to the statute and the
      enforcement actions taken by the Israeli Tax Authority are in legal
      dispute before the Israeli Supreme Court, which has not yet ruled on this
      matter. In addition, under current legislation the stamp duty statute is
      expected to be gradually abolished until its complete cancellation in
      2008. To date, the Company has not received a demand for payment of stamp
      duty following this amendment. The outcome of the Supreme Court ruling is
      uncertain.

NOTE 16 - CONVERTIBLE NOTE

      In July 2003, the Company issued a convertible note ("the Note") in the
      principal amount of $500,000 to Merhav M.N.F - an Israeli private company
      controlled by the Company's major shareholder ("Merhav").

      The Note will be due four years from its issuance date. The Note bears
      interest at the rate of 10% per year, compounded on a quarterly basis.

      Merhav has the right, at any time, to convert the Note and any accrued
      interest thereon into ordinary shares of the Company at a price of $ 0.33
      per ordinary share. The Company may at its sole discretion repay the
      accrued interest on the principal of the Note to Merhav.

      In January 2004, $ 200,000 of the principal amount of the Note was
      converted into 606,060 ordinary shares.

      As of December 31, 2004, the Note including accrued interest is
      convertible into 1,085,197 ordinary shares which will constitute 16.5% of
      the company's ordinary shares after conversion.

                                      F-28

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 17 - SHAREHOLDERS' EQUITY

      A.    AUTHORIZED, ISSUED AND PAID UP SHARE CAPITAL IN HISTORICAL TERMS IS
            AS FOLLOWS:

<TABLE>
<CAPTION>
                                              AUTHORIZED              ISSUED AND PAID
                                            --------------    --------------------------------
                                              DECEMBER 31       DECEMBER 31       DECEMBER 31
                                             2003 AND 2004         2003              2004
                                            --------------    --------------    --------------
                                            (IN THOUSANDS)    (IN THOUSANDS)    (IN THOUSANDS)
                                            --------------    --------------    --------------
<S>                                             <C>                <C>               <C>
Number of shares:
Ordinary Shares of par value NIS 0.6 each       50,000             4,886             5,492

Amount in nominal NIS:
Ordinary Shares of par value NIS 0.6 each       30,000             2,932             3,295
</TABLE>

      B.    OPTIONS

      In January 1997, the Company adopted the Eltek Ltd. 1996 Stock Option Plan
      (the "1996 Plan"). The 1996 Plan authorizes the issuance of options to
      purchase an aggregate number of 474,000 ordinary shares. The options
      generally (i) expire on the fifth anniversary of the day of grant, (ii)
      vest ratably over a three year period (iii) may not be exercised for a
      period of one year from the date of grant, and (iv) can be converted as
      the basis of one option per share.

      The 1996 Plan is under the administration of the Compensation Committee
      appointed by the Board of Directors.

      The Board of Directors of the Company may, at any time and at its sole and
      absolute discretion, suspend, terminate or amend the 1996 Plan in any
      manner. However, in no event may any action of the Company alter or impair
      the rights of a grantee under any outstanding option without their
      consent.

      As of December 31, 2004, options for the purchase of 107,999 ordinary
      shares have been exercised in exercise price ranging from $ 1.375 to $
      1.75. There are no options currently outstanding under the 1996 Plan.

      In August 2000, the Company adopted the Eltek Ltd. 2000 stock option plan
      (the "2000 Plan"). The 2000 Plan authorizes the issuance of options to
      purchase an aggregate of 750,000 ordinary shares. The options generally
      (i) expire on the fifth anniversary of the day of grant, (ii) vest ratably
      over a three-year period and (iii) may not be exercised for a period of
      one year from the date of grant. The exercise price of these options is
      equal to the market value of the underlying stock on the date of the
      grant.

      As of December 31, 2004, options for the purchase of 394,933 ordinary
      shares having exercise price of $ 4.375 per share and options for the
      purchase of 20,000 ordinary shares having exercise price of $ 1.14 per
      share had been granted under the 2000 Plan.

                                      F-29

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 17 - SHAREHOLDERS' EQUITY (CONT'D)

      B.    OPTIONS (CONT'D)

      A summary of the Company's plans and the options that were granted to the
      Company's employees is presented below:

<TABLE>
<CAPTION>
                                                 NUMBER        WEIGHTED
                                                   OF           AVERAGE
                                                 OPTIONS     EXERCISE PRICE
                                                ---------    --------------
                                                                  US$
                                                ---------    --------------
<S>                                <C>          <C>               <C>
Balance as at December 31, 2001                   569,567         4.07
                                   Forfeited      (30,634)        3.80
                                                ---------

Balance as at December 31, 2002                   538,933         4.09
                                   Expired        (14,000)*       1.75
                                   Forfeited      (71,600)*       4.08
                                                ---------

Balance as at December 31, 2003                   453,333         4.16

                                   Granted         20,000         1.14
                                   Expired        (37,000)        1.75
                                   Forfeited      (21,400)        4.38
                                                ---------

BALANCE AS AT DECEMBER 31, 2004                   414,933         4.22
                                                =========
</TABLE>

* Reclassified

      The following table summarizes information concerning options outstanding
      at December 31, 2004.

<TABLE>
<CAPTION>
                      NUMBER OF        NUMBER OF
                       OPTIONS          OPTIONS
                   OUTSTANDING AT    EXERCISABLE AT       REMAINING
EXERCISE PRICES      DECEMBER 31       DECEMBER 31     CONTRACTUAL LIFE
    (U.S.$)             2004              2004            (IN YEARS)
---------------    --------------    --------------    ----------------
      <C>          <C>               <C>                     <C>
      4.38                381,333           381,333          0.6
      4.38                 13,600            13,600          1.4
      1.14                 20,000                 -          4.9
                   --------------    --------------

                          414,933           394,933
                   ==============    ==============
</TABLE>

                                      F-30

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 18 - REVENUES

      A.    REVENUES BY ACTIVITIES

<TABLE>
<CAPTION>
                                 CONSOLIDATED                                     COMPANY
                  ------------------------------------------    -----------------------------------------
                   YEAR ENDED      YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED
                  DECEMBER 31     DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31
                      2002           2003           2004           2002           2003           2004
                  -----------    ------------    -----------    -----------    -----------    -----------
<S>               <C>            <C>             <C>            <C>            <C>            <C>
Sales of
manufactured
products              107,409         107,212        122,127         99,919         92,691        105,835
Sales of non-
manufactured
products                  105             786          2,219            105            786          2,285
Commissions               521             305            656            521            340            665
                  -----------    ------------    -----------    -----------    -----------    -----------
                      108,035         108,303        125,002        100,545         93,817        108,785
                  ===========    ============    ===========    ===========    ===========    ===========
</TABLE>

      B.    (1)   During the year ended December 31, 2004, one customer
                  accounted for NIS 15,359 thousand (12.3%) of the total
                  consolidated revenues.
                  During the years ended December 31, 2002 and 2003 there were
                  no customers who accounted for more than 10% of the total
                  consolidated revenues.

            (2)   During the year ended December 31, 2004, the Company had one
                  customer who accounted for NIS 15,359 thousand (14.1%) of the
                  total Company's revenues.
                  During the year ended December 31, 2003, the Company had two
                  customers who accounted for NIS 9,864 thousand (10.5%) and NIS
                  9,522 thousand (10.2%) of the company revenues (in 2002 -
                  there were no customers who accounted for more than 10% of the
                  company revenues).

                                      F-31

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 19 - COST OF REVENUES

<TABLE>
<CAPTION>
                                     CONSOLIDATED                                  COMPANY
                       -----------------------------------------    -----------------------------------------
                        YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED
                       DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31
                          2002            2003           2004           2002          2003            2004
                       -----------    -----------    -----------    -----------    -----------    -----------
<S>                    <C>            <C>            <C>            <C>            <C>            <C>
Cost of
 materials
 and non-
 manufactured
 products (1)               39,516*        37,742*        42,117         38,541*        35,659*        38,550
Payroll and
 related
 benefits                   35,541         33,086         35,699         32,976         27,240         29,228
Manufacturing
 expenses                   16,960*        18,088*        19,491         15,975*        15,713*        16,265
Depreciation                13,488         14,517         13,136         12,561         12,665         11,561
Changes in
 inventories of
 completed
 products
 and work-in-
 process**                     953*          (790)*         (445)           925*          (474)*         (273)
                       -----------    -----------    -----------    -----------    -----------    -----------
                           106,458        102,643        109,998        100,978         90,803         95,331
                       ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

*  Reclassified
** Including changes in non-manufactured products.

(1)   The Company has two major suppliers of raw material, each of whom supplies
      more than 10% of its raw material. The following table shows the amounts
      of the purchases from each of the two suppliers:

<TABLE>
<CAPTION>
                       CONSOLIDATED                         COMPANY
             ---------------------------------   ---------------------------------
               PERCENTAGE OF                       PERCENTAGE OF
              TOTAL PURCHASES       YEAR ENDED    TOTAL PURCHASES      YEAR ENDED
                 FROM RAW          DECEMBER 31        FROM RAW         DECEMBER 31
             MATERIAL SUPPLIERS       2004       MATERIAL SUPPLIERS       2004
             ------------------    -----------   ------------------    -----------
                     %                 NIS               %                 NIS
             ------------------    -----------   ------------------    -----------
<S>                <C>                <C>               <C>              <C>
Supplier 1         19.9               8,373             21.7             8,373
Supplier 2         14.3               6,038             15.7             6,038
</TABLE>

                                      F-32

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 20 - RESEARCH AND DEVELOPMENT EXPENSES (INCOME), NET

      CONSOLIDATED AND COMPANY

<TABLE>
<CAPTION>
                                             YEAR ENDED     YEAR ENDED    YEAR ENDED
                                             DECEMBER 31   DECEMBER 31   DECEMBER 31
                                                2002           2003          2004
                                             -----------   -----------   -----------
<S>                                          <C>           <C>           <C>
(Approved) unapproved grants from the OCS            116           (18)            -
                                             ===========   ===========   ===========
</TABLE>

      In January 1999, the Company joined a consortium of companies for a period
      which ended in July 2001. The consortium was under the supervision of the
      OCS. Within the framework of the consortium, the Company specialized in
      High Density Interconnect ("HDI") technology.

      Under the terms of the consortium, each member of the consortium was
      provided with an advance for its research and development costs for a
      specific research and development project assigned to it by the
      consortium. The OCS reimbursed 66% of such approved research and
      development expenses.

      These reimbursements were contingent upon the Company submitting monthly
      reports prepared in accordance with the requirements of the OCS but were
      not contingent upon royalties or any future payments being made by the
      Company.

      Unapproved reimbursements from the OCS relating to research and
      development expenses that were debited in 2001 in the amount of NIS 116
      thousand were included in research and development expenses, net in the
      year 2002.

      In 2003, after the consortium has been discontinued, a surplus amount of
      money was distributed among the members and has been recognized as income.

                                      F-33

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 21 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                               CONSOLIDATED                                  COMPANY
                  ---------------------------------------    ----------------------------------------
                  YEAR ENDED    YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED    YEAR ENDED
                  DECEMBER 31   DECEMBER 31   DECEMBER 31    DECEMBER 31    DECEMBER 31   DECEMBER 31
                     2002          2003           2004          2002           2003          2004
                  -----------  ------------   -----------    ------------   -----------   -----------
<S>               <C>           <C>           <C>              <C>          <C>           <C>
Payroll and
 related
 benefits
 expenses            6,930          7,386          8,437         5,805         5,674           6,416
Commissions            597          1,232          1,476           788           802           1,675
Export and
 delivery
 expenses            1,400          1,275          1,592         1,261           972           1,357
Office
 maintenance           815            870            890           756           676             674
Traveling              631            422            594           565           349             430
Depreciation           416            421            292           380           328             205
Professional
 services            1,757          1,420          2,215         1,334         1,012           1,809
Car
 maintenance           605            579            710           533           516             624
Investors
 relations             687            383            230           687           383             230
Other                1,314          1,008          1,829         1,296           975           1,634
                  --------      ---------     ----------       -------      --------      ----------

                    15,152         14,996         18,265        13,405        11,687          15,054
                  ========      =========     ==========       =======      ========      ==========
</TABLE>

                                      F-34

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 22 - FINANCIAL EXPENSES, NET

<TABLE>
<CAPTION>
                                    CONSOLIDATED                                 COMPANY
                      ----------------------------------------   -----------------------------------------
                       YEAR ENDED    YEAR ENDED    YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED
                      DECEMBER 31   DECEMBER 31   DECEMBER 31    DECEMBER 31    DECEMBER 31    DECEMBER 31
                          2002          2003          2004          2002            2003           2004
                      -----------   -----------   ------------   -----------    -----------    -----------
<S>                   <C>           <C>           <C>            <C>            <C>            <C>
Expenses on
 long-term loans
 net of erosion               540*          399            864           540*           399            864
Expenses on
 short-term
 credit and bank
 charges net of
 erosion                      885*        1,706          1,465           871*         1,692          1,450
Effect of
 exchange rate
 differences
 expenses                    (918)*         (68)*          319          (972)*         (209)*          263
Expenses on
 convertible
 note                           -           112            150             -            112            150
Other financing
 expenses
 (income), net                936*          840*           150           642*           232*          (446)
                      -----------   -----------   ------------   -----------    -----------    -----------

                            1,443         2,989          2,948         1,081          2,226          2,281
                      ===========   ===========   ============   ===========    ===========    ===========
</TABLE>

*  Reclassified

NOTE 23 - OTHER INCOME (EXPENSES), NET

<TABLE>
<CAPTION>
                                        CONSOLIDATED                                COMPANY
                         ----------------------------------------   ----------------------------------------
                          YEAR ENDED     YEAR ENDED    YEAR ENDED    YEAR ENDED    YEAR ENDED     YEAR ENDED
                         DECEMBER 31    DECEMBER 31   DECEMBER 31   DECEMBER 31    DECEMBER 31   DECEMBER 31
                             2002           2003          2004          2002           2003          2004
                         -----------    ------------  -----------   -----------    -----------   -----------
<S>                      <C>            <C>           <C>           <C>            <C>           <C>
Indemnification
 to customer (1)                (116)           (161)           -          (116)         (161)            -
Gain on
 disposals of
 fixed assets, net               415             200           86             8           112            77
Customs charges                    -             (59)           -                         (59)            -
Other expenses                    (9)              -          (34)            -             -           (34)
                         -----------    ------------  -----------   -----------    ----------    ----------

                                 290             (20)          52          (108)         (108)           43
                         ===========    ============  ===========   ===========    ==========    ==========
</TABLE>

(1) During 2002, the Company received a demand from one of its customers to
    compensate it with respect to damages it claimed to have occurred as a
    result of the use of defective PCB that were manufactured and supplied by
    the Company. The Company has recorded a provision in respect of its
    deductible amount that is not covered by the company's insurance. (See Note
    15.B.2).

                                      F-35

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 24 - TAXES ON INCOME

      A.    TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
            INVESTMENTS, 1959 (THE "LAW")

      Certain of the Company's investment programs in expanding its production
      facilities in Israel were granted "approved enterprise" status in
      accordance with the above Law. As of the date of these financial
      statements, two approved investment programs are applicable to the
      Company.

      The investment programs are based on the Alternative Benefits track and
      provide for tax benefits as follows: a zero tax rate on the Company's
      undistributed income arising from the revenue that is derived from the
      "approved enterprise", for a period of two years, starting with the year
      in which the "Approved Enterprise" first earns taxable income. The income
      so derived in the five subsequent years will be subject to tax at a
      reduced rate of 25%. The periods of tax benefits relating to these
      programs have not yet commenced, and will expire no later than 2005 for
      one program and 2016 for the other.

      Entitlement to the above benefits is conditional upon the Company
      complying with the conditions stipulated by the Law and the regulations
      promulgated thereunder, as well as the criteria set forth in the approval
      for the specific investment in the "approved enterprise". In the event of
      failure to comply with these conditions, the tax benefits may be
      cancelled, and the Company may be required to refund the amount of the
      cancelled benefits, together with CPI linkage adjustment and interest. See
      Note 15(A)(2) for a pledge registered in this respect.

      The period of tax benefits described above is limited to 12 years from the
      commencement of production, or 14 years from the approval date, whichever
      is earlier.

      The Law also grants entitlement to claim accelerated depreciation for tax
      purposes on machinery and equipment used by the "approved enterprise".

      Income of the Company not derived from the "approved enterprise" is
      subject to the regular corporate tax rate, which is 35% in 2004.

      Dividends paid out of income derived from an approved enterprise (or out
      of dividends received from a company whose income is derived from an
      approved enterprise) are generally subject to withholding tax at the rate
      of 15% (deductible at source). The rate of 15% is limited to dividends and
      distributions out of income derived during the benefits period and
      actually paid at any time up to 12 years thereafter. A company which
      elects the Alternative Benefits track will be subject to corporate tax at
      the otherwise applicable rate of 25% in respect of the gross amount of the
      dividend if it pays a dividend out of income derived from its approved
      enterprise during the tax exemption period.

      B.    TAXATION OF EMPLOYEE STOCK OPTION PLANS

      In respect to employee stock incentive plan, the 2003 Israeli tax reform
      codified past practice and determined three alternative tracks for taxing
      employee stock option plans. Where a trustee arrangement is in place, the
      employer can either claim an expense for tax purposes while the employee
      will be fully taxed up to the maximum marginal tax rate of 49% (the
      "Ordinary Income Route") or the Company can waive the tax expense and the
      employee will pay a reduced tax rate of 25% (the "Capital Gains Route").
      Where there is no trustee arrangement, the employee is fully taxed and no
      expense is allowed to the Company. There are detailed provisions for
      implementing these tracks. The tax reform's new practice is not in effect
      for options granted before December 31, 2002 under plans adopted before
      December 31, 2002. The options granted by the Company during 2004 were
      granted pursuant the Capital Gains Route.

                                      F-36

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 24 - TAXES ON INCOME (CONT'D)

      C.    AMENDMENTS TO THE INCOME TAX ORDINANCE

     On June 29, 2004, the Israeli parliament passed the "Law for the Amendment
     of the Income Tax Ordinance (Amendment No. 140 and Temporary Order) - 2004"
     ("the Amendment"). The Amendment provides for a gradual reduction in the
     corporate tax rate from 36% to 30% in the following manner: 35% for the
     2004 tax year, 34% for the 2005 tax year, 32% for the 2006 tax year and 30%
     for the 2007 tax year and thereafter.

      D.    MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX
            (INFLATIONARY ADJUSTMENTS) LAW, 1985 (THE "INFLATIONARY ADJUSTMENT
            LAW")

      The Company is taxed in accordance with the Inflationary Adjustment Law.
      Under the Inflationary Adjustment Law, taxable income as determined by the
      provisions of the Income Tax Ordinance is adjusted for the effect of
      inflation by allowing a "capital preservation deduction" or by charging an
      "addition for inflation" depending on whether the entity shows a positive
      or negative net equity adjusted for inflation on the basis of the changes
      in the CPI, in terms of the provisions of the Inflationary Adjustment Law.

      E.    CARRYFORWARD TAX LOSSES

      As of December 31, 2004, the consolidated tax loss carryforwards was
      approximately NIS 68.3 million (Company - NIS 62 million). As discussed in
      Note 2M above, the Company has not recorded a deferred tax asset in
      respect of these losses as available evidence indicates that it is not
      expected that such assets will be realized in the foreseeable future.
      These losses do not have expiry date.

      In the consolidated balance sheet, a deferred tax asset has been recorded
      in respect of Kubatronik's tax loss carryforwards in the amount of NIS 753
      thousand. These losses do not have expiry date.

      F.    INCOME TAX ASSESSMENTS

      The Company has received final tax assessments through the 1995 tax year.

      Kubatronik is subject to German corporate tax of approximately 38% and has
      received final tax assessments through the 2003 tax year.

      The Company's other subsidiaries have not yet received any final tax
      assessments since incorporation.

                                      F-37

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 24 - TAXES ON INCOME (CONT'D)

      G.    RECONCILIATION OF THE THEORETICAL TAX EXPENSE TO THE ACTUAL TAX
            EXPENSE

      A reconciliation of the theoretical tax expense, assuming all income is
      taxable at the statutory rates applicable in Israel, and the actual tax
      expense, is as follows:

<TABLE>
<CAPTION>
                                      CONSOLIDATED                                 COMPANY
                       -----------------------------------------   ---------------------------------------
                         YEAR ENDED    YEAR ENDED     YEAR ENDED   YEAR ENDED     YEAR ENDED    YEAR ENDED
                        DECEMBER 31    DECEMBER 31   DECEMBER 31   DECEMBER 31   DECEMBER 31   DECEMBER 31
                            2002          2003           2004         2002           2003          2004
                       ------------   ------------   -----------   -----------   -----------   -----------
<S>                    <C>            <C>            <C>           <C>           <C>           <C>
Loss before taxes
 as reported in the
 statement of
 operations
Statutory tax               (15,136)       (12,911)       (6,750)      (15,143)      (10,989)       (3,838)

Primary tax rate                 36%            36%           35%           36%           36%           35%
                       ------------   ------------   -----------   -----------   -----------   -----------

Tax calculated               (5,448)        (4,648)       (2,363)       (5,451)       (3,956)       (1,343)
                       ------------   ------------   -----------   -----------   -----------   -----------
Non-deductible
 operating
 expenses                       134*           120*          160           134*          120*          160
Taxes on account
 of previous years                -            445*            -             -             -             -
Amortization of
 goodwill                       105*           214*          216             -             -             -
Unrecognized
 deferred taxes               5,544*         4,199*        1,544         5,164*        4,099*        1,445
Depreciation and
 inflation impact               153*          (263)*        (261)          153*         (263)*        (262)
Tax losses that
 no deferred tax
 was computed
 on difference
 between tax rate
 and tax rules                    -            383*            -             -             -             -
Applicable to
 foreign subsidiary            (108)*         (256)*          (9)           94*          (96)*           -
                       ------------   ------------   -----------   -----------   -----------   -----------

Total                         5,828          4,842         1,650         5,545         3,860         1,343
                       ------------   ------------   -----------   -----------   -----------   -----------
Tax (benefit)
 expenses                       380            194          (713)           94           (96)            -
                       ============   ============   ===========   ===========   ===========   ===========
</TABLE>

*    Reclassified


                                      F-38

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 24 - TAXES ON INCOME (CONT'D)

      H.    RECOGNIZED DEFERRED TAX ASSETS

      Deferred tax assets are attributable to the following:

<TABLE>
<CAPTION>
                                        CONSOLIDATED
                                 -------------------------
                                 DECEMBER 31   DECEMBER 31
                                    2003          2004
                                 -----------   -----------
<S>                              <C>           <C>
Loss carryforwards in Germany              -           753
                                 -----------   -----------
</TABLE>

      I.    UNRECOGNIZED DEFERRED TAX ASSETS

      Deferred assets have not been recognized in respect of the following
      items:

<TABLE>
<CAPTION>
                                         CONSOLIDATED                  COMPANY
                                  -------------------------   -------------------------
                                  DECEMBER 31   DECEMBER 31   DECEMBER 31   DECEMBER 31
                                     2003          2004          2003          2004
                                  -----------   -----------   -----------   -----------
<S>                               <C>           <C>           <C>           <C>
Deferred tax assets comprise:
Losses carryforward                    22,578*       21,079        22,578*       21,079
Severance pay                             338           287           311           287
Vacation pay                              804           752           756           752
Allowance for doubtful accounts           491           549           467           549
                                  -----------   -----------   -----------   -----------

Total                                  24,211        22,667        24,112        22,667
                                  ===========   ===========   ===========   ===========
</TABLE>

* Reclassified

                                      F-39

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 25 - SEGMENT REPORTING

      The Company has identified three reportable geographic segments in 2004,
      i.e. Israel, Europe and others - mainly the United States and India.

<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31, 2004
                           -----------------------------------------------------
                           ISRAEL   EUROPE    OTHER   ADJUSTMENTS   CONSOLIDATED
                           ------   ------   ------   -----------   ------------
<S>                        <C>      <C>      <C>      <C>           <C>
External revenues for
 the segment               67,867   48,005    9,130             -        125,002
Internal revenues for
 the segment                   60    8,750        -        (8,810)             -
                           ------   ------   ------   -----------   ------------
Total revenues for
 the segment               67,927   56,755    9,130        (8,810)       125,002
                           ======   ======   ======   ===========   ============
Operating income (loss)     1,313   (4,039)  (1,078)          (50)        (3,854)
Financial expenses         (1,944)  (1,718)    (261)          649         (3,274)
Financial income                4      921       64          (663)           326
Other income, net              43        9        -             -             52
Company's share
in losses of
subsidiaries, net          (2,017)       -        -         2,017              -
Tax benefit                     -      713        -             -            713
Minority share in
subsidiary's net results        -      182        -             -            182
                           ------   ------   ------   -----------   ------------

Net loss                   (2,601)  (3,932)  (1,275)        1,953         (5,855)
                           ======   ======   ======   ===========   ============
Total assets for the
 segment                   45,866   38,280    6,603       (11,061)        79,688
Deferred taxes                  -        -        -             -            753
                           ------   ------   ------   -----------   ------------

Total assets               45,866   38,280    6,603       (11,061)        80,441
                           ======   ======   ======   ===========   ============

Total liabilities          40,261   35,379    5,359       (15,549)        65,450
                           ======   ======   ======   ===========   ============

    Capital expenditure       743      627      100             -          1,470
                           ======   ======   ======   ===========   ============
    Depreciation and
     amortization           7,345    5,686      990             -         14,021
                           ======   ======   ======   ===========   ============
</TABLE>

                                      F-40

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 25 - SEGMENT REPORTING (CONT'D)

      The Company has identified three reportable geographic segments in 2003,
      i.e. Israel, Europe and others - mainly the United States and India.

<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31, 2003
                          --------------------------------------------------------
                           ISRAEL    EUROPE    OTHER    ADJUSTMENTS   CONSOLIDATED
                          -------   --------   ------   -----------   ------------
<S>                        <C>        <C>      <C>       <C>            <C>
External revenues for
 the segment               72,584     30,814    4,905          -        108,303
Internal revenues for
 the segment                   35      2,806        -     (2,841)             -
                           ------     ------   ------    -------        -------
Total revenues for
 the segment               72,619     33,620    4,905     (2,841)       108,303
                           ======     ======   ======    =======        =======
Operating loss             (4,572)    (4,257)  (1,269)       196         (9,902)
Financial expenses         (2,434)    (1,351)    (213)       506         (3,492)
Financial income               12      1,116        -       (625)           503
 Other income
 (expenses), net             (108)        88        -          -            (20)
Company's share in
 losses of
 subsidiaries, net         (2,094)         -        -      2,094              -
Tax expenses                    -       (194)       -          -           (194)
Minority share in
 subsidiary's net
 results                        -        118        -          -            118
                           ------     ------   ------    -------        -------

Net loss                   (9,196)    (4,480)  (1,482)     2,171        (12,987)
                           ======     ======   ======    =======        =======
Total assets for the
 segment                   68,812     27,668    4,008    (11,864)        88,624
                           ======     ======   ======    =======        =======

Total liabilities          52,325     27,792    3,201    (14,091)        69,227
                           ======     ======   ======    =======        =======

Capital expenditure         1,262      2,414      121          -          3,797
                           ======     ======   ======    =======        =======

Depreciation and
 amortization              10,056      4,792      674          -         15,222
                           ======     ======   ======    =======        =======
</TABLE>

                                      F-41

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE  25 - SEGMENT REPORTING (CONT'D)

     The Company has identified three reportable geographic segments in 2002,
     i.e. Israel, Europe and others.

<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31, 2002
                          --------------------------------------------------------
                           ISRAEL    EUROPE     OTHER   ADJUSTMENTS   CONSOLIDATED
                          -------   --------   ------   -----------   ------------
<S>                       <C>         <C>      <C>       <C>             <C>
External revenues for
 the segment               81,839     21,544    4,652          -         108,035
Internal revenues for
 the segment                    -      1,323        -     (1,323)              -
                          -------     ------   ------    -------         -------
Total revenues for
 the segment               81,839     22,867    4,652     (1,323)        108,035
                          =======     ======   ======    =======         =======

Operating loss             (9,697)    (3,261)  (1,005)       (20)        (13,983)
Financial expenses         (2,290)      (849)    (129)       390          (2,878)
Financial income              131      1,547      128       (371)          1,435
Other income
 (expenses), net             (108)       398        -          -             290
Company's share in
 losses of
 subsidiaries, net           (477)         -        -        477               -
Tax expenses                    -       (380)       -          -            (380)
Minority share in
 subsidiary's net
 results                        -       (198)       -          -            (198)
                          -------     ------   ------    -------         -------

Net loss                  (12,441)    (2,743)  (1,006)       476         (15,714)
                          =======     ======   ======    =======         =======
Total assets for the
 segment                   86,702     26,733    3,782    (11,386)        105,831
                          =======     ======   ======    =======         =======

Total liabilities          60,194     24,242    3,273    (12,797)         74,912
                          =======     ======   ======    =======         =======

Capital expenditure         6,692     12,912      378     (6,498)         13,484
                          =======     ======   ======    =======         =======
Depreciation and
 amortization              10,534      3,067      595          -          14,196
                          =======     ======   ======    =======         =======
</TABLE>

                                      F-42

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 26 - BENEFITS TO RELATED AND INTERESTED PARTIES AND TRANSACTIONS WITH THEM

<TABLE>
<CAPTION>
                                                           CONSOLIDATED AND COMPANY
                                                   ---------------------------------------
                                                    YEAR ENDED    YEAR ENDED    YEAR ENDED
                                                   DECEMBER 31   DECEMBER 31   DECEMBER 31
                                                       2002          2003         2004
                                                   -----------   -----------   -----------
<S>                                                   <C>           <C>          <C>
A. SALARIES AND RELATED EXPENSES
     TO INTERESTED PARTIES (1)                        1,329         1,422        1,382
(1)     5 persons in each year.

B. INTEREST AND EXCHANGE RATE
     EXPENSES (2)                                         -           112          150
(2)     Expenses on convertible note (see Note 16).
</TABLE>

      C.   Subsidiaries debt included in the financial statements of the
           Company as at December 31, 2004 and 2003 is NIS 17,449 thousand and
           NIS 16,061 thousand, respectively (see Note 5 and Note 7).

      D.    COMPENSATION OF DIRECTORS

      The Chairman of the Board of Directors and the external directors are
      compensated for their service on the Board of Directors and its
      committees. During the year ended December 31, 2004, the Company paid its
      directors NIS 321 thousand (in 2003 - NIS 272 thousands, in 2002 - NIS 267
      thousand).

      The transactions with interested parties were conducted at "arms-length".

NOTE 27 - DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

      The Company's financial instruments consist primarily of cash and cash
      equivalents, trade and other receivables, trade payables, short-term
      credit and long-term debt. The carrying amounts of the short- term
      financial instruments, approximates their fair value because of the short
      maturity of these instruments.

      Management estimates that the carrying value of its long-term debt as at
      December 31, 2004 also approximates its fair value because the interest on
      the long-term debt is similar to the market interest rate for similar debt
      instruments of comparable maturities.

                                      F-43

<PAGE>

                                                                   Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE  28 - EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
           ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES

      The financial statements of the Company conform to Israeli GAAP which
      varies in certain significant respects from those followed in the United
      States of America. The effect of such differences on net loss and
      shareholders' equity are set out below.

      A.    EFFECT OF INFLATION

      The Company, in accordance with Israeli GAAP, comprehensively includes the
      effect of price level changes in the accompanying financial statements, as
      described in Note 2B. According to such Israeli accounting principles, the
      Company has discontinued the adjustment of the financial statements as of
      January 1, 2004.

      U.S. GAAP does not provide for recognition of the effects of such price
      level changes. Such effects have not been included in a reconciliation to
      U.S. GAAP.

      B.    LIABILITY FOR EMPLOYEE SEVERANCE BENEFITS

      Under Israeli GAAP, the severance obligation is presented on the balance
      sheet net of the assets held by the CSPF, whereas under U.S. GAAP, such
      assets are presented as long-term assets of the Company. (See also Note
      14.4.)

      C.    CONVERTIBLE NOTE

      Under Israeli GAAP, the convertible note is presented on the balance sheet
      as a separate item between long-term liabilities and shareholders' equity,
      whereas under U.S. GAAP it should be presented as a liability.

      D.    GOODWILL AMORTIZATION

      Under Israeli GAAP, goodwill derived from the acquisition of Kubatronik
      (see Note 1) is being amortized on a straight-line basis over 10 years.
      Under US GAAP, goodwill is no longer amortized but is evaluated for
      impairment in accordance with SFAS No. 142.

                                      F-44

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 28 - EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
          ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES (CONT'D)

      E.    FINANCIAL DERIVATIVE

      As described in Note 1, the seller of Kubatronik has the right to require
      the Company to purchase (put option) the sellers remaining 24% holdings of
      Kubatronik

      Under Israeli GAAP, there are no accounting consequences.

      Under US GAAP, according to SFAS 133 "Accounting for Derivative
      Instruments and Hedging Activities", the put option should be considered
      as a financial instrument and such an instrument should be marked to
      market every reporting period.

      1)    EFFECT ON BALANCE SHEET ITEMS:

<TABLE>
<CAPTION>
                                               CONSOLIDATED
                                         -------------------------
                                         DECEMBER 31   DECEMBER 31
                                             2003          2004
                                         -----------   -----------
<S>                                         <C>           <C>
Israeli GAAP -
 Goodwill, net of amortization (D)          4,972         4,656

US GAAP -
 Goodwill                                   5,888         6,254
</TABLE>

<TABLE>
<CAPTION>
                                               CONSOLIDATED
                                         -------------------------
                                         DECEMBER 31   DECEMBER 31
                                             2003          2004
                                         -----------   -----------
<S>                                         <C>          <C>
Israeli GAAP -
Other liabilities and accrued expenses      8,555        11,083

US GAAP -
Put option (E)                                  -           114
                                            -----        ------
Other liabilities and accrued expenses      8,555        11,197
                                            =====        ======
</TABLE>

     2)   EFFECT ON STATEMENTS OF OPERATION ITEMS:

<TABLE>
<CAPTION>
                                                   CONSOLIDATED AND COMPANY
                                           ---------------------------------------
                                            YEAR ENDED    YEAR ENDED    YEAR ENDED
                                           DECEMBER 31   DECEMBER 31   DECEMBER 31
                                           -----------   -----------   -----------
                                               2002         2003          2004
                                           -----------   -----------   -----------
<S>                                          <C>           <C>           <C>
Net loss reported under Israeli GAAP         (15,714)      (12,987)      (5,855)
Amortization of goodwill (D)                     292           584          593
Put option (E)                                     -             -         (114)
                                             -------       -------       ------
Net loss under US GAAP                       (15,422)      (12,403)      (5,376)
                                             =======       =======       ======
      3)    EFFECT ON SHAREHOLDERS EQUITY

Total shareholders equity - Israeli GAAP      30,919        19,397       14,991
Accumulated amortization of goodwill (D)         292           876        1,469
Translation adjustments in respect
of goodwill                                        -             -          129
Put option (E)                                     -             -         (114)
                                             -------       -------       ------
Total shareholders equity - US GAAP           31,211        20,273       16,475
                                             =======       =======       ======
</TABLE>

                                      F-45

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 28 - EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
          ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES (CONT'D)

      F.    EARNINGS (LOSS) PER SHARE ("EPS")

      Under Israeli GAAP and pursuant to Opinion No. 55, the dilutive effect of
      stock options and convertible note is included in the computation of basic
      EPS only if their exercise or conversion is considered to be probable.
      Calculation of the probability is based on the ratio between the market
      price of the shares and the present value of the exercise price of the
      stock options and convertible note.

      In accordance with Statement of Financial Accounting Standards No. 128
      "Earnings Per Share" ("Statement 128"), basic EPS is calculated by
      dividing the net income or loss attributable to ordinary shareholders by
      the weighted average number of ordinary shares outstanding during the
      year. Diluted EPS assumes the issuance of ordinary shares for all
      potential dilutive ordinary shares outstanding during the year without
      consideration of the probability of conversion.

      Following are the details of the basic and diluted EPS under U.S. GAAP*:

<TABLE>
<CAPTION>
                                                          CONSOLIDATED AND COMPANY
                                                   ---------------------------------------
                                                    YEAR ENDED    YEAR ENDED    YEAR ENDED
                                                   DECEMBER 31   DECEMBER 31   DECEMBER 31
                                                   -----------   -----------   -----------
                                                       2002          2003          2004
                                                   -----------   -----------   -----------
<S>                                                  <C>            <C>           <C>
Basic and diluted EPS (NIS)                          (3.16)         (2.54)        (0.98)

Weighted average number of shares used in basic
 and diluted EPS calculation (thousands)             4,886          4,886         5,492
</TABLE>

* EPS data is provided for one ordinary share of a par value of NIS 0.6 the
  actual par value of the shares as compared to the disclosure in the statement
  of operations where EPS data is presented based on NIS 1 par value per share
  as required under Israeli GAAP.

      G.    STATEMENT OF OTHER COMPREHENSIVE INCOME

      1.    In June 1997, the Financial Accounting Standards Board issued
            Financial Accounting Standard No. 130 "Reporting Comprehensive
            Income" ("Statement 130"). The Company adopted Statement 130 during
            the year ended March 31, 1999. Statement 130 requires that all items
            that are required to be recognized under accounting standards as
            components of comprehensive income be reported in a financial
            statement that is displayed in the same prominence as other
            financial statements. It requires that an enterprise (a) classify
            items of other comprehensive income by their nature in a financial
            statement and (b) display the accumulated balance of other
            comprehensive income separately from retained earnings and
            additional paid in capital in the equity section of the statement of
            financial position.

<TABLE>
<CAPTION>
                                                          CONSOLIDATED AND COMPANY
                                                   ---------------------------------------
                                                    YEAR ENDED    YEAR ENDED    YEAR ENDED
                                                   DECEMBER 31   DECEMBER 31   DECEMBER 31
                                                   -----------   -----------   -----------
                                                       2002          2003          2004
                                                   -----------   -----------   -----------
<S>                                                  <C>           <C>            <C>
Net loss - US GAAP                                   (15,422)      (12,403)       (5,376)
Translation adjustments                                  539         1,504*          699
                                                     -------       -------        ------
Net comprehensive loss - US GAAP                     (14,883)      (10,899)       (4,677)
                                                     =======       =======        ======
</TABLE>

* Restated - see Note 28(G)(2).

                                      F-46

<PAGE>

                                                                      Eltek Ltd.

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 28 - EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
          ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES (CONT'D)

      G.    STATEMENT OF OTHER COMPREHENSIVE INCOME (CONT'D)

      2.    RESTATEMENT

            The statements of other comprehensive income for the year ended
            December 31, 2003 has been restated in order to reflect a correction
            in 2003 figures. The correction in 2003 is due to an error, which
            consisted of recording the aggregate translation adjustments for the
            years 2002 and 2003, rather than the impact for the respective year:

<TABLE>
<CAPTION>
                                                   CONSOLIDATED
                                                   AND COMPANY
                                                   ------------
                                                    YEAR ENDED
                                                   DECEMBER 31
                                                       2003
                                                   ------------
<S>                                                  <C>
Translation adjustments - as reported                  2,004

Translation adjustments - as restated                  1,504

Net comprehensive loss - U.S. GAAP - as reported     (10,399)

Net comprehensive loss - U.S. GAAP - as restated     (10,899)
</TABLE>

                                      F-47

<PAGE>

                                                                      Eltek Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 29 - ASSETS AND LIABILITIES ANALYZED BY CURRENCY AND LINKAGE BASIS

      A.    CONSOLIDATED

<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 2004
                                    -------------------------------------------------------------------------------------
                                                            FOREIGN      FOREIGN
                                    LINKED                  CURRENCY     CURRENCY   OTHER FOREIGN   NON-MONETARY
                                    TO CPI   NON-LINKED   U.S. DOLLARS     EURO       CURRENCY          ITEMS      TOTAL
                                    ------   ----------   ------------   --------   -------------   ------------   ------
<S>                                 <C>       <C>            <C>           <C>          <C>            <C>         <C>
Cash and cash equivalents                -        260         1,906        2,105          3                 -       4,274
Trade and other receivables and
  prepaid expenses                     126     11,323        10,831        2,713          -               563      25,556
Inventories                              -          -             -            -          -            13,633      13,633
Deferred taxes                           -          -             -          753          -                 -         753
Property and equipment, net              -          -             -            -          -            31,569      31,569
Goodwill                                 -          -             -            -          -             4,656       4,656
                                    ------    -------        ------        -----        ---            ------      ------

TOTAL ASSETS                           126     11,583        12,737        5,571          3            50,421      80,441
                                    ======    =======        ======        =====        ===            ======      ======

Short-term credit and current
  maturities of long-term debts      2,735     12,548         4,306            -          -                 -      19,589
Trade payables                           -     14,863         5,197        3,517          -                 -      23,577
Other liabilities and accrued
  expenses                           2,561      5,917         1,218        1,377         10                 -      11,083
Long-term debt, excluding current
  maturities                         1,425      1,292         3,970            -          -                 -       6,687
Employee severance benefits, net         -        956             -           92          -                 -       1,048
Minority interests                       -          -             -            -          -             1,900       1,900
Convertible note                         -          -         1,566            -          -                 -       1,566
                                    ------    -------        ------        -----        ---            ------      ------

TOTAL LIABILITIES                    6,721     35,576        16,257        4,986         10             1,900      65,450
                                    ------    -------        ------        -----        ---            ------      ------

TOTAL SHAREHOLDERS' EQUITY          (6,595)   (23,993)       (3,520)         585         (7)           48,521      14,991
                                    ======    =======        ======        =====        ===            ======      ======
</TABLE>

                                      F-48

<PAGE>

                                                                      Eltek Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

NOTE 29 - ASSETS AND LIABILITIES ANALYZED BY CURRENCY AND LINKAGE BASIS (CONT'D)

     B.   CONSOLIDATED

<TABLE>
<CAPTION>
                                                                      DECEMBER 31, 2003
                                   -------------------------------------------------------------------------------------------
                                                              FOREIGN       FOREIGN
                                   LINKED                    CURRENCY      CURRENCY    OTHER FOREIGN    NON-MONETARY
                                   TO CPI    NON-LINKED    U.S. DOLLARS      EURO        CURRENCY          ITEMS        TOTAL
                                   ------    ----------    ------------    --------    -------------    ------------    ------
<S>                                <C>       <C>           <C>             <C>         <C>              <C>             <C>
Cash and cash equivalents               -           537             693       3,055               86               -     4,371
Trade and other receivables and
  prepaid expenses                    155        16,561           3,547       1,741               45             693    22,742
Inventories                             -             -               -           -                -          13,158    13,158
Property and equipment, net             -             -               -           -                -          43,381    43,381
Goodwill                                -             -               -           -                -           4,972     4,972
                                   ------    ----------    ------------    --------    -------------    ------------    ------

TOTAL ASSETS                          155        17,098           4,240       4,796              131          62,204    88,624
                                   ======    ==========    ============    ========    =============    ============    ======

Short-term credit and current
  maturities of long-term debts     2,350        13,272           3,839           -                -               -    19,461
Trade payables                          -        11,582           4,648       6,084                -               -    22,314
Other liabilities and
  accrued expenses                    493         5,968             818       1,260               16               -     8,555
Long-term debt, excluding
  current maturities                3,900         2,073           7,719           -                -               -    13,692
Employee severance benefits,
  net                                   -           864               -          76                -               -       940
Minority interests                      -             -               -           -                -           1,970     1,970
Convertible note                        -             -           2,295           -                -               -     2,295
                                   ------    ----------    ------------    --------    -------------    ------------    ------

TOTAL LIABILITIES                   6,743        33,759          19,319       7,420               16           1,970    69,227
                                   ------    ----------    ------------    --------    -------------    ------------    ------

TOTAL SHAREHOLDERS' EQUITY         (6,588)      (16,661)        (15,079)     (2,624)             115          60,234    19,397
                                   ======    ==========    ============    ========    =============    ============    ======
</TABLE>

                                      F-49

<PAGE>

                                                                      Eltek Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)

     NOTE 30 - SUBSEQUENT EVENTS

     Subsequent to the balance sheet date, 110,800 stock options were exercised
     by employees into shares with capital contribution of NIS 2,120 thousand
     which were received on April 5, 2005.

                                      F-50