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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

FORM 20-F

|  |                                                                                                   
|- | --------------------------------------------------------------------------------------------------
|o | REGISTRATION STATEMENT PURSUANT TO
  SECTION 12(b) OR (g) OF
  THE SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                                   
|  | OR                                                                                                
|x | ANNUAL REPORT PURSUANT TO SECTION
  13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934          
|  | For the fiscal year ended December 31, 2005                                                       
|  | OR                                                                                                
|o | TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934      
|  | For the transition period from __________
  to __________                                         
|  | OR                                                                                                
|o | SHELL COMPANY REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934   

Date of event requiring this shell company
report ...........
Commission file number 0-28884ELTEK 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 5,602,511(as of December 31, 2005)

Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.

Yes o No x



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If this report is an annual
or transition report, indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.

Yes o No x

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

Yes x No o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o  Accelerated filer o
  Non-accelerated filer x

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

Item 17 x Item 18 o

If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

Yes o No x

This Annual Report on Form
20-F is incorporated by reference into our Form S-8 Registration Statements
File Nos. 333-12012, 333-123559 and 333-130611.

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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
medical technology, defense and aerospace, industrial equipment and
telecommunications industries. Our principal customers include manufacturers of
medical, defense, aerospace, industrial, telecom and networking equipment, as
well as contract electronic manufacturers. Our ordinary shares are listed on
the NASDAQ Capital 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.

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, 2005 of NIS 4.603 = $1.00, as published by the
Bank of Israel. See Item 3.A. Key Information  Selected Financial Data 
Exchange Rate Information.

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.

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, 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 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

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|       |          |                   |                                                          |   |   
|------ | -------- | ----------------- | -------------------------------------------------------- | - | --
|       |          | TABLE OF CONTENTS |                                                          |  
|       |          |                   | Page No.                                                
|       |          |                   |                                                         
|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                                      |   | 18
|       |          |                   |                                                         
|       |          | C.                | ORGANIZATIONALSTRUCTURE                                  |   | 22
|       |          |                   |                                                         
|       |          | D.                | PROPERTY,PLANTS AND EQUIPMENT                            |   | 22
|       |          |                   |                                                         
|       | ITEM 4A. |                   | UNRESOLVED
  STAFF COMMENTS                              |   | 23
|       | ITEM 5.  |                   | OPERATING
  AND FINANCIAL REVIEW AND PROSPECTS           |   | 24
|       |          |                   |                                                         
|       |          | A.                | OPERATING
  RESULTS                                      |   | 24
|       |          |                   |                                                         
|       |          | B.                | LIQUIDITY
  AND CAPITAL RESOURCES                        |   | 37
|       |          |                   |                                                         
|       |          | C.                | RESEARCH
  AND DEVELOPMENT, PATENTS AND LICENSES         |   | 40
|       |          |                   |                                                         
|       |          | D.                | TRENDINFORMATION                                         |   | 40
|       |          |                   |                                                         
|       |          | E.                | OFF-BALANCE SHEET ARRANGEMENTS                           |   | 40
|       |          |                   |                                                         
|       |          | F.                | TABULAR  DISCLOSURE OF CONTRACTUAL OBLIGATIONS           |   | 40
|       |          |                   |                                                         
|       | ITEM 6.  |                   | DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES             |   | 41
|       |          |                   |                                                         
|       |          | A.                | DIRECTORS
  AND SENIOR MANAGEMENT                        |   | 41
|       |          |                   |                                                         
|       |          | B.                | COMPENSATION                                             |   | 45
|       |          |                   |                                                         
|       |          | C.                | BOARD  PRACTICES                                         |   | 45
|       |          |                   |                                                         
|       |          | D.                | EMPLOYEES                                                |   | 55
|       |          |                   |                                                         
|       |          | E.                | SHARE  OWNERSHIP                                         |   | 56
|       |          |                   |                                                         
|       | ITEM 7.  |                   | MAJOR
  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      |   | 61
|       |          |                   |                                                         
|       |          | A.                | MAJOR SHAREHOLDERS                                       |   | 61
|       |          |                   |                                                         
|       |          | B.                | RELATED  PARTY TRANSACTIONS                              |   | 63
|       |          |                   |                                                         
|       |          | C.                | INTERESTS
  OF EXPERTS AND COUNSEL                       |   | 64
|       |          |                   |                                                         
|       | ITEM 8.  |                   | FINANCIAL
  INFORMATION                                  |   | 64
|       |          |                   |                                                         
|       |          | A.                | CONSOLIDATED  STATEMENTS AND OTHER FINANCIAL INFORMATION |   | 64
|       |          |                   |                                                         
|       |          | B.                | SIGNIFICANT  CHANGES                                     |   | 65
|       |          |                   |                                                         
|       | ITEM 9.  |                   | THE
  OFFER AND LISTING                                  |   | 65
|       |          |                   |                                                         
|       |          | A.                | OFFER
  AND LISTING DETAILS                              |   | 65
|       |          |                   |                                                         
|       |          | B.                | PLAN
  OF DISTRIBUTION                                   |   | 66
|       |          |                   |                                                         
|       |          | C.                | MARKETS                                                  |   | 66
|       |          |                   |                                                         
|       |          | D.                | SELLING  SHAREHOLDERS                                    |   | 66
|       |          |                   |                                                         
|       |          | E.                | DILUTION                                                 |   | 66
|       |          |                   |                                                         
|       |          | F.                | EXPENSE
  OF THEISSUE                                    |   | 66

-i-

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|         |           |    | Page No.                                                                      
|-------- | --------- | -- | ------------------------------------------------------------------------------
|         |           |    |                                                                               
|         | ITEM 10.  |    | ADDITIONAL
  INFORMATION                                                      
|         |           |    |                                                                               
|         |           | A. | SHARE  CAPITAL                                                                
|         |           |    |                                                                               
|         |           | B. | MEMORANDUM
  AND ARTICLES OFASSOCIATION                                       
|         |           |    |                                                                               
|         |           | C. | MATERIAL  CONTRACTS                                                           
|         |           |    |                                                                               
|         |           | D. | EXCHANGE  CONTROLS                                                            
|         |           |    |                                                                               
|         |           | E. | TAXATION                                                                      
|         |           |    |                                                                               
|         |           | F. | DIVIDENDS
  ANDPAYINGAGENTS                                                   
|         |           |    |                                                                               
|         |           | G. | STATEMENT
  BY EXPERTS                                                        
|         |           |    |                                                                               
|         |           | H. | DOCUMENTS
  ONDISPLAY                                                         
|         |           |    |                                                                               
|         |           | I. | SUBSIDIARY
  INFORMATION                                                      
|         | ITEM 11.  |    | QUANTITATIVE AND QUALITATIVE DISCLOSURE
  ABOUT MARKET RISKS                  
|         | ITEM 12.  |    | DESCRIPTION OF SECURITIES OTHER THAN EQUITY
  SECURITIES                      
|PART II  |           |    |                                                                               
|         | ITEM 13.  |    | DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                             
|         | ITEM 14.  |    | MATERIAL MODIFICATIONS TO THE RIGHTS OF
  SECURITY HOLDERS AND USE OF PROCEEDS
|         | ITEM 15.  |    | CONTROLS AND PROCEDURES                                                       
|         | ITEM 16.  |    | [RESERVED]                                                                    
|         | ITEM 16A. |    | AUDIT COMMITTEE FINANCIAL EXPERT                                              
|         | ITEM 16B. |    | CODE
  OF ETHICS                                                              
|         | ITEM 16C. |    | PRINCIPAL
  ACCOUNTANT FEES AND SERVICES                                      
|         | ITEM 16D. |    | EXEMPTIONS
  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  
|         | ITEM 16E. |    | PURCHASES
  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      
|PART III |           |    |                                                                               
|         | ITEM 17.  |    | FINANCIAL STATEMENTS                                                          
|         | ITEM 18.  |    | FINANCIAL STATEMENTS                                                          
|         | ITEM 19.  |    | EXHIBITS                                                                      

-ii-

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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, 2005 and 2004 and for
the three years ended December 31, 2005 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,
2003, 2002 and 2001 and for the two years ended December 31, 2003 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 whose report appears elsewhere herein. 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.

For
the convenience of the reader, the reported consolidated NIS figures as at and
for the year ended December 31, 2005 have been presented in U.S. dollars
(unaudited) translated at the representative rate of exchange on December 31,
2005 of NIS 4.603 = $1.00, as published by the Bank of Israel. The U.S. dollars
amounts so presented should not be construed as representing amounts
receivable, payable or incurred in U.S. dollars or convertible into U.S.
dollars.

1

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STATEMENT OF
CONSOLIDATED OPERATIONS DATA:

|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----------- | ------- |  | ----------- | - | ------- | ----------- | ------- |  | ----------- | - |  | ----------- | - | ---------------------------------------- | ------- | -
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   | Convenience
  Translation
  into Dollars |        
|                                                                                                          |  |                                       |             |         | 
|                                                                                                         
|                                                                                                          |  | Year Ended December 31,               |            
|                                                                                                          |  |                                       |            
|                                                                                                          |  | 2001(1)                               |             | 2002(1) |  | 2003(1)     |   | 2004(2) |             | 2005(2) |  | 2005        |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |  
|                                                                                                          |  | (In thousands, except per share data) |            
|                                                                                                          |  |                                       |            
|                                                                                                          |  |                                       |            
|Israeli GAAP:                                                                                             |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Revenues                                                                                                  |  |                                       | NIS 119,920 |         |  | NIS 108,035 |   |         | NIS 108,303 |         |  | NIS 125,002 |   |  | NIS 144,429 |   | $                                        | 31,378  |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Cost of revenues                                                                                          |  |                                       | (101,335    | )       |  | (106,458    | ) |         | (102,643    | )       |  | (109,998    | ) |  | (115,733    | ) |                                          | (25,143 | )
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Gross profit                                                                                              |  |                                       | 18,585      |         |  | 1,577       |   |         | 5,660       |         |  | 15,004      |   |  | 28,696      |   |                                          | 6,235   |  
|Research and development income (expenses),
  net                                                         |  |                                       | (398        | )       |  | (116        | ) |         | 18          |         |  | --          |   |  | (646        | ) |                                          | (140    | )
|Selling, general and administrative
  expenses                                                            |  |                                       | (14,273     | )       |  | (15,152     | ) |         | (14,996     | )       |  | (18,265     | ) |  | (19,862     | ) |                                          | (4,315  | )
|Amortization of goodwill                                                                                  |  |                                       | --          |         |  | (292        | ) |         | (584        | )       |  | (593        | ) |  | (593        | ) |                                          | (129    | )
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Operating income (loss)                                                                                   |  |                                       | 3,914       |         |  | (13,983     | ) |         | (9,902      | )       |  | (3,854      | ) |  | 7,595       |   |                                          | 1,651   |  
|Financial expenses, net                                                                                   |  |                                       | (1,799      | )       |  | (1,443      | ) |         | (2,989      | )       |  | (2,948      | ) |  | (2,656      | ) |                                          | (577    | )
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Income (loss) before other income
  (expenses), net                                                       |  |                                       | 2,115       |         |  | (15,426     | ) |         | (12,891     | )       |  | (6,802      | ) |  | 4,939       |   |                                          | 1,074   |  
|Other income (expenses), net                                                                              |  |                                       | 718         |         |  | 290         |   |         | (20         | )       |  | 52          |   |  | 103         |   |                                          | 22      |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Income (loss) before tax benefit (expenses)
  and minority interest                                       |  |                                       | 2,833       |         |  | (15,136     | ) |         | (12,911     | )       |  | (6,750      | ) |  | 5,042       |   |                                          | 1,096   |  
|Tax benefit (expenses)                                                                                    |  |                                       | --          |         |  | (380        | ) |         | (194        | )       |  | 713         |   |  | --          |   |                                          | --      |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Income (loss) after tax benefit (expenses)
  before minority interest                                     |  |                                       | 2,833       |         |  | (15,516     | ) |         | (13,105     | )       |  | (6,037      | ) |  | 5,042       |   |                                          | 1,096   |  
|Minority interests                                                                                        |  |                                       | --          |         |  | (198        | ) |         | 118         |         |  | 182         |   |  | 218         |   |                                          | 47      |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Net income (loss)                                                                                         |  |                                       | NIS 2,833   |         |  | NIS (15,714 | ) |         | NIS (12,987 | )       |  | NIS (5,855  | ) |  | NIS 5,260   |   | $                                        | 1,143   |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Basic and diluted earnings (loss) per NIS 1
  par value of the share capital1                             |  |                                       | NIS 0.96    |         |  | NIS (5.36   | ) |         | NIS (3.61   | )       |  | NIS (1.36   | ) |  | NIS 1.29    |   | $                                        | 0.28    |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Weighted average NIS 1 par value of share
  capital used to compute basic and diluted net earnings (loss) |  |                                       | 2,932       |         |  | 2,932       |   |         | 3,569       |         |  | 4,131       |   |  | 4,209       |   |                                          | 4,209   |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|U.S. GAAP:                                                                                                |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Net income (loss)                                                                                         |  |                                       | NIS 2,833   |         |  | NIS (15,422 | ) |         | NIS (12,403 | )       |  | NIS (5,376  | ) |  | NIS 5,913   |   | $                                        | 1,285   |  
|Basic earnings (loss) per share                                                                           |  |                                       | NIS 0.59    |         |  | NIS (3.16   | ) |         | NIS (2.54   | )       |  | NIS (0.98   | ) |  | NIS 1.06    |   | $                                        | 0.23    |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Weighted average number of shares used in
  basic EPS calculation (thousands)                             |  |                                       | 4,825       |         |  | 4,886       |   |         | 4,886       |         |  | 5,492       |   |  | 5,575       |   |                                          | 5,575   |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Diluted earnings (loss) per share                                                                         |  |                                       | NIS 0.58    |         |  | NIS (3.16   | ) |         | NIS (2.54   | )       |  | NIS (0.98   | ) |  | NIS 0.84    |   | $                                        | 0.18    |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  
|Weighted average number of shares used in
  diluted EPS calculation (thousands)                           |  |                                       | 4,884       |         |  | 4,886       |   |         | 4,886       |         |  | 5,492       |   |  | 6,970       |   |                                          | 6,970   |  
|                                                                                                          |  |                                       |             |         |  |             |   |         |             |         |  |             |   |  |             |   |                                          |         |  




1 Ordinary shares of a par value of NIS 0.6
each.


-2-

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|                                                     |  |                     |             |         |  |             |   |         |             |         |  |             |   |  |            |   |                                          |        |  
|---------------------------------------------------- |  | ------------------- | ----------- | ------- |  | ----------- | - | ------- | ----------- | ------- |  | ----------- | - |  | ---------- | - | ---------------------------------------- | ------ | -
|                                                     |  |                     |             |         |  |             |   |         |             |         |  |             |   |  |            |   | Convenience
  Translation
  into Dollars |       
|                                                     |  |                     |             |         |  |             |   |         |             |         |  |             |   |  |            |   |                                          |       
|                                                     |  | As at December  31, |            
|                                                     |  |                     |            
|CONSOLIDATED BALANCE SHEETS DATA:                    |  | 2001(1)             |             | 2002(1) |  | 2003(1)     |   | 2004(2) |             | 2005(2) |  | 2005        |  
|                                                     |  |                     |             |         |  |             |   |         |             |         |  |             |  
|                                                     |  | (In thousands)      |            
|Israeli GAAP:                                        |  |                     |             |         |  |             |   |         |             |         |  |             |   |  |            |   |                                          |        |  
|Working capital (deficit) (3)                        |  |                     | NIS 7,712   |         |  | NIS (4,521  | ) |         | NIS (10,059 | )       |  | NIS (10,786 | ) |  | NIS (4,440 | ) | $                                        | (965   | )
|Total assets                                         |  |                     | 106,570     |         |  | 105,831     |   |         | 88,624      |         |  | 80,441      |   |  | 86,612     |   |                                          | 18,816 |  
|Long-term liabilities excluding current
  maturities |  |                     | 16,016      |         |  | 21,725      |   |         | 14,632      |         |  | 7,735       |   |  | 7,881      |   |                                          | 1,713  |  
|Shareholders equity                                 |  |                     | 46,094      |         |  | 30,919      |   |         | 19,397      |         |  | 14,991      |   |  | 21,713     |   |                                          | 4,717  |  
|                                                     |  |                     |             |         |  |             |   |         |             |         |  |             |   |  |            |   |                                          |        |  
|US GAAP:                                             |  |                     |             |         |  |             |   |         |             |         |  |             |   |  |            |   |                                          |        |  
|Total assets                                         |  |                     | NIS 106,570 |         |  | NIS 106,123 |   |         | NIS 89,540  |         |  | NIS 82,039  |   |  | NIS 88,673 |   | $                                        | 19,264 |  
|Shareholders equity                                 |  |                     | 46,094      |         |  | 31,211      |   |         | 20,273      |         |  | 16,475      |   |  | 23,720     |   |                                          | 5,153  |  

|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Adjusted amount. The
  nominal historical amount adjusted in accordance with the provisions of
  Opinions 23, 34, 36 and 37 of the Institute of Certified Public Accountants
  in Israel.                                  
|    |                                                                                                                                                                                                                            
|(2) | Reported amount. Amount as
  at the transition date (December 31, 2003) with the addition of amounts in
  nominal values that were added after the transition sale and less amounts
  eliminated after the transition date.
|    |                                                                                                                                                                                                                            
|(3) | Working capital (deficit)
  represents total current assets less total current liabilities.                                                                                                                                

-3-

---

---



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.

|                               |  |             |  |       |  |       |  |           
|------------------------------ |  | ----------- |  | ----- |  | ----- |  | ----------
|Period                         |  | Average (1) |  | High  |  | Low   |  | Period End
|                               |  |             |  |       |  |       |  |           
|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     
|Year ended
  December 31, 2005 |  | 4.503       |  | 4.741 |  | 4.299 |  | 4.603     



---

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

|                |  |       |  |      
|--------------- |  | ----- |  | -----
|Period          |  | High  |  | Low  
|                |  |       |  |      
|               
|December
  2005 |  | 4.662 |  | 4.579
|January 2006    |  | 4.658 |  | 4.577
|February
  2006 |  | 4.725 |  | 4.664
|March 2006      |  | 4.717 |  | 4.658
|April 2006      |  | 4.671 |  | 4.503
|May 2006        |  | 4.522 |  | 4.428

At
June 26, 2006, the representative rate of exchange was NIS 4.476 = $1.00, as
published by the Bank of Israel.

|   |                                        
|-- | ---------------------------------------
|B. | CAPITALIZATION AND INDEBTEDNESS        
|   |                                        
|   | Not
  applicable.                      
|   |                                        
|C. | REASONS FOR THE OFFER ANDUSE OFPROCEEDS
|   |                                        
|   | 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-

---

---



Risks Relating to Our Business and Market

We have had a
history of operating losses and we may not be able to sustain profitable
operations.

Prior
to attaining operating profits in 2005, we incurred operating losses in each of
the three years ended December 31, 2004, and we may not be able to sustain
profitable operations in the future. Even if we maintain profitability, we
cannot assure that future net income will offset our cumulative losses. To the
extent that we incur operating losses in the future, we may not have sufficient
working capital to fund our operations. If we do not generate sufficient cash
from operations, we will be required to obtain additional financing or reduce
our level of expenditure. Such financing may not be available in the future,
or, if available, may not be on terms favorable to us.

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 medical, defense, aerospace,
industrial, telecom and networking equipment, as well as 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 medical equipment industries and the defense and
aerospace industries, which accounted for approximately 37% and 26%,
respectively, of our sales in the year ended December 31, 2005, is subject to
sharp economic cycles. Increased or excess production capacity by our
competitors in the PCB industry and recessionary pressure in major electronics
industry segments may result in intensified price competition and reduced
margins. As a result, our financial condition and results of operations may be
adversely affected. A weakness in the Israeli and international electronic
markets may adversely affect our operating results and financial condition in
the future.

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. We compete
principally in the market for complex, flex-rigid and rigid multi-layer PCBs.
In the Israeli market we mainly compete with PCB Technologies Ltd. and Melta
Ltd., as well as with major international PCB exporters, mainly from the United
States, Europe and Asia. In the European market we mainly compete with Ruwel
Werke GmbH (Germany), Advanced Circuit Boards NV (Belgium), Dyconex
(Switzerland) and certain other German companies. In the United States market
we mainly compete with Tyco Printed Circuit Group. Many of these competitors
have significantly greater financial, technical and marketing resources than
us. During the last few 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, 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
Far-East based PCB manufacturers, which have substantially lower production
costs than us. Continued competitive pressures could cause us to lose market
share.

-5-

---

---



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:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | the size and
  timing of significant orders and their fulfillment;                                      
| |   |                                                                                                         
| |  | demand for
  the products produced by our customers;                                                    
| |   |                                                                                                         
| |  | competition
  with our products;                                                                        
| |   |                                                                                                         
| |  | plant
  utilization;                                                                                    
| |   |                                                                                                         
| |  | changes in
  currency fluctuation of the NIS against the U.S. dollar and the Euro;                      
| |   |                                                                                                         
| |  | yields in the
  manufacturing process;                                                                  
| |   |                                                                                                         
| |  | timing of
  expenditures based on projections of future sales;                                          
| |   |                                                                                                         
| |  | availability
  of raw materials;                                                                        
| |   |                                                                                                         
| |  | the length
  of our sales cycles;                                                                       
| |   |                                                                                                         
| |  | changes in
  our strategy;                                                                              
| |   |                                                                                                         
| |  | the number
  of working days in the quarter; and                                                        
| |   |                                                                                                         
| |  | 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.

Quarterly
sales and operating results are also difficult to forecast because quarterly
sales and 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 might be 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.

-6-

---

---



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. We may
not 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. We may not be able to
continue 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 flex-rigid and
specialty 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:

| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty
  in combining the technology, operations or work force of the acquired
  business;                                                                   
| |   |                                                                                                                                                                  
| |  | adverse
  effects on our reported operating results under Israeli GAAP due to the
  amortization or write-down of intangible assets associated with acquisitions;
| |   |                                                                                                                                                                  
| |  | diversion of
  management attention from running our existing business; and                                                                                      
| |   |                                                                                                                                                                  
| |  | increased
  expenses, including compensation expenses resulting from newly-hired employees.                                                                      

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.

-7-

---

---



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. This capital may not be available to us in the
future for such purposes and any new manufacturing processes developed by us
may not become or remain commercially viable. As a result, we may not 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.
Our future process development efforts may not be successful or the emergence
of new technologies, industry standards or customer requirements may 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 a significant amount of our revenues.

Our
top ten customers accounted for 46% and 63% of our revenues in the years ended
December 31, 2004 and December 31, 2005, respectively. During the year ended
December 31, 2005, our principal customer accounted for approximately 31% of
our total revenues. We expect that a significant portion of our future revenues
will continue to be dependent on our principal customer and a small number of
other customers. Our key customers may not continue to purchase products from
us at current levels. Furthermore, if we are unable to retain our key
customers, we may not be able to attract sufficient new business to compensate
for their loss.

We are dependent
upon a select number of suppliers of key raw materials and the loss of one or
more of these suppliers would adversely affect our manufacturing ability. If
these suppliers delay or discontinue manufacture or supply of these raw
materials, we may experience delays in production and shipments, increased
costs and cancellation of orders for our products.

We
currently obtain our key raw materials from a select number of suppliers. We do
not have long-term supply contracts with our suppliers and our principal
suppliers may not continue to supply raw materials to us at current levels or
at all. Any delays in delivery of or shortages in these raw materials could
interrupt and delay manufacturing of our products and may result in the
cancellation of orders for our products. In addition, these suppliers could
discontinue the manufacture or supply of these raw materials at any time.
During the year ended December 31, 2006, one principle supplier accounted for
22% of our supplies. We may not be able to identify and integrate alternative
sources of supply in a timely fashion. Any transition to alternate suppliers
may result in delays in production and shipment and increased expenses and may
limit our ability to deliver products to our customers. Furthermore, if we are
unable to identify an alternative source of supply, we may have to modify our
products to use a substitute raw material, which may cause delays in production
and shipments, increased design and manufacturing costs and increased prices
for our products.

-8-

---

---



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:

| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | the timing
  of orders and deliveries;                                                     
| |   |                                                                                            
| |  | the purchase
  of new equipment;                                                           
| |   |                                                                                            
| |  | the build-up
  of inventories;                                                             
| |   |                                                                                            
| |  | the payment
  terms offered to our customers;                                              
| |   |                                                                                            
| |  | the payment
  terms offered by our suppliers; and                                          
| |   |                                                                                            
| |  | approval of
  the current or additional lines of credit and long-term loans from our banks.

As
of December 31, 2005, we had revolving lines of credit aggregating NIS 11.9
million ($2.6 million) with our banks, of which NIS 11.7 million ($2.5 million)
will be available to us until at least March 31, 2007, subject to certain
conditions. NIS 11.3 million ($2.4 million) of our line of credit was utilized
as of December 31, 2005. As of December 31, 2005, we also had NIS 11.4 million
($2.5 million) of long-term loans. These credit facilities may not 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 or 20% of our
total assets. For these purposes, shareholders equity includes the outstanding
convertible note and excludes prepaid expenses. As of December 31, 2005, we
were in compliance with the terms of such covenants. We may not 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. Such additional financing may not be
available to us or, if available, may not be obtained on terms favorable to us.
Any equity or debt financings, if available at all, may cause dilution to our
then current 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 additional financing, if necessary, may not 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 adversely affected.

-9-

---

---



Our operating
margins might be affected as a result of price increases for our principal raw
materials.

During
2005, the significant increase in oil and energy costs put pressure on our
suppliers to increase their prices for most of our principal raw materials.
During the first quarter of 2006, this situation continued due to further
increases in energy costs and commodity prices (such as copper, gold and glass
fibers), and we expect these conditions to continue through the remaining part
of 2006. In 2005, price negotiations with our suppliers resulted in lower price
increases than requested by our suppliers, however we may not continue to be
successful in such negotiations in the future. We have also faced pressure to
raise our prices for our products to compensate for these price increases and
maintain our operating margins, and have managed to date to maintain our sales
volume with only moderate price increases, however we may not be able to do so
in the future. Future price changes in raw materials may materially affect our
future 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 year ended December 31, 2005 accounted for
51.7% of our revenues, of which 12.9% was generated in Germany. Our sales in
Europe in the years ended December 31, 2004 and 2003 accounted for 38.4% and
28.5% of our revenues, respectively. In June 2002, we acquired 76% of
Kubatronik, a privately held German PCB manufacturer. We may not be able to
maintain or increase international market demand for our products. To the
extent that we cannot do so, our business, operating results and financial
condition may be adversely affected.

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

| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | the impact
  of possible recessionary environments in multiple foreign markets;                                
| |   |                                                                                                                
| |  | changes in
  regulatory requirements and complying with a wide variety of foreign laws;                        
| |   |                                                                                                                
| |  | tariffs and
  other trade barriers;                                                                            
| |   |                                                                                                                
| |  | the
  imposition of exchange or price controls or other restrictions on the
  conversion of foreign currencies;
| |   |                                                                                                                
| |  | difficulties
  and costs of staffing and managing foreign operations; and                                      
| |   |                                                                                                                
| |  | political
  and economic instability.                                                                          

-10-

---

---



We may be adversely
affected by fluctuations in currency exchange rates.

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. From time to time in the past we have engaged in
hedging transactions in order to partially protect ourselves from currency
fluctuation and inflation risks and may use hedging instruments from time to
time in the future. If we were to determine that it was in our best interests
to enter into any other hedging transactions in the future, we may not be able
to do so or such transactions, if entered into, may not 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. Currency fluctuations in the future may
have a material adverse effect on 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. 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 were required to reduce
the quantity of the wastewater discharged by them by 90% within four years. To
be exempted from such legislation, 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 such
compliance may not be sufficient in the future.

-11-

---

---



Compliance with
changing regulation of corporate governance and public disclosure may result in
additional expenses.

As
a result of changing laws, regulations and standards relating to accounting,
corporate governance and public disclosure, the costs of being a public company
in general have increased in recent years. The Sarbanes-Oxley Act of 2002
requires changes in some of our corporate governance and securities disclosure
or compliance practices. We expect that the on-going implementation of these
regulations will further increase our legal compliance costs and will make some
activities more time consuming. We are presently evaluating and monitoring
regulatory developments and cannot estimate the magnitude of additional costs
we may incur as a result of such developments. When we are required to
implement Section 404 of the Sarbanes-Oxley Act of 2002, which governs internal
controls and procedures for financial reporting, we will need to expend
significant management time and financial resources to comply with the
applicable requirements. This and other proposed legislation may increase the
fees of our professional advisors and our insurance premiums. We may not be
able to timely implement Section 404 of the Sarbanes-Oxley Act of 2002 and we
cannot assure you that we would be not required to report any material weakness
in our internal control over financials reporting.

The implementation
of Standard No. 24, which requires us to record compensation expense in connection
with certain equity share based compensation, may reduce our future
profitability.

In
September 2005, the Israel Accounting Standards Board published Accounting
Standard No. 24, Share- Based Payments, or Standard No. 24. Standard No. 24
requires all share-based payments, including transactions with employees or
other parties that are to be settled by equity instruments, cash or other
assets, to be recognized as an expense. In accordance with Standard No. 24,
share-based payment transactions in which goods or services are received will
be recognized at their fair value. Standard No. 24 applies to financial
statements for periods beginning as from January 1, 2006. The instructions of
Standard No. 24 should be applied to each share-based payment transaction
executed after March 15, 2005 that has not yet vested as of the effective date
of Standard No. 24. Standard No. 24 may have a material impact on our future
results of operations if we adopt any additional stock option plans in the future,
which impact cannot be predicted at this time.

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:

| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly
  variations in our operating results;                                                                                                 
| |   |                                                                                                                                                  
| |  | operating
  results that vary from the expectations of securities analysts and investors;                                                        
| |   |                                                                                                                                                  
| |  | changes in
  expectations as to our future financial performance, including financial
  estimates by securities analysts and investors;          
| |   |                                                                                                                                                  
| |  | announcements
  of technological innovations or new products by us or our competitors;                                                           
| |   |                                                                                                                                                  
| |  | announcements
  by us or our competitors of significant contracts, acquisitions, strategic
  partnerships, joint ventures or capital commitments;

-12-

---

---



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in
  the status of our intellectual property rights;                                                                                          
| |   |                                                                                                                                                       
| |  | announcements
  by third parties of significant claims or proceedings against us;                                                                     
| |   |                                                                                                                                                       
| |  | additions or
  departures of key personnel;                                                                                                           
| |   |                                                                                                                                                       
| |  | changes in
  our cost structure due to factors beyond our control, such as new laws or
  regulations relating to environmental matters and employment;
| |   |                                                                                                                                                       
| |  | future sales
  of our ordinary shares; and                                                                                                            
| |   |                                                                                                                                                       
| |  | general
  stock market price and volume fluctuations.                                                                                                 

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, 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 Capital Market if we fail to meet its maintenance requirements.

We
must comply with certain NASDAQ Capital Market maintenance requirements in
order to maintain the listing of our ordinary shares on the NASDAQ Capital
Market. Currently we comply with all of the requirements but we may not 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 Capital
Market and transferred to the NASDAQ Bulletin Board.

We do not expect to
distribute dividends.

We
have never declared or paid any cash dividends on our ordinary shares. We
currently intend to retain our current and any future earnings to finance
operations and expand our business and, therefore, do not expect to pay any
dividends in the foreseeable future. According to the Israeli Companies Law, a
company may distribute dividends out of its profits (within the meaning of the
Israeli Companies Law), provided that there is no reasonable concern that such
dividend distribution will prevent the company from paying all its current and
foreseeable obligations, as they become due. The declaration of dividends is
subject to the discretion of our Board of Directors and would depend on various
factors, including our operating results, financial condition, future prospects
and any other factors deemed relevant by our Board of Directors.

You
should not rely on an investment in our company if you require dividend income
from your investment. The success of your investment will likely depend
entirely upon any future appreciation of the market price of our ordinary
shares, which is uncertain and unpredictable. There is no guarantee that our
ordinary shares will appreciate in value or even maintain the price at which
you purchased your ordinary shares.

- 13 -

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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 executive
offices and research and development facilities are located in Israel.  Although most of our sales are made to
customers outside Israel, 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 military 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.  These developments have
adversely affected the regional peace process, placed the Israeli economy under
significant stress, and have negatively influenced Israels relationship with
several Arab countries.  In August 2005,
Israel evacuated all Israeli settlements in the Gaza Strip and four settlements
in the West Bank.  In January 2006,
Hamas won the elections in the Palestinian Authority and as a result the
diplomatic relations between Israel and the Palestinian Authority have
worsened.  The implications of these
developments cannot at this time be foreseen.
Any future armed conflict, political instability or violence in the
region may have a negative effect on our business condition and our results of
operations, and may adversely affect our share price.

No
predictions can be made as to whether or when a final resolution of the regions problems will be
achieved or the nature thereof and to what extent the situation will impact
Israels economic development or our operations.

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
Israel or Israeli companies 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,
restrictive laws, policies or practices directed towards Israel or Israeli
businesses may have an adverse impact on our future operations, financial
results and the expansion of our business.

Our results of operations may be negatively affected by the
obligation of our personnel to perform military reserve 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.

-14-

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Our results of operations may be harmed by currency
fluctuations.

Since
we report our financial results in NIS, fluctuations in rates of exchange
between NIS and non-NIS currencies may affect our results of operations.  The majority of our expenses are in U.S.
dollars, Euros, dollar-linked NIS or Euro-linked NIS and virtually most of the
remaining expenses are in non-linked NIS.
As such, our expenses other than those paid in Israeli currency that are
not-linked to other currencies 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.  Our dollar and Euro costs in Israel will
increase if the NIS is devalued against the dollar and the Euro and other
currencies other than NIS.  Over time,
the NIS generally has been devalued against foreign currencies.  Likewise, our operations could be adversely
affected if we are unable to protect against currency fluctuations in the
future.

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 and similar acts.

Provisions of Israeli law may delay, prevent or make
difficult an acquisition of us, which could prevent a change of control and
therefore impact the price of our shares.

Provisions
of Israeli corporate and tax laws 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.

-15-

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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
he or she 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 currently does not
define the substance of this duty of fairness.
Because Israeli corporate law has undergone extensive revision in recent
years, there is relatively little case law available to assist in understanding
the implications of these provisions that govern shareholder behavior.

As a foreign private issuer whose shares are listed on the
NASDAQ Capital Market, we may follow certain home country corporate governance
practices instead of certain NASDAQ requirements.

As
a foreign private issuer whose shares are listed on the NASDAQ Capital Market,
we are permitted to follow certain home country corporate governance practices
instead of certain requirements of NASDAQ Marketplace Rules.  A foreign private issuer that elects to
follow a home country practice instead of such requirements, must submit in
advance to NASDAQ a written statement from an independent counsel in such
issuers home country certifying that the issuers practices are not prohibited
by the home countrys laws.  In
addition, a foreign private issuer must disclose in its annual reports filed
with the Securities and Exchange Commission each such requirement that it does
not follow and describe the home country practice followed by the issuer
instead of any such requirement.  As an
Israeli company listed on the NASDAQ Capital Market, we may follow home country
practice with regard to, among other things, composition of the Board of
Directors, director nomination procedures, compensation of officers, and quorum
at shareholders meetings.  In addition,
we may follow Israeli law instead of the NASDAQ Marketplace Rules that require
that we obtain shareholder approval for certain dilutive events, such as for
the establishment or amendment of certain equity based compensation plans, an
issuance that will result in a change of control of the company, certain
transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of
another company.

|        |                           
|------- | --------------------------
|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.

-16-

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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, Europe and the United States.  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, mainly flex-rigid PCBs.

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 several types of high-performance base
material.  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 (1 mil=0.001 inch).  As part of this investment, we  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.

In
June 2002, we acquired 76% of Kubatronik, a privately held German PCB
manufacturer, for approximately Euro 2.6 million.  The remaining 24% of Kubatronik is held by Mr.
Alois Kubat, its founder and General Manager at that time.  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, defense, aerospace, telecom,
networking, computer and data storage equipment, as well as contract electronic
manufacturers. This acquisition facilitated our entry into the German market,
while complementing our other relationships throughout the rest of Europe.

In
2005, we continued to focus on the sale of flex-rigid HDI PCBs and PCBs made
with high performance base materials.
Such products accounted for approximately $22.7 million or 72% of our total
sales in the year ended December 31, 2005 as compared to approximately $17.3
million or 61% of our total sales in the year ended December 31, 2004.

-17-

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|   |                    
|-- | -------------------
|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:

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.

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.

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.

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, 2005, we invested approximately $10.1 million for these purposes (not
including the acquisition 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, and 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 year ended December 31,
2005, approximately 27% of our manufactured products were ordered for delivery
in less than 20 working days, of which approximately 5% were ordered for
delivery within six to ten working days and approximately 6% in five or less
working days.

-18-

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Computer
Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD system
developed by Frontline Ltd., an Israeli based company jointly owned by Orbotech
Ltd. and Valor Ltd., and can receive CAD data by electronic data
transmission.  Our CAD 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 an advanced inner-layer production
line, a laser direct imaging system, drilling equipment and clean room
environments (class 10,000) to produce technologically advanced products.

Quality
and Environment 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
approval (MIL-PRF-55110F and MIL-P-50884D) for our products.  Since 1976, our Glass Epoxy (FR4) Boards
have been UL 94V-0 certified by Underwriters Laboratories Inc. (a standards
organization that offers product safety testing and certification of product
safety).  Our environmental management
system has been ISO 14001 certified since 2003.

Sales,
Customers and Marketing

Sales.In the years ended December 31, 2003, December 31, 2004 and
December 31, 2005, the primary industries for which we produced PCBs were
medical equipment (10%, 23% and 37% of production, respectively), defense and
aerospace equipment (41%, 35% and 26% of production, respectively), telecom and
networking equipment (24%, 18% and 5% of production, respectively) and
industrial equipment (13%, 16% and 11% of production, respectively) as well as
for contract electronic manufacturers (6%, 3% and 12% of production,
respectively).

Customers. During the year ended December 31, 2005,
we
provided PCBs to approximately 190 customers in Israel and approximately 260
customers outside of Israel (including Kubatroniks customers).  Our customers outside of Israel are located
primarily in Germany, Scandinavia, France (where our principal customer is
located), the United States and India.Sales
to non-Israeli customers increased from $8.3 million (33% of revenues) in the
year ended December 31, 2003 to $13.3 million (45.7% of revenues) in the year
ended December 31, 2004 to $18.1 million (57.7% of revenues) in the year ended
December 31, 2005.

-19-

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In
the years ended December 31, 2003, 2004 and 2005, one principal customer
accounted for 9.1%, 12.3% and 30.6% of our sales, respectively.  Our ten largest customers accounted for
40.5%, 46% and 63% of our sales in the years ended December 31, 2003, 2004 and
2005, 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 personnel, sales agents and agreements with PCB
trading and manufacturing companies. Our sales personnel currently consist of
nine persons (six in Israel, one in the United States and two persons employed
by our German subsidiary, Kubatronik).
In Europe we have sales agents in Sweden, Germany, Switzerland, France,
Belgium and Spain.  In the Netherlands,
the United Kingdom and Italy we have PCB trading and manufacturing companies
acting as distributors of our products.
In the United States we market and sell our products through a full-time
self-employed marketing and sales manager, who is supported by six
representatives, as well as through a PCB manufacturing company.  In India we have marketed our products since
2001 through a local sales agent.  We
maintain technical support services for our customers world-wide.  We also maintain customer service support
centers that handle all logistical matters relating to delivery and maintenance
arrangements and receive and handle complaints relating to delivered products.

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, 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.

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.  The materials we
use are manufactured in Europe, the United States and the Far-East.  Some of the materials are purchased directly
from the manufacturer, while others are purchased from local distributors.

Our
suppliers decreased their prices in 2002, 2003 and 2004 for the principal raw
materials we use in the manufacture of PCBs.During 2005, the
significant increase in oil and energy costs put pressure on our suppliers to increase their prices for most of our principal raw
materials.  During the first quarter of
2006, this pressure on our suppliers increased due to the further increase in
energy costs and commodity prices (such as copper, gold and glass fibers) and
we expect this pressure to continue through the remaining part of 2006.  In 2005, price negotiations with our
suppliers resulted in lower price increases than requested by our suppliers,
however we may not continue to be successful in such negotiations in the
future.  We have also faced pressure to
raise our prices for our products to compensate for these price increases and
have managed to date to maintain our sales prices with only moderate price
increases, however we may not be able to so in the future.  Although to date our profitability
has not been significantly affected by such price changes, future price changes
in raw materials may materially affect our future profitability.

-20-

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Competition

The
global PCB industry is highly fragmented and intensely competitive, trends that
we believe will continue.  It is characterized
by rapidly changing technology, frequent new product introductions and rapidly
changing customer requirements.  We
compete principally in the market for complex, flex-rigid multi-layer PCBs.  In the Israeli market we mainly compete with
PCB Technologies Ltd. and Melta Ltd., as well as with major PCB exporters,
mainly from the United States, Europe and Asia.  In the European market we mainly compete with Ruwel Werke GmbH (Germany), Advanced Circuit Boards NV
(Belgium) and Dyconex (Switzerland) and certain other German companies.
In the United States market we mainly compete with Tyco Printed Circuit
Group.  Many of these competitors have
significantly greater financial, technical and marketing resources than us.  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.  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, 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.

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.
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 in the future.

-21-

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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
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.

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.  We
currently intend to transfer our entire holdings in Kubatronik from En-Eltek
Netherlands 2002 B.V. to our company and dissolve En-Eltek Netherlands 2002
B.V.  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 Kubatronik.
Subject to certain conditions, Mr.
Kubat will have the right to require us to purchase, and we will have the right
to require him (or his permitted transferee) to sell to us, his remaining
interest in Kubatronik.  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 year ended December 31, 2005, we paid
NIS 2.9 million ($600,000) 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 year ended December 31, 2005, Kubatronik paid an aggregate of NIS
442,000 ($96,000) in rent for these premises.

-22-

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Leased
Equipment

We
lease manufacturing equipment from Orbotech Ltd. under two operating lease
agreements, pursuant to which as of December 31, 2005 we are obligated to pay a
total amount of NIS 3.3 million ($727,000), through March 2010.  Our monthly lease expense under these two
agreements is approximately NIS 65,000 ($14,250), linked to the U.S. dollar.

From
September 2005 until May 2006, we leased additional manufacturing equipment
under an operating lease agreement.  Our
monthly lease expense under this agreement was approximately NIS 48,000
($10,000),
linked to the Swiss Franc.  In May 2006,
we purchased this equipment and the agreement terminated.

Kubatronik
leases manufacturing equipment under two operating lease agreements, which as
of December 31, 2005 require us to pay a total of Euro 94,000 ($111,000)
through April 2009.  Our monthly lease
expense under these two agreements is approximately Euro 3,155 ($3,730).

Investment
in Equipment and Infrastructure

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

In
2004, we invested approximately NIS 1.5 million in capital expenditures.  Almost all of our capital expenditures were
related to the purchase of production and manufacturing equipment  in
the amount of NIS 1.1 million and leasehold improvements in the amount of NIS
306,000.

In
2005, we invested approximately NIS 12.6 million ($2.7 million) in capital
expenditures.  Of such amount, NIS 12
million ($2.6 million) was used to purchase production and manufacturing
equipment and NIS 365,000 was
used for leasehold improvements.

In
2006, we intend to invest approximately NIS 14 million ($3 million) in capital
expenditures, including approximately $2 million in manufacturing equipment and
approximately $1 million in leasehold improvements for the expansion of our
production facilities.

|         |                          
|-------- | -------------------------
|ITEM 4A. | UNRESOLVED STAFF COMMENTS

Not
applicable.

-23-

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|        |                                               
|------- | ----------------------------------------------
|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS

|   |                    
|-- | -------------------
|A. | OPERATING
  RESULTS

The
following discussion of our results of operations should be read together with
our consolidated financial statements and the related notes, which appear
elsewhere in this annual report.  The
following discussion contains forward-looking statements that reflect our
current plans, estimates and beliefs and involve risks and uncertainties.  Our actual results may differ materially
from those discussed in the forward-looking statements.  Factors that could cause or contribute to
such differences include those discussed below and elsewhere in this annual
report.

Overview

We
were incorporated under the laws of the State of Israel in 1970.  Kubatronik, our European manufacturing and
marketing subsidiary located in Geislingen Germany, is our only active
subsidiary.

We
develop, manufacture, market and sells PCBs (printed circuit boards), including
high density interconnect (HDI) multi-layered and flex-rigid boards for the
telecommunications, defense and aerospace and medical technology
industries.  Our principal customers
include manufacturers of medical equipment, defense and aerospace equipment,
industrial equipment,  and telecom and
networking equipment, as well as contract electronic manufacturers.

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 2of 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 in Israel, are discussed below.

Revenue Recognition

We
recognize revenues when products are shipped and the customer takes ownership
and assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sale price is fixable or
determinable.  Commission income is
accounted for on the accrual basis.

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 direct production costs, plus allocated
indirect expenses, all of which are determined 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.

-24-

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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 be derived 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.  As of December 31, 2005, no
impairment losses have been identified.

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.
Under Israeli GAAP, in accordance with Accounting 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.

Goodwill

Our
goodwill as of December 31, 2005 is the expense of our investment in Kubatronik
over the unamortized fair value of the assts acquired and liabilities assumed,
determined as of the acquisition date.
Under Israeli GAAP, goodwill is amortized periodically on a
straight-line basis over ten years.

Recent Accounting Pronouncements

Recent Accounting Pronouncements in Israel

In
July 2005, the Israel Accounting
Standards Board, or  IASB, published Accounting Standard
No. 22, Financial Instruments: Disclosure and Presentation, Standard No. 22.
Standard No. 22 provides rules for presenting financial instruments in the
financial statements and specifies the proper disclosure requirements.  Standard No. 22 also provides guidelines for
classifying financial instruments as financial liabilities or shareholders
equity, for classifying the interest, dividends, losses and gains related to
them and the circumstances for offsetting financial assets and financial
liabilities.  Standard No. 22 applies to
financial statements for periods beginning on January 1, 2006 or
thereafter.  Standard No. 22 provides
that it is to be adopted on a prospective basis.  The comparative data presented in the financial statements for
periods beginning on the date Standard No. 22 comes into effect will not be
restated.  We do not believe that the
adoption of Standard No. 22 will have a material impact on our financial
statements, other than with respect to the classification of our convertible debentures
net of the issuance costs into a liability component or an equity component.

-25-

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In
September 2005, the IASB published Accounting Standard No. 24, Share- Based
Payments, or Standard No. 24.  Standard
No. 24 requires all share-based payments, including transactions with employees
or other parties that are to be settled by equity instruments, cash or other
assets, to be recognized as an expense.
In accordance with Standard No. 24, share-based payment transactions in
which goods or services are received will be recognized at their fair
value.  Standard No. 24 applies to
financial statements for periods beginning as from January 1, 2006 and early
implementation is encouraged.  The
instructions of Standard No. 24 should be applied to each share-based payment
transaction executed after March 15, 2005 that has not yet vested as of the
effective date of Standard No. 24.
Furthermore, it is required that comparative data relating to periods
after March 15, 2005 be restated.  Since
all of the options granted under our recently adopted 2005 Stock Option Plan
were fully vested upon grant, we do not believe that the adoption of Standard
No. 24 will have a material impact on our financial statements at this
time.  The impact of the adoption of Standard
No. 24 on our remaining option plans with unvested awards is not expected to be
material.  However, Standard No. 24 may
have a material impact on our future results of operations if we adopt any
additional stock option plans in the future, which impact cannot be predicted
at this time.

In
February 2006, the IASB published Accounting Standard No. 21, Earnings per
Share, or Standard No. 21.  Standard
No. 21 provides that an entity should calculate basic earnings per share with
respect to the earnings or loss attributable to the ordinary shareholders of
the reporting entity and with respect to the earnings or loss from continuing
operations attributable to the ordinary shareholders of the reporting entity if
such earnings or loss is presented.  The
basic earnings per share is calculated by dividing the earnings or loss
attributable to the ordinary shareholders of the reporting entity (the
numerator) with the weighted average number of ordinary shares outstanding (the
denominator) during the period.  In
order to calculate the diluted earnings per share, the earnings or loss
attributable to the ordinary shareholders of the reporting entity, and the
weighted average number of outstanding ordinary shares are adjusted in respect
of the effects of all the dilutive potential ordinary shares. Standard No. 21
applies to financial statements for periods beginning on January 1, 2006 or
thereafter.  The instructions of
Standard No. 21 regarding earnings per share are to be implemented
retroactively on comparative data for prior periods.  The implementation of Standard No. 21 will result in a basic
earnings (loss) per share of NIS 0.94 and NIS (1.07) for the years ended
December 31, 2005 and 2004, respectively, and a diluted earnings (loss) per
share of NIS 0.75 and NIS (1.07) for the years December 31, 2005 and 2004,
respectively.

-26-

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In
February 2006, the IASB published Accounting Standard No. 25, Revenues, or
Standard No. 25.  Standard No. 25
provides the required accounting treatment (recognition, measurement,
presentation and disclosure principles) of revenues derived from the selling of
goods, the rendering of services, and the use of the entitys assets by others,
which generate interest, royalties and dividends.  Standard No. 25 provides that an entity is to measure its
revenues according to the fair value of the proceeds received and/or the
proceeds the entity is entitled to receive.
Standard No. 25 applies to financial statements for periods beginning on
January 1, 2006 or thereafter.  An
entity that in the past did not present its revenues according to the
requirements of the Standard regarding the reporting of gross or net revenues,
will implement the requirements of Standard No. 25 retroactively with respect
to its revenues for all the periods reported as comparative figures in the
financial statements for periods beginning from the date Standard No. 25 came
into effect.  Assets and liabilities
that are included in the financial statements as at December 31, 2005 at
amounts different from those that would have been reported if the instructions
of Standard No. 25 had been implemented must be adjusted as at January 1, 2006
to the amounts that would have been reported in accordance with Standard No.
25.  The impact of adjusting the amounts
of assets and liabilities as at January 1, 2006 as aforementioned, is required
to be recognized as a cumulative effect of change in accounting principle.  Other than as mentioned above, the
comparative figures in the financial statements for periods beginning from the
date Standard No. 25 came into effect will be presented as in the past.  We do not believe that the adoption of
Standard No. 25 will have a material impact on our financial statements.

In
March 2006, the IASB published an amendment to Accounting Standard No. 20, The
Accounting Treatment of Goodwill and Intangible Assets when Purchasing an
Investee Company, or Standard No. 20(R).
Standard No. 20(R) replaces Accounting Standard No. 20, Goodwill
Amortization Period.  In accordance with
Standard No. 20(R), goodwill and intangible assets with an indefinite useful
life, which were identified at the time of purchasing an investee company, will
not be amortized.  Instead, an
examination of impairment in value should be performed once a year or more
frequently if events or changes in circumstances indicate that there may have
been an impairment in the value of goodwill or of an intangible asset with an
indefinite useful life.  Standard No.
20(R) applies to financial statements for periods beginning on January 1, 2006
or thereafter.  The transition date for
discontinuing the amortization of goodwill is January 1, 2006.  Accordingly, an entity is to discontinue amortizing
goodwill included in the financial statements, including goodwill included in
the balance of an investment in an investee company that is not a subsidiary,
as at January 1, 2006.  On the
transition date, the entity will also test for the impairment in the value of
goodwill in accordance with Accounting Standard No. 15.  The financial statements for periods in
which Standard No. 20(R) was not implemented will not be restated. The
amortization of the goodwill amounted to NIS 593, NIS 593 and NIS 584 for the
years ended December 31, 2005, 2004 and 2003, respectively.

In
February 2006, the IASB published Clarification No. 8, Reporting Revenues on a
Gross or Net Basis, or Clarification No. 8.
Clarification No. 8 provides that an entity acting as an agent or
intermediary without bearing the risks and enjoying the rewards arising from
the transaction will present its revenues on a net basis.  On the other hand, an entity acting as a
principal supplier that bears the risks and enjoys the rewards arising from the
transaction will present its revenues on a gross basis.  Clarification No. 8 provides a list of
indications that have to be examined in order to determine whether the revenues
should be reported on a gross or net basis.
Clarification No. 8 applies to financial statements for periods
beginning on or after January 1, 2006.
The entity is required to retroactively implement the instructions of
Clarification No. 8 with respect to its revenues for all the periods reported
as comparative data, which were not treated as prescribed in Clarification No.
8.  We do not believe that the adoption
of Clarification No. 8 will have a material impact on our results of operations
and financial position.

-27-

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Recent Accounting Pronouncements in the United States

On
December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS 123 (revised 2004),
Share-Based Payment, or SFAS 123(R), which is a revision of SFAS 123,
Accounting for Stock Based Compensation, or SFAS 123.  Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123.
However, while SFAS 123 permitted, but did not require, share-based
payments to employees to be recognized based on their fair values, SFAS 123(R)
requires all share-based payments to employees to be recognized based on their
fair values on the date of grant.  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.  SFAS 123(R) became effective for us commencing January 1,
2006.  SFAS 123(R) does not have an
impact on our recently adopted 2005 Stock Option Plan because all options
granted under such plan were fully vested upon their award.  The impact of the adoption of SFAS 123(R) on
our remaining option plans with unvested awards is not expected to be
material.  The impact of the adoption of
SFAS 123(R) on our future results of operations cannot be predicted at this
time, as it depends on levels of share-based payments for future grant.

In
May 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections, or SFAS 154, which supersedes APB Opinion No. 20,
Accounting Changes and SFAS 3, Reporting Accounting Changes in Interim Financial
Statements.  SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 also carries forward without change the guidance contained
in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting
estimate.  SFAS 154 requires
retrospective application to prior periods financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The correction of an error in
previously issued financial statements is not a change in accounting
principle.  However, the reporting of an
error correction involves adjustments to previously issued financial statements
similar to those generally applicable to reporting an accounting change
retroactively. Therefore, the reporting of a correction of an error by
restating previously issued financial statements is also addressed by SFAS 154.  SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005.  We cannot
predict at this time whether  the adoption
of SFAS 154 will have a material impact on our financial condition or results
of operations.

In
November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of
Accounting Research Bulletin (ARB) No. 43, Chapter 4, or SFAS
151.  SFAS 151 amends the guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current-period charges.  In addition, SFAS 151 requires that
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities.   SFAS 151 is effective for inventory cost incurred during fiscal
years beginning after June 15, 2005.
The adoption of SFAS 151 has not had a material impact on our financial
condition or results of operations.

-28-

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Differences
between Israeli Accounting Standards and U.S. Accounting Standards

Our
consolidated financial statements appearing in this annual report are prepared
in NIS in accordance Israeli GAAP, which vary in certain significant respects
from U.S. GAAP, as described in Note 28 to the consolidated financial
statements.  The differences between
Israeli GAAP and U.S. GAAP that have a material effect on net loss and total
shareholders equity are also described in Note 28 to the consolidated
financial statements.

The
following table sets forth a comparison of our net income (loss) and total
shareholders equity in accordance with Israeli GAAP and U.S. GAAP as of the
dates and for the periods indicated:

|                                                  |  |                                               |         |      |  |        |   |  |        | 
|------------------------------------------------- |  | --------------------------------------------- | ------- | ---- |  | ------ | - |  | ------ | 
|                                                  |  |                                               |        
|                                                  |  | As of and
  for the years  ended December 31, |        
|                                                  |  |                                               |        
|                                                  |  | 2003                                          |         | 2004 |  | 2005   |  
|                                                  |  |                                               |         |      |  |        |  
|                                                  |  | (NIS in thousands)                            |        
|                                                  |  |                                               |        
|Net income (loss) in accordance with:             |  |                                               |         |      |  |        |   |  |        | 
|Israeli GAAP                                      |  |                                               | (12,987 | )    |  | (5,855 | ) |  | 5,260  | 
|U.S. GAAP                                         |  |                                               | (12,403 | )    |  | (5,376 | ) |  | 5,913  | 
|                                                  |  |                                               |         |      |  |        |   |  |        | 
|Total shareholders equity  in
  accordance with: |  |                                               |         |      |  |        |   |  |        | 
|Israeli GAAP                                      |  |                                               | 19,397  |      |  | 14,991 |   |  | 21,713 | 
|U.S. GAAP                                         |  |                                               | 20,273  |      |  | 16,475 |   |  | 23,720 | 

Results of Operations

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

|                                             |  |                         |       |      |  |       |   |  |       |  
|-------------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                             |  | Year Ended December 31, |      
|                                             |  |                         |      
|                                             |  | 2003                    |       | 2004 |  | 2005  |  
|                                             |  |                         |       |      |  |       |  
|Revenues                                     |  |                         | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|Cost of revenues                             |  |                         | (94.8 | )    |  | (88.0 | ) |  | (80.1 | )
|                                             |  |                         |       |      |  |       |   |  |       |  
|Gross profit                                 |  |                         | 5.2   |      |  | 12.0  |   |  | 19.9  |  
|Research and development expenses, net       |  |                         | *     |      |  | --    |   |  | 0.4   |  
|Selling, general and administrative expenses |  |                         | (13.8 | )    |  | (14.6 | ) |  | (13.8 | )
|Amortization of goodwill                     |  |                         | (0.5  | )    |  | (0.5  | ) |  | (0.4  | )
|                                             |  |                         |       |      |  |       |   |  |       |  

-29-

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|                                                                    |  |                         |       |      |  |      |   |  |      |  
|------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | - |  | ---- | -
|                                                                    |  | Year Ended December 31, |      
|                                                                    |  |                         |      
|                                                                    |  | 2003                    |       | 2004 |  | 2005 |  
|                                                                    |  |                         |       |      |  |      |  
|Operating income (loss)                                             |  |                         | (9.1  | )    |  | (3.1 | ) |  | 5.3  |  
|Financial expenses, net                                             |  |                         | (2.8  | )    |  | (2.3 | ) |  | (1.8 | )
|Other income (expenses), net                                        |  |                         | *     |      |  | *    |   |  | *    |  
|                                                                    |  |                         |       |      |  |      |  
|Income (loss) before tax benefit (expenses) and minority
interest   |  |                         | (11.9 | )    |  | (5.4 | ) |  | 3.4  |  
|Tax benefit (expenses)                                              |  |                         | (0.2  | )    |  | 0.6  |   |  | --   |  
|                                                                    |  |                         |       |      |  |      |  
|Income (loss) after tax benefit (expenses) before minority
interest |  |                         | (12.1 | )    |  | (4.8 | ) |  | 3.5  |  
|Minority interest                                                   |  |                         | 0.1   |      |  | 0.1  |   |  | 0.1  |  
|                                                                    |  |                         |       |      |  |      |  
|Net income (loss)                                                   |  |                         | (12.0 | )    |  | (4.7 | ) |  | 3.6  |  
|                                                                    |  |                         |       |      |  |      |  

| |                   
| | ------------------
| | *
  Less than 0.1%

Year Ended December 31, 2005 Compared with Year Ended
December 31, 2004

Revenues. Revenues increased by 15.5% to NIS 144.4
million ($31.4 million) in the year ended December 31, 2005 from NIS 125
million in the year ended December 31, 2004.
The increase in revenues in 2005 is primarily attributable to the increase in sales of our flex-rigid boards, which have a higher
price per PCB than our rigid PCBs, and the increased number of our PCBs sold in
2005.  We believe that our revenues will
increase slightly in 2006 due to continued marketing efforts in Europe and the
United States and the expansion of our manufacturing capacity.

Cost
of Revenues.  Cost of
revenues increased by
5.2 % to NIS 115.7 million ($25.1 million) in the year ended December 31, 2005
from NIS 110.0 million in the year ended December 31, 2004.   The cost of revenues increased in 2005 due
to an increase in the volume of sales.
Cost of revenues as a percentage of revenues decreased to 80.1% in the
year ended December 31, 2005 from 88% in the year ended December 31, 2004.  The decrease in cost of revenues in 2005 as
a percentage of revenues is primarily attributable to the increase in sales
volume while costs increased at a lower pace due to fixed costs being absorbed
over a greater volume of sales.  We
believe that our cost of revenues as a percentage of revenues will decrease
slightly in 2006 due to an expected increase in our sales volume while we expect
that our costs will increase at a lower rate due to fixed costs being absorbed
over a greater volume of sales.
However, the continued increase in energy and commodity prices may
result in our costs increasing at a higher level than anticipated.

Gross
Profit. Gross profit
increased by 91.3 % to NIS 28.7 million ($6.2 million) in the year ended
December 31, 2005 from NIS 15.0 million in the year ended December 31,
2004.  The increase in gross profit as a
percentage of revenues in 2005 is primarily attributable to the increase in
sales of flex-rigid boards, which yield higher gross margins.  We believe that our gross profit as a
percentage of revenues will increase slightly in 2006 due to an expected
increase in revenues, with continued focus on flex-rigid boards.

-30-

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Research
and Development Expenses, Net.We
generally do not engage in significant research and developments efforts.  In 2005, we incurred NIS 1,115,000 ($242,000) in research
and
development expenses in connection with our membership in OptiPac, a consortium
within the framework of the MAGNET program of the Office of the Chief Scientist of the Ministry
of Industry and Trade of the State of Israel, or the OCS.   Of such total expenses, NIS 469,000
($102,000) were reimbursed to us by the OCS in accordance with the terms of the
OptiPac consortium.  We did not
record research and development income or expense in 2004.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
increased by 8.7 % to NIS 19.9 million ($4.3 million) in the year ended
December 31, 2005 from NIS 18.3 million in the year ended December 31,
2004.  The increase in selling, general
and administrative expenses in 2005 is primarily attributable to the associated
growth in payroll and employee benefits expenses, commissions to sales
representatives, travel expenses of marketing personnel and costs of
professional services resulting from our increased revenues.

Amortization
of Goodwill.
Amortization of goodwill was NIS 593,000 ($129,000) in the year ended
December 31, 2005 and NIS 593,000 in the year ended December 31, 2004.  Goodwill represents the goodwill that arose
from our acquisition of Kubatronik.

Operating
income (loss). As
a result of the foregoing, our operating income was NIS 7.6 million ($1.7
million) in the year ended December 31, 2005 compared to an operating loss of
NIS 3.9 million in the year ended December 31, 2004.

Financial
Expenses, Net.
Financial expenses, net were NIS 2.7 million ($577,000) in the year
ended December 31, 2005 and NIS 2.9 million in the year ended December 31,
2004.  These financial expenses were
primarily attributable to short-term credit and bank charges, expenses on
long-term loans and exchange rate expenses net.  The decrease in financial expenses in 2005 is attributable to the
discharge of long-term debt and differences in foreign currency exchange rates.

Other
Income (Expenses), Net.
We had other income, net of NIS 103,000 ($22,000) in the year ended
December 31, 2005 as compared to other income, net of NIS 52,000 in the year
ended December 31, 2004.  Other income,
net in the years ended December 31, 2004 and 2005 was attributable to the gain
we recorded on the disposal of fixed assets, which in 2004 was partially offset
by certain legal expenses that were not in the ordinary course of business.

Tax
Benefit (Expenses).  We did not record a tax expense in the year
ended December 31, 2005, as we utilized our tax loss carryforward to offset
such amount.  We recorded a tax benefit
of NIS 713,000 in the year ended December 31, 2004 from a deferred tax asset
due to carryforward losses of Kubatronik.

Minority
Interest. Minority share in subsidiarys net results reflects the
minoritys interest of NIS 218,000
($47,000) in Kubatroniks net loss in the year ended December 31, 2005,
as compared to the minoritys interest
of NIS 182,000 in its net loss in
the year ended December 31, 2004.

-31-

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

Revenues. Revenues increased by 15.4% to NIS 125
million in the year ended December 31, 2004 from NIS 108.3 million in the year
ended December 31, 2003.  The increase
in revenues in 2004 primarily reflects the growth of our sales in Europe, which
increase was partially offset by a decrease in our sales to local customers.

Cost
of Revenues.  Cost of
revenues increased by 7.2% to NIS 110.0 million in the year
ended December 31, 2004 from NIS 102.6 million in the year ended December 31,
2003.  The cost of revenues increased in
2004 due to an increase in the volume of sales.   Cost of revenues as a percentage of revenues decreased to 88% in
the year ended December 31, 2004 from 94.8% in the year ended December 31,
2003.  The decrease in cost of revenues
as a percentage of revenues in 2004 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.

Gross
Profit. Gross profit
increased by 265% to NIS 15.0 million in the year ended December 31, 2004 from
NIS 5.7 million in the year ended December 31, 2003.  The increase in gross profit as a percentage of revenues in 2004
primarily reflects increased margins as a result of the concentration of our
efforts in the high-end PCB market, mainly flex-rigid PCBs.

Research
and Development Income, Net.
 We generally do not engage in significant 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
OCS.  The consortium ended its
activities as of July 31, 2001, and in 2003, after the consortium was
discontinued, a surplus amount of money was distributed among its members and
we received NIS 18,000, which 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 in the year ended December 31, 2004 from
NIS 15.0 million in the year ended December 31, 2003.  The increase in selling, general and administrative expenses in
2004 primarily reflects growth in payroll and related benefits expenses and
costs of professional services.

Amortization
of Goodwill.
 Amortization of goodwill was NIS 593,000 in the year ended December 31,
2004 and NIS 584,000 in the year ended December 31, 2003.  Goodwill represents the goodwill that arose
from our acquisition of Kubatronik.

Operating
loss. As
a result of the foregoing, we had an operating loss of NIS 3.9 million in the
year ended December 31, 2004 compared to an operating loss of NIS 9.9 million
in year ended December 31, 2003.

Financial
Expenses, Net.
Financial expenses, net were NIS 2.9 million in the year ended December
31, 2004 and NIS 3.0 million in the year ended December 31, 2003.  Financial expenses, net in such years were
primarily attributable to short-term credit and bank charges, expenses on
long-term loans and exchange rate expenses, net.

-32-

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---



Other
Income (Expenses), Net.
We had other income, net of NIS 52,000 in the year ended December 31,
2004 as compared to other expenses, net of NIS 20,000 in the year ended
December 31, 2003.  Other income, net in
the year ended December 31, 2004 was attributable to a gain on the disposal of
fixed assets, which was partially offset by certain legal expenses.  Other expenses, net in the year ended
December 31, 2003 were attributable to a provision that we recorded with
respect to the indemnification of a customer for a defective PCB and customs
charges, which amount was partially offset by the gain on the disposal of fixed
assets.

Tax
Benefit (Expenses).  We recorded a tax benefit of NIS 713,000 in
the year ended December 31, 2004 from a deferred tax asset due to carryforward
losses of Kubatronik that we expect to realize in the foreseeable future.  In the year ended December 31, 2003,
Kubatronik recorded taxes on income of NIS 194,000.

Minority
Interest. Minority share in subsidiarys net results reflects the minoritys
interest of NIS 182,000 in
Kubatroniks net loss in the year ended December 31, 2004 as compared to
the minoritys interest of NIS 118,000
in its net loss in the year ended December 31, 2003.

Quarterly
Results of Operations

The
following table sets forth certain unaudited quarterly financial information in
accordance with Israeli GAAP expressed in NIS as a percentage of revenues for
each of the eight fiscal quarters ended December 31, 2005.  The data has been prepared on a basis
consistent with our audited consolidated financial statements included
elsewhere in this annual report and includes all adjustments, 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.

|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|--------------------------------------------------------------------- |  | --------------------------- | ------- | ------- |  | ------- | - | ------- | ------- | ------- |  | ------- | - | ------- | ------- | ------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                      |  | Quarter
  Ended (Unaudited) |        
|                                                                      |  |                             |        
|                                                                      |  | 2004                        |         | 2005    | 
|                                                                      |  |                             |         |         | 
|                                                                      |  | Mar. 31                     |         | Jun. 30 |  | Sep. 30 |   | Dec. 31 |         | Mar. 31 |  | Jun. 30 |   | Sep. 30 |         | Dec. 31 | 
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         | 
|                                                                      |  | (NIS in
  thousands)        |        
|                                                                      |  |                             |        
|Israeli GAAP:                                                         |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|Revenues                                                              |  |                             | 30,314  |         |  | 27,102  |   |         | 32,569  |         |  | 35,017  |   |         | 34,395  |         |  | 33,842  |   |  | 36,622  |   |  | 39,570  |  
|Cost of revenues                                                      |  |                             | (26,845 | )       |  | (26,135 | ) |         | (28,780 | )       |  | (28,238 | ) |         | (28,083 | )       |  | (27,746 | ) |  | (28,921 | ) |  | (30,983 | )
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|Gross profit                                                          |  |                             | 3,469   |         |  | 967     |   |         | 3,789   |         |  | 6,779   |   |         | 6,312   |         |  | 6,096   |   |  | 7,701   |   |  | 8,587   |  
|Research and
  development  income, net                               |  |                             | -       |         |  | -       |   |         | -       |         |  | -       |   |         | (191    | )       |  | (160    | ) |  | (134    | ) |  | (161    | )
|Selling, general
  and administrative expenses                        |  |                             | (4,629  | )       |  | (4,547  | ) |         | (4,043  | )       |  | (5,046  | ) |         | (4,519  | )       |  | (4,686  | ) |  | (5,212  | ) |  | (5,445  | )
|Amortization of
  goodwill                                            |  |                             | (147    | )       |  | (147    | ) |         | (147    | )       |  | (152    | ) |         | (152    | )       |  | (148    | ) |  | (147    | ) |  | (146    | )
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|Operating income
  (loss)                                             |  |                             | (1,307  | )       |  | (3,727  | ) |         | (401    | )       |  | 1,581   |   |         | 1,450   |         |  | 1,102   |   |  | 2,208   |   |  | 2,835   |  
|Financial income
  (expenses), net                                    |  |                             | (1,152  | )       |  | (664    | ) |         | (674    | )       |  | (458    | ) |         | (614    | )       |  | (766    | ) |  | (648    | ) |  | (628    | )
|Other income
  (expenses), net                                        |  |                             | (17     | )       |  | (12     | ) |         | 68      |         |  | 13      |   |         | (11     | )       |  | (13     | ) |  | 58      |   |  | 69      |  
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|Income (loss)
  before tax benefit (expenses) and minority interest   |  |                             | (2,476  | )       |  | (4,403  | ) |         | (1,007  | )       |  | 1,136   |   |         | 825     |         |  | 323     |   |  | 1,618   |   |  | 2,276   |  
|Tax benefit
  (expenses)                                              |  |                             | (55     | )       |  | 55      |   |         | -       |         |  | 713     |   |         | -       |         |  | -       |   |  | -       |   |  | -       |  
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|Income (loss)
  after tax benefit (expenses) before minority interest |  |                             | (2,531  | )       |  | (4,348  | ) |         | (1,007  | )       |  | 1,849   |   |         | 825     |         |  | 323     |   |  | 1,618   |   |  | 2,276   |  
|Minority
  Interest                                                   |  |                             | (31     | )       |  | 69      |   |         | 74      |         |  | 70      |   |         | 14      |         |  | 138     |   |  | 42      |   |  | 24      |  
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  
|Net income
  (loss)                                                   |  |                             | (2,562  | )       |  | (4,279  | ) |         | (933    | )       |  | 1,919   |   |         | 839     |         |  | 461     |   |  | 1,660   |   |  | 2,300   |  
|                                                                      |  |                             |         |         |  |         |   |         |         |         |  |         |   |         |         |         |  |         |   |  |         |   |  |         |  

-33-

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|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  
|------------------------------------------------------------------- |  | ------------------------------------- | ----- | ------- |  | ------- | - | ------- | ----- | ------- |  | ------- | - | ------- | ----- | ------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                                                    |  | Quarter
  Ended (Unaudited )          |      
|                                                                    |  |                                       |      
|                                                                    |  | 2004                                  |       | 2005    | 
|                                                                    |  |                                       |       |         | 
|                                                                    |  | (As a
  percentage of total revenues) |      
|                                                                    |  |                                       |      
|                                                                    |  | Mar. 31                               |       | Jun. 30 |  | Sep. 30 |   | Dec. 31 |       | Mar. 31 |  | Jun. 30 |   | Sep. 30 |       | Dec. 31 | 
|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         | 
|Israeli GAAP:                                                       |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  
|Revenues                                                            |  |                                       | 100   | %       |  | 100     | % |         | 100   | %       |  | 100     | % |         | 100   | %       |  | 100   | % |  | 100   | % |  | 100   | %
|Cost of revenues                                                    |  |                                       | (88.6 | )       |  | (96.4   | ) |         | (88.4 | )       |  | (80.6   | ) |         | (81.7 | )       |  | (82.0 | ) |  | (79.0 | ) |  | (78.3 | )
|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  
|Gross profit                                                        |  |                                       | 11.4  |         |  | 3.6     |   |         | 11.6  |         |  | 19.4    |   |         | 18.3  |         |  | 18.0  |   |  | 21.0  |   |  | 21.7  |  
|Research and
  development income, net                              |  |                                       | -     |         |  | -       |   |         | -     |         |  | -       |   |         | (0.6  | )       |  | (0.5  | ) |  | (0.4  | ) |  | (0.4  | )
|Selling, general
  and administrative expenses                      |  |                                       | (15.2 | )       |  | (16.8   | ) |         | (12.4 | )       |  | (14.4   | ) |         | (13.1 | )       |  | (13.8 | ) |  | (14.2 | ) |  | (13.7 | )
|Amortization of
  goodwill                                          |  |                                       | (0.5  | )       |  | (0.5    | ) |         | (0.4  | )       |  | (0.4    | ) |         | (0.4  | )       |  | (0.4  | ) |  | (0.4  | ) |  | (0.4  | )
|Operating income
  (loss)                                           |  |                                       | (4.3  | )       |  | (13.7   | ) |         | (1.2  | )       |  | 4.6     |   |         | 4.2   |         |  | 3.3   |   |  | 6.0   |   |  | 7.2   |  
|Financial income
  (expenses),  net                                 |  |                                       | (3.8  | )       |  | (2.5    | ) |         | (2.1  | )       |  | (1.3    | ) |         | (1.8  | )       |  | (2.3  | ) |  | (1.8  | ) |  | (1.6  | )
|Other income
  (expenses), net                                      |  |                                       | (0.1  | )       |  | *       |   |         | 0.2   |         |  | *       |   |         | *     |         |  | *     |   |  | 0.2   |   |  | 0.2   |  
|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  
|Income (loss)
  before tax benefit (expenses) and minority interest |  |                                       | (8.2  | )       |  | (16.2   | ) |         | (3.1  | )       |  | 3.3     |   |         | 2.4   |         |  | 1.0   |   |  | 4.4   |   |  | 5.8   |  
|Tax benefit
  (expenses)                                            |  |                                       | (0.2  | )       |  | 0.2     |   |         | -     |         |  | 2.0     |   |         | -     |         |  | -     |   |  | -     |   |  | -     |  
|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  
|Income (loss)
  after tax benefit (expenses)                        |  |                                       | (8.4  | )       |  | (16.0   | ) |         | (3.1  | )       |  | 5.3     |   |         | 2.4   |         |  | 1.0   |   |  | 4.4   |   |  | 5.8   |  
|Minority
  Interest                                                 |  |                                       | (0.1  | )       |  | 0.2     |   |         | 0.2   |         |  | 0.2     |   |         | *     |         |  | 0.4   |   |  | 0.1   |   |  | *     |  
|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  
|Net income
  (loss)                                                 |  |                                       | (8.5  | )       |  | (15.8   | ) |         | (2.9  | )       |  | 5.5     |   |         | 2.4   |         |  | 1.4   |   |  | 4.5   |   |  | 5.8   |  
|                                                                    |  |                                       |       |         |  |         |   |         |       |         |  |         |   |         |       |         |  |       |   |  |       |   |  |       |  

|                | 
|--------------- | 
|*Less than 0.1%

Conditions
in Israel

We
are incorporated under the laws of, and our principal executive offices and
manufacturing and research and development facilities are located in, the State
of Israel. Accordingly, we are directly affected by political, economic and
military conditions in 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.

-34-

---

---



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 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.  These developments have adversely affected
the regional peace process, placed the Israeli economy under significant
stress, and have negatively influenced Israels relationship with several Arab
countries.  In August 2005, Israel
evacuated all Israeli settlements in the Gaza Strip and four settlements in the
West Bank.  In January 2006, Hamas won
the elections in the Palestinian Authority and on March 28, 2006 and as a result the diplomatic
relations between Israel and the Palestinian Authority have worsened.  The implications of these developments
cannot at this time be foreseen.  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 may 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, executive officers and employees in Israel are
obligated to perform annual reserve duty in the Israeli Defense Forces and are
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.  To date, no executive officer or
key employee has been recruited for military service for any significant period
of time.  However, 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.

Economic
Conditions

In
recent years Israel has been going through a period of recession in economic
activity, resulting in low growth rates and growing unemployment.  Although economic activity in Israel has
improved recently, our operations could be adversely affected if the economic
conditions in Israel begin to deteriorate again.

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.  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 the products covered by such programs either
duty-free or at reduced tariffs.

-35-

---

---



Israel
and the European Union Community, known now as the European Union, concluded
a Free Trade Agreement in July 1975 that confers some 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 some 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 the 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 a
redefinition of rules of origin and other improvements, such as allowing 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 Russia, China, India, Turkey and other nations in Eastern Europe and
Asia.

Effective
Corporate Tax Rate

Israeli
companies are generally subject to income tax on their taxable income.  The applicable rate for 2005 was 34%, which
was reduced to 31% in 2006, and will be further reduced to 29% in 2007, 27% in
2008, 26% in 2009 and 25% in 2010 and thereafter.

However,
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.

As
of December 31, 2005, we had approximately NIS 65 million ($14.1 million) in tax loss carry-forwards, which can be
offset against future income without time limitation.  However, of such amount, NIS 11.0 million ($2.6 million) relate
to tax years for which we have not as yet received final tax assessments.  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.

Impact
of Currency Fluctuations 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.

-36-

---

---



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.

|                               |  |                         |   |      |      |      |  |      |    |      |      |    |  |      |    | 
|------------------------------ |  | ----------------------- | - | ---- | ---- | ---- |  | ---- | -- | ---- | ---- | -- |  | ---- | -- | 
|                               |  | Year Ended December 31, |  
|                               |  |                         |  
|                               |  | 2001                    |   | 2002 |      | 2003 |  | 2004 |    | 2005 |     
|                               |  |                         |   |      |      |      |  |      |    |      |     
|U.S. dollar                    |  | 9.3                     | % |      | 7.3  | %    |  | (7.6 | )% |      | (1.6 | )% |  | 6.9  | %  | 
|Euro                           |  | 3.8                     | % |      | 27.2 | %    |  | 11.3 | %  |      | 6.2  | %  |  | (7.3 | )% | 
|Israeli consumer price
  index |  | 1.4                     | % |      | 6.5  | %    |  | (1.9 | )% |      | 1.2  | %  |  | 2.4  | %  | 

Since
most of our sales are quoted in U.S. dollars or 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.  We have engaged
external consultants to assist us to manage our foreign exchange risk.  From time to time in the past we have
engaged in hedging transactions in order to partially protect ourselves from
currency fluctuation and inflation risks and may use hedging instruments from
time to time 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), long-term and short-term bank loans and
borrowings under available credit facilities, and a convertible note issued to
our major shareholder.

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

We
spent approximately NIS 12.6 million ($2.7 million) for capital expenditures in
the year ended December 31, 2005 and approximately NIS 1.5 million in the year
ended December 31, 2004.  In the years
ended December 31, 2005 and 2004, our capital expenditures mainly related to
our investments in production and manufacturing equipment, and leasehold
improvements.  We expect to invest
approximately NIS 14 million ($3 million) in capital expenditures and capital
leases in 2006.

In
June 2002, we acquired 76% of Kubatronik
for approximately Euro 2.6 million.  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), 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 him (or his permitted transferee) to sell to us, his remaining
interest in Kubatronik.  The price for
Mr. Kubats remaining holdings in Kubatronik will not be less than Euro 552,000
($653,000) and will not exceed Euro 920,000 ($1.1 million), subject to certain
price adjustments set forth in the agreement (including, among other things, an
accrual of annual interest at the rate of LIBOR + 1% from May 2005).  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 arrangement gives
rise to a derivative instrument which 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).

-37-

---

---



Net
cash provided by operating activities was NIS 14.3 million ($3.1 million)
for the year ended December 31, 2005.
This amount was primarily attributable to net income of NIS 5.3 million
($1.1 million), fixed asset depreciation of NIS 10.9 million ($2.4 million), an
increase in trade payables of NIS 0.9 million
($196,000), a decrease in trade receivables of NIS 1.0 million ($209,000) and
amortization of goodwill of NIS 0.6 million
($129,000).  This amount was partially
offset by an increase in inventories of NIS 2.5 million ($553,000), an increase
in other receivables and prepaid expenses of NIS 1.5 million ($317,000) and a decrease in employee severance
benefits, net of NIS 0.8 million
($167,000).  Net cash provided by
operating activities was NIS 7.9 million for the year ended December 31,
2004.  This amount was primarily
attributable to fixed assets depreciation of NIS 13.4 million, an increase in
other liabilities and accrued expenses of NIS 2.5 million, a decrease in other
receivables and prepaid expenses of NIS 1.3 million, an increase in trade
payables of NIS 1.2 million and amortization of goodwill of NIS 593,000.  This amount was partially offset by our net
loss of NIS 5.9 million, an increase in trade receivables of NIS 4.0 million,
our recording of a deferred tax asset of NIS 753,000 and an increase in
inventories of NIS 379,000.

Net
cash used in investing activities was NIS 12.5 million ($2.7 million) in the
year ended December 31, 2005 and NIS 1.3 million in the year ended December 31,
2004.  Net cash used in investing
activities in the year ended December 31, 2005 and 2004 was primarily for the
purchase of fixed assets for our production lines.

Net
cash provided by financing activities was NIS 1.3 million ($289,000) in the
year ended December 31, 2005, which was primarily attributable to new loans of
NIS 8.3 million ($1.8 million) from our banks and cash from the exercise of
employee stock options of NIS 2.1 million ($461,000), which was partly offset
by a decrease NIS 9.1 million ($2.0 million) in long-term and short-term credit
from our banks.  Net cash used in
financing activities was NIS 6.9 million in the year ended December 31, 2004,
which was primarily attributable to a net decrease of NIS 6.9 million in
long-term and short-term credit from our banks.

As
of December 31, 2005, we had NIS 7.3 million ($1.6 million) in cash and cash
equivalents as compared to NIS 4.3 million in cash and cash equivalents at
December 31, 2004 and a working capital deficit of NIS 4.4 million ($1.0
million), as compared to a working capital deficit of NIS 10.8 million at
December 31, 2004.

As
of December 31, 2005, 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.

| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a revolving line of credit of approximately NIS 4.6
  million ($1.0 million) with Bank Hapoalim B.M.  Of such amount, NIS 506,000 ($110,000) is linked to the U.S.
  dollar and NIS 4.1 million ($890,000) is not linked.

-38-

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| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | long-term loans from Bank Hapoalim B.M. aggregating
  NIS 4.1 million ($0.9 million).
  Of such amount, NIS 1.6 million ($349,000) is linked to the Israeli
  consumer price index, NIS 792,000 ($172,000) is linked to the U.S. dollar and
  NIS 1.7 million ($362,000) is not linked.                      
| |   |                                                                                                                                                                                                                                                                                                              
| |  | a revolving line of credit of approximately NIS 3.6
  million ($782,000) with Israel Discount Bank Ltd.  Of such amount NIS 599,000 ($130,000) is linked to the U.S.
  dollar and NIS 3.0 million ($652,000) is not linked.                                                                                  
| |   |                                                                                                                                                                                                                                                                                                              
| |  | long-term loans from Israel Discount Bank Ltd. in
  the aggregate amount of NIS 6.6 million ($1.4 million). Of such amount, NIS
  578,000 ($126,000) is linked to the Israeli consumer price index, NIS 2.8
  million ($609,000) is linked to the U.S. dollar and NIS 3.2 million
  ($695,000) is not linked.
| |   |                                                                                                                                                                                                                                                                                                              
| |  | a revolving line of credit of approximately NIS 3.7
  million ($796,000) with Bank Leumi LeIsrael Ltd.                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                              
| |  | long-term loans from Bank Leumi LeIsrael Ltd. in the
  aggregate amount of NIS 681,000 ($148,000).  Of such amount, NIS 432,000 ($94,000) is linked to the Israeli
  consumer price index and NIS 249,000 ($54,000) is linked to the U.S.
  dollar.                                                          

Our
credit lines bear annual interest ranging from 6.95% to 7.5% for non-linked credit and 6.27% to 6.39% for credit which was linked to
the dollar.  Our long-term loans bear annual interest
ranging from 5.89% to 6.54% for long-term loans which were linked to the
Israeli consumer price index, 5.3% to 7.05% for long-term loans which were
linked to the dollar and 5% to 7.95% 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 or 20% of the our total assets.  For these purposes, shareholders equity
includes the outstanding convertible note and excludes prepaid expenses.  As of December 31, 2005, we were in compliance with such
covenants.  We cannot assure you that we will be able to
maintain compliance with such covenants in the future.

In
2003, we negotiated a financing plan with our banks and controlling
shareholder, pursuant to which the banks agreed to extend the payment of our
outstanding debt, and our major shareholder contributed $500,000 to our company
in consideration of a convertible note.
In July 2003, as part of this financing plan, we signed a factoring
agreement with U Bank Ltd. (formerly Investec Bank (Israel) Ltd.), or U Bank,
for a $1.0 million factoring facility, in consideration for the assignment to U
Bank of an equal amount of our accounts receivable.  The use of this factoring facility is subject to the consent of
our banks, which have provided their consent until March 31, 2007.  Also see Item 7.B., Major Shareholders and
Related Party Transactions - Related Party Transactions.

-39-

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We
expect to finance our 2006 budget from operational cash flow, revolving bank
credit lines and long-term bank loans, and supplier financing.   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, 2006.

|   |                                                 
|-- | ------------------------------------------------
|C. | RESEARCH
  AND DEVELOPMENT, PATENTS AND LICENSES

We
generally do not engage in significant research and development.

In
2005, we were granted membership in OptiPac, a consortium within the framework
of the MAGNET program of the Office of the Chief Scientist.  OptiPac was created specifically to develop
generic optical packaging technologies for the microelectronics sector,
technologies that are critically important to the communications industry.  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  We are not required to pay
the Office of the Chief Scientist royalties with respect to this grant.  In 2005, we incurred NIS 1,115,000 ($242,000) in research and
development expenses in connection with our membership in OptiPac, of which NIS 469,000 ($102,000)
were reimbursed to us by the OCS in accordance with the terms of the OptiPac consortium.

|   |                    
|-- | -------------------
|D. | TREND
  INFORMATION

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 are
developing new business relationships with customers from abroad.

Our backlog
at December 31, 2005 was approximately $4.9 million compared to a backlog of
approximately $5.2 million at December 31, 2004.  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.  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 as of December
  31, 2005 and the effect we expect them to have on our liquidity and cash flow
  in future periods.                                    

-40-

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|                                                                                          |  |                                              |        |                      |  |           |  |           |        |                     |  |       |  |  |       | 
|----------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | -------------------- |  | --------- |  | --------- | ------ | ------------------- |  | ----- |  |  | ----- | 
|                                                                                          |  | Payments
  due by periodNIS (in
  thousands) |       
|                                                                                          |  |                                              |       
|Contractual
  Obligations                                                                 |  | Total                                        |        | less than
  1
  year |  | 1-3 years |  | 3-5 years |        | more than
  5 years | 
|                                                                                          |  |                                              |        |                      |  |           |  |           |        |                     | 
|Short-term bank credit                                                                    |  |                                              | 11,322 |                      |  | 11,322    |  |           |       |                     |  |      |  |  |      | 
|Long-term debt obligations                                                                |  |                                              | 11,385 |                      |  | 6,239     |  |           | 5,146  |                     |  |      |  |  |      | 
|Long-term debt related to fixed assets financing
transactions                             |  |                                              | 3,528  |                      |  | 1,067     |  |           | 2,461  |                     |  |      |  |  |      | 
|Operating lease and other contractual
obligations                                         |  |                                              | 26,000 |                      |  | 6,654     |  |           | 9,869  |                     |  | 6,725 |  |  | 2,752 | 
|Purchase obligations                                                                      |  |                                              | 3,744  |                      |  | 3,744     |  |           |       |                     |  |      |  |  |      | 
|Other long-term liabilities reflected on the
companys balance sheet
  under Israeli GAAP |  |                                              | 274    |                      |  |          |  |           |       |                     |  |      |  |  | 274   | 
|Total                                                                                     |  |                                              | 56,253 |                      |  | 29,026    |  |           | 17,476 |                     |  | 6,725 |  |  | 3,026 | 

|        |                                             
|------- | --------------------------------------------
|ITEM 6. | DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES

|                                                                                                                                          |                                  
|----------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
|A.                                                                                                                                        | DIRECTORS
  AND SENIOR MANAGEMENT
|                                                                                                                                          |                                  
|Set
  forth below are the name, age, principal position and a biographical
  description of each of our directors and executive officers:

|                      |  |    |     |                                                             |          | 
|--------------------- |  | -- | --- | ----------------------------------------------------------- | -------- | 
|Name                  |  |    | Age |                                                             | Position | 
|                      |  |    |     |                                                             |          | 
|                     
|Nissim Gilam(1)(2)    |  | 68 |     | Chairman of the Board of
  Directors                       
|Arieh Reichart        |  | 52 |     | President and Chief
  Executive Officer                    
|Amnon Shemer          |  | 47 |     | Vice President, Finance
  and Chief Financial Officer      
|Dan Eshed             |  | 55 |     | Senior Vice President,
  Subsidiaries                      
|Eli Dvora             |  | 50 |     | Vice President, Operations                                 
|Moshe Leibovich       |  | 49 |     | Vice President, Marketing
  and Sales                      
|Roberto Tulman        |  | 47 |     | Vice President,
  Technologies and Chief Technology Officer
|Shlomo Danino         |  | 43 |     | Vice President,
  Engineering and Quality Assurance        
|Vardit Dekel          |  | 42 |     | Vice President, Human
  Resources                          
|Ernst Winkler         |  | 55 |     | General
  Manager of Kubatronik                            
|David Banitt(1)(3)(4) |  | 54 |     | Independent Director                                       
|Jack Bigio            |  | 40 |     | Director                                                   

-41-

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|                        |  |    |     |                  |          | 
|----------------------- |  | -- | --- | ---------------- | -------- | 
|Name                    |  |    | Age |                  | Position | 
|                        |  |    |     |                  |          | 
|Revital Degani(1)(3)    |  | 50 |     | Outside Director
|Joseph Maiman           |  | 60 |     | Director        
|Eliyaho Tov(1)(2)(3)(4) |  | 63 |     | Outside Director
|Joseph Yerushalmi       |  | 67 |     | Director        

|                                        
|----------------------------------------
|                                        
|(1) Member of the Executive Committee   
|                                        
|(2) Member of the Compensation Committee
|                                        
|(3) Member of the Audit Committee       
|                                        
|(4) Member of the Stock Option Committee

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. Messrs. Joseph A. Maiman and Nissim Gilam,
Class III directors, will serve as directors until our 2008 general annual
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 one
additional three-year term.

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. Mr. Gilam is also a member of the board of directors of
Israel Steel Corporation, Eliyaho Insurance Company and Solomon Capital
Markets. 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 as our chief
financial officer 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
Shemerjoined us
in February 2004 as vice president-finance and chief financial officer. From
January 2003 until November 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 and an M.A. degree in Economics, both from Bar-Ilan
University.

Dan
Eshed joined
us in April 1987 as a production manager. During his employment with our
company, Mr. Eshed has 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.

-42-

---

---



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 our company and in
August 1999, was appointed as our vice president - operations.
Mr. Dvora holds a B.A. degree in Economics and an M.B.A. degree, both from
Bar Ilan 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 from 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.

Roberto
Tulman joined us
in August 2005 as vice president, technologies and chief technology
officer.  During the 22 years prior to
joining our company, Mr. Tulman served in the electronic research department of
the Israel Defense Forces, where he held various research and development and
management positions, and managed the printed circuits division during his last
eight years of service. Mr. Tulman holds a B.SC (Cum Laude) in Chemistry, an
M.Sc degree in Chemistry (Electrochemistry) and an MBA degree, all from Tel-Aviv
University.

Shlomo
Danino joined us
in August 1985. During his employment with our company, Mr. Danino has served
as product engineering manager, and was appointed as vice president,
engineering and quality assurance in February 1999. Mr. Danino holds a B.Sc.
degree in mechanics from Ort Technology College in Israel and a B.Sc. degree in
general business from Champlain College, in Burlington, Vermont.

Vardit
Dekel joined us
in August 2005 as vice president, human resources. From May 2001 until July
2005, Ms. Dekel served as Human Resources manager of Chefa Ltd., an Israeli
group engaged in food services for airlines, business & industry companies.
During the 12 years prior to joining Chefa Ltd., Ms. Dekel served at Israel
Elwyns Residential Center for people with special needs, where she served in
several management positions, including human resources and training manager
and as its manager. Ms. Dekel holds a B.A degree in special education and a MA
degree in organizational sociology and organizational counseling, both from The
Hebrew University of Jerusalem.

Ernst
Winkler joined
us in July 2003 as general manager of our subsidiary Kubatronik. Prior thereto
and from July 1997, Mr. Winkler served as director of sales world-wide of Ruwel
circuit board manufacturers. From August 1977 until July 1997, Mr. Winkler
served as a development technician for special rigid products, flex-rigid, flex boards and complex rigid
multilayer boards at Schoeller
Electronics.

-43-

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David
Banitt, an
independent director, has served as a director since March 1997. Since January
2006, Mr. Bannit has served as chief executive officer of YDesign Ltd., a
company involved in the development of consumer products. Mr. Bannit is a
member of the board of directors of Nano-OR Technology Ltd. and Tidex Systems
Ltd. From July 2005 until January 2006, Mr. Banitt was self-employed, providing
consulting services in marketing, primarily in the PCB market. From August 2001
until July 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 Technology Ltd. and from 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. From 1992 until 1985, Mr. Banitt served
as Vice President of Marketing of Optrotech Ltd., an Israeli company that
provides optical inspection systems to the PCB industry. Mr. Banitt holds a
B.Sc. degree in Electronics Engineering from Tel Aviv University.

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.  Mr. Bigio serves as a
member of the board of directors of several companies within the Ampal group.
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, Mr. Bigio 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 chief executive officer
of Bakara Handasit Ltd., an Israeli company engaged in engineering control and
building inspection and surveying, and serves as a member of its board of
directors. 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.
Mr. Maiman has served as the chairman of the board of directors of Israel 10
Channel Ltd. since January 2002 and since April 2002, as the chairman of the
board of directors of Ampal American Israel Corporation, a public holding
company that trades on The NASDAQ National 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 until 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, both from The Hebrew University of Jerusalem.

-44-

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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. Mr. Bigio serves as a member of the
board of directors of Ampal Israel Corporation Ltd. From 1992 to 1996, Mr.
Yerushalmi served as vice president for projects of Israel Chemicals Ltd.
During such time, Mr. Yerushalmi also served as chairman and director for
several of Israel Chemicals Ltd.s subsidiaries. From 1989 until 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, Mr. Yerushalmi 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.

|   |             
|-- | ------------
|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 year ended December 31,
2005.

|                                                                                  |  |                                            |   |                                                |  |  |  |   |        |  | 
|--------------------------------------------------------------------------------- |  | ------------------------------------------ | - | ---------------------------------------------- |  |  |  | - | ------ |  | 
|                                                                                  |  | Salaries,
  fees,commissions and
  bonuses |   | Pension,
  retirement
  and similar
  benefits | 
|                                                                                  |  |                                            |   |                                                | 
|All directors and
  executive officers as a group (then consisting of 15 persons) |  |                                            | $ | 1,055,000                                      |  |  |  | $ | 91,000 |  | 

During
the year ended December 31, 2005, we paid each of our outside and independent
directors an annual fee of NIS 15,780
($3,428) and a per meeting attendance fee of NIS 1,000 ($217). In accordance
with the approval of our shareholders, during such period, we paid Nissim
Gilam, chairman of our board of directors, a management fee of $3,500 per month
for the period prior to October 1, 2005 and $5,000 per month thereafter, 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 17,281
($3,754). As of October 2005, we also provide Mr. Gilam with a company car and
pay all expenses in connection therewith, pursuant to the approval of our
shareholders at the 2005 annual general meeting.

As
of December 31, 2005, our directors and executive officers as a group,
consisting of 15 persons, held options to purchase an aggregate of 119,500
ordinary shares. Of such options, options to purchase 20,000 ordinary shares
have an exercise price of $1.14, and vest over a three-year period (of which,
options to purchase 6,666 ordinary shares had vested at December 31 2005) and
will expire in November 2009 and options to purchase 99,500 ordinary shares
have an exercise price of NIS 21 ($4.56), were fully vested upon grant and will
expire in December 2007. The options were granted under our 2000 Stock Option
Plan and 2005 Stock Option Plan. See  Share Ownership  Stock Option Plans.

|   |                  
|-- | -----------------
|C. | BOARD
  PRACTICES

Introduction

According
to the Israeli Companies Law and our Articles of Association, the management of
our business is vested in our board of directors. The board of directors may
exercise all powers and may take all actions that are not specifically granted
to our shareholders. Our executive officers are responsible for our day-to-day
management. The executive officers have individual responsibilities established
by our chief executive officer and board of directors.

-45-

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Election
of Directors

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.

Pursuant
to our articles of association, our board of directors is divided into three
classes (other than outside directors). Generally, at each annual meeting of
shareholders one of such classes 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.  Directors (other
than outside directors) may be removed earlier from office by a resolution
passed at a general meeting of our shareholders, provided that shareholders
holding in the aggregate no less than forty-percent of our outstanding share
capital vote in favor of such resolution. Our board of directors may
temporarily fill vacancies in the board or add to their body until the next
annual meeting of shareholders, provided that
the total number of directors will not exceed the maximum number
permitted under our articles of association.

Under
a recent amendment to the Israeli Companies Law, our board of directors is
required to determine the minimum number of directors who must have accounting
and financial expertise, as such term is defined in regulations promulgated
under the Israeli Companies Law. Our Board of Directors has determined that our
Board of Directors will include at least one director who has accounting and
financial expertise, within the meaning of the regulations promulgated under
the Israeli Companies Law. Our Board of Directors has further determined that
Mr. Eliyaho Tov has the requisite accounting and financial expertise.

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.

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 who are qualified to be
appointed as directors, 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 an 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 an
entity which was controlled by the company or its controlling shareholder at
the time of the appointment or during the two years that preceded the
appointment. 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.

-46-

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---



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. 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. 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 a March 2005 amendment to the Israeli Companies Law, effective as of January
2006 at least one of the outside directors must be an accounting and financial
expert and the other outside directors must be (i) accounting and financial
experts or (ii) professional experts, as such terms are defined by regulations
promulgated under the Israeli Companies Law. This requirement does not apply to
outside directors appointed prior to the March 2005 amendment, however a
company can not renew the appointment of any such outside director for an
additional term unless the outside director is (i) an accounting and financial
expert or (ii) a professional expert and at the time the appointment is to be
renewed, an outside director who is an accounting and financial expert serves
on the board of directors and such other number of directors who are accounting
and financial experts serve on the board of directors as determined by the
board of directors of the company.

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.

-47-

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In
addition, in general, under NASDAQ Stock Market Rules 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 NASDAQ and the Securities and
Exchange Commission. However, on June 9, 2005, we provided NASDAQ with a notice
of non-compliance with respect to (among other things) the requirement to
maintain a majority of independent directors, as defined under 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. (See below in this Item 6C.
Directors, Senior Management and Employees - Board Practices - NASDAQ
Marketplace Rules and Home Country Practices.) In addition, in accordance with
rules of the Securities and Exchange Commission, we have the mandated three
independent directors, as defined by the Securities and Exchange Commission and
NASDAQ rules, on our audit committee.

Our
Board of Directors 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 Directors has further determined that Mr. Banitt
qualifies as an independent director under the Securities and Exchange
Commission and NASDAQ requirements.

Committees of the Board of Directors

Audit Committee

Under
the Israeli Companies Law, the board of directors of any public company must
establish an audit committee, which consists of at least three directors and
must include all of the outside directors. In addition, NASDAQ Marketplace
Rules require us to establish an audit committee comprised of at least three
members, each of whom satisfies the respective independence requirements of
the Securities and Exchange Commission and NASDAQ and is financially literate,
and one of whom has accounting or related financial management expertise.

Our audit committee 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 and 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. The audit committee may consult
from time to time with our independent auditors and internal auditor with respect to
matters involving financial reporting and internal accounting controls.

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-

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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 and Tov and Ms. Degani are the current members of our executive
committee. Our executive committee meets approximately once a month with our
Chief Executive Officer.

Stock Option Committee

Our
Board of Directors established a Stock Option Committee, the initial purpose of
which is to administer, where permitted under applicable law, our 2005 Stock
Option Plan (see Item 6.E., Directors, Senior Management and Employees - Share
Ownership - Stock Option Plans). Messrs. Tov and Banitt are the current members
of our Stock Option Committee. Our
Stock Option Committee meets on an as required basis.

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, subject to
certain conditions, the board of directors may delegate to a board committee
its authority to grant options. The grant of options to our office holders
(within the meaning of the Israeli Companies Law) requires the approval of our
audit committee and board of directors, and if the office holder is a director,
also by our shareholders.

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, Certified Public
Accountant (Israel), serves as our internal auditor.

Directors Service Contracts

We
do not have any service contracts with our directors, except for the
compensation we pay to Mr. Nissim Gilam in connection with his services as
Chairman of our Board of Directors. In accordance with Mr. Gilams compensation
terms that had been approved by our shareholders prior to our 2005 annual
general meeting, we paid Mr. Gilam a management fee of $3,500 per month and
reimbursed him for various expenses that he incurs in connection with his
service as Chairman of the Board of Directors in an annual amount up to NIS
18,000 (approximately $3,900). At the 2005 annual general meeting, our shareholders
approved new terms of compensation for Mr. Gilam, in accordance with which we
are authorized to pay Mr. Gilam, effective as of October 1, 2005, a management
fee of $5,000 per month, reimburse him for various expenses that he incurs in
connection with his service as Chairman of the Board of Directors in an annual
amount up to NIS 18,000 (approximately $3,900), and provide him with a company
car and pay all expenses in connection therewith. Mr. Gilam may receive this
compensation directly or through his personal company, Nissim Gilam Ltd.

There
are no arrangements or understandings between us and any of our directors for
benefits upon termination of their service.

-49-

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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 is defined in the Israeli Companies Law as a director, general manager,
chief business manager, deputy general manager, vice general manager, other
manager directly subordinate to the managing director or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such persons title. 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. This includes the duty to
utilize reasonable means to obtain information regarding the appropriateness of
a given action brought for his or her approval or performed by him or her by
virtue of his or her position and all other information of importance
pertaining to the foregoing actions. The duty of loyalty requires an officer
holder to act in good faith and in the companys interest, including avoiding
any conflict of interest between the office holders position in the company
and any other position or his or her personal affairs; avoiding any 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 disclosing to the company any information and documents that relate
to its affairs which the office holder received by virtue of such position.
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 exculpation insurance and
indemnification of, or an undertaking to indemnify, an office holder who is not
a director requires both board of directors and audit committee approval.  The compensation of office holders who are
directors must be approved by our audit committee, board of directors and shareholders.

The
Israeli Companies Law requires that an office holder promptly, and no later
than the first board meeting at which such transaction is considered, disclose
any personal interest that he or she may have and all related material
information known to him or her and any documents in their position, 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 may not be approved. In some cases, such a transaction must
be approved by the audit committee and by the board of directors itself, and
under certain circumstances shareholder approval may be required. A director
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 matter which is considered is in the ordinary course of
business of the company or the majority of the members of the board or the
audit committee have a personal interest, as the case may be. In the event the
majority of the members of the board or the audit committee have a personal
interest, then the approval of the general meeting of shareholders is also
required.

-50-

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The
Israeli Companies Law also provides that an extraordinary transaction with a
controlling shareholder or an extraordinary transaction with another person in
whom the controlling shareholder 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 or her 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, under such regulations,
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. Also,
employment and compensation arrangements of an office holder that is a
controlling shareholder of the company do not require the approval of the
shareholders provided that certain criteria is met. The foregoing relieves 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 or object to the grant of such relief, provided that such objection is
submitted to the company in writing not later than seven 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 transaction or compensation arrangement
will require shareholders approval as detailed above.

In
addition, a private placement of securities (i) in which 20% or more of the
companys outstanding share capital prior to the placement are offered, the
payment for which (in whole or in part) is not in cash or listed securities or
not under market terms, that will (a) increase the relative holdings of a
shareholder that holds 5% or more of the companys outstanding share capital,
or (b) cause any person to become, as a result of the issuance, a holder of
more than 5% of the companys outstanding share capital or (ii) that will cause
a person to become a controlling shareholder, requires approval by the board of
directors and the shareholders of the company.

-51-

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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 (i) was made in a private placement that received
shareholder approval, (ii) 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 (iii) 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 or her 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

Exculpation
of Office Holders

The
Israeli Companies Law provides that an Israeli company cannot exculpate an
office holder from liability with respect to a breach of his or her duty of
loyalty, but may, if permitted by its articles of association, exculpate in
advance an office holder from his or her liability to the company, in whole or
in part, with respect to a breach of his or her duty of care. However, a
company may not exculpate in advance a director from his or her liability to
the company with respect to a breach of his or her 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.

-52-

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Insurance
of Office Holders

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 an office holder in
such capacity, for: (i) a breach of the office holders duty of care to the
company or to another person; (ii) a breach of the office holders duty of
loyalty to the company, provided that the office holder acted in good faith and
had reasonable cause to assume that his or her act would not prejudice the
companys interests; or (iii) a financial liability imposed upon the office
holder 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.

Indemnification
of Office Holders

The
Israeli Companies Law provides that a company may, if permitted by its articles
of association, indemnify an office holder for acts or omissions performed by
the office holder in such capacity for: (i) a financial obligation imposed upon
the office holder in favor of another person by any judgment, including a
settlement or an arbitrators award approved by a court; (ii) reasonable
litigation expenses, including attorneys fees, incurred by the office holder
as a result of an investigation or proceeding instituted against him or her by
a competent authority, provided that such investigation or proceeding concluded
without the filing of an indictment against the office holder or the imposition
of any financial liability in lieu of criminal proceedings, or concluded
without the filing of an indictment against the office holder and a financial
liability was imposed on him or her in lieu of criminal proceedings with
respect to a criminal offense that does not require proof of criminal intent;
and (iii) reasonable litigation expenses, including attorneys fees, incurred
by the office holder or charged to him or her by a court: (a) in a proceeding
instituted against the office holder by or on behalf of the company or by
another person, (b) in a criminal charge from which the office holder was
acquitted, or (c) in a criminal proceeding in which the office holder 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 with respect to a financial
liability imposed on the office holder by any judgment, settlement or
court-approved arbitration award, the undertaking is limited to types of events, which, in the opinion of
the companys board of directors, are, at the time of the undertaking,
foreseeable due to the 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.

-53-

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Limitations
on Exculpation, Insurance and Indemnification

The
Israeli Companies Law provides that a company may not enter into a contract for
the insurance of the liability of an office holder nor indemnify an office
holder nor exculpate an office holder from his or her liability to the company
for any of the following: (i) a breach by the office holder of his or her duty
of loyalty unless, with respect to indemnification and insurance coverage, the
office holder acted in good faith and had reasonable grounds to assume that the
act would not harm the company; (ii) a breach by the office holder of his or
her duty of care if the breach was committed intentionally or recklessly,
unless it was committed only negligently; (iii) any act or omission committed
with the intent to realize a personal illegal profit; or (iv) any fine or
monetary composition imposed on the office holder.

Under
the Israeli Companies Law, exculpation of, procurement of insurance coverage
for, and an undertaking to indemnify or indemnification of, an office holder
must be approved by the companys audit committee and board of directors and,
if such office holder is a director, also by the companys 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 $10 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.

NASDAQ
Marketplace Rules and Home Country Practices

NASDAQ
Marketplace Rule 4350, or Rule 4350, permits foreign private issuers, such as
our company, to follow certain home country corporate governance practices
instead of certain provisions of Rule 4350, without the need to seek individual
exemptions from NASDAQ provided that the foreign private issuer submits in
advance to NASDAQ a written statement from an independent 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 rules of the Securities and
  Exchange Commission and NASDAQ, on our audit committee. See above in this
  Item 6C. Directors, Senior Management and Employees - Board Practices -
  Independent and Outside Directors.

-54-

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 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, 2005, we employed 273 full-time employees in Israel, of which
157 were employed in manufacturing services, 36 in process and product
engineering, 30 in quality assurance and control, 13 in marketing and sales and
37 in finance, accounting, information service and administration.

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.

In
addition, as of December 31, 2005, Kubatronik, our subsidiary in Germany,
employed 37 full-time employees and 9 part-time employees, 32 full-time
employees and 9 part-time employees at December 31, 2004, and 32 full-time
employees and 2 part-time employees at December 31, 2003.

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.

-55-

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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 15.8% of base salaries to such plans and
employees contribute between 5.0% to 6.5% of base salaries. We also contribute
7.5% of base salaries to certain professional advancement funds for managers,
engineers and others and such employees contribute 2.5% of base salaries. 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. Subject to minimum thresholds, the employer
contribution to the National Insurance Institute is at the rate of 5.68% of the
salary and the employee contribution to the National Insurance Institute is at
the rate of 10.38% of the salary (of which 4.8% relates to payments for
national health insurance), both of which are limited to a maximum salary of
NIS 34,820 (approximately $7,600). In the year ended December 31, 2005, our
aggregate payments as an employer to the National Insurance Institute amounted
to approximately 5.6% of salaries.

|   |                  
|-- | -----------------
|E. | SHARE
  OWNERSHIP

Beneficial
Ownership of Executive Officers and Directors

The
following table sets forth certain information as of June 27, 2006 regarding
the beneficial ownership by each of our directors and executive officers:

|                  |                                                      |  |                                |  |      |   | 
|----------------- | ---------------------------------------------------- |  | ------------------------------ |  | ---- | - | 
|Name              | Number of Ordinary
  Shares
  Beneficially Owned (1) |  | Percentage of 
  Ownership (2)
|                  |                                                      |  |                                | 
|                 
|Nissim Gilam      | 30,000                                               |  | (3)                            |  | *    |  
|Arieh Reichart    | 115,515                                              |  | (4)                            |  | 2.0  | %
|Amnon Shemer      | 7,333                                                |  | (5)                            |  | *    |  
|Dan Eshed         | -                                                    |  |                                |  | -    |  
|Eli Dvora         | 23,500                                               |  | (3)                            |  | *    |  
|Moshe Leibovich   | 7,333                                                |  | (5)                            |  | *    |  
|Roberto Tulman    | 5,000                                                |  | (3)                            |  | *    |  
|Shlomo Danino     | -                                                    |  |                                |  | -    |  
|Vardit Dekel      | 3,000                                                |  | (3)                            |  | *    |  
|Ernst Winkler     | -                                                    |  |                                |  | -    |  
|David Banitt      | -                                                    |  |                                |  | -    |  
|Jack Bigio        | -                                                    |  |                                |  | -    |  
|Revital Degani    | -                                                    |  |                                |  | -    |  
|Joseph Maiman     | 1,859,253                                            |  | (6)                            |  | 27.0 | %
|Eliyaho Tov       | -                                                    |  |                                |  | -    |  
|Joseph Yerushalmi | -                                                    |  |                                |  | -    |  

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

-56-

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 5,624,011 ordinary shares issued and
  outstanding as of June 27, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | Subject to currently
  exercisable options granted under our 2005 Stock Option Plan, having an
  exercise price of NIS 21 ($4.56) per share, which options expire in December
  2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(4) | Includes
  30,000 ordinary shares subject to currently exercisable options granted under
  our 2005 Stock Option Plan, having an exercise price of NIS 21 ($4.56) per
  share, which options expire in December 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(5) | Of
  such shares, 3,333 ordinary shares are subject to currently exercisable
  options granted under our 2000 Stock Option Plan, having an exercise price of
  $1.14 per share, which options expire in November 2009 and 4,000 ordinary
  shares are subject to currently exercisable options granted under our 2005
  Stock Option Plan, having an exercise price of NIS 21 ($4.56) per share,
  which options expire in December 2007.                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(6) | Includes
  1,259,510 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.                   

-57-

---

---



Major
Shareholders Voting Rights

Our
major shareholders do not have different voting rights.

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.
The 1996 Plan will expire in December 2006.

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 December 31, 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 were at an exercise price of $1.375 per share and options to purchase
3,333 ordinary shares were 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.

-58-

---

---



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 Income Tax Ordinance (New Version), 1961, or 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | propose to grant awards under the 2000 Plan and
  recommend to the board of directors the persons to whom such awards be
  granted;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | 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);                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | prescribe the form and provisions of the notice of
  exercise and payment of the option;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | nominate a trustee for options issued under Section
  102 of the Israeli Tax Ordinance;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | 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;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | interpret the provisions of the 2000 Plan; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | 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.

-59-

---

---



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 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.

As
of December 31, 2005, options for the purchase of 138,400 ordinary shares had
been granted under the 2000 Plan (excluding options that expired without being
exercised), of which, options to purchase 118,400 ordinary shares having an
exercise price of $4.375 per share and options to purchase 20,000 ordinary
shares having an exercise price of $1.14 per share. Options to purchase 11,666
ordinary shares are currently exercisable under the 2000 Plan. Of the options
granted under the 2000 Plan (excluding options that expired without being
exercised), options to purchase 59,500 ordinary shares were granted to our
executive officers and the chairman of our board of directors, of which options
to purchase 6,666 ordinary shares are currently exercisable and options to
purchase 39,500 ordinary shares have been exercised.  We do not intend to grant any additional options under the 2000
Plan.

2005 Stock Option Plan

Our
2005 Stock Option Plan, or the 2005 Plan, was adopted at our 2005 annual
general meeting.

In
August 2000, our company granted options under the 2000 Plan to certain of our
employees, officers and the Chairman of our Board of Directors. The exercise
price of such options
was $4.375, which, except for limited periods of time, exceeded the market
price of our ordinary shares and the majority of the grantees did not exercise
these options prior to their expiration on July 31, 2005. In order to maintain
the interest of such individuals in our company in a manner that would defer
the optionees tax liability (if any) to the date that the options are
exercised and so that the underlying shares issued upon exercise of the options
will not be subject to a minimum lock-up period prior to the disposition
thereof, as provided under new Section 102(c) of the Israeli Income Tax
Ordinance that came into effect on January 1, 2003, we adopted the 2005 Plan,
which is designed to reflect the provisions of such new Section 102(c). Under
the 2005 Plan we have granted options to those optionees who did not exercise
their August 2000 options prior to the expiration, to the extent not exercised,
and a few additional employees.

-60-

---

---



Under
the 2005 Plan, up to an aggregate of 284,500 ordinary shares may be issued to
our Israeli directors, officers and employees. Options granted ­under the 2005
Plan may only be awarded in accordance with Section 102 (c) of the Israeli
Income Tax Ordinance. The 2005 Plan has a term of two years commencing on
December 11, 2005. No option grant may be made under the 2005 Plan after
December 31, 2005.

The
2005 Plan is currently administered by our Board of Directors. However, where
permitted under applicable law, the 2005 Plan may be administered by a stock
option committee appointed by the board of directors. Subject to the provisions
of the 2005 Plan, the board of directors has the authority, in its sole
discretion, among other things, to grant options under the 2005 Plan and to
determine their terms, to interpret the provisions of the 2005 Plan and,
subject to the requirements of applicable law, to prescribe, amend, and rescind
rules and regulations relating to the 2005 Plan or any options granted
thereunder.

The
exercise price per share of options granted under the 2005 Plan is NIS 21.  All options granted under the 2005 Plan are
fully vested upon their award. The period for which an option is granted under
the 2005 Plan is two years. 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 may be exercised during the lifetime of the optionee only
by the optionee or his or her guardian or legal representative. However, during
the optionees lifetime, the optionee may, with the consent of the board of
directors, transfer without consideration all or any portion of his options to
(i) one or more members of the optionees immediate family (as defined in the
2005 Plan), (ii) a trust established for the exclusive benefit of one or more
members of the optionees immediate family, or (iii) a limited liability
company in which all members are members of the optionees immediate family.

As
of December 31, 2005, options for the purchase of 284,500 ordinary shares had
been granted under the 2005 Plan at an exercise price of NIS 21 ($4.56) per
share. Such options are currently exercisable and expire in December 2007. No
additional options may be granted in the future under the 2005 Plan. Of the
options granted under the 2005 Plan, options to purchase 99,500 ordinary shares
were granted to our executive officers and the chairman of our board of
directors.

|        |                                                    
|------- | ---------------------------------------------------
|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED
  PARTY TRANSACTIONS

|                                                                                                                                                                                                       |                     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------
|A.                                                                                                                                                                                                     | MAJOR
  SHAREHOLDERS
|                                                                                                                                                                                                       |                     
|The
  following table sets forth certain information as of June 27, 2006 regarding the beneficial ownership by all
  shareholders known to us to own beneficially 5% or more of our ordinary
  shares:

|                              |                                                    |  |                                |  |      |   | 
|----------------------------- | -------------------------------------------------- |  | ------------------------------ |  | ---- | - | 
|Name                          | Number of Ordinary Shares
  Beneficially Owned (1) |  | Percentage 
  of Ownership (2)
|                              |                                                    |  |                                | 
|                             
|Joseph Maiman                 | 1,859,253                                          |  | (3)                            |  | 27.0 | %
|Merhav M.N.F. Ltd.            | 1,259,510                                          |  | (4)                            |  | 18.3 | %
|Integral International
  Inc. | 599,744                                            |  | (5)                            |  | 10.7 | %

-61-

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 5,624,011 ordinary shares issued and
  outstanding as of June 27, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | Includes
  1,259,510 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) | 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

As
of December 31, 2003 and 2004, Mr. Joseph Maiman beneficially held 1,409,896 and 2,015,956 ordinary
shares, respectively, representing approximately 28.9% and 36.7% of our then outstanding ordinary shares,
respectively. As at December 31, 2003 and 2004, Integral International Inc.
beneficially held 1,068,396 ordinary shares, representing approximately 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 Merhav 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 approximately 10.7% of our then outstanding shares
(excluding 1,136,803 ordinary shares issuable upon exercise of a currently exercisable
convertible note).

-62-

---

---



As
of December 31, 2005, Mr. Joseph Maiman beneficially held 1,798,563 ordinary shares,
representing approximately 26.4 % of
our then outstanding ordinary shares, and Integral International Inc.
beneficially held 599,744 ordinary shares, representing approximately 10.7 % of
our then outstanding shares.

Major
Shareholders Voting Rights

Our
principal shareholders do not have different voting rights attached to their
ordinary shares.

Record
Holders

Based
on a review of the information provided to us by our transfer agent, as of June
26, 2006, there were 21 holders of record of our ordinary shares, of which 13
record holders holding approximately 88.14% of our ordinary shares had
registered addresses in the United States and six record holders holding
approximately 11.65 % 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 87.77% of our outstanding ordinary shares as of such
date).

|   |                             
|-- | ----------------------------
|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 2005, we recorded interest and
exchange rate expenses of NIS 173,000 ($37,000) on the convertible note.

At the 2005
annual general meeting, our shareholders approved, pursuant to the
recommendation of our audit committee and board of directors, new terms of
compensation for Mr. Nissim Gilam, the Chairman of our Board of Directors, in
connection with his service in such capacity. See Item 6.C. Directors, Senior
Management and Employees - Board Practices - Directors Service Contracts.

-63-

---

---



|   |                                 
|-- | --------------------------------
|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 have
denied all liability under this claim and asserted that no agreement was
entered into between the parties, no compensation was agreed upon and that the
amount of the claim is baseless. In April 2005, the court referred the parties
to mediation proceedings. A mediation meeting was held in July 2005 and no
further meetings have been scheduled to date.

Since
the end of 2004, we have received correspondence from one of our customers alleging that we have caused the customer
to suffer damages between $120,000 to $500,000 due to our supplying allegedly
defective PCBs. We do not agree with the customers allegations and do not
believe that we are responsible for such damages. To our knowledge, no lawsuit
has been filed against us by the customer to date.

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 declared or paid any cash dividends to our shareholders. We
currently 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.

According
to the Israeli Companies Law, a company may distribute dividends out of its
profits provided that there
is no reasonable concern that such dividend distribution will prevent the
company from paying all its current and foreseeable obligations, as they become
due. Notwithstanding the foregoing, dividends may be paid with the
approval of a court, provided that there is no reasonable concern that such dividend distribution
will prevent the company from satisfying its current and foreseeable
obligations, as they become due. 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.

-64-

---

---



|   |                    
|-- | -------------------
|B. | SIGNIFICANT CHANGES
|   |                    
|   | None.              

|        |                        
|------- | -----------------------
|ITEM 9. | THE
  OFFER AND LISTING

|   |                         
|-- | ------------------------
|A. | OFFERAND 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 Capital Market:

|     |  |      |      |     |   |      | 
|---- |  | ---- | ---- | --- | - | ---- | 
|Year |  | High |      | Low |  
|     |  |      |      |     |  
|2001 |  | $    | 4.64 |     | $ | 1.50 | 
|2002 |  | $    | 1.91 |     | $ | 0.28 | 
|2003 |  | $    | 1.84 |     | $ | 0.31 | 
|2004 |  | $    | 2.84 |     | $ | 0.82 | 
|2005 |  | $    | 6.40 |     | $ | 1.21 | 

Quarterly
Stock Information

The
following table sets forth, for each of the full financial quarters in the two
most recent full financial years and any subsequent period, the range of high
ask and low bid prices of our ordinary shares on the NASDAQ Capital Market:

|               |  |      |      |     |   |      | 
|-------------- |  | ---- | ---- | --- | - | ---- | 
|               |  | High |      | Low |  
|               |  |      |      |     |  
|2004           |  |      |      |     |   |      | 
|               |  |      |      |     |   |      | 
|First Quarter  |  | $    | 2.84 |     | $ | 1.19 | 
|Second Quarter |  | $    | 2.30 |     | $ | 1.32 | 
|Third Quarter  |  | $    | 1.80 |     | $ | 0.95 | 
|Fourth Quarter |  | $    | 1.71 |     | $ | 0.82 | 
|               |  |      |      |     |   |      | 
|2005           |  |      |      |     |   |      | 
|               |  |      |      |     |   |      | 
|First Quarter  |  | $    | 6.40 |     | $ | 1.21 | 
|Second Quarter |  | $    | 4.50 |     | $ | 1.62 | 
|Third Quarter  |  | $    | 4.43 |     | $ | 1.68 | 
|Fourth Quarter |  | $    | 4.75 |     | $ | 3.61 | 
|               |  |      |      |     |   |      | 
|2006           |  |      |      |     |   |      | 
|               |  |      |      |     |   |      | 
|First Quarter  |  | $    | 5.35 |     | $ | 3.79 | 
|               |  |      |      |     |   |      | 

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 Capital
Market:

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|              |  |      |      |     |   |      | 
|------------- |  | ---- | ---- | --- | - | ---- | 
|Month         |  | High |      | Low |  
|              |  |      |      |     |  
|December 2005 |  | $    | 4.49 |     | $ | 3.61 | 
|January 2006  |  | $    | 5.35 |     | $ | 4.37 | 
|February 2006 |  | $    | 5.00 |     | $ | 4.30 | 
|March 2006    |  | $    | 4.97 |     | $ | 3.79 | 
|April 2006    |  | $    | 4.76 |     | $ | 3.70 | 
|May 2006      |  | $    | 4.60 |     | $ | 3.88 | 

|   |                       
|-- | ----------------------
|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 Capital Market
(symbol: ELTK).

|   |                     
|-- | --------------------
|D. | SELLING SHAREHOLDERS
|   |                     
|   | Not applicable.     
|   |                     
|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

Set
out below is a description of certain provisions of our memorandum of
association and articles of association and of the Israeli Companies Law
related to such provisions. This description is only a summary and does not
purport to be complete and is qualified by reference to the full text of the
memorandum of association and articles of association, which are incorporated
by reference as exhibits to this Annual Report, and to Israeli law.

Purposes
and Objects of the Company

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.

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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:

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
Distributions Policy. 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.

Unless
otherwise required by law, all resolutions require approval of no less than a
majority of the voting rights represented at the meeting in person or by proxy
and voting thereon.

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Pursuant
to our articles of association, our board of directors is divided into three
classes (other than outside directors). Generally, at each annual meeting of
shareholders one of such classes 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. For information regarding the election of our
outside directors, 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.

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 and if the agenda for the meeting includes certain matters
(including, among other things, the appointment or removal of directors), the notice
must be provided to shareholders at least 35 days in advance.

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.

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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 is adjourned by three
business days, at the same time and place, or any time and place as the board
of 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. We do not follow the requirements of the
NASDAQ Marketplace Rules regarding the quorum for any meeting of the holders of
common stock. See Item 6C. Directors, Senior Management and Employees - Board
Practices - NASDAQ Marketplace Rules and Home Country Practices.

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.

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.               

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|   |                    
|-- | -------------------
|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

The
following is a discussion of Israeli and United States tax consequences
material to our shareholders. To the extent that the discussion is based on tax
legislation which has not been subject to judicial or administrative
interpretation, the views expressed in the discussion might not be accepted by
the tax authorities in question or by court. The discussion is not intended,
and should not be construed, as legal or professional tax advice and does not
exhaust all possible tax considerations.

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

ISRAELI TAX CONSIDERATIONS

General Corporate Tax Structure

Israeli
companies are subject to Corporate Tax on their worldwide income. The
applicable rate for 2005 was 34%. The rate was reduced to 31% in 2006, and will
be further reduced to 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter. 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.

As
of December 31, 2005, we had tax loss carry-forwards of approximately NIS 65
million ($14.1 million), which can be offset against future income without time
limitation. However, of such amount, NIS 11.9 million ($2.6 million) relate to
tax years for which we have not as yet received final tax assessments.

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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 UnderThe 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.

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.

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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, 2005, one approved investment program is applicable to us. This
investment program is based on the alternative package of tax benefits track
and provides for a tax exemption on undistributed earnings derived from the
program for two years and a reduced tax rate for the remainder of the benefit
period. The benefit period with respect to such program has not yet commenced,
and will expire no later than 2016. However, the tax benefits with respect to
income derived out of the program, if any, may not be available to us due to
our noncompliance with a condition prescribed in the certificate of approval.
See Note 24.A of our financial statements.

In
April 2005, the Israeli legislature passed an amendment to the Investment Law
in which it revised the criteria for investments qualified to receive tax
benefits as an approved enterprise. The primary changes are as follows:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Companies that meet the criteria of the alternative
  package of tax benefits track will receive those benefits without need for
  prior approval, rather, a company may claim the tax benefits offered by the
  Investment Law directly in its tax returns. In addition, there will be no
  requirement to file reports with the Investment Center. Audits will be the
  responsibility of the Income Tax Authorities as part of their tax audits.
  Companies may also approach the Israeli Tax Authority for a pre-ruling
  regarding its eligibility for benefits under the April 2005 amendment.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Tax benefits of the alternative benefits track
  include lower tax rates or no tax depending on the area and the track chosen,
  lower tax rates on dividends and accelerated depreciation.                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In order to receive benefits in the grant track or
  the alternative benefit track, the industrial enterprise must contribute to
  the economic independence of the Israeli economy in one of the manners
  stipulated in the amended Investment Law. Tax benefits would be available,
  subject to certain conditions (described below), to production facilities
  that generally derive more than 25% of their annual revenue from export, or
  that do not derive 75% or more of their annual revenue in a single market.                                                                        

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Upon the establishment of an enterprise, an
  investment of at least NIS 300 thousand in production machinery and equipment
  within three years is required in order for the investment to qualify for the
  alternative benefits track. For an expansion of an enterprise under the
  alternative benefits track, a company is required to invest within three
  years in production machinery and equipment the greater of NIS 300 thousand
  or a certain percentage of its existing production machinery and equipment.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The April 2005 amendment to the Investment Law does
  not apply to investment programs having an Approved Enterprise approval
  certificate from the Investment Center issued prior to December 31, 2004.                                                                                                                                                                                                                                                                                                                 

In
April 2006, we applied to the Israeli Tax Authority for a pre-ruling regarding
our eligibility for benefits under the April 2005 amendment to the Investment
Law, and if such application is approved, we will apply to the Investment
Center to cancel our present approved enterprise program. We are seeking, under
the alternative benefits track, a tax exemption for two years and a tax rate of
25% thereafter. No assurance can be given that the ruling sought will be
granted or that we will be eligible to any benefits under the alternative
benefits track.

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.

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.

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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.

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.

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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.

Subject
to certain conditions non-Israeli residents will be tax exempt on capital gain
derived from investment in Israeli companies made 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.

Subject to certain transitional provisions relating to capital gains derived
from the sale of assets, including our shares, purchased prior to January 1,
2003, the tax rate on dividends and capital gains, including capital gain from
the sale of securities listed on a stock exchange, is generally a uniform rate
of 20% for individuals, 25% for substantial individual shareholders (who are,
generally, shareholders of 10% or more of the shares of the company on
the date of the sale of the shares or at any date during the 12 months before
the sale of the shares), and 25% for
corporate bodies.

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Under
the convention between the United States and Israel concerning taxes on income,
Israeli capital gains tax will generally not apply to the sale, exchange or
disposition of ordinary shares by a person who qualifies as a resident of the
United States within the meaning of the U.S.-Israel tax treaty. 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.

The
capital gain from the sale of our shares by non-Israeli residents would be tax
exempt as long as our shares are listed on the NASDAQ Capital 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 Capital 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 20% tax if the
shares are listed on a stock exchange recognized by the Israeli Ministry of
Finance. We believe that in 2005, 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 20% or 25%, as described above, subject to certain transitional provisions
relating to shares purchased before January 1, 2003, unless an exemption
or other tax rate applies in accordance with a tax treaty between Israel and
the shareholders country of residence.

On
the distribution of dividends other than bonus shares (stock dividends), income
tax applies at the rate of 20% or 25%, as described above, but is generally
withheld at source at the rate of 20% (or 25%, as described above if we are
delisted) 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.

-76-

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Taxation of Non-Resident Holders of Shares

Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in Israel. Such sources of income include passive income such as dividends,
royalties and interest, as well as non-passive income from services rendered in
Israel. On distributions of dividends other than bonus shares or stock
dividends, income tax at the rate of 20% for individual (25% for a substantive
individual shareholder (as described above) and 25% for corporate bodies (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 for a designated period, and
15% for dividends generated by an approved enterprise applies, unless a
different rate is provided for based on 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 and Withholding Taxes

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, as may
be applicable.

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

Until
December 31, 2005, stamp duty applied 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. Since January 1, 2006, there is no stamp duty in
Israel.

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:

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| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | broker-dealers,                                                                                                                      
| |   |                                                                                                                                      
| |  | financial institutions,                                                                                                              
| |   |                                                                                                                                      
| |  | certain insurance companies,                                                                                                         
| |   |                                                                                                                                      
| |  | regulated investment companies,                                                                                                      
| |   |                                                                                                                                      
| |  | investors liable for alternative minimum tax,                                                                                        
| |   |                                                                                                                                      
| |  | tax-exempt organizations,                                                                                                            
| |   |                                                                                                                                      
| |  | non-resident aliens of the U.S. or taxpayers whose
  functional currency is not the U.S. dollar,                                     
| |   |                                                                                                                                      
| |  | persons who hold the ordinary shares through
  partnerships or other pass-through entities,                                          
| |   |                                                                                                                                      
| |  | investors that actually or constructively own, or
  have owned, 10 percent or more of our voting shares, and                         
| |   |                                                                                                                                      
| |  | 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:

| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | an individual who is a citizen or, for U.S. federal
  income tax purposes, a resident of the United States;                           
| |   |                                                                                                                                       
| |  | a corporation or other entity created or organized
  in or under the laws of the United States or any political subdivision
  thereof;
| |   |                                                                                                                                       
| |  | an estate whose income is subject to U.S. federal
  income tax regardless of its source; or                                           

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| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 31-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.

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Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 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. 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.

-80-

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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 (i) 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, dividends would not qualify for
the reduced maximum tax rate, and, 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,

| |   |                                                                                                                                                                                                                                                                                                                                                                                    | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | 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,                                                                                                                                                                      | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | 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, | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | 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                                                                                                                                                                                                                     | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | 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.                                                                                                                                                                                                | 

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.

-81-

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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 (except that loss on a disposition of ordinary shares
is treated as capital loss to the extent the loss exceeds the net
mark-to-market gains, if any, that you included in income with respect to such
ordinary shares in prior years). Gain or loss from the disposition of ordinary
shares (as to which a mark-to-market election was made) in a year in which we
are no longer a PFIC, will be capital gain 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. | DIVIDENDS AND PAYING AGENTS
|   |                            
|   | Not applicable.            
|   |                            
|G. | STATEMENT BY EXPERTS       
|   |                            
|   | Not applicable.            

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|   |                     
|-- | --------------------
|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 100 F Street, N.E., Room 1580, 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.

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. We have engaged external consultants to assist us to manage our foreign
exchange risk. From time to time in the past we have engaged in hedging transactions
in order to partially protect ourselves from currency fluctuation and inflation
risks and may use hedging instruments from time to time 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.

-83-

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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 6.95% to 7.5% as of December 31, 2005;
and (ii) U.S. dollars and bear interest ranging from 6.27% to 6.39% as of
December 31, 2005. 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
$55,000.

|         |                                                         
|-------- | --------------------------------------------------------
|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.

|          |                                   
|--------- | ----------------------------------
|ITEM 16.  | [RESERVED]                        
|          |                                   
|ITEM 16A. | AUDIT
  COMMITTEE FINANCIAL EXPERT

-84-

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Our
Board of Directors has determined that Mr. Eliyaho Tov, an outside director,
meets the definition of an audit committee financial expert, as defined in Item
401 of Regulation S-K. For a brief listing of Mr. Tovs relevant experience,
see Item 6.A. Directors, Senior Management and Employees - Directors and
Senior Management.

|          |                 
|--------- | ----------------
|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
  ACCOUNTANT 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, Somekh Chaikin, a member firm of
KPMG International. All of such fees were pre-approved by our Audit Committee.

|                  |  |                           |         |      |  |         | 
|----------------- |  | ------------------------- | ------- | ---- |  | ------- | 
|                  |  | Year Ended
  December 31, |        
|                  |  |                           |        
|                  |  | 2004                      |         | 2005 | 
|                  |  |                           |         |      | 
|Services Rendered |  | Fees                      |        
|                  |  |                           |        
|                  |  | (In
  thousands)          |        
|Audit (1)         |  |                           | NIS 302 |      |  | NIS 511 | 
|Tax (2)           |  |                           | 13      |      |  | 28      | 
|Other             |  |                           | --      |      |  | --      | 
|Total             |  |                           | NIS 315 |      |  | NIS 539 | 

|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Audit fees relate to
  services that are normally provided in connection with statutory and
  regulatory filings or engagements, including services that generally only the
  independent registered public accounting firm can reasonably provide.
|    |                                                                                                                                                                                                                                                    
|(2) | 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 accounting firm, 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 require specific pre-approval by our audit committee. The policy prohibits retention of the independent
registered public accounting firm 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.

-85-

---

---



|          |                                                             
|--------- | ------------------------------------------------------------
|ITEM 16D. | EXEMPTIONS
  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not
applicable.

|          |                                                                         
|--------- | ------------------------------------------------------------------------
|ITEM 16E. | PURCHASES
  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Issuer
Purchase of Equity Securities

Neither
we nor any affiliated purchaser has purchased any of our securities during
2005.

PART III

|         |                       
|-------- | ----------------------
|ITEM 17. | FINANCIAL
  STATEMENTS

Consolidated
and Company Financial Statements.

| |                                                                          |    
| | ------------------------------------------------------------------------ | ---
| | Report of Independent
  Registered Public Accounting Firm                | F-1
| |                                                                          |    
| | Consolidated and Company Balance Sheets                                  | F-2
| |                                                                          |    
| | Consolidated and Company Statements of Operations                        | F-4
| |                                                                          |    
| | Consolidated and Company Statements of Changes in
  Shareholders Equity | F5 
| |                                                                          |    
| | Consolidated and Company Consolidated Statements of
  Cash Flows         | F-6
| |                                                                          |    
| | Notes to the Consolidated and Company Financial
  Statements             | F-9

|         |                       
|-------- | ----------------------
|ITEM 18. | FINANCIAL
  STATEMENTS

Not
applicable.

|         |         
|-------- | --------
|ITEM 19. | EXHIBITS

Index to Exhibits

| |         |  |             |                                                            
| | ------- |  | ----------- | -----------------------------------------------------------
| | Exhibit |  | Description
| |         |  |            
| | 1.1     |  |             | Memorandum of Association of the Registrant (1)            
| |         |  |             |                                                            
| | 1.2     |  |             | Articles of Association of the Registrant, as
  amended (2)
| |         |  |             |                                                            

-86-

---

---



| |      |  |  |                                                                                                                                                                                        
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 (3)                                                                                                                                                             
| |      |  |  |                                                                                                                                                                                        
| | 4.4  |  |  | 2005 Stock Option Plan (4)                                                                                                                                                             
| |      |  |  |                                                                                                                                                                                        
| | 4.5  |  |  | Services Factoring Agreement dated July 8, 2003 (5)                                                                                                                                    
| |      |  |  |                                                                                                                                                                                        
| | 4.6  |  |  | 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 (6)
| |      |  |  |                                                                                                                                                                                        
| | 4.7  |  |  | Extension of Put/Call Option Agreement among
  En-Eltek Netherlands 2000 B.V. and Mr. Alois Kubat dated May 4, 2005 (7)                                                                
| |      |  |  |                                                                                                                                                                                        
| | 8.1  |  |  | List of Subsidiaries of the Registrant                                                                                                                                                 
| |      |  |  |                                                                                                                                                                                        
| | 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                                  
| |      |  |  |                                                                                                                                                                                        
| | 15.1 |  |  | Consent of Somekh Chaikin, a member firm of KPMG
  International                                                                                                                       

| |     |                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (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 Exhibit 3.2 to
  our Annual Report on Form 20-F for the year ended December 31, 2003 and
  incorporated herein by reference.                                                                                           
| |     |                                                                                                                                                                                                                                 
| | (3) | Filed as Exhibit 10.4 to our
  Annual Report on Form 20-F for the year ended December 31, 2000 and
  incorporated herein by reference.                                                                                          
| |     |                                                                                                                                                                                                                                 
| | (4) | Filed as Appendix A to the
  Proxy Statement for our 2005 Annual General Meeting of Shareholders filed on
  Report of Foreign Private Issuer on Form 6-K for the month of November 2005,
  and incorporated herein by reference.
| |     |                                                                                                                                                                                                                                 
| | (5) | Filed as Exhibit 10.5 to
  our Annual Report on Form 20-F for the year ended December 31, 2002 and
  incorporated herein by reference.                                                                                          
| |     |                                                                                                                                                                                                                                 
| | (6) | Filed as Exhibit 4.5 to
  our Annual Report on Form 20-F for the year ended December 31, 2004 and
  incorporated herein by reference.                                                                                           
| |     |                                                                                                                                                                                                                                 
| | (7) | Filed as Exhibit 4.6 to
  our Annual Report on Form 20-F for the year ended December 31, 2004 and
  incorporated herein by reference.                                                                                           

-87-

---

---



|Eltek Ltd.                                                           
|---------------------------------------------------------------------
|                                                                     
|Consolidated and Company Financial Statements as of December 31, 2005
|                                                                     
|                                                                     

Contents

|                                                                                      | Page
|------------------------------------------------------------------------------------- | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm                               | F-1 
|                                                                                     
|Consolidated and Company Balance Sheets as of December 31, 2005 and 2004              | F-2 
|                                                                                     
|Consolidated and Company Statements of Operations for each of the years ended        
|December 31, 2005, 2004 and 2003                                                      | F-4 
|                                                                                     
|Consolidated and Company Statement of Changes in Shareholders' Equity for each of the
|years ended December 31, 2005, 2004 and 2003                                          | F-5 
|                                                                                     
|Consolidated and Company Statements of Cash Flows for each of the years ended        
|December 31, 2005, 2004 and 2003                                                      | F-6 
|                                                                                     
|Notes to the Consolidated and Company Financial Statements                            | F-9 

-88-

---

---

# Report of Independent
Registered Public Accounting Firm

The Board of Directors and Shareholders
 Eltek Ltd.

We have audited the accompanying
balance sheets of Eltek Ltd. (the Company) and the consolidated balance sheets
of the Company and its subsidiaries as of December 31, 2005 and 2004 and the related
consolidated and Company statements of operations, changes in shareholders equity,
and cash flows, for each of the years in the three-year period ended December 31, 2005.
These Company and consolidated financial statements are the responsibility of the
Companys Board of Directors and 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 financial
statements, referred to above present fairly, in all material respects, the financial
position of the Company and of the Company and its subsidiaries as of December 31, 2005
and 2004 and the results of their operations and cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with generally accepted
accounting principles in Israel.

As discussed in Note 2C, 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.

Generally accepted accounting
principles in Israel vary in certain significant respects from U.S. generally accepted
accounting principles. Information relating to the nature and effect of such differences
with respect to the financial statements of the Company and of the Company and its
subsidiaries is summarized in Note 28 to the financial statements.

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

Tel Aviv, Israel

April 4, 2006

F - 1

---

---

|Eltek Ltd.                               
|-----------------------------------------
|                                         
|Balance Sheets - Consolidated and Company
|                                         
|                                         
|Reported amounts (see Note 2B(6))        

|                          |  | Consolidated | Company | Convenience
translation
into US
Dollars
Consolidated
(Note 2H)
|------------------------- |  | ------------ | ------- | --------------------------------------------------------------
|
|
|
|
|Assets                    |  |              |         |                                                               
|                          |  |             
|Current assets            |  |             
|                          |  |             
|Cash and cash equivalents |  |              |         | 3                                                             
|                          |  |             
|Receivables:              |  |             
|                          |  |             
|Trade                     |  |              |         | 4                                                             
|Other                     |  |              |         | 5                                                             
|                          |  |             
|Inventories               |  |              |         | 6                                                             
|Prepaid expenses          |  |              |         |                                                               
|                          |  |              |         |                                                               
|                          |  |             
|Total current assets      |  |              |         |                                                               
|                          |  |              |         |                                                               
|                          |  |             
|Deferred taxes            |  |              |         | 24                                                            
|                          |  |              |         |                                                               
|                          |  |             
|Long-term investments     |  |              |         | 7                                                             
|                          |  |              |         |                                                               
|                          |  |             
|Property and              |  |             
|equipment, net            |  |              |         | 8                                                             
|                          |  |              |         |                                                               
|                          |  |             
|Goodwill                  |  |              |         | 1; 9                                                          
|                          |  |              |         |                                                               
|                          |  |             
|Total assets              |  |              |         |                                                               
|                          |  |              |         |                                                               

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

F - 2

---

---

|Eltek Ltd.                               
|-----------------------------------------
|                                         
|Balance Sheets - Consolidated and Company
|                                         
|                                         
|Reported amounts (see Note 2B(6))        

|                                  |  | Consolidated | Company | Convenience
translation
Consolidated
(Note 2H)
|--------------------------------- |  | ------------ | ------- | ----------------------------------------------
|
|
|
|
|Liabilities and                   |  |              |         |                                               
|shareholders' equity              |  |             
|                                  |  |             
|Current liabilities               |  |             
|Short-term credit and current     |  |             
|maturities of long-term debts     |  |              |         | 10                                            
|Trade payables                    |  |              |         | 11                                            
|Other liabilities and accrued     |  |             
|expenses                          |  |              |         | 12                                            
|                                  |  |              |         |                                               
|Total current liabilities         |  |              |         |                                               
|                                  |  |              |         |                                               
|Long-term liabilities             |  |             
|Long-term debts, excluding        |  |             
|current maturities                |  |              |         | 13                                            
|Employee severance                |  |             
|benefits, net                     |  |              |         | 14                                            
|                                  |  |              |         |                                               
|Total long-term liabilities       |  |              |         |                                               
|                                  |  |              |         |                                               
|                                  |  |             
|Minority interests                |  |              |         |                                               
|                                  |  |              |         |                                               
|                                  |  |             
|Convertible note                  |  |              |         | 16                                            
|                                  |  |              |         |                                               
|Commitments and                   |  |             
|contingent liabilities            |  |              |         | 15                                            
|Shareholders' equity              |  |              |         | 17                                            
|Ordinary shares, NIS 0.6          |  |             
|par value                         |  |             
|Authorized 50,000,000             |  |             
|shares, issued and                |  |             
|outstanding 5,602,511 shares      |  |             
|as of December 31, 2005           |  |             
|(5,491,711 shares as of           |  |             
|December 31, 2004)                |  |              |         |                                               
|Additional paid-in capital        |  |              |         |                                               
|Capital reserves related to loans |  |             
|from controlling shareholders     |  |              |         |                                               
|Cumulative foreign currency       |  |             
|translation adjustments           |  |              |         |                                               
|Capital reserves                  |  |              |         |                                               
|Accumulated deficit               |  |              |         |                                               
|                                  |  |              |         |                                               
|Total shareholders' equity        |  |              |         |                                               
|                                  |  |              |         |                                               
|Total liabilities and             |  |             
|shareholders' equity              |  |              |         |                                               
|                                  |  |              |         |                                               

|/s/ Arieh Reichart
Arieh ReichartPresident, Chief Executive Officer | /s/ Amnon Shemer
Amnon ShemerChief Financial Officer | /s/ Nissim Gilam
Nissim GilamChairman of the board of directors
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------ | -----------------------------------------------------------------------------

Date: April 4, 2006

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

F - 3

---

---

|Eltek Ltd.                                         
|---------------------------------------------------
|                                                   
|Statements of Operations - Consolidated and Company
|                                                   
|                                                   
|                                                   

|                                                      |  |  |  |    |  |  |          | ConvenienceTranslationinto US Dollars(Note 2H)
|----------------------------------------------------- |  |  |  | -- |  |  | -------- | ----------------------------------------------
|
|
|
|
|
|
|Revenues                                              |  |  |  | 18 |  |  | 108,303  |                                               
|Cost of revenues                                      |  |  |  | 19 |  |  | (102,643 | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|Gross profit                                          |  |  |  |    |  |  | 5,660    |                                               
|Research and development income (expenses), net       |  |  |  | 20 |  |  | 18       |                                               
|Selling, general and administrative expenses          |  |  |  | 21 |  |  | (14,996  | )                                             
|Amortization of goodwill                              |  |  |  | 9  |  |  | (584     | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|Operating income (loss)                               |  |  |  |    |  |  | (9,902   | )                                             
|Financial expenses, net                               |  |  |  | 22 |  |  | (2,989   | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|Income (loss) before other income (expenses), net     |  |  |  |    |  |  | (12,891  | )                                             
|Other income (expenses), net                          |  |  |  | 23 |  |  | (20      | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|Income (loss) before tax benefit (expenses)           |  |  |  |    |  |  | (12,911  | )                                             
|Tax  benefit (expenses)                               |  |  |  | 24 |  |  | (194     | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|Income (loss) after tax benefit (expenses)            |  |  |  |    |  |  | (13,105  | )                                             
|Company's share in losses of subsidiaries, net        |  |  |  | 7  |  |  | -        |                                               
|Minority interests                                    |  |  |  |    |  |  | 118      |                                               
|                                                      |  |  |  |    |  |  |          |                                               
|Net income (loss)                                     |  |  |  |    |  |  | (12,987  | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|                                                      |  | 
|Basic and diluted net earnings (loss) per NIS 1       |  | 
|par  value of the share capital***                    |  |  |  |    |  |  | (3.61    | )                                             
|                                                      |  |  |  |    |  |  |          |                                               
|                                                      |  | 
|Weighted average NIS 1 par value of share capital     |  | 
|used to compute basic and diluted net earnings (loss) |  |  |  |    |  |  | 3,569    |                                               
|                                                      |  |  |  |    |  |  |          |                                               

|* | See
Note 2B(6).
|- | ---------------

|** | See
Note 2B(5).
|-- | ---------------

|*** | 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

---

---

|Eltek Ltd.                                                             
|-----------------------------------------------------------------------
|                                                                       
|Statement of Changes in Shareholders' Equity (Consolidated and Company)
|                                                                       
|                                                                       
|                                                                       

|                                | Number ofordinaryShares** | Ordinaryshares | Additionalpaid-incapital | Capitalreservesrelated toloans fromcontrollingshareholders | Cumulativeforeigncurrencytranslationadjustments | Capitalreserves | Accumulateddeficit | Totalshareholders'equity
|------------------------------- | ------------------------- | -------------- | ------------------------ | ---------------------------------------------------------- | ----------------------------------------------- | --------------- | ------------------ | ------------------------
|
|
|
|
|Balance as of December 31, 2002 |                           |                |                          | 4,885,651                                                  |                                                 |                 | 29,334             |                         
|Changes during the year         |                           |               
|Foreign currency translation    |                           |               
|adjustments                     |                           |                |                          | -                                                          |                                                 |                 | -                  |                         
|Net loss                        |                           |                |                          | -                                                          |                                                 |                 | -                  |                         
|                                |                           |                |                          |                                                            |                                                 |                 |                    |                         
|Balance as of December 31, 2003 |                           |                |                          | 4,885,651                                                  |                                                 |                 | 29,334             |                         
|                                |                           |                |                          |                                                            |                                                 |                 |                    |                         

|                                   | * Reported amounts
|---------------------------------- | ------------------
|
|
|
|
|Balance as of January 1, 2004      |                   
|Changes during the year            |                   
|Conversion of convertible note     |                   
|Foreign currency translation       |                   
|adjustments                        |                   
|Net loss                           |                   
|                                   |                   
|Balance as of December 31, 2004    |                   
|Changes during the year            |                   
|Exercise of employee stock options |                   
|Foreign currency translation       |                   
|adjustments                        |                   
|Net income                         |                   
|                                   |                   
|Balance as of December 31, 2005    |                   
|                                   |                   

|                                    |  | US$ in thousands (Note 2H)
|----------------------------------- |  | --------------------------
|
|
|
|
|Convenience translation year        |  |                           
|ended December 31, 2005 (Unaudited) |  |                           
|                                    |  |                           

|* | See
Note 2B(6)
|- | --------------

|** | See
Note 2B(5).
|-- | ---------------

|*** | 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

---

---

|Eltek Ltd.                                         
|---------------------------------------------------
|                                                   
|Statements of Cash Flows - Consolidated and Company
|                                                   
|                                                   
|                                                   

|                                                                       |  |  |  |         |   |  | Conveniencetranslationinto US Dollars(Note 2H)
|---------------------------------------------------------------------- |  |  |  | ------- | - |  | ----------------------------------------------
|
|
|
|
|
|                                                                       |  |  |  |         |   |  |                                               
|Cash flows from operating activities                                   |  |  |  |         |   |  |                                               
|Net income (loss)                                                      |  |  |  | (12,987 | ) |  | (5,855                                        
|                                                                       |  | 
|Adjustments to reconcile net income (loss) to net                      |  | 
|cash flows provided by operating activities:                           |  | 
|Inflationary and exchange rate impact on long- term debts              |  |  |  | (706    | ) |  | 12                                            
|Depreciation                                                           |  |  |  | 14,938  |   |  | 13,428                                        
|Amortization of goodwill                                               |  |  |  | 584     |   |  | 593                                           
|Gain on disposal of fixed assets, net                                  |  |  |  | (200    | ) |  | (86                                           
|Company's share in losses of subsidiaries, net                         |  |  |  | -       |   |  | -                                             
|Minority interests                                                     |  |  |  | (118    | ) |  | (182                                          
|Increase (decrease) in employee severance benefits, net                |  |  |  | (62     | ) |  | 103                                           
|Decrease (increase) in trade receivables                               |  |  |  | 5,721   |   |  | (3,988                                        
|Decrease (increase) in other receivables and prepaid expenses          |  |  |  | 20      |   |  | 1,265                                         
|Increase in inventories                                                |  |  |  | (632    | ) |  | (379                                          
|Increase (decrease) in trade payables                                  |  |  |  | (503    | ) |  | 1,192                                         
|Increase (decrease) in other liabilities and accrued expenses          |  |  |  | 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                              |  |  |  | 6,551   |   |  | 7,949                                         
|                                                                       |  |  |  |         |   |  |                                               

|* | See
Note 2B(6).
|- | ---------------

|** | See
Note 2B(5).
|-- | ---------------

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

F - 6

---

---

|Eltek Ltd.                                                  
|------------------------------------------------------------
|                                                            
|Statements of Cash Flows - Consolidated and Company (cont'd)
|                                                            
|                                                            
|                                                            

|                                                       |  |  |  |        |   |  | Conveniencetranslationinto US Dollars(Note 2H)
|------------------------------------------------------ |  |  |  | ------ | - |  | ----------------------------------------------
|
|
|
|
|
|                                                       |  |  |  |        |   |  |                                               
|Cash flows used in investing activities:               |  |  |  |        |   |  |                                               
|Investment in subsidiary                               |  |  |  | -      |   |  | -                                             
|Purchase of fixed assets                               |  |  |  | (3,797 | ) |  | (1,470                                        
|Proceeds from sale of fixed assets                     |  |  |  | 304    |   |  | 188                                           
|                                                       |  |  |  |        |   |  |                                               
|Net cash used in investing activities                  |  |  |  | (3,493 | ) |  | (1,282                                        
|                                                       |  |  |  |        |   |  |                                               
|Cash flows provided by (used in) financing activities: |  | 
|Decrease in short- term credit                         |  |  |  | (1,388 | ) |  | (726                                          
|Repayment of long-term loans                           |  |  |  | (6,116 | ) |  | (6,164                                        
|Long-term loans received                               |  |  |  | -      |   |  | -                                             
|Exercise of employee stock options                     |  |  |  | -      |   |  | -                                             
|Issuance of convertible note                           |  |  |  | 2,166  |   |  | -                                             
|                                                       |  |  |  |        |   |  |                                               
|Net cash provided by (used in) financing activities    |  |  |  | (5,338 | ) |  | (6,890                                        
|                                                       |  |  |  |        |   |  |                                               
|Adjustments from translation of financial              |  | 
|statements of foreign entity                           |  |  |  | 414    |   |  | 126                                           
|                                                       |  |  |  |        |   |  |                                               
|Net increase (decrease) in cash and cash equivalents   |  |  |  | (1,866 | ) |  | (97                                           
|Cash and cash equivalents at beginning of the year     |  |  |  | 6,237  |   |  | 4,371                                         
|                                                       |  |  |  |        |   |  |                                               
|Cash and cash equivalents at end of the year           |  |  |  | 4,371  |   |  | 4,274                                         
|                                                       |  |  |  |        |   |  |                                               

|* | See
Note 2B(6).
|- | ---------------

|** | See
Note 2B(5).
|-- | ---------------

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

F -7

---

---

|Eltek Ltd.                                                  
|------------------------------------------------------------
|                                                            
|Statements of Cash Flows - Consolidated and Company (cont'd)
|                                                            
|                                                            
|                                                            

|                                    |  |  |  |   |  |  | Conveniencetranslationinto US Dollars(Note 2H)
|----------------------------------- |  |  |  | - |  |  | ----------------------------------------------
|
|
|
|
|
|                                    |  |  |  |   |  |  |                                               
|Supplemental Cash Flow Information  |  |  |  |   |  |  |                                               
|                                    |  | 
|Non-cash activities:                |  | 
|                                    |  | 
|Conversion of convertible note into |  | 
|share capital                       |  |  |  | - |  |  | 879                                           
|                                    |  |  |  |   |  |  |                                               

|* | See
Note 2B(6).
|- | ---------------

|** | See
Note 2B(5).
|-- | ---------------

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

F - 8

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 1 |  | General
|------ | - | -------

| | a. | 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, flex and flex rigid
circuit                boards for electronic equipment. The principal markets of the
Company are in                Israel and Europe.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | 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 and Note 2(E)(1)).
The excess of the                consideration paid over the fair value of 76% of the
shares of Kubatroniks                assets and liabilities was attributed to
goodwill.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
Company has recorded a profit of NIS 5.3 million in 2005 after three years
               of net losses, and as at December 31, 2005 has a working capital deficit
of NIS                7.3 million and an accumulated deficit of NIS 81.2 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is dependent upon bank credit to finance its operations. The credit lines and
facilities are subject to compliance with financial covenants and meeting its
projections.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
covenants in respect of the Companys credit facilities and long-term debt require
the Company to maintain the higher of shareholders equity of NIS 20.0 million or
20% of the Companys total assets. For these purposes, shareholders equity
includes the Companys outstanding convertible note and excludes prepaid expenses.
As of December 31, 2005, the Company was in compliance with such covenants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Such
factoring facilities are subject to the consent of the Companys banks that has been
granted until June 30, 2007.
| | ----------------------------------------------------------------------------------------------------------------------

| | 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 in January 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, 110,800 employee stock options were exercised into shares with capital contribution
of NIS 2,120 thousand.
| | -------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|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 acquired 76% of the shares of Kubatronik  Leiterplatten
GmbH (Kubatronik) for the consideration of  2.6 million (NIS 11.8
million as of the date of acquisition).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the agreement, the seller has until December 31, 2007, 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, until December 31, 2007. Through the date of these financial
statements the seller has not approached the Company to exercise the put option.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition resulted in the recognition of goodwill in the amount of 1.1 million
(NIS 5 million as of the date of acquisition)  see Note 9.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

|Note 2 |  | Significant Accounting Policies
|------ | - | -------------------------------

| | A. | Basis
of preparation of financial statements
| | -- | --------------------------------------------

| | 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 of America (U.S.
GAAP) as described in Note 28.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | 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.
| | --- | ----------------------------

| | (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.
| | --- | -----------------------------------------------------------------

F - 10

---

---

|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. | Definitions
(contd)
| | -- | --------------------

| | (d) | Interested
parties  as defined in Section 1 of the Israeli           Securities Law:
| | --- | -------------------------------------------------------------------------------------

| | (1) | 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | A
subsidiary of a company, other than a nominee company.
| | --- | --------------------------------------------------------

| | (2) | Subsidiaries  companies
whose financial statements are fully                consolidated with those of the
Company, whether held directly or indirectly.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | CPI  Israeli
consumer price index as published by the Israeli                Central Bureau of
Statistics.
| | --- | -----------------------------------------------------------------------------------------------------------

| | (4) | NIS  New
Israeli Shekels.
| | --- | --------------------------

| | (5) | Adjusted
amount  the nominal historical amount adjusted in                accordance
with the provisions of Opinions 23, 34, 36 and 37 of the ICPAI.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Adjusted
financial reporting  Financial reporting based on the                provisions
of Opinions 23, 34, 36, 37 and 50 of the ICPAI.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Nominal
financial reporting  Financial reporting based on reported
               amounts.
| | --- | -------------------------------------------------------------------------------------------

| | C. | Financial
statements reported New Israeli Shekels (NIS)
| | -- | -------------------------------------------------------

| | (1) | 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 for the effect of inflation was
discontinued as of                January 1, 2004. Until December 31, 2003, the Company
continued to prepare                adjusted financial statements in accordance with
Opinion No. 36 of the ICPAI.                The adjusted amounts included in the
consolidated and Company 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

|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. | Financial
statements reported New Israeli Shekels (NIS) (contd)
| | -- | ----------------------------------------------------------------

| | (2) | Amounts
of non-monetary assets do not necessarily reflect their realizable value
               or current 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) | The
financial statements of certain subsidiaries are stated on basis of the
               changes in the exchange rates of their relevant functional currencies.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Comparative
data for the year ended December 31, 2003 are stated on the basis of                the
adjusted CPI of 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 values as at           balance
sheet date.
| | -- | ----------------------------------------------------------------------------------------------------------

| | Statement
of operations:
| | ------------------------

| | a. | The
Companys equity in the operating results of investee companies and the
               share of minority shareholders in the results of subsidiaries are
determined on                the basis of the reported financial statements of those
companies.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Income
and expenses derived from non-monetary items 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
other income and expense items (such as sales, cost of revenues, etc.) are
               presented at their nominal values.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | D. | Translation
of foreign entity operations
| | -- | ----------------------------------------

| | 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 subsidiaries for the purpose of including them in the financial
statements of the reporting entity. The standard provides rules for classifying foreign
operations as 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 foreign investees, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|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)
|------ | - | ----------------------------------------

| | D. | Translation
of foreign entity operations (contd)
| | -- | -------------------------------------------------

| | The
financial statements of a foreign subsidiary are translated into Israeli currency as
follows:
| | -------------------------------------------------------------------------------------------------

| | (1) | The
assets and liabilities, both monetary and non-monetary, are translated
               according to the closing exchange rate including the goodwill arising upon
the                acquisition of the subsidiary.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Income
and expense items are translated according to the average exchange rate,
               on a quarterly basis.
| | --- | --------------------------------------------------------------------------------------------------------------------

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

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

| | F. | Rate
of exchange and linkage bases
| | -- | ----------------------------------

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

| | b. | Non-monetary
assets and liabilities denominated in, or linked to foreign           currencies have
been recorded based on the representative exchange rate           prevailing on the
transaction date as published by the Bank of Israel.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|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)
|------ | - | ----------------------------------------

| | F. | Rate
of exchange and linkage bases (contd)
| | -- | -------------------------------------------

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

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

| |                     | Israeli
CPI | Exchange rate
of one dollar | Exchange rate
of one Euro
| | ------------------- | ----------- | --------------------------- | -------------------------
|
|
|
|
| | For the year ended: |             |                             |                          
| | December 31, 2003   |             |                             |                          
| | December 31, 2004   |             |                             |                          
| | December 31, 2005   |             |                             |                          

| |                                | % | % | %
| | ------------------------------ | - | - | -
|
|
|
|
| | Changes during the year ended: |   |   |  
| | December 31, 2003              |   |   |  
| | December 31, 2004              |   |   |  
| | December 31, 2005              |   |   |  

| | G. | Estimates
and assumptions in the financial statements
| | -- | -----------------------------------------------------

| | The
preparation of the financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
are managements best estimates based on experience and historical data, however,
actual results may vary from these estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | H. | Unaudited
convenience translation
| | -- | ---------------------------------

| | For
the convenience of the reader, the reported consolidated NIS figures of December 31, 2005
have been presented in U.S. dollar thousands (unaudited), translated at the
representative rate of exchange as of December 31, 2005 (NIS 4.603 = U.S. Dollar 1.00).
The U.S. dollar amounts so presented should not be construed as representing amounts
receivable, payable or incurred in U.S. dollars or convertible into U.S. dollars.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|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. | Allowance
for doubtful accounts receivable
| | -- | ------------------------------------------

| | The
allowance for doubtful accounts receivable is determined based on managements
estimate of the aged receivable balance considered uncollectible, based on historical
experience, aging of the receivable and information available about specific debtors,
including their financial condition and volume of their operation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Inventories
| | -- | -----------

| | Inventories
are recorded at the lower of cost or market value. Cost is determined on the moving
average basis.
| | --------------------------------------------------------------------------------------------------------------

| | L. | 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:
| | --------------------------------------------

| |                                | Mostly | Range
| | ------------------------------ | ------ | -----
|
|
|
|
| | Machinery and equipment        |        |      
| | Office furniture and equipment |        |      
| | Motor vehicles                 |        |      
| | Leasehold improvements         |        |      

| | The
cost of maintenance and repairs is charged to expenses as incurred. The cost of
significant renewals and improvements is added to the carrying amount of the respective
asset.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Fixed
asset financing transactions
| | -- | ----------------------------------

| | The
Company signed financing agreements with two of its equipment suppliers (see Note 13B),
to acquire machinery and equipment with long-term payment terms. These acquisitions are
recorded in the financial statements as capital leases. Depreciation is computed by the
straight line method over the machinerys useful life.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|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. | Investments
in investee companies
| | -- | ---------------------------------

| | Investments
in subsidiaries are stated in the Company only financial statements under the equity
method, that is, at cost plus the Companys share of the post-acquisition gains or
losses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Amortization of Goodwill.
According to the standard, 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
also Note X(5) hereunder regarding an amendment to Accounting Standard No. 20.
| | ----------------------------------------------------------------------------------

| | N. | Deferred
taxes
| | -- | --------------

| | Effective
January 1, 2005, the Company applies Accounting Standard No. 19  Accounting
for Income 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 transition to the new standard did not have an
effect on the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
cannot reasonably determine the Companys ability to utilize at least part of the
net deferred 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 at least part of its
carryforward tax losses and therefore a deferred tax asset has been recorded (see Notes
24(H) and 24(I)).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|O. | Financial
instruments
|-- | ---------------------

| | The
financial statements include disclosures relating to the fair value of financial
instruments.
| | -------------------------------------------------------------------------------------------------

| | With
regard to current financial assets and liabilities and long-term liabilities, the
respective carrying values approximate their fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|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. | Convertible
note
| | -- | ----------------

| | Convertible
note is classified in the balance sheet based on the probability of its conversion, as
provided in Opinion 53 Accounting for Convertible Liabilities of the ICPAI.
Convertible notes, the conversion of which is not probable, are included as a liability
at their amortized cost liability amount. Convertible notes, the conversion of which is
probable, are stated between the items long-term liabilities and shareholders equity,
in accordance with the greater of their amortized cost or cost. See Note 16 and also Note
X(1) regarding Accounting Standard No. 22.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | Impairment
in value of assets
| | -- | -----------------------------

| | The
Company applies (for both Company and consolidated financial statements) Accounting
Standard No. 15  Impairment in Value of Assets (hereinafter  the standard).
The standard provides procedures which a company must apply in order to ensure that its
assets in the consolidated balance sheet (to which the standard applies), are not
presented at an amount which is in excess of their recoverable value, which is the higher
of the net selling price and the use value (the present value of the estimated future
cash flows expected to be derived from use and disposal of the asset).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
standard applies to all the assets in the consolidated balance sheet, deferred tax assets
and monetary assets (excluding monetary assets which are investments in investee
companies that are not subsidiaries). In addition, the standard provides rules for
presentation and disclosure with respect to assets whose value has been impaired. When
the value of an asset in the consolidated balance sheet is higher than its recoverable
value, the Company recognizes a loss from the impairment in value in the amount of the
difference between the book value of the asset and its recoverable value. The loss thus
recognized will be reversed only in the event of changes occurring in the estimates that
were used to determine the recoverable value of the asset since the date on which the
most recent loss from the decline in value was recognized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | 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 is able to factor receivables, with U
Bank on a non-recourse basis, provided that U Bank approves 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
Statement of Financial Accounting Standard (SFAS) No. 140, Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of Liabilitiesissued
by the Financial Accounting Standards Board.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
have been no instances in which the Company has had to reimburse U Bank for accounts
receivables as a result of a commercial dispute. The Company does not expect to make any
reimbursements in the foreseeable future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2005, net trade receivables amounting to NIS 2,435 thousand were factored
out of an avaliable NIS 4,603 thousand available (December 31, 2004  NIS 4,200
thousand) (See Note 15A).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|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)
|------ | - | ----------------------------------------

| | S. | Revenue
recognition
| | -- | -------------------

| | The
Company recognizes revenues when products are shipped and the customer takes ownership
and assumes risk of loss, collection of the relevant receivable is probable, persuasive
evidence of an arrangement exists and the sale price is fixable or determinable.
Commission income is accounted for on the accrual basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | 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. See also Note 20.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U. | Earnings
(loss) per 1 NIS par value of share capital
| | -- | ----------------------------------------------------

| | Earnings
(loss) per share have been calculated in accordance with Opinion No. 55 Earnings
per share of the ICPAI.
| | --------------------------------------------------------------------------------------------------------------------

| | The
calculation of the basic earnings (loss) per share takes into consideration convertible
securities that were issued by the Company if it is considered likely that they will be
converted or exercised in accordance with tests stipulated in opinions of the ICPAI.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
calculation of the diluted earnings (loss) per share takes into consideration convertible
securities issued by the Company and its investee companies that were not included in the
calculation of the basic earnings (loss) per share if their conversion or exercise does
not increase the earnings (decrease the loss) per share (i.e., does not have an
anti-dilutive effect).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | V. | 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 only if the current market price of the underlying stock exceeds the
exercise price on the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | Segment
reporting
| | -- | -----------------

| | Segment
reporting is presented according to Accounting Standard No. 11 of the IASB.
| | -----------------------------------------------------------------------------------

F - 18

---

---

|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)
|------ | - | ----------------------------------------

| | X. | Disclosure
of effect of new accounting standards in the pre-application                period
| | -- | ---------------------------------------------------------------------------------------------

| | 1. | In
July 2005, the IASB published Accounting Standard No. 22, Financial
               Instruments: Disclosure and Presentation (hereinafter  the
               Standard). The Standard provides rules for presenting financial
instruments in                the financial statements and specifies the proper
disclosure requirements.                Furthermore, the Standard provides the guidelines
for classifying financial                instruments as financial liabilities or
shareholders equity, for                classifying the interest, dividends, losses
and gains related to them and the                circumstances for offsetting financial
assets and financial liabilities. The new                standard will apply to financial
statements for periods beginning on January 1,                2006 or thereafter. The
standard provides that it is to be adopted on a                prospective basis. The
comparative data presented in the financial statements                for periods
beginning on the date the standard comes into effect will not be                restated.
The Companys management expects that the effect of the new                standard
will not have a material effect in the financial statements, except
               classification of the Companys convertible debentures net of the
issuance                costs into a liability component or an equity component.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2005, the IASB published Accounting Standard No. 24, Share-
               Based Payments (hereinafter  the Standard). The Standard
requires                that share-based payments, including transactions with employees
or other                parties that are to be settled by equity instruments, cash or
other assets, be                recognized in the financial statements. In accordance
with the standard,                share-based payment transactions in which goods or
services are received will be                recognized at their fair value. The Standard
will apply to financial statements                for periods beginning as from January
1, 2006 and early implementation is                recommended. The instructions of the
Standard should be applied to each                share-based payment transaction
executed after March 15, 2005 that has not yet                vested until the effective
date of the Standard. Furthermore, it is required                that comparative data
relating to periods after March 15, 2005 be restated.                Since the Companys
new stock option plan (see Note 17) is fully vested,                the new standard is
not expected to have a material effect on the financial                statements. This
standard may have a material effect if the Company adopts new                stock option
plans in the future, which cannot be determined at this point.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
February 2006, the IASB Accounting Standard No. 21, Earnings per Share
               (hereinafter  the Standard). The Standard provides that an entity
should                calculate basic earnings per share with respect to the earnings or
loss                attributable to the ordinary shareholders of the reporting entity and
with                respect to the earnings or loss from continuing operations
attributable to the                ordinary shareholders of the reporting entity if such
earnings or loss is                presented. The basic earnings per share will be
calculated by dividing the                earnings or loss attributable to the ordinary
shareholders of the reporting                entity (the numerator) with the weighted
average number of ordinary shares                outstanding (the denominator) during the
period. In order to calculate the                diluted earnings per share an entity
will adjust the earnings or loss                attributable to the ordinary shareholders
of the reporting entity, and the                weighted average number of outstanding
ordinary shares in respect of the effects                of all the dilutive potential
ordinary shares. The Standard will apply to                financial statements for
periods beginning on January 1, 2006 or thereafter. The                instructions of
the Standard regarding earnings per share are to be implemented
               retroactively on comparative data for prior periods. The implementation of
the                Standard will result in a basic earnings (loss) per share of NIS 0.94
and NIS                (1.07) for the years 2005 and 2004, respectively, and a diluted
earnings (loss)                per share of NIS 0.75 and NIS (1.07) for the years 2005
and 2004, respectively
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|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)
|------ | - | ----------------------------------------

| | X. | Disclosure
of effect of new accounting standards in the pre-application                period (contd)
| | -- | ------------------------------------------------------------------------------------------------------

| | 4. | In
February 2006, the IASB published Accounting Standard No. 25,                Revenues (hereinafter
 the Standard). The Standard provides                the required accounting
treatment (recognition, measurement, presentation and                disclosure
principles) of revenues derived from the selling of goods, the                rendering
of services, and the use of the entitys assets by others, which
               generate interest, royalties and dividends. The Standard provides that an
entity                is to measure its revenues according to the fair value of the
proceeds received                and/or the proceeds the entity is entitled to receive.
The Standard will apply                to financial statements for periods beginning on
January 1, 2006 or thereafter.                An entity that in the past did not present
its revenues according to the                requirements of the Standard regarding the
reporting of gross or net revenues,                will implement the requirements of the
Standard retroactively with respect to                its revenues for all the periods
reported as comparative figures in the                financial statements for periods
beginning from the date the Standard comes into                effect. Assets and
liabilities that are included in the financial statements as                at December
31, 2005 at amounts different from those that would have been                reported if
the instructions of the Standard had been implemented will be                adjusted as
at January 1, 2006 to the amounts that would have been reported                according
to the instructions of this Standard. The effect of adjusting the                amounts
of assets and liabilities as at January 1, 2006 as aforementioned, is
               required to be recognized as a cumulative effect of change in accounting
method.                Other than the aforementioned, the comparative figures in the
financial                statements for periods beginning from the date the Standard
comes into effect                will be presented as in the past. The new standard is
not expected to have any                effect on the Company and Consolidated financial
statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | In
March 2006, the IASB published an amendment to Accounting Standard No. 20,
               The Accounting Treatment of Goodwill and Intangible Assets when
Purchasing                an Investee Company (hereinafter  the Standard).
The new Standard                replaces Accounting Standard No. 20, Goodwill
Amortization Period.                In accordance with the Standard, goodwill and
intangible assets with an                indefinite useful life, which were identified at
the time of purchasing an                investee company, will not be amortized.
Instead, an examination of impairment                in value should be performed once a
year or more frequently if events or changes                in circumstances indicate
that there may have been an impairment in the value of                goodwill or of an
intangible asset with an indefinite useful life. The Standard                applies to
financial statements for periods beginning on January 1, 2006 or
               thereafter. The transition date for discontinuing the amortization of
goodwill                is January 1, 2006. Accordingly, an entity is to discontinue
amortizing goodwill                included in the financial statements, including
goodwill included in the balance                of an investment in an investee company
that is not a subsidiary, as at January                1, 2006. On the transition date,
the entity will also test for the impairment in                the value of goodwill in
accordance with Accounting Standard No. 15. The                financial statements for
periods in which this Standard was not implemented will                not be restated.
The amortization of the goodwill amounted to NIS 593, NIS 593                and NIS 584
for the years ended December 31, 2005, 2004 and 2003, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|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)
|------ | - | ----------------------------------------

| | X. | Disclosure
of effect of new accounting standards in the pre-application                period (contd)
| | -- | ------------------------------------------------------------------------------------------------------

| | 6. | In
February 2006, the IASB published Clarification No. 8, Reporting Revenues on
               a Gross or Net Basis (hereinafter  the Clarification).
               The Clarification provides that an entity acting as an agent or
intermediary                without bearing the risks and enjoying the rewards arising
from the transaction                will present its revenues on a net basis. On the
other hand, an entity acting as                a principal supplier that bears the risks
and enjoys the rewards arising from                the transaction will present its
revenues on a gross basis. The Clarification                provides a list of
indications that have to be examined in order to determine                whether the
revenues should be reported on a gross or net basis. The                Clarification
applies to financial statements for periods beginning on or after                January
1, 2006. The entity is required to retroactively implement the
               instructions of the clarification with respect to its revenues for all the
               periods reported as comparative data, which were not treated as prescribed
in                the Clarification. Implementation of the new Clarification is not
expected to                have any effect on the results of operations and financial
position of the                Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Y. | Derivative
financial instruments
| | -- | --------------------------------

| | (1) | The
gains and losses on derivative financial instruments held for hedging
               purposes in relation to existing assets and liabilities are recognized
               concurrently with the gains and losses on the hedged assets and
liabilities.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
gains and losses on derivative financial instruments held as hedging
               instruments for firm commitments and anticipated transactions are
deferred, and                are recognized in the same period in which the gains and
losses from the hedged                transactions are recognized.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Derivative
financial instruments, not held for hedging, are stated in the                financial
statements at their fair value. Changes in fair value are recognized                in
the Consolidated and Company statement of operations as financing item.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of derivative financial instruments is determined on the basis of their market
values or the quotations of financial institutions. In the absence of a market value or
financial institution quotation the fair value is determined on the basis of a valuation
model.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 3 |  | Cash and Cash Equivalents
|------ | - | -------------------------

| |              | Consolidated | Company
| | ------------ | ------------ | -------
|
|
|
|
| | NIS          |              |        
| | U.S. dollars |              |        
| | Euro         |              |        
| | Others       |              |        
| |              |              |        
| |              |              |        
| |              |              |        
| |              |              |        

| | As
for pledges on assets.  See Note 15A.
| | ----------------------------------------

F - 21

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 4 |  | Trade Receivables
|------ | - | -----------------

| |                                 | Consolidated | Company
| | ------------------------------- | ------------ | -------
|
|
|
|
| | Israeli customers               |              |        
| | Foreign customers               |              |        
| | Checks receivable               |              |        
| |                                 |              |        
| |                                 |              |        
| |                                 |              |        
| | Allowance for doubtful accounts |              |        
| |                                 |              |        
| |                                 |              |        
| |                                 |              |        
| |                                 |              |        

| | As
at December 31, 2005 one customer accounted for NIS 5,681 thousand of receivables (25% of
the total consolidated trade receivables) (Company  26.5%). As at December 31, 2004
one customer accounted for NIS 6,766 thousand of receivables (28.4% of the total
consolidated trade receivables) (Company  30.7%).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for pledges on assets.  See Note 15A.
| | ----------------------------------------

|Note 5 |  | Other Receivables
|------ | - | -----------------

| |                                   | Consolidated | Company
| | --------------------------------- | ------------ | -------
|
|
|
|
| | Employees                         |              |        
| | Subsidiary                        |              |        
| | Commissions and other receivables |              |        
| | Advances to suppliers             |              |        
| | Government of Israel and other    |              |        
| | institutions                      |              |        
| | Government of Germany             |              |        
| |                                   |              |        
| |                                   |              |        
| |                                   |              |        
| |                                   |              |        

F - 22

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 6 |  | Inventories
|------ | - | -----------

| |                   | Consolidated | Company
| | ----------------- | ------------ | -------
|
|
|
|
| | Raw materials:    |              |        
| | On hand           |              |        
| | In transit        |              |        
| | Work-in-process   |              |        
| | Finished products |              |        
| |                   |              |        
| |                   |              |        
| |                   |              |        
| |                   |              |        

|Note 7 |  | Long-Term Investments
|------ | - | ---------------------

| |                                                      | Company
| | ---------------------------------------------------- | -------
|
|
|
|
| | A.          Investments in subsidiaries:             |        
| |                                                      |        
| | Cost of shares and long-term loan                    |        
| | Loans to subsidiaries                                |        
| | Accumulated losses                                   |        
| | Adjustments from translation of financial statements |        
| |                                                      |        
| |                                                      |        
| |                                                      |        
| |                                                      |        

| |                                                            | Company
| | ---------------------------------------------------------- | -------
|
|
|
|
| | B.          Changes in the investments in subsidiaries     |        
| |                                                            |        
| | Balance at the beginning of the year                       |        
| |                                                            |        
| | Changes during the year:                                   |        
| | Share of losses                                            |        
| | Accrued loan interest and investments made during the year |        
| | Adjustments from the translation of financial statements   |        
| |                                                            |        
| |                                                            |        
| | Balance at the end of the year                             |        
| |                                                            |        

F - 23

---

---

|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
| | -- | ------------

| |                   | December 31, 2005
| | ----------------- | -----------------
|
|
|
|
| | Cost              |                  
| | Balance as of     |                  
| | December 31, 2004 |                  
| | Additions         |                  
| | Disposals         |                  
| | Translation       |                  
| | adjustments of    |                  
| | subsidiary        |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| |                   |                  
| |                   |                  
| | Accumulated       |                  
| | Depreciation      |                  
| | Balance as of     |                  
| | December 31, 2004 |                  
| | Depreciation      |                  
| | during the year   |                  
| | Disposals         |                  
| | Translation       |                  
| | adjustments of    |                  
| | subsidiary        |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2005 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2004 |                  
| |                   |                  

| | As
for pledges on assets.  See Note 15A.
| | ----------------------------------------

F - 24

---

---

|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
| | -- | -------

| |                   | December 31, 2005
| | ----------------- | -----------------
|
|
|
|
| | Cost              |                  
| | Balance as of     |                  
| | December 31, 2004 |                  
| | Additions         |                  
| | Disposals         |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| |                   |                  
| |                   |                  
| | Accumulated       |                  
| | Depreciation      |                  
| | Balance as of     |                  
| | December 31, 2004 |                  
| | Depreciation      |                  
| | during the year   |                  
| | Disposals         |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2005 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2004 |                  
| |                   |                  

| | As
for pledges on assets.  See Note 15A.
| | ----------------------------------------

F - 25

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 9 |  | Goodwill
|------ | - | --------

| |                                      | Consolidated
| | ------------------------------------ | ------------
|
|
|
|
| | Balance at the beginning of the year |             
| | Goodwill amortization                |             
| | Translation adjustments              |             
| |                                      |             
| |                                      |             
| |                                      |             
| |                                      |             

|Note 10 |  | Short-Term Credit and Current Maturities of Long-Term Debts
|------- | - | -----------------------------------------------------------

| |                    | Annualinterest rate atDecember 312005 | Consolidated and Company
| | ------------------ | ------------------------------------- | ------------------------
|
|
|
|
| | In NIS (unlinked)  |                                       |                         
| | In U.S. dollars    |                                       |                         
| | Current maturities |                                       |                         
| | of long-term       |                                       |                         
| | debts due to       |                                       |                         
| | banks (Note 13A)   |                                       |                         
| |                    |                                       |                         
| |                    |                                       |                         
| |                    |                                       |                         
| |                    |                                       |                         

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

| | 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. For these purposes, shareholders equity
includes the Companys outstanding convertible note and excludes prepaid expenses.
As of December 31, 2005, the Company was in compliance with such covenants. The Companys
management has programs and projects which it believes will enable it to continue these
terms.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

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---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 11 |  | Trade Payables
|------- | - | --------------

| |                                     | Consolidated | Company
| | ----------------------------------- | ------------ | -------
|
|
|
|
| | Israeli suppliers                   |              |        
| | Foreign suppliers                   |              |        
| |                                     |              |        
| |                                     |              |        
| | Checks payable                      |              |        
| |                                     |              |        
| |                                     |              |        
| |                                     |              |        
| |                                     |              |        
| | "Israeli suppliers" included        |              |        
| | current maturities of               |              |        
| | long-term debts related to          |              |        
| | fixed assets financing transactions |              |        
| | (Note 13B)                          |              |        
| |                                     |              |        

|Note 12 |  | Other Liabilities and Accrued Expenses
|------- | - | --------------------------------------

| |                                      | Consolidated | Company
| | ------------------------------------ | ------------ | -------
|
|
|
|
| | Accrued payroll and related benefits |              |        
| | Provision for vacation and other     |              |        
| | employee benefits                    |              |        
| | Government of Israel and other       |              |        
| | institutions                         |              |        
| | Accrued expenses                     |              |        
| | Other liabilities                    |              |        
| |                                      |              |        
| |                                      |              |        
| |                                      |              |        

F - 27

---

---

|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 Debts, Excluding Current Maturities
|------- | - | ---------------------------------------------

| | A. | Banks
| | -- | -----

| |                           | Annualinterest rate atDecember 312005 | Consolidated and Company
| | ------------------------- | ------------------------------------- | ------------------------
|
|
|
|
| | Linkage terms             |                                       |                         
| |                           |                                       |                         
| | U.S. dollar               |                                       |                         
| | CPI                       |                                       |                         
| | Unlinked                  |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| | Less - current maturities |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         

| | 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. For these purposes, shareholders equity
includes the Companys outstanding convertible note and excludes prepaid expenses.
As of December 31, 2005, the Company was in compliance with such covenants. The Companys
management has programs and projects which it believes will enable it to continue these
terms.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Long-term
debt related to fixed assets financing transactions
| | -- | -------------------------------------------------------------

| |                           |  |  |       
| | ------------------------- |  |  | ------
|
|
|
|
| | U.S. dollars linked       |  |  | 4-4.89
| |                           |  | 
| | Less - current maturities |  |  |       
| |                           |  |  |       
| |                           |  |  |       
| |                           |  |  |       
| | Total long-term debt      |  |  |       
| |                           |  |  |       

F - 28

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---

|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 Debts, 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, 2005 are as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------

| |                                 | Consolidated and Company
| | ------------------------------- | ------------------------
|
|
|
|
| | First year (current maturities) |                         
| |                                 |                         
| |                                 |                         
| | Second year                     |                         
| | Third year                      |                         
| | Fourth year                     |                         
| | Fifth year and thereafter       |                         
| |                                 |                         
| |                                 |                         
| |                                 |                         
| |                                 |                         
| |                                 |                         

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

|Note 14 |  | Employee Severance Benefits, net
|------- | - | --------------------------------

| | Under
Israeli law and labor agreements, the Company is required to make severance and pension
payments to their retired or dismissed employees and to employees leaving employment in
certain other circumstances.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | The
liability in respect of most of its non-senior employees is discharged by
               participating in a defined contribution pension plan and making regular
deposits                with a pension fund. The liability deposited with the pension
fund is based on                salary components as prescribed in the existing labor
agreement. The custody and                management of the amounts so deposited are
independent of the Company and                accordingly, such amounts funded (included
in expenses on an accrual basis) and                related liabilities are not reflected
in the balance sheet.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, occasionally, the Company 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
respect of the liability to other employees, individual insurance policies
               are purchased and deposits are made with recognized severance pay funds.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
liability for severance pay is calculated on the basis of the latest salary paid to each
employee multiplied by the number of years of employment. The liability is covered by the
amounts deposited including accumulated income thereon as well as by the unfunded
provision.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|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)
|------- | - | -----------------------------------------

| | 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 liabilities 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:
| | -- | --------------------------------------------

| |                                    | Consolidated | Company
| | ---------------------------------- | ------------ | -------
|
|
|
|
| | Liability for employee             |              |        
| | severance benefits                 |              |        
| |                                    |              |        
| | Assets held for severance benefits |              |        
| |                                    |              |        
| |                                    |              |        
| | Employee severance benefits, net   |              |        
| |                                    |              |        

|Note 15 |  | Commitments and Contingent Liabilities
|------- | - | --------------------------------------

| | A. | 1. | The
Company has pledged certain items of its equipment and the rights to any
               insurance claims on such items 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 machine and a computer system to suppliers to           secure
its indebtedness.
| | -- | ---------------------------------------------------------------------------------------------------------------

| | 4. | In
June 2003, the Company signed a factoring agreement with U Bank, pursuant to
          which the Company was provided with a $ 1.0 million of factoring facility, in
          consideration for the assignment to U Bank of an equal amount of its accounts
          receivable. Such factoring facilities are subject to the consent of the
          Companys banks that has been granted until June 30, 2007.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
Company has signed an 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 agreed to pay bonuses to the consulting company based on
          its success. In the year ended December 31, 2004, the consulting company was
not           entitled to a bonus. During the year ended December 31, 2005, the
consulting           company was entitled to a bonus of NIS 517 thousand. The agreement
will expire           on September 30, 2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

|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. | 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                denied liability and claimed 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 effect
on its financial position or results                of its operations. The claim has been
diverted by the court to mediation. A                mediation meeting took place in July
2005. No further meetings have been                scheduled.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | As
of December 31, 2005, the Company and Kubatronik are committed to purchase
               equipment, services and inventories costing approximately NIS 3.7 million
               (Company  NIS 3.6 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 lease and maintenance agreements for production
          equipment with supplier of equipment. Of such agreements, two principal
          agreements will expire in September 2009 and March 2010.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Three
production machines are leased under operating agreements which will           expire in
September 2007, January 2008 and April 2009.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
Company has signed several other maintenance agreements for production
          equipment and software.
| | -- | ------------------------------------------------------------------------------------------------------------

| | 6. | The
majority of the Companys motor vehicles are leased under three year
          operating agreements.
| | -- | --------------------------------------------------------------------------------------------------------

| | 7. | Minimum
future payments due under the above agreements are as follows:
| | -- | ----------------------------------------------------------------------

| |                           | Consolidated | Company
| | ------------------------- | ------------ | -------
|
|
|
|
| | First year                |              |        
| | Second year               |              |        
| | Third year                |              |        
| | Fourth year               |              |        
| | Fifth year and thereafter |              |        
| |                           |              |        
| |                           |              |        
| |                           |              |        
| |                           |              |        

| | Payments
required under operating lease agreements are charged to expense by the straight-line
method over the periods of the respective leases.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|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 an 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 shareholders equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Concentration
of credit risk
| | -- | ----------------------------

| | Financial
instruments that may subject the Company to significant concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
and cash equivalents are deposited with major financial institutions in Israel and in
Germany.
| | ---------------------------------------------------------------------------------------------------

| | The
Company grants credit to customers without generally requiring collateral or security.
The Company performs ongoing credit control of the financial condition of its customers.
The risk of collection associated with trade receivables is reduced by credit insurance
policy that covers a material part of the trade receivables and by the large number and
geographical dispersion of the Companys customer base.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
also Note 25.
| | -----------------

|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 Ltd.  an Israeli private company controlled by
the Companys major shareholder (Merhav).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Note is due four years from its issuance date and 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, which was the
price of the share at the time the terms of the Note were concluded. The Company may in
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, 2005, the Note including accrued interest is convertible into 1,198,173
ordinary shares which at such date would have constituted 17.6% of the Companys
ordinary shares after conversion.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|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 outstanding share capital in historical terms is as           follows:
| | -- | ---------------------------------------------------------------------------------------------

| |                                           | Authorized | Issued and outstanding
| | ----------------------------------------- | ---------- | ----------------------
|
|
|
|
| | Number of shares:                         |            |                       
| | Ordinary Shares of par value NIS 0.6 each |            |                       
| | Amount in nominal NIS:                    |            |                       
| | Ordinary Shares of par value NIS 0.6 each |            |                       

| | B. | Options
| | -- | -------

| | In
August 2000, the Company adopted the Eltek Ltd. 2000 Stock Option Plan (the 2000
Plan). The 2000 Plan authorized the issuance of options to purchase an aggregate of
750,000 ordinary shares. The options generally (i) expire on the fifth anniversary of the
date 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 prices of these options are
equal to the market price of the underlying stock on the date of the grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, options for the purchase of 7,600 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 were outstanding under the 2000 Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Besides
the above mentioned options, the Company does not intend to grant additional options
under the 2000 plan.
| | -----------------------------------------------------------------------------------------------------------------

| | In
November 2005, the Board of Directors of the Company adopted and the Shareholders
subsequently approved the Eltek Ltd. 2005 Stock Option Plan (the 2005 Plan).
The aggregate number of options issued under the 2005 Plan amounted to 284,500 options.
The options will expire two years from the date of the Shareholders Approval of
such plan, which was December 11, 2005, and no awards may be made under the 2005 Plan
after December 31, 2005. Options granted under the 2005 Plan were fully vested upon their
award, and each option was designated as a Section 102(c) option of the Israeli tax
ordinance. The exercise price per option was set to NIS 21 which equals the market price
of the Companys ordinary shares on date of grant. See Note 24B.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

|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)
| | -- | ----------------

| | The
option exercise price per share is NIS 21.
| | ----------------------------------------------

| | A
summary of the Companys option plans and the options that were granted to the
Companys employees and to the chairman of the board of directors is presented
below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                 |  | Number
of
options | Weighted
average
exercise price
| | ------------------------------- |  | ----------------- | -------------------------------
|
|
|
|
| | Balance as at December 31, 2002 |  |                   |                                
| |                                 |  |                   | Expired                        
| |                                 |  |                   | Forfeited                      
| |                                 |  |                   |                                
| | Balance as at December 31, 2003 |  |                   |                                
| |                                 |  |                  
| |                                 |  |                   | Granted                        
| |                                 |  |                   | Expired                        
| |                                 |  |                   | Forfeited                      
| |                                 |  |                   |                                
| | Balance as at December 31, 2004 |  |                   |                                
| |                                 |  |                  
| |                                 |  |                   | Granted                        
| |                                 |  |                   | Exercised                      
| |                                 |  |                   | Expired                        
| |                                 |  |                   | Forfeited                      
| |                                 |  |                   |                                
| |                                 |  |                  
| | Balance as at December 31, 2005 |  |                   |                                
| |                                 |  |                   |                                

| | * | Equal
to NIS 21 at December 31, 2005.
| | - | -------------------------------------

| | The
following table summarizes information concerning options outstanding at December 31,
2005.
| | -----------------------------------------------------------------------------------------------

| | Exercise prices | Number of
options
outstanding at
December 31
2005 | Number of
options
exercisable at
December 31
2005 | Remaining
contractual life
(in years)
| | --------------- | ------------------------------------------------- | ------------------------------------------------- | -------------------------------------
|
|
|
|
| | U.S.$           |                                                   |                                                   |                                      
| | U.S.$           |                                                   |                                                   |                                      
| | NIS             |                                                   |                                                   |                                      
| |                 |                                                   |                                                   |                                      
| |                 |                                                   |                                                   |                                      
| |                 |                                                   |                                                   |                                      

F - 34

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 18 |  | Revenues
|------- | - | --------

| | Revenues
by activities
| | ----------------------

| |               | Consolidated (1) | Company (2)
| | ------------- | ---------------- | -----------
|
|
|
|
| | Sales of      |                  |            
| | manufactured  |                  |            
| | products      |                  |            
| | Sales of non- |                  |            
| | manufactured  |                  |            
| | products      |                  |            
| | Commissions   |                  |            
| |               |                  |            
| |               |                  |            
| |               |                  |            
| |               |                  |            

| | * | Adjusted
amounts, see Note 2B(5).
| | - | ---------------------------------

| | (1) | During
the year ended December 31, 2005, one customer accounted for NIS 44,213
               thousand (30.6% of the total consolidated revenues).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2004, one customer accounted for NIS 15,359 thousand (12.3%
of the total consolidated revenues).
| | -----------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2003, there was no customer who accounted for more than 10%
of the total consolidated revenues.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | (2) | During
the year ended December 31, 2005, the Company had one customer who
               accounted for NIS 44,213 thousand (34.4% of the total Companys
revenues).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 total Companys
revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

|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
|------- | - | ----------------

| |                | Consolidated | Company
| | -------------- | ------------ | -------
|
|
|
|
| | Cost of        |              |        
| | materials      |              |        
| | and non-       |              |        
| | manufactured   |              |        
| | products (1)   |              |        
| | Payroll and    |              |        
| | related        |              |        
| | benefits       |              |        
| | Manufacturing  |              |        
| | expenses       |              |        
| | Depreciation   |              |        
| | Changes in     |              |        
| | inventories of |              |        
| | finished       |              |        
| | products       |              |        
| | and work-in-   |              |        
| | process**      |              |        
| |                |              |        
| |                |              |        
| |                |              |        
| |                |              |        

| | * | Adjusted
amounts, see Note 2B(5).
| | - | ---------------------------------

| | ** | Including
changes in inventories of non-manufactured products.
| | -- | --------------------------------------------------------------

| | (1) | During
the year ended December 31, 2005, one major supplier accounted for NIS
               10,384 thousand (22.4% of the total consolidated materials and
non-manufactured                products purchase costs) (Company  NIS 10,384
thousand (23.6%)).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|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
| | -------------------------------------- | ------------------------
|
|
|
|
| | Payroll and payments to subcontractors |                         
| |                                        |                         
| | Raw materials                          |                         
| |                                        |                         
| | Depreciation                           |                         
| |                                        |                         
| | Approved grants from  the OCS          |                         
| |                                        |                         
| |                                        |                         
| |                                        |                         
| |                                        |                         

| | * | Adjusted
amounts. See Note 2B(5).
| | - | ---------------------------------

| | In
2005, the Company was granted membership in OptiPac, a consortium within the framework of
the MAGNET program of the OCS. The OptiPac target is to develop generic electro-optical
packaging technologies for optical fiber based telecommunication systems and for several
other industries and applications.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the consortium, each member of the consortium is 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 reimburses 66% of such approved research and
development expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
reimbursements are contingent upon the Company submitting periodic reports prepared in
accordance with the requirement of the OCS but are not contingent upon royalties or any
future payments being made by the Company. The Company has been in compliance with such
OCS requirements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

|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
|------- | - | --------------------------------------------

| |              | Consolidated | Company
| | ------------ | ------------ | -------
|
|
|
|
| | Payroll and  |              |        
| | related      |              |        
| | benefits     |              |        
| | Commissions  |              |        
| | Export and   |              |        
| | delivery     |              |        
| | expenses     |              |        
| | Office       |              |        
| | maintenance  |              |        
| | Traveling    |              |        
| | Depreciation |              |        
| | Professional |              |        
| | services     |              |        
| | Car          |              |        
| | maintenance  |              |        
| | Investors    |              |        
| | relations    |              |        
| | Other        |              |        
| |              |              |        
| |              |              |        
| |              |              |        
| |              |              |        

| | * | Adjusted
amounts. See Note 2B(5).
| | - | ---------------------------------

F - 38

---

---

|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
|------- | - | -----------------------

| |                  | Consolidated | Company
| | ---------------- | ------------ | -------
|
|
|
|
| | Interest and     |              |        
| | exchange rates   |              |        
| | Expenses on      |              |        
| | long- term loans |              |        
| | net of monetary  |              |        
| | erosion          |              |        
| | Expenses on      |              |        
| | short-term       |              |        
| | credit and bank  |              |        
| | charges net of   |              |        
| | monetary         |              |        
| | erosion          |              |        
| | Effect of        |              |        
| | exchange rate    |              |        
| | differences      |              |        
| | expenses  and    |              |        
| | net gain from    |              |        
| | derivative       |              |        
| | instruments      |              |        
| | Expenses on      |              |        
| | convertible      |              |        
| | note             |              |        
| | Other financing  |              |        
| | expenses         |              |        
| | (income), net    |              |        
| |                  |              |        
| |                  |              |        
| |                  |              |        

| | * | Adjusted
amounts.  See Note 2B(5).
| | - | ----------------------------------

|Note 23 |  | Other Income (Expenses), Net
|------- | - | ----------------------------

| |                   | Consolidated | Company
| | ----------------- | ------------ | -------
|
|
|
|
| | Indemnification   |              |        
| | to customer       |              |        
| | Gain on           |              |        
| | disposals of      |              |        
| | fixed assets, net |              |        
| | Customs charges   |              |        
| | Other expenses    |              |        
| |                   |              |        
| |                   |              |        
| |                   |              |        

| | * | Adjusted
amounts.  See Note 2B(5).
| | - | ----------------------------------

F - 39

---

---

|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)
| | -- | ----------------------------------------------------------------------------------------

| | 1. | 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, one                approved investment program is 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 period of tax benefit relating to one of these
programs have not yet commenced, and will expire no later than 2016 and expired in 2005
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 34% in 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Amendments
to the Law
| | -- | ---------------------

| | On
March 30, 2005, the Israeli Parliament approved a reform of the above Law. The primary
changes are as follows:
| | -----------------------------------------------------------------------------------------------------------------

| | (a) | Companies
that meet the criteria of the Alternative Benefit track tax benefits           will
receive those benefits without prior approval. In addition, there will be           no
requirement to file reports with the Investment Center. Audits will be the
          responsibility of the Income Tax Authorities as part of their tax audits.
          Request for pre-ruling is possible.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Tax
benefits of the Alternative track include lower tax rates or no tax           depending
on area and the path chosen, lower tax rates on dividends and           accelerated
depreciation.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

|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 (contd)
|------- | - | ------------------------

| | A. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959(the
Law)
| | -- | ----------------------------------------------------------------------------------------

| | 2. | Amendments
to the Law (contd)
| | -- | ------------------------------

| | (c) | In
order to receive benefits in the Grant Path or the Alternative Benefit track,
               the industrial enterprise must contribute to the economic independence of
the                Israels economy in one of the following ways:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Its
primary activity is in the Biotechnology or Nanotechnology fields and
          pre-approval has been obtained from the head of research and development at the
          OCS;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Its
revenue from a specific country is not greater than 75% of its total           revenues
that year;
| | -- | ------------------------------------------------------------------------------------------------------

| | 3. | 25%
or more of its revenues are derived from a specific market of at least 12
          million residents.
| | -- | ----------------------------------------------------------------------------------------------------------

| | (d) | Upon
the establishment of an enterprise, an investment of at least NIS 300
               thousand in production machinery and equipment within three years is
required.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | For
an expansion, a company is required to invest within three years the greater
               of NIS 300 thousand in production machinery and equipment or a certain
               percentage of its existing production machinery and equipment.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amendment to the Law does not retroactively apply for investment programs having an
Approved Enterprise approval certificate from the Investment Center issued prior to
December 31, 2004. Therefore, the amendments do not impact an existing Approved
Enterprise which received written approval. The new tax regime shall apply for a new
Approved Enterprise and for an Approved Enterprise expansion for which the first year of
benefits is 2004 or thereafter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
deduction 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 deduction is allowed to the Company. There are detailed provisions for
implementing these tracks. The tax reforms new regulations do not apply for options
granted before December 31, 2002. The options granted by the Company during 2004 and 2005
were granted pursuant the Capital Gains Route.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

|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 (contd)
|------- | - | ------------------------

| | C. | Amendments
to the Income Tax Ordinance
| | -- | --------------------------------------

| | 1. | On
June 29, 2004, the Knesset (the Israeli Parliament) passed the Law for
               the Amendment of the Income Tax Ordinance (Amendment No. 140 and Temporary
               Order)  2004 (the 2004 Amendment). The 2004
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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
July 25, 2005 the Knesset passed the Law for the Amendment of the Income Tax
               Ordinance (No. 147 and Temporary Order) 2005 (the 2005 Amendment).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
2005 Amendment provides for a gradual reduction in the corporate tax rate in the
following manner: in 2006 the tax rate will be 31%, in 2007 the tax rate will be 29%, in
2008 the tax rate will be 27%, in 2009 the tax rate will be 26% and from 2010 onward the
tax rate will be 25%. Furthermore, as from 2010, upon reduction of the company tax rate
to 25%, real capital gains will be subject to tax of 25%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that both Amendments will have no significant impact on its financial
position or results of operations, since it had not recognized deferred tax assets as of
December 31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Adjustments
for inflation
| | -- | -------------------------

| | The
Income Tax Law (Inflationary Adjustments)  1985 (hereinafter  the Law) is
effective as from the 1985 tax year. The Law introduced the concept of measurement of
results for tax purposes on a real (net of inflation) basis. The various adjustments
required by the aforesaid law are designed to achieve taxation of income on a real basis.
However, the earnings adjusted according to the tax laws are not always identical to the
earnings reported according to the accounting standards of the Israel Accounting Standard
Board. As a result, differences arise between the reported income in the financial
statements and the adjusted income for tax purposes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Carryforward
tax losses
| | -- | -----------------------

| | As
of December 31, 2005, the total consolidated tax loss carryforward was approximately NIS
65 million (Company  NIS 59.3 million). The carry-forward losses in Israel are
linked to the Consumer Price Index in accordance with the law mentioned in D above,
except for those of the subsidiary that keeps its books in foreign currency, and which
are linked to the change in the foreign currency exchange rate. As discussed in Note 2N
above, the Company has not recorded a deferred tax asset in respect of these losses,
other than as noted below, due to the uncertainty as to whether such assets will be
realized in the foreseeable future. These losses do not have expiry dates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the consolidated balance sheet, a deferred tax asset has been recorded in respect of tax
loss carryforward of a foreign subsidiary recorded prior to December 31, 2004 in the
amount of NIS 697 thousand. These losses do not have expiry dates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

|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 (contd)
|------- | - | ------------------------

| | F. | Income
tax assessments
| | -- | ----------------------

| | In
Israel, the Company has received final tax assessments through the 1995 tax year. The tax
years 1996-2000 are considered final due to limitation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys principal foreign subsidiary 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.
| | -----------------------------------------------------------------------------------------------------

| | 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:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | Consolidated | Company
| | -------------------- | ------------ | -------
|
|
|
|
| | Income (loss)        |              |        
| | before taxes as      |              |        
| | reported in the      |              |        
| | statement of         |              |        
| | operations           |              |        
| |                      |              |        
| | Primary tax rate     |              |        
| |                      |              |        
| |                      |              |        
| | Tax expenses         |              |        
| | (benefit) calculated |              |        
| |                      |              |        
| | Non-deductible       |              |        
| | operating            |              |        
| | expenses             |              |        
| | Taxes on account     |              |        
| | of previous years    |              |        
| | Amortization of      |              |        
| | goodwill             |              |        
| | Unrecognized         |              |        
| | deferred taxes       |              |        
| | Depreciation and     |              |        
| | inflation impact     |              |        
| | Translation          |              |        
| | adjustments          |              |        
| | Tax losses for       |              |        
| | which no             |              |        
| | deferred tax         |              |        
| | was computed         |              |        
| | on difference        |              |        
| | between tax rate     |              |        
| | and tax rules        |              |        
| | Applicable to        |              |        
| | foreign subsidiary   |              |        
| |                      |              |        
| | Total                |              |        
| |                      |              |        
| | Tax (benefit)        |              |        
| | expenses             |              |        
| |                      |              |        

| | * | Adjusted
amounts.  See Note 2B(5).
| | - | ----------------------------------

F - 43

---

---

|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 (contd)
|------- | - | ------------------------

| | H. | Deferred
taxes
| | -- | --------------

| |                                                  | Consolidated
| | ------------------------------------------------ | ------------
|
|
|
|
| | Balance as at January 1, 2004                    |             
| |                                                  |             
| | Recognized deferred taxes during 2004            |             
| |                                                  |             
| |                                                  |             
| | Balance as at December 31, 2004                  |             
| |                                                  |             
| | Changes in 2005 that are not carried to income - |             
| | translation adjustments                          |             
| |                                                  |             
| |                                                  |             
| | Balance as at December 31, 2005                  |             
| |                                                  |             

| | (1) | The
deferred taxes are in respect of losses carryforward of Kubatronik and are
               calculated according to the relevant tax rates in Germany.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Deferred
tax assets that were recognized:
| | -- | -----------------------------------------

| |                                      | Consolidated | Company
| | ------------------------------------ | ------------ | -------
|
|
|
|
| | Total deferred tax assets            |              |        
| |                                      |              |        
| | Less: deferred tax assets that were  |              |        
| | not recognized due to non-           |              |        
| | compliance with the conditions for   |              |        
| | recognizing deferred tax assets:     |              |        
| |                                      |              |        
| | Losses carryforward (in Israel)      |              |        
| | Losses carryforward (outside Israel) |              |        
| | Severance pay                        |              |        
| | Vacation pay                         |              |        
| | Allowance for doubtful accounts      |              |        
| |                                      |              |        
| |                                      |              |        
| | Total                                |              |        
| |                                      |              |        
| |                                      |              |        
| | Deferred tax assets that were        |              |        
| | recognized                           |              |        
| |                                      |              |        

F - 44

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 25 |  | Segment Reporting
|------- | - | -----------------

| | The
Company and its subsidiaries have three reportable geographic segments, i.e. Israel,
Europe and others  mainly the United States and India.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| |                       | Year ended December 31, 2005
| | --------------------- | ----------------------------
|
|
|
|
| | External revenues     |                             
| | for the segment       |                             
| | Internal revenues for |                             
| | the segment           |                             
| |                       |                             
| | Total revenues for    |                             
| | the segment           |                             
| |                       |                             
| |                       |                             
| | Operating income      |                             
| | (loss)                |                             
| | Financial expenses    |                             
| | Financial income      |                             
| | Other income          |                             
| | (expenses), net       |                             
| | Company's share in    |                             
| | losses of             |                             
| | subsidiaries, net     |                             
| | Tax benefit           |                             
| | Minority interests    |                             
| |                       |                             
| | Net income (loss)     |                             
| |                       |                             
| | Total assets for the  |                             
| | segment               |                             
| | Deferred taxes        |                             
| |                       |                             
| |                       |                             
| | Total assets          |                             
| |                       |                             
| |                       |                             
| | Total liabilities     |                             
| |                       |                             
| |                       |                             
| | Capital expenditure   |                             
| |                       |                             
| |                       |                             
| | Depreciation and      |                             
| | amortization          |                             
| |                       |                             

F - 45

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 25 |  | Segment Reporting (contd)
|------- | - | --------------------------

| |                       | Year ended December 31, 2004
| | --------------------- | ----------------------------
|
|
|
|
| | External revenues     |                             
| | for the segment       |                             
| | Internal revenues for |                             
| | the segment           |                             
| |                       |                             
| | Total revenues for    |                             
| | the segment           |                             
| |                       |                             
| |                       |                             
| | Operating income      |                             
| | (loss)                |                             
| | Financial expenses    |                             
| | Financial income      |                             
| | Other income, net     |                             
| | Company's share       |                             
| | in losses of          |                             
| | subsidiaries, net     |                             
| | Tax benefit           |                             
| | Minority interests    |                             
| |                       |                             
| | Net loss              |                             
| |                       |                             
| | Total assets for the  |                             
| | segment               |                             
| | Deferred taxes        |                             
| |                       |                             
| |                       |                             
| | Total assets          |                             
| |                       |                             
| |                       |                             
| | Total liabilities     |                             
| |                       |                             
| |                       |                             
| | Capital expenditure   |                             
| |                       |                             
| |                       |                             
| | Depreciation and      |                             
| | amortization          |                             
| |                       |                             

F - 46

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 25 |  | Segment Reporting (contd)
|------- | - | --------------------------

| |                       | Year ended December 31, 2003*
| | --------------------- | -----------------------------
|
|
|
|
| | External revenues for |                              
| | the segment           |                              
| | Internal revenues for |                              
| | the segment           |                              
| |                       |                              
| | Total revenues for    |                              
| | the segment           |                              
| |                       |                              
| |                       |                              
| | Operating (income)    |                              
| | loss                  |                              
| | Financial expenses    |                              
| | Financial income      |                              
| | Other income          |                              
| | (expenses), net       |                              
| | Company's share in    |                              
| | losses of             |                              
| | subsidiaries, net     |                              
| | Tax expenses          |                              
| | Minority interests    |                              
| |                       |                              
| | Net loss              |                              
| |                       |                              
| | Total assets for the  |                              
| | segment               |                              
| |                       |                              
| |                       |                              
| | Total liabilities     |                              
| |                       |                              
| |                       |                              
| | Capital expenditure   |                              
| |                       |                              
| |                       |                              
| | Depreciation and      |                              
| | amortization          |                              
| |                       |                              

| | * | Adjusted
amounts. See Note 2B(5).
| | - | ---------------------------------

F - 47

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 26 |  | Related and Interested Party Transactions
|------- | - | -----------------------------------------

| |    |                        | Consolidated and Company
| | -- | ---------------------- | ------------------------
|
|
|
|
| | A. | Salaries and related   |                         
| |    | expenses to interested |                         
| |    | parties(1)             |                         
| | B. | Interest and exchange  |                         
| |    | rate expenses (2)      |                         

| | (1) | 5
persons in each year.
| | --- | -----------------------

| | (2) | Expenses
on convertible note (see Note 16).
| | --- | -------------------------------------------

| | C. | Loans
and other receivables to the subsidiaries included in the financial
               statements of the Company as at December 31, 2005 and 2004 is NIS 2,482
thousand                and NIS 17,449 thousand, respectively (see Note 5 and Note 7).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Compensation
of directors
| | -- | -------------------------

| | (1) | The
Company pays its Chairman of the Board of Directors a management fee and
               reimburses him for various expenses that he incurs in connection with his
               service. Since 2005 the Company also provides him with a car. In addition,
the                Company compensates its external directors for their service.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
total cost of the above mentioned compensation in 2005 was NIS 367 thousand
               (in 2004  NIS 321 thousand, in 2003  NIS 272 thousand).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
transactions with related and interested parties were conducted at terms comparable with
those of similar transactions with third parties.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

|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, 2005 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 - 48

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 28 |  | Effect of Significant Differences Between Generally Accepted AccountingPrinciples
in Israel and the United States
|------- | - | -----------------------------------------------------------------------------------------------------------------

| | The
Consolidated and Company financial statements are prepared in accordance with Israeli
GAAP which differs in certain significant respects from those followed in the United
States of America. The significant differences are set out below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Effect
of inflation
| | -- | -------------------

| | The
Company, in accordance with Israeli GAAP, included the effect of price level changes in
the accompanying financial statements, as described in Note 2B until December 31, 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U.S.
                      GAAP does not provide for recognition of the effects of such price
level                     changes. Such effects have not been included in the
reconciliation to U.S. GAAP.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Liability
for employee severance benefits
| | -- | -----------------------------------------

| | According
to Israeli GAAP, amounts funded by purchase of insurance policies or by deposits are
deducted from the related accrued severance pay liability, and presented at a net amount.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the U.S. GAAP, these balance sheet amounts (the amount of the related liability
accrued and the related assets) should be presented gross, instead of net.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 U.S. GAAP, goodwill is not
amortized but is evaluated for impairment in accordance with SFAS No. 142 Goodwill
and Other Intangible Assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Financial
derivative
| | -- | --------------------

| | As
described in Note 1, the seller of Kubatroniks shares has the right to require the
Company to purchase (put option) the sellers remaining 24% stock ownership of
Kubatronik. Under Israeli GAAP, there are no accounting consequences. Under U.S. 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 28 |  | Effect of Significant Differences Between Generally Accepted AccountingPrinciples
in Israel and the United States (contd)
|------- | - | --------------------------------------------------------------------------------------------------------------------------

| | F. | Cash
flows
| | -- | ----------

| | 1. | Changes
in exchange rate
| | -- | ------------------------

| | According
to Israeli GAAP, the effects of changes in exchange rates in cash and cash equivalents
are reflected as cash flows from operating activities in the statement of cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
U.S. GAAP, the effect of changes in exchange rates on cash and cash equivalents are
presented separately in the statement of cash flows (see Note 28(I)(5)).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Loans
in respect of fixed assets financing arrangement treated as capital           leases
| | -- | ------------------------------------------------------------------------------------------

| | According
to Israeli GAAP, long term financing arrangement in respect of acquisition of fixed
assets, treated as capital leases are reflected in the statement of cash flows as cash
flows from financing activities and investing activities for the acquisition of the fixed
assets  financed by the arrangement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
U.S. GAAP, as prescribed by SFAS 95, the above mentioned items are reflected as non-cash
financing activities (see Note 28(I)(5)).
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | G. | Earnings
(loss) per share capital (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 per NIS 1 of common stock,
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 SFAS No. 128 Earnings Per Share, basic EPS is calculated by
dividing the net income or loss attributable to ordinary shares 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*:
| | ------------------------------------------------------------------------

| |                                                 | Consolidated and Company
| | ----------------------------------------------- | ------------------------
|
|
|
|
| | Basic EPS (NIS)                                 |                         
| | Diluted EPS (NIS)                               |                         
| |                                                 |                         
| | Weighted average number of shares used in basic |                         
| | EPS calculation (thousands)                     |                         
| | Weighted average number of shares used in       |                         
| | diluted EPS calculation (thousands)             |                         

| | * | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
described in Note 2X(3), in 2006 EPS under Israeli GAAP will be calculated on a per share
basis and not per NIS par value.
| | -----------------------------------------------------------------------------------------------------------------------------

F - 50

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 28 |  | Effect of Significant Differences Between Generally Accepted AccountingPrinciples
in Israel and the United States (contd)
|------- | - | --------------------------------------------------------------------------------------------------------------------------

| | H. | Statement
of other comprehensive income
| | -- | ---------------------------------------

| | In
June 1997, the Financial Accounting Standards Board issued SFAS 130 Reporting
Comprehensive Income. SFAS 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 and 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Effect
on Financial statements
| | -- | ------------------------------

| | 1) | Balance
sheet items:
| | -- | --------------------

| |                                   | Consolidated
| | --------------------------------- | ------------
|
|
|
|
| | Israeli GAAP -                    |             
| | Goodwill, net of amortization (D) |             
| |                                   |             
| | U.S.GAAP -                        |             
| | Goodwill                          |             
| |                                   |             

| |                                        | Consolidated
| | -------------------------------------- | ------------
|
|
|
|
| | Israeli GAAP -                         |             
| | Other liabilities and accrued expenses |             
| | U.S. GAAP -                            |             
| | Put option (E)                         |             
| | Other liabilities and accrued expenses |             

F - 51

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company Financial Statements               
|                                                                         
|                                                                         
|(All amounts in thousands of reported NIS, except where otherwise stated)

|Note 28 |  | Effect of Significant Differences Between Generally Accepted AccountingPrinciples
in Israel and the United States (contd)
|------- | - | --------------------------------------------------------------------------------------------------------------------------

| | I. | Effect
on Financial statements (contd)
| | -- | ---------------------------------------

| | 2) | Statements
of operation items:
| | -- | ------------------------------

| |                                               | Consolidated and Company
| | --------------------------------------------- | ------------------------
|
|
|
|
| | Net income (loss) reported under Israeli GAAP |                         
| | Amortization of goodwill (D)                  |                         
| | Put option (E)                                |                         
| |                                               |                         
| | Net loss  under U.S. GAAP                     |                         
| |                                               |                         

| | 3) | Statement
of other comprehensive income
| | -- | ---------------------------------------

| |                                             | Consolidated and Company
| | ------------------------------------------- | ------------------------
|
|
|
|
| | Net income (loss) - U.S. GAAP               |                         
| | Foreign currency translation adjustments    |                         
| |                                             |                         
| | Net comprehensive income (loss) - U.S. GAAP |                         
| |                                             |                         

| | 4) | Shareholders equity
| | -- | --------------------

| |                                                |  |  | 
| | ---------------------------------------------- |  |  | 
|
|
|
|
| | Total shareholders' equity - Israeli GAAP      |  |  | 
| | Accumulated amortization of goodwill (D)       |  |  | 
| | Translation adjustments in respect of goodwill |  |  | 
| | Put option (E)                                 |  |  | 
| |                                                |  |  | 
| | Total shareholders' equity - U.S. GAAP         |  |  | 
| |                                                |  |  | 

| | * | Adjusted
amounts.  See Note 2B(5).
| | - | ----------------------------------

| | 5) | Statement
of changes in shareholders equity  US GAAP
| | -- | ------------------------------------------------------

| |                                          | 2003 | 2004 | 2005
| | ---------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Balance as of January 1                  |      |      |     
| |                                          |      |     
| | Conversion of convertible note           |      |      |     
| |                                          |      |     
| | Exercise of employee stock options       |      |      |     
| |                                          |      |     
| | Net income (loss)                        |      |      |     
| |                                          |      |     
| | Foreign currency translation adjustments |      |      |     
| |                                          |      |      |     
| |                                          |      |     
| | Balance as of December 31                |      |      |     
| |                                          |      |      |     

F - 52

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company 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)
|------- | - | ---------------------------------------------------------------------------------------------------------------------------

| | I. | Effect
on Financial statements (contd)
| | -- | ---------------------------------------

| | 6) | Condensed
cash flows statement
| | -- | ------------------------------

| |                                             | Consolidated
| | ------------------------------------------- | ------------
|
|
|
|
| | Net cash provided by operating activities   |             
| | under Israeli GAAP                          |             
| |                                             |             
| | Changes in exchange rate included in above  |             
| | Note 28(F)(1)                               |             
| |                                             |             
| | Net cash provided by operating activities   |             
| | under U.S. GAAP                             |             
| |                                             |             
| | Net cash used in investment                 |             
| | activities under Israeli GAAP               |             
| | Purchase of fixed assets under financing    |             
| | arrangement - Note 28(F)(2)                 |             
| |                                             |             
| | Net cash used in investment activities      |             
| | under U.S. GAAP                             |             
| |                                             |             
| | Net cash provided by (used in) financing    |             
| | activities under Israeli GAAP               |             
| | Loans in respect of financing arrangement - |             
| | Note 28(F)(2)                               |             
| |                                             |             
| | Net cash used in financing                  |             
| | activities under U.S. GAAP                  |             
| |                                             |             
| | Effect of exchange rates - changes on cash  |             
| |                                             |             
| | Changes in cash and cash equivalents under  |             
| | Israeli GAAP                                |             
| |                                             |             
| | Changes in cash and cash equivalents        |             
| | under U.S. GAAP                             |             
| |                                             |             

| | The
Company paid NIS 1,709 thousand, NIS 2,261 thousand and NIS 2,593 thousand for interest
in 2005, 2004 and 2003, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------

F - 53

---

---

|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company 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
| | -- | ------------

| |                                                  | December 31, 2005
| | ------------------------------------------------ | -----------------
|
|
|
|
| | Cash and cash equivalents                        |                  
| | Trade and other receivables and prepaid expenses |                  
| | Inventories                                      |                  
| | Deferred taxes                                   |                  
| | Property and equipment, net                      |                  
| | Goodwill                                         |                  
| |                                                  |                  
| |                                                  |                  
| | Total assets                                     |                  
| |                                                  |                  
| |                                                  |                  
| | Short-term credit and current maturities         |                  
| | of long-term debts                               |                  
| | Trade payables                                   |                  
| | Other liabilities and accrued expenses           |                  
| | Long-term debt, excluding current maturities     |                  
| | Employee severance benefits, net                 |                  
| | Minority interests                               |                  
| |                                                  |                  
| |                                                  |                  
| | Total liabilities                                |                  
| |                                                  |                  
| |                                                  |                  
| | Convertible note                                 |                  
| |                                                  |                  
| |                                                  |                  
| | Total shareholders' equity                       |                  
| |                                                  |                  

F - 54

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|Eltek Ltd.                                                               
|-------------------------------------------------------------------------
|                                                                         
|Notes to the Consolidated and Company 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
(contd)
| | -- | ---------------------

| |                                                  | December 31, 2004
| | ------------------------------------------------ | -----------------
|
|
|
|
| | Cash and cash equivalents                        |                  
| | Trade and other receivables and prepaid expenses |                  
| | Inventories                                      |                  
| | Deferred taxes                                   |                  
| | Property and equipment, net                      |                  
| | Goodwill                                         |                  
| |                                                  |                  
| |                                                  |                  
| | Total assets                                     |                  
| |                                                  |                  
| |                                                  |                  
| | Short-term credit and current maturities         |                  
| | of long-term debts                               |                  
| | Trade payables                                   |                  
| | Other liabilities and accrued expenses           |                  
| | Long-term debt, excluding current maturities     |                  
| | Employee severance benefits, net                 |                  
| | Minority interests                               |                  
| |                                                  |                  
| |                                                  |                  
| | Total liabilities                                |                  
| |                                                  |                  
| |                                                  |                  
| | Convertible note                                 |                  
| |                                                  |                  
| |                                                  |                  
| | Total shareholders' equity                       |                  
| |                                                  |                  

F - 55

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SIGNATURES

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
Arieh ReichartPresident and Chief Executive Officer
| |  | --------------------------------------------------------------------------------------------------

| |  | By: /s/ Amnon Shemer
Amnon ShemerChief Financial Officer
| |  | ----------------------------------------------------------------------

Dated: June 28, 2006

-89-



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