---

---

# UNITED STATESSECURITIES 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, 2007

# 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
0-28884

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

Israel(Jurisdiction of incorporation or organization)

4 Drezner Street, Sgoola Industrial Zone, P.O. Box 159, Petach Tikva 49101, Israel(Address of principal executive offices)

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

|                                   |                                          
|---------------------------------- | -----------------------------------------
|
|
|
|
|Title of each class                | Name of each exchange on which registered
|Ordinary Shares, NIS 0.6 Par Value | NASDAQ Capital Market                    
|                                   |                                          

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

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

6,609,807 Ordinary Shares, par value NIS 0.6 per share (as of December 31, 2007)

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

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.

|                          |                     |                        
|------------------------- | ------------------- | -----------------------
|
|
|
|
|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 o Item 18 x

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 Registration Statement on Form S-8, File No.
333-123559.



---

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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 presently our only significant active subsidiary. As used in this annual
report, the terms we, us and our mean Eltek Ltd. and
its subsidiaries, unless otherwise indicated.

For
periods prior to December 31, 2006, our consolidated financial statements were prepared in
New Israeli Shekels, or NIS, and in accordance with generally accepted accounting
principles in Israel with a reconciliation to generally accepted accounting principles in
the United States, or U.S. GAAP. Effective as of January 1, 2007, our consolidated
financial statements appearing in this annual report are prepared in accordance with U.S.
GAAP and our reporting currency is U.S. dollars. Our functional currency continues to be
NIS. The consolidated financial statements for all prior periods presented have been
restated and are presented in accordance with U.S. GAAP. See Notes 1B and 1C to the
consolidated financial statements. The consolidated financial statements appearing in this
annual report are translated into U.S. dollars at the representative rate of exchange
under the current rate method.  Under
such method, the income statement and cash flow statement items for each year (or period)
stated in this report are translated into U.S. dollars using the average exchange rates in
effect at each period presented, and assets and liabilities are translated using the
exchange rate as of December 31, 2007 ($1.00= NIS 3.846, as published by the Bank of
Israel), except for equity accounts, which are translated using the rates in effect at the
date of the transactions. All resulting exchange differences that do not affect our
earnings are reported in the accumulated other comprehensive income as a separate
component of shareholders equity.

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.

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                              | 12      
|A.       | HISTORY AND DEVELOPMENT OF THE COMPANY                  | 12      
|B.       | BUSINESS OVERVIEW                                       | 13      
|C.       | ORGANIZATIONAL STRUCTURE                                | 16      
|D.       | PROPERTY, PLANTS AND EQUIPMENT                          | 17      
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                               | 18      
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 18      
|A.       | OPERATING RESULTS                                       | 18      
|B.       | LIQUIDITY AND CAPITAL RESOURCES                         | 26      
|C.       | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES          | 28      
|D.       | TREND INFORMATION                                       | 29      
|E.       | OFF-BALANCE SHEET ARRANGEMENTS                          | 29      
|F.       | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS           | 29      
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 30      
|A.       | DIRECTORS AND SENIOR MANAGEMENT                         | 30      
|B.       | COMPENSATION                                            | 33      
|C.       | BOARD PRACTICES                                         | 33      
|D.       | EMPLOYEES                                               | 40      
|E.       | SHARE OWNERSHIP                                         | 41      
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 44      
|A.       | MAJOR SHAREHOLDERS                                      | 44      
|B.       | RELATED PARTY TRANSACTIONS                              | 45      
|C.       | INTERESTS OF EXPERTS AND COUNSEL                        | 46      
|ITEM 8.  | FINANCIAL INFORMATION                                   | 46      
|A.       | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 46      
|B.       | SIGNIFICANT CHANGES                                     | 46      
|ITEM 9.  | THE OFFER AND LISTING                                   | 46      
|A.       | OFFER AND LISTING DETAILS                               | 46      
|B.       | PLAN OF DISTRIBUTION                                    | 47      
|C.       | MARKETS                                                 | 47      
|D.       | SELLING SHAREHOLDERS                                    | 47      
|E.       | DILUTION                                                | 47      
|F.       | EXPENSE OF THE ISSUE                                    | 48      

- i -

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|          |                                                                              | Page No.
|--------- | ---------------------------------------------------------------------------- | --------
|
|
|
|
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 48      
|A.        | SHARE CAPITAL                                                                | 48      
|B.        | MEMORANDUM AND ARTICLES OF ASSOCIATION                                       | 48      
|C.        | MATERIAL CONTRACTS                                                           | 51      
|D.        | EXCHANGE CONTROLS                                                            | 51      
|E.        | TAXATION                                                                     | 52      
|F.        | DIVIDENDS AND PAYING AGENTS                                                  | 61      
|G.        | STATEMENT BY EXPERTS                                                         | 61      
|H.        | DOCUMENTS ON DISPLAY                                                         | 61      
|I.        | SUBSIDIARY INFORMATION                                                       | 62      
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS                   | 62      
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 63      
|PART II   |                                                                              | 63      
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 63      
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 63      
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 63      
|ITEM 15T. | CONTROLS AND PROCEDURES                                                      | 63      
|ITEM 16.  | [RESERVED]                                                                   | 64      
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 64      
|ITEM 16B. | CODE OF ETHICS                                                               | 64      
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 65      
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 65      
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 65      
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 65      
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 65      
|ITEM 19.  | EXHIBITS                                                                     | 66      
|          |                                                                              |         

- 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.

Effective
as of January 1, 2007, our consolidated financial statements appearing in this annual
report are prepared in accordance with U.S. GAAP and our reporting currency is U.S.
dollars. Our functional currency continues to be NIS. The consolidated financial
statements for all prior periods presented have been restated and are presented in
accordance with U.S. GAAP. See Notes 1B and 1C to the consolidated financial statements.

The
selected consolidated financial data as of December 31, 2006 and 2007 and for each of the
three years ended December 31, 2005, 2006 and 2007 have been prepared in accordance with
U.S. GAAP, and are derived from our audited consolidated financial statements and
accompanying notes included in Item 18, Financial Statements. The selected
consolidated financial data as of December 31, 2003, 2004 and 2005 and for each of the two
years ended December 31, 2003 and 2004 have been prepared in accordance with Israeli GAAP,
which were reconciled to U.S GAAP for presentation purposes in the following table to
conform to the presentation of the subsequent years, and have been derived from our
previously published audited consolidated financial statements, which are not included in
this annual report. 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 accompanying notes appearing elsewhere
in this annual report.

1

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# STATEMENT OF
CONSOLIDATED OPERATIONS DATA:

|                                                   | Year Ended December 31,
|-------------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                           |                        
|Cost of revenues                                   |                        
|                                                   |                        
|Gross profit                                       |                        
|Research and development income (expenses), net    |                        
|Selling, general and administrative expenses       |                        
|Impairment loss on goodwill                        |                        
|                                                   |                        
|Operating profit (loss)                            |                        
|Financial expenses, net                            |                        
|                                                   |                        
|Profit (loss) before other income (expenses), net  |                        
|Other income (expenses), net                       |                        
|                                                   |                        
|Profit (loss) before tax benefit (income tax       |                        
|expenses) and minority interest                    |                        
|Income tax benefit (expense)                       |                        
|                                                   |                        
|Profit (loss) before minority interest             |                        
|Minority interest                                  |                        
|                                                   |                        
|Net profit (loss)                                  |                        
|                                                   |                        
|Basic net earnings (loss) per ordinary share       |                        
|                                                   |                        
|Diluted net earnings (loss) per ordinary share     |                        
|                                                   |                        
|Weighted average number of ordinary shares used to |                        
|compute basic net earnings (loss) per ordinary     |                        
|share                                              |                        
|                                                   |                        
|Weighted average number of ordinary shares used to |                        
|compute diluted net earnings (loss) per ordinary   |                        
|share                                              |                        
|                                                   |                        
|                                                   |                        

---

|(1)
          Reconciled to U.S. GAAP to conform with subsequent years presentation, see
Notes           1B and 1C to the consolidated financial statements.
|------------------------------------------------------------------------------------------------------------------------------------------------------------

- 2 -

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# CONSOLIDATED BALANCE
SHEETS DATA:

|                                                   | As at December 31,
|-------------------------------------------------- | ------------------
|
|
|
|
|Working capital (deficit)                          |                   
|Total assets                                       |                   
|Long-term liabilities excluding current maturities |                   
|Shareholders' equity                               |                   
|                                                   |                   

---

|(1)
          Reconciled to U.S. GAAP to conform with subsequent years presentation, see
Notes           1B and 1C to the consolidated financial statements.
|------------------------------------------------------------------------------------------------------------------------------------------------------------

- 3 -

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|B. | CAPITALIZATION
AND INDEBTEDNESS
|-- | -------------------------------

Not
applicable.

|C. | REASONS
FOR THE OFFER AND USE OF PROCEEDS
|-- | -----------------------------------------

Not
applicable.

|D. | RISK
FACTORS
|-- | ------------

Investing
in our ordinary shares involves a high degree of risk and uncertainty. You should
carefully consider the risks and uncertainties described below before investing in our
ordinary shares. Our business, prospects, financial condition and results of operations
could be adversely affected due to any of the following risks. In that case, the value of
our ordinary shares could decline, and you could lose all or part of your investment.

# 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.

In
2007 and in each year during the three-year period ended December 31, 2004, we incurred
operating losses, and we may not be able to achieve and sustain profitable operations in
the future. Even if we return to profitability, we cannot assure that our 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 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 printed circuit boards, or PCBs, manufactured by us could have a
material adverse effect on us. In addition, the electronics industry, particularly the
defense and aerospace and medical equipment industries, which accounted for approximately
39% and 19%, respectively, of our sales in the year ended December 31, 2007, 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 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 Melta Ltd. and PCB
Technologies Ltd., as well as with major international PCB exporters, mainly from Asia,
Europe and the United States. In the European market we mainly compete with Advanced
Circuit Boards NV (Belgium), Cirep (France), Invotec (UK), Printca (Denmark), Ruwel Werke
GmbH (Germany) and certain other German companies. In the United States market we mainly
compete with DDI Corp, Teledyne and TTM Technologies Inc. Many of these competitors have
significantly greater financial and marketing resources than us. Our current competition
in the rigid PCB segment is mainly from PCB manufacturers in the Far-East (mainly in
China), which have substantially lower production costs than us. Continued competitive
pressures could cause us to lose market share.

- 4 -

---

---

Our quarterly operating
results fluctuate significantly.

Our
quarterly operating 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;
| | - | ------------------

| |  | fluctuations
in foreign currency exchange rates, primarily 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;
| | - | ------------------------------

| |  | timing
to repair or replace any malfunctioning manufacturing equipment;
| | - | -----------------------------------------------------------------------

| |  | 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 any penalties, except
for the time and materials expended on the order.

Our
business involves highly complex manufacturing processes that are subject to periodic
failure. Process failures have occurred in the past and have resulted in delays in product
shipments. There is no assurance that process failures will not occur in the future.
Further, our expenses are, in significant part, relatively fixed in the short-term. If
revenue levels fall below expectations, our net income is likely to be disproportionately
adversely affected because a proportionately smaller amount of the expenses varies with
our revenues. 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.

- 5 -

---

---

Our results of operations
may be harmed by currency fluctuations.

Our
reporting currency is U.S dollars, however our functional currency is NIS. Our revenues
are primarily denominated in the U.S. dollar, while our expenses are primarily denominated
in NIS, U.S. dollars, Euros, dollar-linked NIS and Euro-linked NIS. As a result,
fluctuations in rates of exchange between NIS and non-NIS currencies may affect our
operating results and financial condition. The NIS value of our U.S. dollar revenues are
adversely affected by the appreciation of the NIS against the U.S. dollar. In addition,
the U.S. dollar value of our expenses other than those paid in NIS or Euros are negatively
impacted by the devaluation of the U.S. dollar against the NIS and Euro. In 2006 and 2007,
the NIS appreciated against the U.S. dollar by 8.2% and 9.0%, respectively, and the Euro
appreciated against the U.S. dollar by 11.3% and 11.7%, respectively, which had a
significant adverse affect on our results of operations.

If
we were to determine that it is in our best interests to enter into any other hedging
transactions in the future in order to protect ourselves in part from currency fluctuation
and inflation risks, 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 and may result in additional expenses.

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 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. Over the years we have been involved in claims or litigations relating to
allegedly defective products. If such suits are brought against us in the future, our
business, results of operations and financial condition may be adversely affected.

Technological change may
adversely affect the market acceptance of our products.

Technological
change in the PCB industry is rapid and continual. To satisfy customers needs for
increasingly complex products, PCB manufacturers must continue to develop improved
manufacturing processes, provide innovative solutions and invest in new facilities and
equipment. To the extent we determine that new technologies and equipment are required to
remain competitive, the acquisition and implementation of such technologies and equipment
are likely to require significant capital investment. 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.

- 6 -

---

---

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.

In
the years ended December 31, 2005, 2006 and 2007, our ten largest customers accounted for
64%, 61% and 52% of our revenues, respectively, of which one customer accounted for 30.4%,
25.3% and 8.9% of our total revenues, respectively, and another customer accounted
(consisting of two affiliated companies) for 12.9%, 11.7% and 15.2% of our total revenues,
respectively. In June 2007, our then-largest customer notified us that it would cease
production of the PCB for its principal product. As a result, the volume of sales to such
customer has declined significantly and the customer is no longer considered a key
customer. We expect that a significant portion of our future revenues will continue to be
dependent on a small number of customers. If we are unable to retain our key customers or
if we are unable to attract sufficient new business to compensate for the loss of any of
our key customers, our results of operations and financial condition would be adversely
affected.

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, 2007, we had revolving lines of credit aggregating $3.6 million with our
banks, all of which was utilized as of such date. As of December 31, 2007, we also had
$5.7 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 debt with one of our banks
require us to maintain the higher of shareholders equity, excluding intangible
assets, of NIS 24.0 million ($6.24 million) or 23% of our total assets (on an non
consolidated basis). With another bank, the financial covenants require us to maintain the
higher of tangible shareholders equity of NIS 17.5 million ($4.55 million) or 17% of
our consolidated total assets. For these purposes, shareholders equity excludes
prepaid expenses (except insurance). The foregoing NIS amounts have been translated for
convenience into U.S. dollars at the representative rate of exchange on December 31, 2007
of $1.00= NIS 3.846, as published by the Bank of Israel. As of December 31, 2007, we were
in compliance with 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 financing may cause dilution to our then current
shareholders. If additional funds are raised through the issuance of equity securities,
the percentage ownership of then current shareholders will 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.

- 7 -

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

In
recent years, the significant increase in oil and energy costs and commodity prices (such
as copper, gold and glass fibers) put pressure on our suppliers to increase their prices
for most of our principal raw materials, and we expect these conditions to continue
through 2008. During 2005, 2006 and 2007, 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 although we have managed to date to maintain our sales volume with moderate
price increases, we may not be able to do so in the future. Future price changes in raw
materials may materially affect our future profitability.

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 the 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, 2007, one supplier accounted for 17.5% of our total
consolidated materials and non-manufactured products purchase costs. 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 or a large portion of our production process 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.

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 years ended December 31, 2005, 2006 and 2007 accounted for
50.6%, 46.0% and 36.3% of our consolidated revenues, respectively, of which 12.9%, 11.7%
and 10.5% was generated in Germany, respectively. We intend to pursue market share in the
United States, including the U.S. military, however contracts with U.S. military agencies
are subject to certain regulatory restrictions and approvals, which we may not be able to
comply with or obtain. 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.
| | - | -----------------------------------

- 8 -

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If we are found to be in violation of environmental laws, we could be liable for damages and costs of remedial
actions or our production may be subject to stop orders, which may adversely 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. We may not sufficiently comply in the future with the
September 2000 regulations or other regulations that may be adopted in the future.

We may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of
2002, which could have a material adverse effect on our operating results, investor confidence in our reported
financial information, and the market price of our ordinary shares.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, governing internal controls and procedures for financial reporting, which started in
connection with this Annual Report on Form 20-F for the year ended December 31, 2007, have
resulted in increased general and administrative expenses and a diversion of management
time and attention, and we expect these efforts to require the continued commitment of
significant resources. We may identify material weaknesses or significant deficiencies in
our assessments of our internal controls over financial reporting. Failure to maintain
effective internal controls over financial reporting could result in investigations or
sanctions by regulatory authorities, and could have a material adverse effect on our
operating results, investor confidence in our reported financial information, and the
market price of our ordinary shares

# 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;
| | - | ------------------------------------------------------------------------------------

- 9 -

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

| |  | changes
in the status of our intellectual property rights;
| | - | ----------------------------------------------------------

| |  | announcements
by third parties of significant claims or proceedings against us;
| | - | -------------------------------------------------------------------------------

| |  | announcements
by governmental or regulatory authorities of significant investigations 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;
| | - | ------------------------------------

| |  | general
stock market price and volume fluctuations; and
| | - | -------------------------------------------------------

| |  | devaluation
of the dollar against the NIS.
| | - | ------------------------------------------

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 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.

# Risks Relating to Our
Operations in Israel

Political, economic and military
instability in Israel may disrupt our operations and negatively affect our business
condition, harm our results of operations and adversely affect our share price.

We
are incorporated under the laws of, and our executive offices, principal production
facilities and research and development facilities are located in, the State of Israel. As
a result, political, economic and military conditions affecting Israel directly influence
us. Any major hostilities involving Israel, a full or partial mobilization of the reserve
forces of the Israeli army, the interruption or curtailment of trade between Israel and
its present trading partners, or a significant downturn in the economic or financial
condition of Israel could have a material adverse effect on our business, financial
condition and results of operations.

- 10 -

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Since
the establishment of the State of Israel in 1948, Israel and its Arab neighbors have
engaged in a number of armed conflicts. A state of hostility, varying from time to time in
intensity and degree, has led to security and economic problems for Israel. Major
hostilities between Israel and its neighbors may hinder Israels international trade
and lead to economic downturn. This, in turn, could have a material adverse effect on our
operations and business. There has been an increase in unrest and terrorist activity in
Israel, which began in September 2000 and which has continued with varying levels of
severity through 2007. The future effect of this deterioration and violence on the Israeli
economy and our operations is unclear. The election of representatives of the Hamas
movement to a majority of seats in the Palestinian Legislative Council in January 2006
resulted in an escalation in violence among Israel, the Palestinian Authority and other
groups. In July 2006, extensive hostilities began along Israels northern border with
Lebanon and to a lesser extent in the Gaza Strip. Since June 2007, when Hamas effectively
took control of the Gaza Strip, there have been extensive hostilities along Israels
border with the Gaza Strip, which have intensified since February 2008. Ongoing violence
between Israel and the Palestinians as well as tension between Israel and the neighboring
Syria and Lebanon may have a material adverse effect on our business, financial conditions
and results of operations.

Furthermore,
there are a number of countries, primarily in the Middle East, as well as Malaysia and
Indonesia, that restrict business with Israel or Israeli companies, and we are precluded
from marketing our products to these countries. Restrictive laws or policies directed
towards Israel or Israeli businesses may have an adverse impact on our operations, our
financial results or 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 employees and some of our directors and officers 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.

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.

- 11 -

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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 and in a customary
manner 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 the NASDAQ Marketplace Rules. A foreign private issuer that elects to
follow a home country practice instead of such requirements, must submit to NASDAQ in
advance 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 or on its website each such requirement that it
does not follow and describe the home country practice followed by the issuer instead of
any such requirement. As a foreign private issuer 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 procedure, compensation of officers, and quorum at
shareholders meetings. In addition, we may follow our home country law, instead of
the NASDAQ Marketplace Rules, which 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.

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.

- 12 -

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In
July 2000, we adopted a plan 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
3-4 mils and hole diameters of 8 to 10 mils (1 mil=0.001 inch). We began to supply
PCBs utilizing the HDI technology to select customers in August 2000 and since such time,
have focused our efforts on HDI PCBs. In 2007, 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 $26.9 million or 71.7% of our total sales in the year ended
December 31, 2007 as compared to approximately of $27.4 million or 70.2% of our total
sales in the year ended December 31, 2006.

In
June 2002, we acquired 76% of Kubatronik, a privately held German PCB manufacturer, for
approximately Euro 2.6 million ($2.4 million as of the date of acquisition). 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
November 2006, we entered into a license agreement with Stablcor, Inc., under which we
were granted the first license to use the STABLCOR® technology, an advanced thermal
management solution for PCB fabrication, outside the United States. The STABLCOR
technology enables PCB manufacturers, such as our company, to produce smaller electronic
products while eliminating the thermal, mechanical and reliability concerns that currently
challenge the semiconductor industry. We intend to work with the STABLCOR technology to
design and develop new and unique solutions for our high-end customers and believe that
this license will expand our opportunities in the high-end PCB market. However, we cannot
predict the market acceptance of a PCB product using the STABLCOR technology.

During
the three years ended December 31, 2007, we invested approximately$8.0 million in
the expansion of our facilities and infrastructures and purchase of equipment.

|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, flex-rigid or high-frequency materials. In essence, they are
platforms that conduct electrical signals among active and passive microelectronics
components, microprocessors, memories, resistors and capacitors. Photolitographic 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 two 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 3-4 mils and hole diameters of 8 to 10 mils.

- 13 -

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# Manufacturing and
Engineering Processes

In
the PCB industry, significant investments in equipment are necessary to maintain
technological competitiveness. During the three years ended December 31, 2007, we invested
approximately$7.2 million in machinery and equipment for that purpose (not
including the acquisition ofKubatronik).

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 0.001 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. In August
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.  During
2007, we developed new technologies, enabling us to manufacture via-in-pad
multilayer PCBs, microvia filling, through hole via filling and copper overplating. These
technologies enable us to offer our customers new solutions and participate in bids in
which we were not able to participate in the past. In the year ended December 31, 2007,
approximately 29% of our manufactured products were ordered for delivery in less than 20
working days, of which approximately 7% were ordered for delivery within six to ten
working days and approximately 5% in five or less working days.

Computer
Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD
system developed by Frontline PCB Solutions 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 (ISO-7) to produce technologically advanced
products.

Quality,
Environmental and Safety Standards. Our quality management system has been ISO
9001:2000 certified since July 2002 (and prior to such date, was ISO 9002 certified from
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 Rigid Glass Epoxy (FR4 & FR5) &
Flex-Rigid 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 14001:2004 certified since 2005
(and prior to such date was ISO 14001 certified from 2003). We are OHSAS 18001 certified
for occupation health and safety management systems since December 2007. We are currently
in the process of AS9100 Aerospace Standard certification, which we expect to complete
during 2008.

# Sales, Customers and
Marketing

Sales.In the years ended December 31, 2005, 2006 and 2007, the primary industries
          for which we produced PCBs were medical equipment (37%, 35% and 19% of
          production, respectively), defense and aerospace equipment (26%, 25% and 39% of
          production, respectively), industrial equipment (11%, 11% and 15% of
production,           respectively) and telecom and networking equipment (5%, 7% and 5%
of production,           respectively) as well as for contract electronic manufacturers
(12%, 16% and 16%           of production, respectively).

- 14 -

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Customers.           During
the year ended December 31, 2007, we provided PCBs to approximately 175
          customers in Israel and approximately 313 customers outside of Israel
(including           Kubatroniks customers). Our customers outside of Israel are
located           primarily in Germany, France, Italy, the Netherlands, Scandinavia and
the United           States. Sales to non-Israeli customers were $18.6 million (57.7% of
revenues)           for the year ended December 31, 2005, $21.2 million (54.2% of
revenues) for the           year ended December 31, 2006 and $19.0 million (50.6% of
revenues) for the year           ended December 31, 2007.

In
the years ended December 31, 2005, 2006 and 2007, our ten largest customers accounted for
64%, 61% and 52% of our revenues, respectively, of which one customer accounted for 30.4%,
25.3% and 8.9% of our total revenues, respectively, and another customer (consisting of
two affiliated companies) accounted for 12.9%, 11.7% and 15.2% of our total revenues,
respectively. In June 2007, our then-largest customer notified us that it would cease
production of the PCB for its principal product. As a result, the volume of sales to such
customer has declined significantly and the customer is no longer considered a key
customer. 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 26 persons, of which 14 are in Israel,
          three are in the United States employed by our U.S. subsidiary, Eltek USA Inc.,
          two are in Europe and seven persons are employed by our German subsidiary,
          Kubatronik, and we also have sales agents in France, Germany, Sweden and
          Switzerland. In the Netherlands and Italy PCB trading and manufacturing
          companies act as distributors of our products. In the United States we market
          and sell our products through our U.S. subsidiary, which is supported by three
          representatives, as well as through a PCB manufacturing company. In India we
          market our products 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 and 2006, the significant increase in
oil and energy costs and commodity prices (such as copper, gold and glass fibers) put
pressure on our suppliers to increase their prices for most of our principal raw
materials. During 2007, the prices stabilized, however there is no assurance that prices
will remain stable during 2008. During recent years, 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 although
we have managed to date to maintain our sales prices with 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.

# 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
Advanced Circuit Boards NV (Belgium), Cirep (France), Invotec (UK), Printca (Denmark),
Ruwel Werke GmbH (Germany) and certain other German companies. In the United States market
we mainly compete with DDI Corp, Teledyne and TTM Technologies Inc. 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. Our current competition in the rigid PCB segment is mainly from PCB
manufacturers in the Far-East (mainly in China), which have substantially lower production
costs than us. Continued competitive pressures could cause us to lose market share.

- 15 -

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# 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. In 2008,
we began to invest in improving our effluent wastewater treatment system to lower the
amounts of inorganic salts in the discharged water.

# 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. However, we have applied for two patents in
Israel in the field of opto-electronic circuits. 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. We are devoting resources to the development
of new manufacturing technology that we believe will allow us to enhance our product
offerings.

|C. | ORGANIZATIONAL
STRUCTURE
|-- | ------------------------

In
May 2002, we established En-Eltek Netherlands 2002 B.V., a wholly-owned subsidiary
organized 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. 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. Mr. Kubat has
the right to require us to purchase, and we 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.

- 16 -

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In
July 2007, we established Eltek USA Inc., a wholly-owned subsidiary incorporated in
Delaware to manage our marketing activities in the North American market. Eltek USA Inc.
commenced operations in 2008.

|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 such facilities expires in
February 2017 and we have an option to extend the lease for an additional five year term
upon six months prior notice. In the year ended December 31, 2007, we paid $618,000 in
rent for these premises. The foregoing amount has been translated for convenience into
U.S. dollars from NIS at the respective rate of exchange on December 31, 2007.

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 on June 30, 2008 and our
intention is to request an extension of the lease for an additional period. A lease for an
adjoining 8,000 square feet parking area expires on December 31, 2010. In the year ended
December 31, 2007, Kubatronik paid an aggregate of $107,000 in rent for these premises.
The foregoing amounts have been translated for convenience into U.S. dollars from Euro at
the respective rate of exchange on December 31, 2007.

# Leased Equipment

We
lease manufacturing equipment under two operating lease agreements, pursuant to which as
of December 31, 2007 we were obligated to pay a total amount of $556,000 through March
2010. Our monthly lease expense under these two agreements is $14,250.

Kubatronik
leases manufacturing equipment under three operating lease agreements, which as of
December 31, 2007 required us to pay a total of 183,000 Euros ($270,000) through November
2012. Our monthly lease expense under these three agreements is approximately 6,033 Euros
($9,877). The foregoing amounts have been translated for convenience into U.S. dollars
from Euro at the respective rate of exchange on December 31, 2007.

# Investment in Equipment
and Infrastructure

In
2005, we invested approximately $2.8 million in capital expenditures. Of such amount, $2.7
million was used to purchase production and manufacturing equipment and $81,000 was used
for leasehold improvements.

In
2006, we invested approximately $1.9 million in capital expenditures. Of such amount,
approximately $1.5 million was used to purchase production and manufacturing equipment and
$0.4 million was used for leasehold improvements.

In
2007, we invested approximately $3.3 million in capital expenditures. Of such amount,
approximately $1.9 million was used to purchase production and manufacturing equipment and
$1.4 million was used for leasehold improvements.

In
2008, we intend to invest approximately $2.0 million in capital expenditures, including
approximately $1.5 million in manufacturing equipment and approximately $0.5 million in
leasehold improvements for the expansion of our production facilities.

- 17 -

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

Not
applicable.

|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, 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.

For
periods prior to December 31, 2006, our consolidated financial statements were prepared in
NIS and in accordance with generally accepted accounting principles in Israel with a
reconciliation to generally accepted accounting principles in the United States, or U.S.
GAAP. Effective as of January 1, 2007, our consolidated financial statements appearing in
this annual report are prepared in accordance with U.S. GAAP and our reporting currency is
U.S. dollars. Our functional currency continues to be NIS. The consolidated financial
statements for all prior periods presented have been restated and are presented in
accordance with U.S. GAAP. See Notes 1B and 1C to the consolidated financial statements.
The consolidated financial statements appearing in this annual report are translated into
U.S. dollars at the representative rate of exchange under the current rate method. Under
such method, the income statement and cash flow statement items for each year (or period)
stated in this report are translated into U.S. dollars using the average exchange rates in
effect at each period presented, and assets and liabilities are translated using the
exchange rate as of December 31, 2007 ($1.00= NIS 3.846, as published by the Bank of
Israel), except for equity accounts, which are translated using the rates in effect at the
date of the transactions. All resulting exchange differences that do not affect our
earnings are reported in the accumulated other comprehensive income as a separate
component of shareholders equity.

# Critical Accounting
Policies

We
have identified the policies below as critical to the understanding of our consolidated
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 1of our consolidated financial
statements, which we believe to be most important to fully understand and evaluate our
financial condition and results of operation under U.S. GAAP, 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.

- 18 -

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Inventories

Inventories
are recorded at the lower of cost or market value. Cost is determined on the weighted
average basis for raw materials and finished goods, and on the basis of actual
manufacturing costs for work-in-progress.

Provision for doubtful accounts
receivable

The
allowance for doubtful accounts receivable is calculated on the basis of specific
identification of customer balances. The allowance 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
customers, including their financial condition and the volume of their operations.

Fixed assets

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. Machinery and
equipment purchased under capital lease arrangements are recorded at the present value of
the minimum lease payments at lease inception. Such assets and leasehold improvements are
depreciated and amortized respectively, using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.

Impairment in Value of
Assets

We
account for long-lived assets and certain intangible assets in accordance with the
provisions of the Financial Accounting Standards Board, or the FASB, Statements of
Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment
of or Disposal of Long-Lived Assets, or SFAS 144. SFAS 144 requires that
long-lived assets and certain identifiable intangible assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset or asset group to the undiscounted future
net cash flows expected to be generated by the asset or the asset group. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets. As of
December 31, 2007, no impairment losses have been identified.

Goodwill

Goodwill
represents the excess of the aggregate purchase price over the fair value of the net
assets acquired in a purchase business combination. Goodwill is reviewed for impairment at
least annually in accordance with the provisions of FASB SFAS No. 142, Goodwill
and Other Intangible Assets. The goodwill impairment test is a two-step test.
Under the first step, the fair value of the reporting unit is compared with its carrying
value. An indication any excess of the carrying amount of the reporting units
goodwill over the implied fair value of that goodwill. The implied fair value of goodwill
is determined by allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with FASB SFAS No. 141, Business
Combinations. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Fair value of the reporting unit is determined using
a discounted cash flow analysis. If the fair value of the reporting unit exceeds its
carrying value, step two does not need to be performed.

In
2006, following our annual impairment test of goodwill, based on our projections and using
expected future discounted cash flows, we determined that goodwill in the amount of
$473,000 of the $1.3 million goodwill relating to our investment in Kubatronik had been
impaired. As a result, we recorded an impairment loss in the amount of $473,000 for the
year ended December 31, 2006. We have not identified and did not record any impairment of
goodwill for the year ended December 31, 2007.

- 19 -

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# 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,
| | -------------------------------------- | -----------------------
|
|
|
|
| | Revenues                               |                        
| | Cost of revenues                       |                        
| |                                        |                        
| | Gross profit                           |                        
| | Research and development expenses, net |                        
| | Selling, general and administrative    |                        
| | expenses                               |                        
| | Impairment loss on goodwill            |                        
| |                                        |                        
| | Operating profit (loss)                |                        
| | Financial expenses, net                |                        
| | Other income, net                      |                        
| |                                        |                        
| | Profit (loss) before tax expenses and  |                        
| | minority interest                      |                        
| | Income tax expense                     |                        
| |                                        |                        
| | Profit (loss) after tax expenses       |                        
| | before minority interest               |                        
| |                                        |                        
| | Minority interest                      |                        
| |                                        |                        
| | Net profit (loss)                      |                        
| |                                        |                        
| |                                        |                        

| | 
| | 

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

Year Ended December 31,
2007 Compared with Year Ended December 31, 2006

Revenues.           Revenues
decreased by 4.0% to $37.5 million in the year ended December 31, 2007           from
$39.0 million in the year ended December 31, 2006. This decrease in           revenues is
primarily attributable to reduced sales to our former largest           customer, which
notified us at the end of the second quarter of 2007 that it was           terminating
production of its principal product. As a result of the change in           the U.S.
dollar/NIS exchange rate, from the beginning of 2008 we have been in
          discussions with many of our Israeli customers in an attempt to increase our
          U.S. dollar linked prices or to agree to use a higher U.S. dollar/NIS exchange
          rate for our U.S. dollar linked prices, and we have also been in discussions to
          increase our offshore U.S. dollar prices.

Cost
of Revenues. Cost of revenues increased by 4.3 % to $31.9 million in the year ended
December 31, 2007 from $30.6 million in the year ended December 31, 2006. This increase in
cost of revenues is primarily due to the appreciation of the NIS against the U.S. dollar
in 2007, which adversely affected the U.S. dollar value of NIS denominated expenses
(primarily salaries and other domestic expenses), a higher consumption of raw material due
to the replacement of a high volume of revenue from one major customer with many smaller
orders, causing additional challenges in our production efficiency, and an increase in
energy costs. Cost of revenues as a percentage of revenues increased to 85.1% in the year
ended December 31, 2007 from 78.3 % in the year ended December 31, 2006. This increase in
cost of revenues as a percentage of revenues is primarily attributable to the same reasons
explained above. We expect that our expenses as a percentage of revenue will increase in
2008 as result of the continued appreciation of the NIS against the U.S. dollar during the
first half of 2008, which adversely affects the U.S. dollar value of our NIS denominated
expenses (primarily salaries and other domestic expenses). In addition, if energy and
commodity prices increase in 2008, our costs may increase at a higher level than
anticipated.

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Gross
Profit. Gross profit decreased by 34.1% to $5.6 million in the year ended December 31,
2007 from $8.5 million in the year ended December 31, 2006. This decrease in gross profit
is primarily due to the reduction in sales and the increase in cost of revenues, for the
reasons explained above. Gross profit as a percentage of revenues decreased to 14.9% in
the year ended December 31, 2007 from 21.7% in the year ended December 31, 2006. This
decrease in gross profit as a percentage of revenues is primarily attributable to the
reduction in sales and the increase in cost of revenues, for the reasons explained above.
We expect that our expenses as a percentage of revenue will increase in 2008 as result of
the continued appreciation of the NIS against the U.S. dollar during the first half of
2008, which adversely affects the U.S. dollar value of our NIS denominated expenses
(primarily salaries and other domestic expenses). In addition, if energy and commodity
prices increase in 2008, our gross profit as a percentage of revenues may decrease at a
higher level than anticipated.

Research
and Development Expenses, Net.We generally do not engage in significant research and
developments efforts. In 2006 and 2007, we incurred $326,000 and $167,000, respectively,
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 in 2006 and 2007, $172,000 and $93,000, respectively, were reimbursed to us by
the OCS in accordance with the terms of the OptiPac consortium. The OptiPac program was
completed in July 2007.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
increased by 1.8 % to $5.7 million in the year ended December 31, 2007 from $5.6 million
in the year ended December 31, 2006. This increase in selling, general and administrative
expenses is primarily attributable to the expansion of our sales and marketing force in
Europe and the United States (including the establishment of a new sales and marketing
office in New Hampshire), and increased commission expenses as a result of an increase in
sales made through our sales representatives as opposed to direct sales. The increase was
offset in part by a reduction in liability that we recorded in connection with the
put/call option agreement with the former owner of Kubatronik as a result of the extension
of the term of the option and the amendment of other provisions relating to the put/call
option. We expect that our selling, general and administrative expenses will increase in
2008 as we intend to increase the number of our sales personnel, as well as due to an
anticipated increase in commissions to sales representatives as a result of an increase in
sales made through our sales representatives and increased export and delivery expenses as
a result of the anticipated increase in our export revenues.

Impairment
loss on goodwill.For the year ended December 31, 2006, following our annual
impairment test of goodwill, we recorded an impairment loss of $473,000 relating to our
investment in Kubatronik. We did not record any impairment of goodwill for the year ended
December 31, 2007.

Operating
profit (loss).As a result of the foregoing, our operating loss was $160,000 in the
year ended December 31, 2007 compared to an operating profit of $2.3 million in the year
ended December 31, 2006.

Financial
Expenses, Net. Financial expenses, net decreased to $145,000 in the year ended
December 31, 2007 from $538,000 in the year ended December 31, 2006. These financial
expenses were primarily attributable to interest paid on short-term debt and long-term
debt as well as exchange rate expenses, net. This decrease in financial expenses is
attributable to gain on currency hedging transactions.

Other
Income, Net. We had other income, net of $8,000 in the year ended December 31, 2007
and $5,000 in the year ended December 31, 2006. Other income, net in the years ended
December 31, 2007 and 2006 was attributable to the gain we recorded on the disposal of
fixed assets.

Income
tax expense. We did not record any current tax expenses in the years ended December
31, 2006 in respect of our profits in Israel, as we utilized our tax loss carryforwards to
offset such profits. Despite our accumulated profits in Israel during the years ended
December 31, 2006 and 2007, we did not record a net deferred tax asset and related tax
benefit in 2006 or 2007 with respect to our net operating losses generated in Israel due
to uncertainty about our ability to utilize such losses in the foreseeable future. Such
uncertainty is primarily due to the appreciation of the NIS against the U.S. dollar, the
replacement of a high volume of revenue from our former largest customer with many smaller
orders, causing additional challenges for our production efficiency, the fluctuations of
the PCB industry and our history of losses. We recorded a tax expense of $158,000 in the
year ended December 31, 2006 relating to the establishment of a valuation allowance on a
deferred tax asset in respect of the loss carryforward of Kubatronik. We did not record
any tax expense for the year ended December 31, 2007 with respect to Kubatronik as we
utilized our tax loss carryforward.

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Minority
Interest. Minority share in subsidiarys net results reflects the
minoritys interest of $4,000 in Kubatroniks net profit in the year ended
December 31, 2007, as compared to the minoritys interest of $60,000 in its net loss
in the year ended December 31, 2006.

Year Ended December 31,
2006 Compared with Year Ended December 31, 2005

Revenues.           Revenues
increased by 21.3% to $39.0 million in the year ended December 31, 2006           from
$32.2 million in the year ended December 31, 2005. This increase in           revenues is
primarily attributable to the increase in sales of our flex-rigid           boards, which
are higher priced than our rigid PCBs, and the increased number of           PCBs sold in
2006. The increase was offset in part by the appreciation of the           NIS against
the U.S. dollar by 8.2% in 2006, which adversely affected the NIS           value of our
U.S. dollar revenues.

Cost
of Revenues. Cost of revenues increased by 19.2% to $30.1 million in the year ended
December 31, 2006 from $25.6 million in the year ended December 31, 2005. This increase in
cost of revenues is primarily due to increased revenues and the increase in payroll and
related benefits. Cost of revenues as a percentage of revenues decreased to 78.3% in the
year ended December 31, 2006 from 79.7% in the year ended December 31, 2005. This decrease
in cost of revenues as a percentage of revenues is primarily attributable to the increase
in our sales volume, while our costs increased at a lower rate due to fixed costs being
absorbed over a greater volume of sales.

Gross
Profit. Gross profit increased by 29.8% to $8.5 million in the year ended December 31,
2006 from $6.5 million in the year ended December 31, 2005. This increase in gross profit
is primarily due to increased revenues. Gross profit as a percentage of revenues increased
to 21.7% in the year ended December 31, 2006 from 20.3 % in the year ended December 31,
2005. This increase in gross profit as a percentage of revenues is primarily attributable
to the increase in our sales volume, while our costs increased at a lower rate due to
fixed costs being absorbed over a greater volume of sales.

Research
and Development Expenses, Net.We generally do not engage in significant research and
developments efforts. In 2005 and 2006, we incurred $249,000 and $326,000, respectively,
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 in 2005 and 2006, $105,000 and $172,000, respectively, were reimbursed to us by
the OCS in accordance with the terms of the OptiPac consortium.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
increased by 26.6% to $5.6 million in the year ended December 31, 2006 from $4.4 million
in the year ended December 31, 2005. This increase in selling, general and administrative
expenses is primarily attributable to the associated growth in payroll and employee
benefits expenses, commissions to sales representatives, export and delivery expenses,
travel expenses of marketing personnel and costs of professional services resulting from
our increased revenues.

Impairment
loss on goodwill.We did not record any impairment of goodwill for the year ended
December 31, 2005. For the year ended December 31, 2006, following our annual impairment
test of goodwill, we recorded an impairment loss of $473,000 relating to our investment in
Kubatronik.

Operating
profit (loss).As a result of the foregoing, our operating profit was $2.3 million in
the year ended December 31, 2006 compared to $2.0 million in the year ended December 31,
2005.

Financial
Expenses, Net. Financial expenses, net decreased to $538,000 in the year ended
December 31, 2006 from $592,000 million in the year ended December 31, 2005. These
financial expenses were primarily attributable to interest paid on short-term debt and
long-term debt as well as exchange rate expenses, net. This decrease in financial expenses
is attributable to a reduction in our short-term debt, reduced interest rates, gain on
currency hedging transactions and differences in foreign currency exchange rates.

Other
Income, Net. We had other income, net of $5,000 in the year ended December 31, 2006
and $23,000 in the year ended December 31, 2005. Other income, net in the years ended
December 31, 2006 and 2005 was attributable to the gains we recorded on the disposal of
fixed assets.

- 22 -

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Income
tax expense. We did not record any tax expenses in the years ended December 31, 2005
and 2006 in respect of our profits in Israel, as we utilized our tax loss carryforwards to
offset such profits. Despite our accumulated profits in Israel during the years ended
December 31, 2005 and 2006, we did not record a net deferred tax asset and related tax
benefit in 2005 or 2006 with respect to our profits generated in Israel due to uncertainty
about our ability to utilize such tax losses in the foreseeable future. Such uncertainty
is primarily due to the appreciation of the NIS against the U.S. dollar, our dependency on
one major customer whose product was at the end of its lifecycle, the uncertainty of our
being able to attract sufficient business to compensate for the loss of such a major
customer, the fluctuations of the PCB industry and our history of losses. We recorded a
tax expense of $158,000 in the year ended December 31, 2006, relating to the establishment
of a valuation allowance on the deferred tax asset in respect of the loss carryforward of
Kubatronik.

Minority
Interest. Minority share in subsidiarys net results reflects the
minoritys interest of $60,000 in Kubatroniks net loss in the year ended
December 31, 2006, as compared to the minoritys interest of $49,000 in its net loss
in the year ended December 31, 2005.

# Quarterly Results of
Operations

The
following table sets forth certain unaudited quarterly financial information in accordance
with U.S. GAAP expressed in U.S. dollars and as a percentage of revenues for each of the
eight fiscal quarters ended December 31, 2007. 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
|---------------------------- | -------------
|
|
|
|
|
|Revenues                     |              
|Cost of revenues             |              
|                             |              
|Gross profit                 |              
|Research and development     |              
|income (expenses), net       |              
|Selling, general and         |              
|administrative expenses      |              
|Impairment loss on goodwill  |              
|                             |              
|Operating profit (loss)      |              
|Financial income (expenses), |              
|net                          |              
|Other income (expenses), net |              
|                             |              
|Profit (loss) before income  |              
|tax expenses and minority    |              
|interest                     |              
|Income tax expense           |              
|                             |              
|Profit (loss) after income   |              
|tax expenses before          |              
|minority interest            |              
|Minority interest            |              
|                             |              
|Net profit (loss)            |              
|                             |              
|                             |              

---

|*Less
than $1,000
|-----------------

- 23 -

---

---

|                             | Quarter Ended
|---------------------------- | -------------
|
|
|
|
|Revenues                     |              
|Cost of revenues             |              
|                             |              
|Gross profit                 |              
|Research and development     |              
|income (expenses), net       |              
|                             |              
|Selling, general and         |              
|administrative expenses      |              
|Impairment loss on goodwill  |              
|                             |              
|Operating profit (loss)      |              
|Financial income (expenses), |              
|net                          |              
|Other income (expenses), net |              
|                             |              
|Profit (loss) before income  |              
|tax expenses and minority    |              
|interest                     |              
|Income tax expense           |              
|                             |              
|Profit (loss) after income   |              
|tax expenses before          |              
|minority interest            |              
|Minority interest            |              
|                             |              
|Net profit (loss)            |              
|                             |              
|                             |              

---

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

# Impact of Currency
Fluctuations and of Inflation

Our
reporting currency is U.S dollars, however our functional currency is NIS. Our revenues
are primarily denominated in the U.S. dollar, while our expenses are primarily denominated
in NIS, U.S. dollars, Euros, dollar-linked NIS and Euro-linked NIS. As a result,
fluctuations in rates of exchange between NIS and non-NIS currencies may affect our
operating results and financial condition. The NIS value of our U.S. dollar revenues are
adversely affected by the appreciation of the NIS against the U.S. dollar. In addition,
the U.S. dollar value of our expenses other than those paid in NIS or Euro are negatively
impacted by the devaluation of the U.S. dollar against the NIS and Euro. In 2006 and 2007,
the NIS appreciated against the U.S. dollar by 8.2% and 9.0%, respectively, and the Euro
appreciated against the U.S. dollar by 11.3% and 11.7%, respectively, which had a
significant adverse affect on our results of operations.

The
following table sets forth, for the periods indicated, (i) devaluation or appreciation 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,
|----------------------- | -----------------------
|
|
|
|
|U.S. dollar             |                        
|Euro                    |                        
|Israeli consumer  price |                        
|index                   |                        
|                        |                        

- 24 -

---

---

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

Because
exchange rates between the NIS and the dollar and Euro fluctuate continuously, exchange
rate fluctuations, particularly larger periodic devaluations, may have an impact on our
profitability and period-to-period comparisons of our results. We cannot assure you that
in the future our results of operations may not be materially adversely affected by
currency fluctuations.

# Conditions in Israel

We
are incorporated under the laws of, and our executive offices, principal production
facilities and research and development facilities are located in, the State of Israel.
See Item 3D Key Information  Risk Factors  Risks Relating to Our
Location in Israel for a description of governmental, economic, fiscal, monetary or
political polices or factors that have materially affected or could materially affect our
operations.

# 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.

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 2007 was 29%, which was reduced to 27% in 2008 and will be further reduced to 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%. The base year is 2005, however due to our
tax loss carryfowards, there was no tax payment in Israel for the year ended December 31,
2007. For additional information see Item 10E. Additional Information 
Taxation  Tax Benefits Under the Law for the Encouragement of Capital Investments,
1959 and Note 15A to our consolidated financial statements.

As
of December 31, 2007, we had approximately $14.3 million in tax loss carryforwards in
Israel, which can be offset against future income in Israel without time limitation. In
Israel, we have received final tax assessments through the 1995 tax year and the tax
assessments we received for the 1996-2003 tax years are considered final due to the
statute of limitations. Our principal foreign subsidiary, Kubatronik has received final
tax assessments through the 2005 tax year, and as of December 31, 2007 had approximately
$0.9 million in tax loss carryforwards in Germany. We do not believe, on a more
likely than not basis, that we will be able 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 to our loss carry-forwards in the
foreseeable future. Therefore we have recorded a full valuation allowance on the deferred
tax asset in respect of these differences and loss carry-forwards.

- 25 -

---

---

# Recent Accounting
Pronouncements

In
September 2006, the Financial Accouting Standards Board, or the FASB, issued FASB
Statement No. 157, Fair Value Measurement, or Statement 157. Statement
157 defines fair value, establishes a framework for the measurement of fair value, and
enhances disclosures about fair value measurements. The statement does not require any new
fair value measures. Statement 157 is effective for fair value measures already required
or permitted by other standards for fiscal years beginning after November 15, 2007. We are
required to adopt Statement 157 beginning on January 1, 2008. Statement 157 is required to
be applied prospectively, except for certain financial instruments. Any transition
adjustment will be recognized as an adjustment to opening retained earnings in the year of
adoption. The FASB announced a one year deferral of Statement 157s fair value
measurement requirements for non-financial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. We believe that the adoption
of Statement 157 will not have a material impact on our financial condition, results of
operations or cash flows.

In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities  including an amendment of FASB No.
115, or Statement 159. Statement 159 provides us the irrevocable option to carry
most financial assets and liabilities at fair value that are not currently required to be
measured at fair value. If the fair value is elected, changes in fair value would be
recorded in earnings at each subsequent reporting date. Statement 159 is effective for our
2008 fiscal year. We believe that the adoption of Statement 159 will not have a material
impact on our financial condition, results of operations or cash flows.

In
December 2007, the FASB issued FASB Statement No. 141R, Business
Combinations, or Statement 141R, and FASB Statement No. 160,
Non-controlling Interests in Consolidated Financial Statements- an amendment to
ARB No. 51, or Statement 160. Statement 141R and Statement 160 require most
identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a
business combination to be recorded at full fair value and require
non-controlling interests (previously referred to as minority interests) to be reported as
a component of equity, which changes the accounting for transactions with non-controlling
interest holders. Both Statements are effective for periods beginning on or after December
15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business
combinations occurring after the effective date. Statement 160 will be applied
prospectively to all non-controlling interests, including any that arose before the
effective date. We are currently evaluating the impact of adopting Statement 141R and
Statement 160 on our results of operations and financial position.

|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
invested approximately $3.3 million in capital expenditures in cash in the year ended
December 31, 2007 and $1.9 million in the year ended December 31, 2006. In the years ended
December 31, 2007 and 2006, our capital expenditures mainly related to our investments in
production and manufacturing equipment, and leasehold improvements. We expect to invest in
2008 approximately $2.0 million in capital expenditures, including approximately $1.5
million in manufacturing equipment and approximately $0.5 million in leasehold
improvements for the expansion of our production facilities.

In
June 2002, we acquired 76% of Kubatronik for approximately Euro 2.6 million ($2.4 million
as of the date of acquisition). 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, 2012 (which period is automatically extended for additional
consecutive two-year periods unless otherwise notified in writing by either party upon at
least six months prior notice), Mr. Kubat has the right to require us to purchase, and we
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 ($727,000) and will not exceed Euro 920,000 ($1.2
million), subject to certain price adjustments set forth in the agreement. Mr. Kubat
retired in October 2003. 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 150, Accounting for Certain Financial Instruments with characteristics of
both Liabilities and Equity. See Note 1A to the consolidated financial
statements.

- 26 -

---

---

In
May 2007, Mr. Josef Maiman elected to convert a convertible note held of record by Merhav
for an aggregate 985,796 ordinary shares. As a result, Mr. Maimans beneficial
ownership interest increased to 1,585,540 ordinary shares, representing approximately 24%
of our then outstanding shares, of which 985,796 are held of record by Merhav and 599,744
are held of record by Integral.

# Cash Flows

The
following table summarizes our cash flows for the periods presented:

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
| | Net cash provided by operating activities           |                        
| | Net cash used in investing activities               |                        
| | Net cash provided by (used in) financing activities |                        
| | Effect of translation adjustments                   |                        
| | Net increase in cash and cash equivalents           |                        
| | Cash and cash equivalents at beginning of year      |                        
| | Cash and cash equivalents at end of year            |                        
| |                                                     |                        

Net
cash provided by operating activities was $1.4 million for the year ended December 31,
2007. This amount was primarily attributable to a decrease in trade receivables of $0.3
million, fixed asset depreciation of $2.3 million and an increase in trade payables of
$0.2 million. This amount was partially offset by net loss of $0.3 million, an increase in
other receivables and prepaid expenses of $0.4 million and a decrease in other liabilities
and accrued expenses of $ 0.3 million. Net cash provided by operating activities was $2.7
million for the year ended December 31, 2006. This amount was primarily attributable to
net income of $1.7 million, fixed asset depreciation of $2.3 million, an impairment of
goodwill of $0.5 million, a decrease in other receivables and prepaid expenses of $0.2, an
increase of other liabilities and accrued expenses of $0.6 million and cancellation of
deferred taxes of $0.2 million. This amount was partially offset by an increase in trade
receivables of $2.1 million and a decrease in trade payables of $0.4 million.

Net
cash used in investing activities was $3.3 million for the year ended December 31, 2007
and $1.9 million for the year ended December 31, 2006. Net cash used in investing
activities for the years ended December 31, 2006 and 2007 was primarily for the purchase
of fixed assets for our production lines.

Net
cash provided by financing activities was $2.3 million for the year ended December 31,
2007, which was primarily attributable to new long-term loans of $ 3.0 million from our
banks and an increase of short-term credit from our banks, which was partly offset by the
repayment of $1.8 million of long-term loans and the repayment of $0.2 million of credit
from fixed asset payables. Net cash used in financing activities was $0.5 million for the
year ended December 31, 2006, which was primarily attributable to the repayment of $2.4
million in long-term and short-term credit from our banks and the repayment of $0.4
million of credit from fixed asset payables, which was partly offset by new loans of $2.2
million from our banks and cash from the exercise of employee stock options of $0.1
million.

As
of December 31, 2007, we had $2.5 million in cash and cash equivalents and working capital
of $0.7 million, as compared to $2.0 million in cash and cash equivalents and working
capital of $1.7 million at December 31, 2006.

- 27 -

---

---

As
of December 31, 2007, the following revolving lines of credit and long-term loans were
outstanding:

| |  | a
revolving line of credit of approximately $1.4 million with Bank Hapoalim B.M.  Of such
amount, $110,000               is linked to the U.S. dollar and $1.3 million is not
linked.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | long-term
loans from Bank Hapoalim B.M. aggregating $2.1 million.  Of such amount, $604,000 is
linked to               the Israeli consumer price index and $1.5 million is not linked.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
revolving line of credit of approximately $2.2 million with Israel Discount Bank Ltd,
which is not linked.
| | - | ------------------------------------------------------------------------------------------------------------

| |  | long-term
loans from Israel Discount Bank Ltd. in the aggregate amount of $2.9 million. Of such
amount, $170,000 is linked to the Israeli consumer price index, $1.0 million is linked to
the U.S. dollar and $1.7 million is not linked.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | long-term
loans from suppliers of fixed assets in the aggregate amount of $672,000. Of such amount,
$91,000 is linked to the Israeli consumer price index, $400,000 is linked to the U.S.
dollar and $181,000 is linked to the Euro.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
credit lines bear annual interest ranging from 6.7% to 6.85% for non-linked credit and
6.7% for credit linked to the dollar. Our long-term loans bear annual interest ranging
from 4.5% to 6.5% for long-term loans linked to the Israeli consumer price index, 4.0% to
6.9% for long-term loans linked to the dollar, 2.85% for long-term loans linked to the
Euro and 6.5% to 8.4% for non-linked long-term loans.

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,
which was converted into ordinary shares in May 2007(see above in this Item). In July
2003, as part of this financing plan, we signed an agreement with U Bank Ltd. (formerly
Investec Bank (Israel) Ltd.), or U Bank, for a $1.0 million factoring facility, in
consideration for our assignment to U Bank of an equal amount of our accounts receivable.
In December 2006, we replaced the factoring arrangement with a NIS 2.8 million line of
credit from Israel Discount Bank Ltd. and a long-term loan of NIS 1.7 million from Bank
Hapoalim B.M. Also see Item 7.B., Major Shareholders and Related Party Transactions
 Related Party Transactions.

The
borrowings from our banks are secured by specific liens on certain assets, by a first
priority charge on the rest of our now owned or after acquired 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 debt with one of our banks require us to
maintain the higher of shareholders equity, excluding intangible assets, of NIS 24.0
million or 23% of our total assets (on an non-consolidated basis). With another bank, the
financial covenants require us to maintain the higher of tangible shareholders
equity of NIS 17.5 million or 17% of our consolidated total assets. For these purposes,
shareholders equity excludes prepaid expenses (except insurance). As of December 31,
2007, we were in compliance with such covenants.

We
expect to finance our 2008 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, 2008.

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

We
generally do not engage in significant research and development.

- 28 -

---

---

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, less certain consortium 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, 2006 and 2007, we
incurred $249,000, $326,000 and $167,000, respectively, 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 in 2005, 2006 and 2007,
$105,000, $172,000 and $93,000, respectively, 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 through the first quarter of 2007, 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, 2007 was approximately $7.0 million compared to a backlog of
approximately $5.9 million at December 31, 2006. 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, 2007.

|Contractual Obligations                      | Payments due by period
($ in thousands)
|-------------------------------------------- | ---------------------------------------
|
|
|
|
|Short-term bank credit (1)                   |                                        
|Long-term debt obligations (2)               |                                        
|Operating lease and other contractual        |                                        
|obligations                                  |                                        
|Purchase obligations                         |                                        
|Other long-term liabilities reflected on the |                                        
|company's balance sheet under U.S. GAAP      |                                        
|Total                                        |                                        
|                                             |                                        

---

|(1) | Our
short-term bank credit lines bear annual interest ranging from 6.7% to 6.85%
               for non-linked credit and 6.7% for credit that is linked to the dollar.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our
long-term debt obligations include long-term loans and long-term debt
               related to fixed assets financing transactions. Our long-term loans bear
annual                interest ranging from 4.5% to 6.5% for long-term loans that are
linked to the                Israeli consumer price index, 4.0% to 6.9% for long-term
loans that are linked                to the U.S. dollar, 2.85% for long-term loans that
are linked to the Euro and                6.5% to 8.4% for non-linked long-term loans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 29 -

---

---

|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)             | 69  | Chairman of the Board of Directors                       
| | Arieh Reichart                 | 53  | President and Chief Executive Officer                    
| | Amnon Shemer                   | 48  | Vice President, Finance and Chief Financial Officer      
| | Dan Eshed                      | 57  | Senior Vice President, Subsidiaries                      
| | Eli Dvora                      | 51  | Vice President, Operations                               
| | Moshe Leibovich                | 50  | Vice President, Marketing and Sales                      
| | Roberto Tulman                 | 49  | Vice President, Technologies and Chief Technology Officer
| | Shlomo Danino                  | 45  | Vice President, Engineering and Quality Assurance        
| | Vardit Dekel                   | 43  | Vice President, Human Resources                          
| | David Banitt(1)(3)(4)          | 56  | Independent Director                                     
| | Josef Maiman                   | 61  | Director                                                 
| | Eitan Popper                   | 30  | Director                                                 
| | Ophira Rosolio-Aharonson(1)(3) | 58  | Outside Director                                         
| | Eliyaho Tov(1)(2)(3)(4)        | 64  | Outside Director                                         
| | Joseph Yerushalmi              | 69  | 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 2009
          general annual meeting of shareholders. Messrs. David Banitt and Eitan Popper,
          Class II directors, will serve as directors until our 2010 annual general
          meeting of shareholders. Messrs. Josef A. Maiman and Nissim Gilam, Class III
          directors, will serve as directors until our 2008 general annual meeting of
          shareholders. Mr. Eliyaho Tov and Ms. Ophira Rosolio-Aharonson will serve as
          outside directors pursuant to the provisions of the Israeli Companies Law for a
          three-year term until our 2009 annual general meeting of shareholders,
following           which the service of Mr. Tov as an outside director may not be
extended and           service of Ms. Rosolio-Aharonson 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 has been self-employed. Mr. Gilam is also a member of
the board of directors of Israel Steel Corporation, Eliyaho Insurance Company and Prisma
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 M.B.A. degree from Bar-Ilan
University.

- 30 -

---

---

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. degree in Economics and Business Administration and M.A.
degree in Economics, both from Bar-Ilan University.

Dan
Eshedjoined 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.

Eli
Dvorajoined 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 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. degree (Cum
Laude) in Chemistry, M.Sc degree in Chemistry (Electrochemistry) and 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 and 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 MA degree in organizational sociology and
organizational counseling, both from The Hebrew University of Jerusalem.

David
Banitt, an independent director, has served as a director since March 1997.
Since January 2006, Mr. Banitt has served as chief executive officer of YDesign Ltd., a
company involved in the development of consumer products. Mr. Banitt is a member of the
board of directors of 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 and member
of the board of directors 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 and member of the board of directors 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 1985 until 1992, Mr. Banitt served
as Vice President of Marketing of Optrotech Ltd., an Israeli company that provided optical
inspection systems to the PCB industry. Mr. Banitt holds a B.Sc. degree in Electronics
Engineering from Tel Aviv University.

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Josef
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 listed on The NASDAQ National Market, and since October 2006 he
also serves as the CEO of Ampal. Mr. Maiman holds a B.A. degree in Economics from
University of Texas and M.A. degree in Economics from Cornell University.

Eitan
Popper has served as a director since December 2007. Mr. Popper has served
as project engineer and executive assistant to the senior vice president of projects of
Merhav M.N.F Ltd. since 2003. In that position, Mr. Popper participated in the evaluation
and analysis of large scale energy and infrastructure projects worldwide. Prior thereto
and from 2002, Mr. Popper served as a civil and environmental engineer in the Mexico City
and San Francisco offices of URS Corporation, a global engineering and consulting company
traded on the New York Stock Exchange. Mr. Popper holds a B.Sc. degree in civil
engineering from the Universidad Iberoamericana of Mexico and M.Sc. degree in
environmental engineering from Stanford University. Mr. Popper is currently enrolled in
the MBA program (specializing in finance) of the Recanati School of Business of Tel Aviv
University.

Ophira
Rosolio-Aharonson was appointed as an outside director (within the meaning
of the Israeli Companies Law) in December 2006. Ms. Rosolio-Aharonson serves as an
executive director of several private and publicly traded companies, a strategic business
consultant to high-technology companies and an advisor to venture capital firms in Israel
and the United States. From 2000 to 2006, Ms. Rosolio-Aharonson served as an active
executive director and audit committee member of Scitex Ltd. (NASDAQ:SCIX), and as a
director and chair of the audit committee of Cimatron Ltd. (NASDAQ:CIMT). Ms.
Rosolio-Aharonson is a co-founder of Seagull Tech Inc. and KeyScan Inc. From 1992 through
1999, Ms. Rosolio-Aharonson served as the chief executive officer of Terra Computers, Inc.
in the United States. From 1980 to 1989, Ms. Rosolio-Aharonson served as a senior
executive, holding managerial positions, at Clal Ltd., an Israeli company publicly traded
on the Tel Aviv Stock Exchange, including director, chief executive officer, chief
operations officer and vice president of sales and marketing of Clal Ltd.s
subsidiaries. Ms. Rosolio-Aharonson holds a B.Sc. degree in applied mathematics and
physics, and has completed courses required for a M.Sc. degree in bio-medical engineering,
both from the Technion  Israel Institute of Technology, Haifa and is a graduate of
the executive business and management program of Tel Aviv University.

Eliyaho
Tov was appointed as an outside director (within the meaning of the Israeli
Companies Law) in December 2003. Since November 1999, Mr. Tov has been a freelance
consultant as an economic advisor and currently 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 M.A. degree in business management, both from The Hebrew University
of Jerusalem. Mr. Eliyaho Tov qualifies as an audit committee financial expert, as defined
by rules of the Securities and Exchange Commission.

Joseph
Yerushalmihas 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. Yerushalmi serves as a member of the board of directors of Ampal
Israel Corporation Ltd. From 1992 to 1996, Mr. Yerushalmi served as vice president,
projects development at Israel Chemicals Ltd., Israels largest chemical concern.
Between 1989 and 1992, Mr. Yerushalmi was a visiting professor at the University of
Pittsburgh. In 1980, Mr. Yerushalmi founded PAMA (Energy Resources Development) Ltd. in
Israel with the goal of commercial utilization of Israel oil shale reserves and he served
as its General Manager until 1989. From 1977 to 1980, Mr. Yerushalmi was Technical Manager
of the Coal Gasification Program of the Electric Power Research Institute (EPRI) in Palo
Alto, California. Between 1969 and 1977, Mr. Yerushalmi was professor of Chemical
Engineering at the City College of New York where he pioneered in research the field of
alternative energy. Mr. Yerushalmi holds a Ph.D. in Chemical Engineering from the City
University of New York.

There
are no family relationships between any of our directors and executive officers.

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|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, 2007.

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

During
the year ended December 31, 2007, we paid each of our outside and independent directors an
annual fee of $3,932 and a per meeting attendance fee of $251. During such period we paid
Nissim Gilam, chairman of our board of directors, a management fee of $5,000 per month and
reimbursed him for various expenses that he incurred in connection with his service as
chairman of the board of directors in an annual amount of $2,439. In addition, in
accordance with the approval of our shareholders at our 2007 annual general meeting of
shareholders, in 2007, we paid Mr. Gilam a special bonus in the amount of $15,210 in
consideration for his on-going efforts and substantial contribution to our company during
the 2006 fiscal year. We also provide Mr. Gilam with a company car and pay all expenses in
connection therewith.

As
of December 31, 2007, our directors and executive officers as a group, consisting of 15
persons, held options to purchase an aggregate of 20,000 ordinary shares. Such options
have an exercise price of $1.14, vest over a three-year period (all of which had vested at
December 31, 2007) and will expire in November 2009. All such options were granted
under our 2000 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.

# 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.

The
board of directors of an Israeli public company is required to determine a minimum number
of directors with accounting and financial expertise, as defined by
regulations promulgated under the Israeli Companies Law. Our board of directors
determined, accordingly, that at least one director must have accounting and
financial expertise. Our Board of Directors has further determined that Mr. Eliyaho
Tov has the requisite accounting and financial expertise.

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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 director nominees are recommended by our board of directors to our
shareholders for election. See below in this Item 6C. Directors, Senior Management
and Employees  Board Practices  NASDAQ Marketplace Rules and Home Country
Practices.

# Outside and Independent
Directors

Outside
Directors. Under the Israeli Companies Law, Israeli companies whose shares have been
offered to the public are required to appoint at least two outside directors. The Israeli
Companies Law provides that a person may not be appointed as an outside director if the
person, or the persons relative, partner, employer or an entity under that
persons control, has or had during the two years preceding the date of appointment
any affiliation with the company, or any entity controlling, controlled by or under common
control with the company. The term relative means a spouse, sibling, parent,
grandparent, child or child of spouse or spouse of any of the above. The term
affiliation includes an employment relationship, a business or professional
relationship maintained on a regular basis, control and service as an office holder
excluding service as an outside director of a company that is offering its shares to the
public for the first time.

In
addition, 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 director or may otherwise interfere with the persons ability to
serve as director. If, at the time an outside director is appointed all members of the
board of directors are of the same gender, then that outside director must be of the other
gender. A director of one company may not be appointed as an outside director of another
company if a director of the other company is acting as an outside director of the first
company at such time.

At
least one of the outside directors elected must have accounting and financial
expertise and any other outside director must have accounting and financial
expertise or professional qualification, as such terms are defined by
regulations promulgated under the Israeli Companies Law. Our outside director, Mr. Eliyaho
Tov, has accounting and financial expertise and our other outside director,
Ms. Ophira Rosolio-Aharonson, has professional qualification, as such terms
are defined by regulations promulgated under the Israeli Companies Law.

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.

Each
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.

Mr.
          Eliyaho Tov and Ms. Ophira Rosolio-Aharonson serve as our outside directors
          under the Israeli Companies Law until our 2009 annual general meeting of
          shareholders, following which the service of Mr. Tov as an outside director may
          not be extended and service of Ms. Rosolio-Aharonson as an outside director may
          be renewed for one additional three-year term.

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Independent
Directors. In general, NASDAQ Marketplace Rules require that the board of directors of
a NASDAQ-listed company have a majority of independent directors and its 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 the rules of the Securities and Exchange Commission and NASDAQ, we have
the mandated three independent directors, as defined by the rules of the Securities and
Exchange Commission and NASDAQ, on our audit committee.

Our
Board of Directors has determined that each of Messrs. Banitt and Tov and Ms.
Rosolio-Aharonson qualifies as an independent director under the requirements of the
Securities and Exchange Commission and NASDAQ.

# Committees of the Board
of Directors

Executive Committee

Our
Board of Directors established an executive committee, which is responsible for monitoring
the implementation of our annual work plan that is adopted each year by our board of
directors, and recommending to our board of directors future strategies for our company
and monitoring their implementation. Messrs. Gilam, Banitt and Tov and Ms.
Rosolio-Aharonson are the current members of our executive committee. Our executive
committee meets approximately once a month with our Chief Executive Officer.

Audit Committee

Under
the Israeli Companies Law, the board of directors of any public company must establish an
audit committee. The audit committee must consist of at least three directors and must
include all of the outside directors. The audit committee may not include the chairman of
the board of directors, any director employed by the company or providing services to the
company on an ongoing basis, or a controlling shareholder or any of the controlling
shareholders relatives.

In
addition, the NASDAQ Marketplace Rules require us to establish an audit committee
comprised of at least three members, all of whom must be independent directors, each of
whom is financially literate and satisfies the respective independence
requirements of the Securities and Exchange Commission and NASDAQ and one of whom has
accounting or related financial management expertise at senior levels within a company.

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.

Our
audit committee consists of three members of our Board of Directors who satisfy the
respective independence requirements of the Securities and Exchange
Commission, NASDAQ and Israeli Law for audit committee members. Our audit committee is
currently composed of Messrs. Banitt and Tov and Ms. Rosolio-Aharonson.The audit
committee meets at least once each quarter.

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.

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Stock Option Committee

Our
Board of Directors established a Stock Option Committee (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.

# 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. The internal auditor must meet
certain statutory requirements of independence. 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.
We pay Mr. Gilam 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 ($4,680) (in 2007 we paid him NIS 10,024 ($2,439)), and
provide him with a company car and pay all expenses in connection therewith. In addition,
in accordance with the approval of our shareholders at our 2007 annual general meeting of
shareholders, in 2007 we paid Mr. Gilam a special bonus in the amount of NIS 60,000
($15,210) in consideration for his on-going efforts and substantial contribution to our
company during the 2006 fiscal year. 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 subsidiaries, on the one
hand, and any of our directors, on the other hand, providing for benefits upon termination
of their employment or service as directors of our company or any of our subsidiaries.

# Approval of Related
Party Transactions Under Israeli Law

Fiduciary Duties of
Office Holders

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 general manager 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 care that a reasonable office holder in the
same position would employ under the same circumstances. This includes the duty to utilize
reasonable means to obtain (i) information regarding the business feasibility of a given
action brought for his approval or performed by him by virtue of his position and (ii) all
other information of importance pertaining to the foregoing actions. The duty of loyalty
requires that an office holder act in good faith and for the benefit of the company,
including (i) avoiding any conflict of interest between the office holders position
in the company and any other position he holds or his personal affairs, (ii) avoiding any
competition with the companys business, (iii) avoiding exploiting any business
opportunity of the company in order to receive personal gain for the office holder or
others, and (iv) disclosing to the company any information or documents relating to the
companys affairs that the office holder has received by virtue of his position as an
office holder.

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Disclosure of Personal
Interests of an Office Holder; Approval of Transactions with Office Holders

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 (as such term is described above) 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.

Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are
not directors require approval by the 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.

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, however, a transaction
that is 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 transaction that 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 the transaction, unless the transaction is not
an extraordinary transaction 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 of directors or the audit committee have a personal interest, then
the approval of the general meeting of shareholders is also required.

Disclosure of Personal
Interests of a Controlling Shareholder; Approval of Transactions with Controlling
Shareholders

The
disclosure requirements that apply to an office holder also apply to a transaction in
which a controlling shareholder of the company has a personal interest. The Israeli
Companies Law 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 or a transaction with a controlling shareholder or his relative
regarding terms of service and employment, must be approved by the audit committee, the
board of directors and shareholders. The shareholder approval for such a transaction must
include at least one-third of the shareholders who have no personal interest in the
transaction who voted on the matter (not including abstentions). 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.

Under
the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated
under the Israeli Companies Law, as amended, certain extraordinary transactions between a
public company and its controlling shareholder(s) do not require shareholder approval. In
addition, under such regulations, directors compensation and employment arrangements
in a public company do not require the approval of the shareholders if both the audit
committee and the board of directors agree that such arrangements are solely for the
benefit of the company or if the directors compensation does not exceed the maximum
amount of compensation for outside directors determined by applicable regulations. Also,
employment and compensation arrangements for an office holder that is a controlling
shareholder of a public company do not require shareholder approval if certain criteria
are met. The foregoing exemptions from shareholder approval will not apply if one or more
shareholders holding at least 1% of the issued and outstanding share capital of the
company or of the companys voting rights, objects to the use of these exemptions
provided that such objection is submitted to the company in writing not later than
fourteen days from the date of the filing of a report regarding the adoption of such
resolution by the company. If such objection is duly and timely submitted, then the
transaction or compensation arrangement of the directors will require shareholders
approval as detailed above.

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In
addition, a private placement of securities that will (i) cause a person to become a
controlling shareholder or (ii) increase the relative holdings of a shareholder that holds
5% or more of the companys outstanding share capital, or (iii) will cause any person
to become, as a result of the issuance, a holder of more than 5% of the companys
outstanding share capital in a private placement 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 not under market terms, requires
approval by the board of directors and the shareholders of the company.

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 was made in a private placement that received shareholder approval, (i) was
from a 25% or greater shareholder of the company which resulted in the acquirer becoming a
25% or greater shareholder of the company, if there is not already a 25% or greater
shareholder of the company, or (ii) was from a shareholder holding a 45% interest in the
company which resulted in the acquirer becoming a holder of a 45% interest in the company
if there is not already a 45% or greater shareholder of the company.

If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a public
companys outstanding shares or a class of shares, the acquisition must be made by
means of a tender offer for all of the outstanding shares or a class of shares. In such
event, 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 acquirer may
not acquire shares in the tender offer that will cause his shareholding to exceed 90% of
the outstanding shares.

# 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. If permitted by its
articles of association, a company may 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 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.

Insurance of Office
Holders

The
Israeli Companies Law provides that a company may, if permitted by its articles of
association, enter into a contract to insure office holders in respect of liabilities
incurred by the office holder with a respect to an act or omission performed in his or her
capacity as an office holder, as a result of: (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 monetary 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.

- 38 -

---

---

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 liabilities or expenses imposed on him or her,
or incurred by him or her concerning acts or omissions performed by the office holder in
such capacity for: (i) a monetary liability imposed on the office holder in favor of
another person by any judgment, including a settlement or an arbitrators award
approved by a court; (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 monetary liability in lieu of criminal proceedings, or concluded without
an indictment against the office holder but with the imposition of a monetary liability on
the office holder 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 attorneys fees, incurred by the office holder or which were imposed on him
or her by a court, in an action instituted by the company or on the companys behalf,
or by another person, against the office holder, or in a criminal charge from which the
office holder was acquitted, or in a criminal proceeding in which the office holder was
convicted of a criminal offense 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, except that with
respect to a monetary liability imposed on the office holder by any judgment, settlement
or court-approved arbitration award, the undertaking must be limited to types of events
which the companys board of directors deems foreseeable considering the
companys actual operations at the time of the undertaking, and to an amount or
standard that the board of directors has determined as 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.

Limitations on
Exculpation, Insurance and Indemnification

The
Israeli Companies Law provides that neither a provision of the articles of association
permitting the company to enter into a contract to insure the liability of an office
holder, nor a provision in the articles of association or a resolution of the board of
directors permitting the indemnification of an office holder, nor a provision in the
articles of association exempting an office holder from duty to the company shall be
valid, where such insurance, indemnification or exemption relates to any of the following:
(i) a breach by the office holder of his duty of loyalty, except with respect to insurance
coverage or indemnification if the office holder acted in good faith and had reasonable
grounds to assume that the act would not prejudice the company; (ii) a breach by the
office holder of his duty of care if such breach was committed intentionally or
recklessly, unless the breach was committed only negligently; (iii) any act or omission
committed with intent to derive an unlawful personal gain; and (iv) any fine or forfeiture
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.

- 39 -

---

---

# NASDAQ Marketplace Rules
and Home Country Practices

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company,
are permitted to follow certain home country corporate governance practices instead of
certain provisions of Rule 4350, without the need to seek individual exemptions from
NASDAQ. A foreign private issuer that elects to follow a home country practice instead of
any of such provisions of Rule 4350, must submit to NASDAQ, in advance, 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. 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  Outside and Independent Directors.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
requirements regarding the directors nominations process. Under Israeli law and practice
our board of directors and shareholders holding at least 1% of a companys voting
rights are authorized to recommend to our shareholders director nominees for election.
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, 2007, we employed 326 full-time employees in Israel, of which 192 were
employed in manufacturing services, 38 in process and product engineering, 43 in quality
assurance and control, 14 in sales and marketing and 39 in finance, accounting,
information service and administration.

As
of December 31, 2006, we employed 310 full-time employees in Israel, of which 184 were
employed in manufacturing services, 35 in process and product engineering, 42 in quality
assurance and control, 12 in sales and marketing and 37 in finance, accounting,
information service and administration.

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 sales and marketing and 37 in finance, accounting,
information service and administration.

In
addition, as of December 31, 2007, Kubatronik, our subsidiary in Germany, employed 38
full-time employees and 8 part-time employees, compared to 40 full-time employees and 7
part-time employees at December 31, 2006 and 37 full-time employees and 9 part-time
employees at December 31, 2005.

- 40 -

---

---

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.

In
addition, certain of our officers, key employees and 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. Most of our employees are covered by
contribution pension plans providing customary benefits including retirement and severance
benefits. Some of our employees are covered by life and pension insurance policies
providing similar benefits. We contribute between 12.0% and 14.5% of base salaries to such
plans and employees contribute between 5.0% to 7,0% 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 4.9% of the salary and the employee contribution to the National Insurance Institute is
at the rate of 8.0% of the salary (of which 4.1% relates to payments for national health
insurance), both of which are limited to a maximum salary of NIS 35,760 (approximately
$8,900). In the year ended December 31, 2007, our aggregate payments as an employer to the
National Insurance Institute amounted to approximately 4.9% of the salaries.

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

# Beneficial Ownership of
Executive Officers and Directors

The
following table sets forth certain information as of April 28, 2008 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             |                                                  |                            
| | Arieh Reichart           |                                                  |                            
| | Amnon Shemer             |                                                  |                            
| | Dan Eshed                |                                                  |                            
| | Eli Dvora                |                                                  |                            
| | Moshe Leibovich          |                                                  |                            
| | Roberto Tulman           |                                                  |                            
| | Shlomo Danino            |                                                  |                            
| | Vardit Dekel             |                                                  |                            
| | David Banitt             |                                                  |                            
| | Eitan Popper             |                                                  |                            
| | Josef Maiman             |                                                  |                            
| | Ophira Rosolio-Aharonson |                                                  |                            
| | Eliyaho Tov              |                                                  |                            
| | Joseph Yerushalmi        |                                                  |                            

| |  
| | -
| | *

- 41 -

---

---

| | (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 6,609,807 ordinary shares issued and
               outstanding as of April 28, 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------

| | (3) | Such
shares are subject to currently exercisable options granted under our 2000
               Stock Option Plan, having an exercise price of $1.14 per share and that
expire                in November 2009.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes
985,796 held of record by Merhav M.N.F. Ltd., an Israeli private                company
controlled by Mr. Maiman and 599,744 ordinary shares held of record by
               Integral International Inc., a Panama corporation controlled by Mr.
Maiman. Mr.                Maiman may be deemed to be the beneficial owner of the
aggregate 1,585,540                ordinary shares held directly by Merhav M.N.F. Ltd.
and Integral International                Inc.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Major Shareholders
Voting Rights

Our
major shareholders do not have different voting rights.

# Stock Option Plans

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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 42 -

---

---

| |  | 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 an optionee under any award previously
granted. Neither the termination of the 2000 Plan nor the change of control of our company
(except to the extent provided in the 2000 Plan) will affect any option previously
granted.

The
option price per share may not be less than 100% of the fair market value of such share on
the date of the grant. However, 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. However, 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, 2007, 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. During the year ended December 31, 2007, no options were exercised. As of December
31, 2007, options to purchase 20,000 ordinary shares were outstanding and 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 20,000 ordinary shares were outstanding and exercisable as of December 31, 2007
and the remaining options to purchase 39,500 ordinary shares were exercised in prior
years. Since December 2004, we have not granted options under the 2000 Plan and we do not
intend to grant any additional options under the 2000 Plan in the future.

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 was designed to reflect the provisions of such new Section 102(c). Under the 2005
Plan we 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.

- 43 -

---

---

The
2005 Plan authorized the issuance of up to an aggregate of 284,500 ordinary shares to our
Israeli directors, officers and employees. Options granted under the 2005 Plan could only
be awarded in accordance with Section 102 (c) of the Israeli Income Tax Ordinance. The
2005 Plan had a term of two years commencing on December 11, 2005 and expired on December
10, 2007. The exercise price per share of options granted under the 2005 Plan was $5.46.
All options granted under the 2005 Plan were fully vested upon their award. The period for
which an option was granted under the 2005 Plan was two years.

We
granted options to purchase an aggregate 284,500 ordinary shares to our Israeli directors,
officers and employees under the 2005 Plan, all of which expired in December 2007 without
being exercised. 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, all of which expired in December 2007 without being exercised.

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

|A. | MAJOR
SHAREHOLDERS
|-- | ------------------

The
following table sets forth certain information as of April 28, 2008 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)
| | --------------------------- | ------------------------------------------------ | ---------------------------
|
|
|
|
| | Josef Maiman                |                                                  |                            
| | Merhav M.N.F. Ltd.          |                                                  |                            
| | Integral International Inc. |                                                  |                            

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

| | (2) | The
percentages shown are based on 6,609,807 ordinary shares issued and
               outstanding as of April 28, 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes
985,796 held of record by Merhav M.N.F. Ltd., an Israeli private                company
controlled by Mr. Maiman and 599,744 ordinary shares held of record by
               Integral International Inc., a Panama corporation controlled by Mr.
Maiman. Mr.                Maiman may be deemed to be the beneficial owner of the
aggregate 1,585,540                ordinary shares held directly by Merhav M.N.F. Ltd.
and Integral International                Inc.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Merhav
M.N.F. Ltd. is an Israeli private company controlled by Mr. Maiman.
               Accordingly, Mr. Maiman may be deemed to be the beneficial owner of the
ordinary                shares held directly by Merhav M.N.F. Ltd.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Integral
International Inc. is a Panama corporation controlled by Mr. Maiman.
               Accordingly, Mr. Maiman may be deemed to be the beneficial owner of the
ordinary                shares held directly by Integral International Inc.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 44 -

---

---

# Significant Changes in
the Ownership of Major Shareholders

As
of December 31, 2004, Mr. Josef Maiman beneficially held 2,015,956 ordinary shares,
representing approximately 36.7% of our then outstanding ordinary shares. Of such shares,
341,500 ordinary shares, representing approximately 6.2% of our then outstanding shares,
were held of record by Mr. Maiman, 606,060 ordinary shares, representing
approximately11.0% of our then outstanding shares, were held of record by Merhav M.N.F.
Ltd., or Merhav, an Israeli private company controlled by Mr. Maiman (excluding ordinary
shares that were issuable upon exercise of a convertible note then held by Merhav) and
1,068,396 ordinary shares, representing approximately 19.5% of our then outstanding
shares, were held of record by Integral International Inc., or Integral, a Panama
corporation controlled by Mr. Maiman.

During
the period of March 24, 2005 through April 6, 2005, Mr. Josef 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, 468,652 ordinary shares were held of record by Integral and
341,500 were held directly by Mr. Maiman. As a result, Mr. Maimans beneficial
ownership interest decreased to approximately 10.7% of our then outstanding shares
(excluding ordinary shares that were issuable upon exercise of a convertible note then
held by Merhav).

As
of December 31, 2005 and 2006, Mr. Josef Maiman beneficially held 599,744 ordinary shares,
which were held of record by Integral, representing approximately 10.7% of our outstanding
shares at such times (excluding ordinary shares that were issuable upon exercise of a
convertible note then held by Merhav).

In
May 2007, Mr. Josef Maiman elected to convert a convertible note held of record by Merhav
for an aggregate 985,796 ordinary shares. As a result, Mr. Maimans beneficial
ownership interest increased to 1,585,540 ordinary shares, representing approximately
24.0% of our then outstanding shares, of which 985,796 are held of record by Merhav and
599,744 are held of record by Integral.

# 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 April 28, 2008,
there were 20 holders of record of our ordinary shares, of which 12 record holders holding
approximately 75.0% of our ordinary shares had registered addresses in the United States.
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 74.68% 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. Josef 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. The note became due on May 15, 2007. The note bore
interest at the rate of 10% per year, compounded on a quarterly basis. Under the terms of
the note, Merhav had the right, at any time, to convert the note into ordinary shares of
our company at a price of $0.33 per ordinary share. We had the right, at our sole
discretion, to repay the accrued interest or convert the accrued interest into ordinary
shares at the foregoing price. On May 15, 2007, Mr. Maiman elected to convert the entire
note into 985,796 ordinary shares. Upon the conversion of the note, we elected to repay
the accrued interest on the principal amount of the convertible note to Merhav in the
amount of $128,000. During 2006, we recorded interest and exchange rate expenses of $5,680
on the convertible note, and we recorded interest and exchange rate income of $10,166 on
the convertible note during 2007.

- 45 -

---

---

|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 18 hereof and incorporated herein by this reference.

# Legal Proceedings

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.

|B. | SIGNIFICANT
CHANGES
|-- | -------------------

None.

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

|A. | OFFER
AND LISTING DETAILS
|-- | -------------------------

Annual Stock Information

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

| | Year | High | Low
| | ---- | ---- | ---
|
|
|
|
| | 2003 |      |    
| | 2004 |      |    
| | 2005 |      |    
| | 2006 |      |    
| | 2007 |      |    

- 46 -

---

---

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
| | -------------- | ---- | ---
|
|
|
|
| | 2006           |      |    
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    
| |                |      |    
| | 2007           |      |    
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    
| |                |      |    
| | 2008           |      |    
| | First Quarter  |      |    

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:

| |                             | High | Low
| | --------------------------- | ---- | ---
|
|
|
|
| | Month                       |      |    
| | November 2007               |      |    
| | December 2007               |      |    
| | January 2008                |      |    
| | February 2008               |      |    
| | March 2008                  |      |    
| | April 2008 (until April 25) |      |    

|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.

- 47 -

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|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.

# 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. The requirements for approval of certain
transactions are set forth above in 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 its profits, as defined under 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.

- 48 -

---

---

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.

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. Depending on the matter
to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting
is required. In addition, the board must convene a special general meeting upon the demand
of two of the directors, 25% of the nominated directors, one or more shareholders having
at least 5% of the outstanding share capital and at least 1% of the voting power in the
company, or one or more shareholders having at least 5% of the voting power in the
company. See this Item 10B. Additional Information  Memorandum and Articles of
Association- Rights Attached to Shares-Voting Rights.

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.

- 49 -

---

---

# 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

Tender
Offer.A person wishing to acquire shares, or any class of shares, of a publicly
traded Israeli company and who would as a result hold over 90% of the companys
issued and outstanding share capital, or a class of shares, is required by the Israeli
Companies Law to make a tender offer to all of the companys shareholders for the
purchase of all of the remaining issued and outstanding shares of the company, or the
class of shares, as the case may be. If the shareholders who do not respond to the offer
hold less than 5% of the issued share capital of the company, or of the relevant class of
shares, all of the shares that the acquirer offered to purchase will be transferred to the
acquirer by operation of law. However, the shareholders may petition the court to
determine the consideration for the acquisition if the consideration is less than the
shares fair value. If the dissenting shareholders hold more than 5% of the issued
and outstanding share capital of the company, or of the relevant class of shares, as the
case may be, the acquirer may not acquire additional shares of the company from
shareholders who accepted the tender offer if following such acquisition the acquirer
would own over 90% of the companys issued and outstanding share capital, or of the
relevant class of shares.

The
Israeli Companies Law provides that an acquisition of shares of a public company be made
by means of a tender offer if as a result of the acquisition the purchaser would become
the holder of a control block. Under the Israeli Companies Law shares
conferring 25% or more of the voting rights in the company constitute a control
block. The requirement for a tender offer does not apply if there is already another
holder of a control block. 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 acquirer would hold more than 45% of the voting rights in
the company, unless there is another person holding more than 45% of the voting rights in
the company. These requirements do not apply if:

| |  | the
acquisition was made in a private placement the object of which was to confer to the
acquirer a control block where there is no holder of a control block,
or to confer to the acquirer more than 45% of the voting rights in the company where
there is no holder of more than 45% of the voting rights in the company, and the private
placement received the general meetings approval; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
acquisition was from the holder of a "control block" and resulted in the acquirer
becoming the holder of a               "control block"; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
acquisition was from a shareholder holding more than 45% of the voting rights in the
company and resulted in the acquirer becoming a holder of more than 45% of the voting
rights in the company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Merger.The Israeli Companies Law permits merger transactions if approved by each
          partys board of directors and, unless certain requirements described
under           the Israeli Companies Law are met, the majority of each partys
shares           voted on the proposed merger at a shareholders meeting convened by with
prior           notice of at least 35 days. A merger is defined as the transfer of all
assets           and liabilities, including conditional, future, known and unknown debts
of the           target company to the surviving company, as a result of which the target
company           is liquidated, and stricken out of the Companies Register.

Under
the Israeli Companies Law, if the approval of a general meeting of the shareholders is
required, merger transactions may be approved by holders of a simple majority of the
shares present and voting, in person or by proxy or by written ballot, at the general
meeting convened to approve the transaction. If one of the merging companies, or a
shareholder that holds 25% or more of the means of control of one of the merging companies
, or a substantial shareholder, holds shares of the other merging company, then a
dissenting vote of holders of the majority of the shares of the other merging company
present and voting, excluding shares held by the merging company or a substantial
shareholder thereof, or by anyone acting on behalf of either of them, their relatives and
corporations controlled thereby, is sufficient to reject the merger transaction. Means of
control are defined as any of the following: (i) the right to vote at a general meeting of
a company and (ii) the right to appoint a director of a company. If the transaction would
have been approved but for the exclusion of the votes as previously indicated, a court may
still approve the merger upon the request of holders of at least 25% of the voting rights
of the company. The court will not approve a merger unless it is convinced that the merger
is fair and reasonable, taking into account the values of the merging companies and the
consideration offered to the shareholders. Upon the request of a creditor of either party
to the proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that, as a result of the merger, the surviving company
will be unable to satisfy the obligations of the merged company. In addition, a merger may
not be completed unless at least 50 days have passed from the date that a proposal for
approval of the merger was filed with the Israeli Registrar of Companies and 30 days from
the date that shareholder approval of both merging companies was obtained.

- 50 -

---

---

Notwithstanding
the foregoing, a merger is not subject to the approval of the shareholders of the target
company if the target company is a wholly-owned subsidiary of the acquiring company. A
merger is not subject to the approval of the shareholders of the acquiring company if:

| |  | the
merger does not require the alteration of the memorandum or articles of association of
the acquiring company;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | the
acquiring company would not issue more than 20% of the voting rights thereof to the
shareholders of the target company in the course of the merger and no person will become,
as a result of the merger, a controlling shareholder of the acquiring company, on a fully
diluted basis;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | neither
the target company, nor any shareholder that holds 25% of the means of control of the
target company is a               shareholder of the acquiring company; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | there
is no person that holds 25% or more of the means of control in both companies.
| | - | ------------------------------------------------------------------------------------

# Disclosure of
Shareholders Ownership

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

# Changes in Our Capital

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

|C. | MATERIAL
CONTRACTS
|-- | ------------------

None.

|D. | EXCHANGE
CONTROLS
|-- | -----------------

Israeli
law and regulations do not impose any material foreign exchange restrictions on
non-Israeli holders of our ordinary shares.

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.

- 51 -

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|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 2006 was 31%. The rate was reduced to 29% in 2007 and will be further
reduced to 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 or a benefited enterprise (as further discussed below) may be
lower. See Item 10E. Additional Information  Taxation  Tax Benefits
Under the Law for the Encouragement of Capital Investments, 1959.

As
of December 31, 2007, we had approximately $14.3 million in tax loss carryforwards in
Israel, which can be offset against future income in Israel without time limitation. In
Israel, we have received final tax assessments through the 1995 tax year and the tax
assessments we received for the 1996-2003 tax years are considered final due to the
statute of limitations. Our principal foreign subsidiary, Kubatronik, has received final
tax assessments through the 2005 tax year and as of December 31,2007 had approximately
$0.9 million in tax loss carryforwards in Germany. Despite our accumulated profits in
Israel during the three years ended December 31, 2007, we did not record a net deferred
tax asset in 2007 and related tax benefit in 2005, 2006 or 2007 with respect to our net
operating losses generated in Israel due to uncertainty about our ability to utilize such
losses in the foreseeable future. Such uncertainty is primarily due to the appreciation of
the NIS against the U.S. dollar, the replacement of a high volume of revenue from our
former largest customer with many smaller orders, causing additional challenges for our
production efficiency, the fluctuations of the PCB industry and our history of losses.

# 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).

- 52 -

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---

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

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

# Tax Benefits Under The
Law for the Encouragement of Capital Investments, 1959

General

Certain
of our production facilities have been granted approved enterprise and benefited
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. As of December 31, 2007, one
benefited investment program is applicable to us, the period of tax benefits relating to
which has not yet commenced and will expire no later than 2016 (see below). The
benefit period for all other programs (approved enterprises) expired in 2005.

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.

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 not involving a
government grant, referred to as a benefited 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, be competitive (as defined in the April 2005 amendment) and contribute to the
gross local product 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 generally does not apply to investment
programs having an approved enterprise approval certificate from the
Investment Center issued prior to December 31, 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 53 -

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On
September 20, 2006, we received a ruling from the Israeli Tax Authority approving our most
recent investment plan as a benefited enterprise in lieu of the former approved enterprise
status. Pursuant to such ruling, the former approved enterprise status of that investment
plan was terminated by the Investment Center.

The
benefited enterprise status granted to our investment plan 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 (see below). The benefit period with respect to such
program has not yet commenced, and will expire no later than 2016.

The
tax benefits available under any instrument of approval relate only to taxable profits
attributable to the specific program and are contingent upon meeting the criteria set out
in the instrument of approval.

If,
(i) only a part of a companys taxable income is derived from an approved enterprise
or a benefited enterprise, as in our case; or (ii) a company owns more than one approved
enterprise or benefited 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 (which is a company that derives income from one or
more sources in addition to an approved enterprise or benefited enterprise)generally may
not distribute a dividend that is attributable only to the approved enterprise or
benefited 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.

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 C,
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 remainder of the benefit period.

A
company owning an approved enterprise, which was approved after April 1, 1986, and
before December 31, 2004 could 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. Qualified investments which were not approved before January 1,
2005 and meet the criteria of the alternative package of tax benefits track will receive
the benefits without need for prior approval.

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.

- 54 -

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The
tax benefits available to benefited enterprises are: (1) benefited enterprise situated in
zone A may choose between (a) limited corporate tax rate of 11.5%; and (b) tax exemption
from corporate tax on undistributed income; (2) benefited enterprise qualified as
strategic investments is entitled to a tax exemption; (3) benefited enterprise
situated in zone B or elsewhere (zone C) is entitled to tax exemption on
undistributed income for six or two years, respectively, and to 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.Our plant is located in zone C.

Dividends
paid out of income derived from an approved enterprise or benefited enterprise (or out of
dividends received from a company whose income is derived from an approved enterprise or
benefited 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 from its approved enterprise or benefited enterprise during the tax
exemption period. Dividends paid to a qualifying non-resident out of the profits of
benefited enterprise subject to 11.5% corporate tax are subject to withholding tax at the
rate of 4%.

The
tax benefits available to an approved enterprise and a benefited 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, 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 and benefited 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 and benefited
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.

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.

- 55 -

---

---

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.

On
February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No.
20) (Restriction of Period of Application)  2008 was passed by the Knesset.
According to the amendment, the inflationary adjustments law will no longer applicable
subsequent to the 2007 tax year accept for the transitional provisions whose objectives
are to prevent distortion of the income tax calculations.

In
addition, according to the amendment commencing in the 2008 tax year, the adjustment of
the income for the effects of inflation for tax purposes will no longer be calculated.
Additionally, depreciation on the protected assets and tax loss carryforwards will no
longer be linked to the Consumer Price Index, or the CPI, subsequent to the 2007 tax year,
and the balances that have been linked to the CPI through the and of 2007 tax year, will
be used going forward. As a result, our carryforward tax loss will no longer be linked to
the Israeli CPI.

# 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 capital gains,
including capital gain from the sale of securities listed on a stock exchange, is
generally a uniform rate of 20% for individuals and 25% for corporate bodies and
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). The tax rate on dividends is generally a uniform rate of 20%
for individuals and non-resident corporate shareholders and 25% for substantial individual
and substantial non-resident corporate shareholders. Dividends paid to an Israeli company
by another Israeli company are not subject to tax, unless received out of income derived
from approved enterprises or stems from income derived or accrued outside of Israel.

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 qualified 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.

- 56 -

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---

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: (i) the capital gain is not attributed to the foreign
residents permanent establishment in Israel, and (ii) 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 (i) for the period ending December 31,
2002 their sale would be tax exempt so long as (1) the shares were listed on a stock
exchange, such as, in our case, the NASDAQ Capital Market, which is recognized by the
Israeli Ministry of Finance on December 31, 2002, and (2) we qualified as an Industrial
Company or Industrial Holding Company under the law for Encouragement of Industry (Taxes)
1969, at the relevant times as provided by the Income Tax Ordinance [New Version], 1961,
which we believe we so qualified and (ii) for the period commencing January 1, 2003, the
sale of the shares would be, generally, subject to a 20% tax if sold by non-substantial
individual shareholders and 25% tax if sold by a corporate body or a substantial
individual shareholders. We cannot provide any assurance that the Israeli tax authorities
will agree with the determination that we qualified as an Industrial Company at the
relevant times.

On
the distribution of dividends other than bonus shares (stock dividends) to individual
Israeli residents shareholders or to non-Israeli shareholders, income tax applies at the
rate of 20% or 25%, as described above, but is generally withheld at source at the rate of
20% (for as long as we are listed) 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 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.

# 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% (or
25% as described above), 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 or benefited enterprise
are, generally, taxed at the rate of 15%.

Subject
to certain conditions, non-Israeli residents will be tax exempt on capital gain derived
from investments in Israeli companies made within the period commencing July 1, 2005
through December 31, 2008, 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.

# 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.

- 57 -

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# 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:

| |  | broker-dealers,
| | - | ---------------

| |  | financial
institutions,
| | - | -----------------------

| |  | certain
insurance companies,
| | - | ----------------------------

| |  | regulated
investment companies or real estate investment trusts,
| | - | ----------------------------------------------------------------

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

| |  | persons
who acquire their ordinary shares through the exercise of employee stock options or
otherwise as               compensation for services,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | investors
who 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 treated as a corporation, created or organized in or under
the laws of the United               States or any political subdivision thereof;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 58 -

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---

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

| |  | 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

Subject
to the discussion below under the heading Passive Foreign Investment
Companies, 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 current and accumulated 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 set out in the Code, 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 (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
category or general category income for United States foreign tax credit purposes. 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.

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.

- 59 -

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# 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 adjusted tax basis in the 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.

# 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,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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 file 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.

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, in
each year in which we are considered a PFIC, 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.

|F. | DIVIDENDS
AND PAYING AGENTS
|-- | ---------------------------

Not
applicable.

|G. | STATEMENT
BY EXPERTS
|-- | --------------------

Not
applicable.

|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.

- 61 -

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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
reporting currency is U.S dollars, however our functional currency is NIS. Our revenues
are generally denominated in foreign currencies, primarily the U.S. dollar, while our
expenses are primarily denominated in NIS, U.S. dollars, Euros, dollar-linked NIS and
Euro-linked NIS. As a result, fluctuations in rates of exchange between NIS and non-NIS
currencies may affect our operating results and financial condition. The NIS value of our
U.S. dollar revenues are adversely affected by the appreciation of the NIS against the
U.S. dollar. In addition, the U.S. dollar value of our expenses other than those paid in
NIS or Euro is negatively impacted by the devaluation of the U.S. dollar against the NIS
and Euro. In 2006 and 2007, the NIS appreciated against the U.S. dollar by 8.2% and 9.0%,
respectively, and the Euro appreciated against the U.S. dollar by 11.3% and 11.7%,
respectively, which had a significant adverse affect on our results of operations. We
estimate that a devaluation of 1% of the U.S. dollar against the NIS would result in a
decrease of approximately $200,000 in our operating income.

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.

# 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-termloans and our
factoring agreement. These are principally denominated in (i) NIS and bear annual interest
ranging from 4.5% to 8.4% as of December 31, 2007; (ii) U.S. dollars and bear interest
from 4% to 6.9% as of December 31, 2007 and (iii) Euro and bear interest of 2.85% as of
December 31, 2007. 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. A hypothetical
increase of 1% in the interest rate would result in an increase of approximately $87,000
in our financial expenses.

A
hypothetical increase of 1% in the Israeli consumer price index would result in an
increase of approximately $10,000 in our financial expenses.

- 62 -

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

Not
applicable.

|ITEM 15T. |  | CONTROLS
AND PROCEDURES
|--------- |  | -----------------------

# Disclosure Controls and
Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its Exchange Act reports 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 is accumulated and
communicated to our chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. Our management, including our chief executive
officer and chief financial officer, conducted an evaluation of our disclosure controls
and procedures, as defined under 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.

# Managements Annual
Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over
our financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the companys principal executive and
principal financial officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies
and procedures that:

| |  | Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the
transaction and               dispositions of the assets of the company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 63 -

---

---

| |  | Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use of disposition of the companys assets that could have a material
effect on the financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on that assessment, our management concluded
that as of December 31, 2007, our internal control over financial reporting is effective.

This
annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements
report was not subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit us to
provide only managements report in this annual report.

# Changes in Internal
Control over Financial Reporting

There
was no change in our internal control over financial reporting that occurred during the
period covered by this annual report that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.

|ITEM 16. |  | [RESERVED]
|-------- |  | ----------

|ITEM 16A. |  | AUDIT
COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our
Board of Directors has determined that Mr. Eliyaho Tov, an outside director, meets the
definition of an audit committee financial expert, as defined by rules of the Securities
and Exchange Commission. 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.

- 64 -

---

---

|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.

| | Services Rendered | 2006 | 2007
| | ----------------- | ---- | ----
|
|
|
|
| | Audit (1)         |      |     
| | Tax (2)           |      |     
| |                   |      |     
| | Total             |      |     

| | 
| | 

| | (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 and
               tax 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 Securities and Exchange
Commission, and also requires the audit committee to consider whether proposed services
are compatible with the independence of the registered public accountants.

|ITEM 16D. |  | EXEMPTIONS FROM THE LISTING 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 2007.

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

Not
applicable.

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

# Consolidated Financial Statements

| |                                                                                     |    
| | ----------------------------------------------------------------------------------- | ---
|
|
|
|
| | Report of Independent Registered Public Accounting Firm                             | F-1
|
| | Consolidated Balance Sheets                                                         | F-2
|
| | Consolidated Statements of Operations                                               | F-4
|
| | Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income | F-5
|
| | Consolidated Statements of Cash Flows                                               | F-6
|
| | Notes to the Consolidated Financial Statements                                      | F-7

- 65 -

---

---

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

| | 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 | 2000
Stock Option Plan (3)
| | --- | --------------------------

| | 4.3 | 2005
Stock Option Plan (4)
| | --- | --------------------------

| | 4.4 | Services
Factoring Agreement dated July 8, 2003 (5)
| | --- | ---------------------------------------------------

| | 4.5 | Share
Purchase Agreement dated June 10, 2002, by and among En-Eltek Netherlands 2000 B.V.,
                           Kubatronik-Leiterplatten GmbH, Mr. Alois Kubat, Mr. Thomas
Kubat and Ms. Heike Heidenreich (6)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 | Extension
of Put/Call Option Agreement dated May 4, 2005, by and between En-Eltek Netherlands
                           2000 B.V. and Mr. Alois Kubat (7)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.7 | Second
Extension of Put/Call Option Agreement Provisions under the Share Purchase Agreement
dated                            December 28, 2007, by and between En-Eltek Netherlands
2000 B.V. and Mr. Alois Kubat
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, Independent Registered Public
                           Accounting Firm
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

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

- 66 -

---

---

|Eltek Ltd. and its Subsidiaries                          
|---------------------------------------------------------
|                                                         
|Consolidated Financial Statements as of December 31, 2007
|                                                         

Contents

|                                                                                    | Page
|----------------------------------------------------------------------------------- | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm                             | F-1 
|                                                                                   
|Consolidated Balance Sheets                                                         | F-2 
|                                                                                   
|Consolidated Statements of Operations                                               | F-4 
|                                                                                   
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income | F-5 
|                                                                                   
|Consolidated Statements of Cash Flows                                               | F-6 
|                                                                                   
|Notes to the Consolidated Financial Statements                                      | F-7 

- 67 -

---

---

# Report of Independent
Registered Public Accounting Firm

# The Board of Directors
and Shareholders ofEltek Ltd.:

We have audited the accompanying
consolidated balance sheets of Eltek Ltd. and subsidiaries (the Company) as of
December 31, 2007 and 2006 and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income and cash flows for each of the years
in the three-year period ended December 31, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated 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 statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the Company and subsidiaries as of December 31, 2007 and 2006, and
the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles (U.S. GAAP).

The Companys consolidated
financial statements for the years ended December 31, 2006 were previously prepared in
conformity with Israeli GAAP and in New Israeli Shekel (NIS). As more fully described in
Note 1C to the consolidated financial statements, the Company elected, at the beginning of
2007, to prepare its consolidated financial statements in accordance with U.S. GAAP and in
US$. Consequently, the Companys financial statements for all previous years have
been prepared under U.S GAAP and in US$.

As discussed in Note 1M to the
consolidated financial statements, effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes.

/s/ Somekh ChaikinSomekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International
Tel-Aviv, Israel, April 27, 2008

F - 1

---

---

|Eltek Ltd. and its Subsidiaries
|-------------------------------
|                               
|Consolidated Balance Sheets    
|                               

|                                              |  | December 31
|--------------------------------------------- |  | -----------
|
|
|
|
|Assets                                        |  |            
|                                              |  |            
|Current assets                                |  |            
|                                              |  |            
|Cash and cash equivalents                     |  |            
|                                              |  |            
|Account receivables:                          |  |            
|                                              |  |            
|Trade, net of provision for doubtful accounts |  |            
|Other                                         |  |            
|                                              |  |            
|Inventories                                   |  |            
|Prepaid expenses                              |  |            
|                                              |  |            
|                                              |  |            
|Total current assets                          |  |            
|                                              |  |            
|Assets held for employees' severance benefits |  |            
|                                              |  |            
|Fixed assets, less accumulated depreciation   |  |            
|                                              |  |            
|                                              |  |            
|Goodwill                                      |  |            
|                                              |  |            
|                                              |  |            
|Total assets                                  |  |            
|                                              |  |            

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

F - 2

---

---

|Eltek Ltd. and its Subsidiaries
|-------------------------------
|                               
|Consolidated Balance Sheets    
|                               

|                                                       |  | December 31
|------------------------------------------------------ |  | -----------
|
|
|
|
|
|Liabilities and shareholders' equity                   |  |            
|                                                       |  |            
|Current liabilities                                    |  |            
|Short-term credit and current                          |  |            
|maturities of long-term debt                           |  |            
|Accounts payable:                                      |  |            
|Trade                                                  |  |            
|Other                                                  |  |            
|Convertible note                                       |  |            
|                                                       |  |            
|Total current liabilities                              |  |            
|                                                       |  |            
|                                                       |  |            
|Long-term liabilities                                  |  |            
|Long-term debt, excluding current maturities           |  |            
|Employee severance benefits                            |  |            
|                                                       |  |            
|Total long-term liabilities                            |  |            
|                                                       |  |            
|Minority interests                                     |  |            
|                                                       |  |            
|Commitments and contingent liabilities                 |  |            
|                                                       |  |            
|Shareholders' equity                                   |  |            
|Ordinary shares, NIS 0.6 par value                     |  |            
|Authorized 50,000,000  shares, issued and              |  |            
|outstanding 6,609,807 shares as of December 31, 2007   |  |            
|(5,624,011 shares as of December 31, 2006)             |  |            
|Additional paid-in capital                             |  |            
|Cumulative translation adjustment related to change in |  |            
|reporting currency                                     |  |            
|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 27, 2008

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

F - 3

---

---

|Eltek Ltd. and its Subsidiaries      
|-------------------------------------
|                                     
|Consolidated Statements of Operations
|                                     

|                                               |  | Year ended December 31
|---------------------------------------------- |  | ----------------------
|
|
|
|
|Revenues                                       |  |                       
|Cost of revenues                               |  |                       
|                                               |  |                       
|Gross profit                                   |  |                       
|                                               |  |                       
|Operating expenses                             |  |                       
|Research and development, gross                |  |                       
|Government grants                              |  |                       
|                                               |  |                       
|                                               |  |                       
|Research and development expenses, net         |  |                       
|Selling, general and administrative expenses   |  |                       
|Impairment loss on goodwill                    |  |                       
|                                               |  |                       
|Operating profit (loss)                        |  |                       
|Financial expenses, net                        |  |                       
|                                               |  |                       
|Operating profit (loss)                        |  |                       
|Other income, net                              |  |                       
|                                               |  |                       
|Profit (loss) before income tax expense        |  |                       
|and minority interest                          |  |                       
|Income tax expense                             |  |                       
|                                               |  |                       
|Profit (loss) before minority interest         |  |                       
|Minority interest                              |  |                       
|                                               |  |                       
|                                               |  |                       
|Net profit (loss)                              |  |                       
|                                               |  |                       
|                                               |  |                       
|Basic net earnings (loss) per ordinary share   |  |                       
|                                               |  |                       
|                                               |  |                       
|Diluted net earnings (loss) per ordinary share |  |                       
|                                               |  |                       
|                                               |  |                       
|Weighted average number of ordinary            |  |                       
|shares used to compute basic net               |  |                       
|earnings (loss) per ordinary share             |  |                       
|                                               |  |                       
|                                               |  |                       
|Weighted average number of ordinary            |  |                       
|shares used to compute diluted net earnings    |  |                       
|(loss) per ordinary share                      |  |                       
|                                               |  |                       

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

F - 4

---

---

|Eltek Ltd. and its Subsidiaries                                                    
|-----------------------------------------------------------------------------------
|                                                                                   
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
|                                                                                   

|                                              | Ordinary shares | Additionalpaid-incapital | Accumulatedothercomprehensiveincome | Capitalreserves | Accumulateddeficit | Totalshareholders'equity
|--------------------------------------------- | --------------- | ------------------------ | ----------------------------------- | --------------- | ------------------ | ------------------------
|
|
|
|
|Balance as of December 31, 2004               |                 |                          |                                     | 5,491,711       |                    |                         
|                                              |                 |                         
|Changes during the year                       |                 |                         
|Translation adjustment related to change in   |                 |                         
|reporting currency                            |                 |                          |                                     | -               |                    |                         
|Foreign currency translation adjustments      |                 |                          |                                     | -               |                    |                         
|Net profit                                    |                 |                          |                                     | -               |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         
|Comprehensive income                          |                 |                          |                                     | -               |                    |                         
|Exercise of employee stock options            |                 |                          |                                     | 110,800         |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         
|Balance as of December 31, 2005               |                 |                          |                                     | 5,602,511       |                    |                         
|                                              |                 |                         
|Changes during the year                       |                 |                         
|Translation adjustment related to change in   |                 |                         
|reporting currency                            |                 |                          |                                     | -               |                    |                         
|Foreign currency translation adjustments      |                 |                          |                                     | -               |                    |                         
|Net profit                                    |                 |                          |                                     | -               |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         
|Comprehensive income                          |                 |                          |                                     | -               |                    |                         
|Exercise of employee stock options            |                 |                          |                                     | 21,500          |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         
|Balance as of December 31, 2006               |                 |                          |                                     | 5,624,011       |                    |                         
|                                              |                 |                         
|Changes during the year                       |                 |                         
|Translation adjustment related to change in   |                 |                         
|reporting currency                            |                 |                          |                                     | -               |                    |                         
|Foreign currency translation adjustments      |                 |                          |                                     | -               |                    |                         
|Net loss                                      |                 |                          |                                     | -               |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         
|Comprehensive income                          |                 |                          |                                     | -               |                    |                         
|Convertible note and accrued interest thereon |                 |                         
|converted into ordinary shares                |                 |                          |                                     | 985,796         |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         
|Balance as of December 31, 2007               |                 |                          |                                     | 6,609,807       |                    |                         
|                                              |                 |                          |                                     |                 |                    |                         

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

F - 5

---

---

|Eltek Ltd. and its Subsidiaries      
|-------------------------------------
|                                     
|Consolidated Statements of Cash Flows
|                                     

|                                                              | Year ended December 31
|------------------------------------------------------------- | ----------------------
|
|
|
|
|Cash flows from operating activities:                         |                       
|Net profit (loss)                                             |                       
|                                                              |                       
|Adjustments to reconcile net profit (loss) to net             |                       
|cash flows provided by operating activities:                  |                       
|Depreciation                                                  |                       
|Impairment of goodwill                                        |                       
|Capital gain on disposal of fixed assets, net                 |                       
|Minority share of subsidiary's net results                    |                       
|Interest payment on convertible note                          |                       
|Increase (decrease) in employee severance benefits, net       |                       
|Decrease (increase) in trade receivables                      |                       
|Decrease (increase) in other receivables and prepaid expenses |                       
|Decrease (increase) in inventories                            |                       
|Increase (decrease) in trade payables                         |                       
|Increase (decrease) in other liabilities and accrued expenses |                       
|Deferred tax assets                                           |                       
|Other, net                                                    |                       
|                                                              |                       
|                                                              |                       
|Net cash provided by operating activities                     |                       
|                                                              |                       
|                                                              |                       
|Cash flows from investing activities:                         |                       
|Purchase of fixed assets                                      |                       
|Proceeds from sale of fixed assets                            |                       
|                                                              |                       
|Net cash used in investing activities                         |                       
|                                                              |                       
|                                                              |                       
|Cash flows from financing activities:                         |                       
|Increase (decrease) in short- term credit                     |                       
|Repayment of long-term loans                                  |                       
|Proceeds from long-term loans                                 |                       
|Proceeds from exercise of employee stock options              |                       
|Repayment of credit from fixed asset payables                 |                       
|                                                              |                       
|Net cash provided by (used in) financing activities           |                       
|                                                              |                       
|                                                              |                       
|Effect of translation adjustments                             |                       
|                                                              |                       
|                                                              |                       
|Net increase in cash and cash equivalents                     |                       
|Cash and cash equivalents at beginning of the year            |                       
|                                                              |                       
|Cash and cash equivalents at end of the year                  |                       
|                                                              |                       
|                                                              |                       
|Supplemental cash flow information:                           |                       
|Interest paid                                                 |                       
|                                                              |                       
|                                                              |                       
|Non-cash activities:                                          |                       
|Conversion of convertible note and accrued interest           |                       
|thereon into share capital                                    |                       
|                                                              |                       
|                                                              |                       
|Purchase of fixed assets not yet paid                         |                       
|                                                              |                       

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

F - 6

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies

| | A. | General
| | -- | -------

| | Eltek
Ltd. ("the  Company") was  incorporated  in Israel in 1970, and the Company's  shares
have been publicly          traded on the NASDAQ Capital Market since 1997.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Acquisition
of Kubatronik Leiterplatten GmbH
| | --------------------------------------------

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

| | On
June 10, 2002, the Company acquired 76% of the shares of Kubatronik  Leiterplatten
GmbH (Kubatronik) for the consideration of  2.6 million ($2.4 million
as of the date of acquisition)  See Note 1(B).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition resulted in the recognition of goodwill in the amount of 1.1 million
($1 million as of the date of acquisition)  see Note 6.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the agreement, the seller has until December 31, 2012, the right to require the
Company to purchase (Put option), and the Company has the right to require
the seller to sell to the Company (Call option), the sellers remaining
24% interest in Kubatronik. The acquisition price for the remaining 24% interest varies
depending on several factors. Through the date of these financial statements the seller
has not approached the Company to exercise the put option. The fair value of the above
options is calculated based on the Binomial model and recorded in the balance sheet.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Establishment
of Eltek USA Inc.
| | -------------------------------

| | In
2007, the Company established a wholly-owned subsidiary, Eltek USA Inc. for the purpose
of sales, promotion and marketing in the North American market. Eltek USA Inc. commenced
operations beginning in 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 7

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | B. | Basis
of presentation
| | -- | ---------------------

| | The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
previous periods up to December 31, 2006 the Companys financial statements were
prepared in accordance with Generally Accepted Accounting Principles in Israel (Israeli
GAAP) with a reconciliation note to U.S. GAAP. Effective January 1, 2007 the Company is
reporting under U.S. GAAP. All comparative data was adjusted accordingly and is presented
in these financial statement in accordance with U.S. GAAP.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | All
intercompany transactions and balances were eliminated in consolidation.
| | ----------------------------------------------------------------------------

| | C. | Functional
and reporting currency
| | -- | ---------------------------------

| | The
Companys functional currency is the New Israeli Shekel (NIS).
| | ------------------------------------------------------------------

| | Effective
January 1, 2007, the Company changed its reporting currency from NIS to the U.S. dollar.
The change in reporting currency was accounted for in accordance with Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation (SFAS No.
52). Assets and liabilities of the Company have been translated using the exchange rate
at the balance sheet date except for equity accounts which were translated using
historical exchange rates. The average exchange rate for the period has been used to
translate revenues and expenses. Translation adjustments were reported separately as a
component of comprehensive income (cumulative translation adjustment).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 1. | The
assets and liabilities, both monetary and non-monetary, are translated
          according to the exchange rate on the consolidated balance sheet date including
          the goodwill arising from the acquisition of the subsidiary.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Income
and expense items are translated according to the weighted average           exchange
rate for the period.
| | -- | -----------------------------------------------------------------------------------------------------------------

| | 3. | The
resulting exchange rate differences are classified as a separate item in
          shareholders equity.
| | -- | ------------------------------------------------------------------------------------------------------------

F - 8

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | E. | Exchange
rates and linkage bases
| | -- | --------------------------------

| | 1. | Balances
linked to the Consumer Price Index (CPI) are recorded           pursuant to
contractual linkage terms of the specific assets and liabilities.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Details
of the CPI and the representative exchange rates are as follows:
| | -- | ------------------------------------------------------------------------

| |                     | Israeli
CPI | Exchange rate
of one US dollar | Exchange rate
of one Euro
| | ------------------- | ----------- | ------------------------------ | -------------------------
|
|
|
|
| | For the year ended: |             |                                |                          
| | December 31, 2005   |             |                                |                          
| | December 31, 2006   |             |                                |                          
| | December 31, 2007   |             |                                |                          

| |                                | % | % | %
| | ------------------------------ | - | - | -
|
|
|
|
| | Changes during the year ended: |   |   |  
| | December 31, 2005              |   |   |  
| | December 31, 2006              |   |   |  
| | December 31, 2007              |   |   |  

| | F. | Use
of estimates
| | -- | ----------------

| | The
preparation of the consolidated financial statements in accordance with generally
accepted accounting principles in the United States of America requires management of the
Company to make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and
expenses during the period. Significant items subject to such estimates and assumption
include the useful lives of fixed assets, allowances for doubtful accounts, valuation of
derivatives, deferred tax asset, fixed assets, inventory, investments, income tax
uncertainties and other contingencies. Actual results could differ from these estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Cash
and cash equivalents
| | -- | -------------------------

| | Cash
equivalents are 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 restricted
by a lien.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Provision
for doubtful accounts receivable
| | -- | ------------------------------------------

| | The
allowance for doubtful accounts receivable is calculated on the basis of specific
identification of customer balances. The allowance 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 customers,
including their financial condition and volume of their operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | H. | Provision
for doubtful accounts receivable (contd)
| | -- | ---------------------------------------------------

| | The
activity in the allowance for doubtful accounts for the three years ended December 31,
2007 is as follows:
| | --------------------------------------------------------------------------------------------------------------

| |                                          | Year ended December 31
| | ---------------------------------------- | ----------------------
|
|
|
|
| | Opening balance                          |                       
| | Additions during the year                |                       
| | Write-offs charged against the allowance |                       
| | Foreign currency translation adjustments |                       
| |                                          |                       
| |                                          |                       
| | Closing balance                          |                       
| |                                          |                       

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

| | Inventories
are recorded at the lower of cost or market value. Cost is determined on the weighted
average basis for raw materials and finished goods, and on the basis of actual
manufacturing costs for work in progress.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Assets
held for employees severance payments
| | -- | ---------------------------------------------

| | Assets
held for employees severance payments represent contributions to insurance policies
and are recorded at their current redemption value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Fixed
assets
| | -- | ------------

| | Fixed
assets are stated at cost. Depreciation is computed by the straight-line method over the
estimated useful lives of the assets at the following annual rates:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | %
| | ------------------------------ | -
|
|
|
|
| | Machinery and equipment        |  
| | Leasehold improvements         |  
| | Motor vehicles                 |  
| | Office furniture and equipment |  

| | Machinery
and equipment purchased under capital lease arrangements are recorded at the present
value of the minimum lease payments at lease inception. Such assets and leasehold
improvements are depreciated and amortized respectively, using the straight-line method
over the shorter of the lease term or estimated useful life of the asset.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | K. | Fixed
assets (contd)
| | -- | ---------------------

| | The
Company accounts for long-lived assets and certain intangible assets in accordance with
the provisions of SFAS No. 144, Accounting for the Impairment of or Disposal of
Long-Lived Assets (Statement 144). This Statement requires that
long-lived assets and certain identifiable intangible assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset or asset group to the undiscounted future
net cash flows expected to be generated by the asset or the asset group. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Goodwill
| | -- | --------

| | Goodwill
represents the excess of the aggregate purchase price over the fair value of the net
assets acquired in a purchase business combination.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
is reviewed for impairment at least annually in accordance with the provisions of FASB
Statement No. 142, Goodwill and Other Intangible Assets (Statement 142).
The goodwill impairment test is a two-step test. Under the first step, the fair value of
the reporting unit is compared with its carrying value. An indication of goodwill
impairment exists if the fair value of the reporting unit is less than its carrying
value, and the enterprise must perform step two of the impairment test (measurement).
Under step two, an impairment loss is recognized for any excess of the carrying amount of
the reporting units goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation, in accordance with
FASB Statement No. 141, Business Combinations. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. Fair value of
the reporting unit is determined using a discounted cash flow analysis. If the fair value
of the reporting unit exceeds its carrying value, step two does not need to be performed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, following the Companys annual impairment test of goodwill, an impairment of
$473 was recorded. In 2007, the Company concluded that there was no impairment of
goodwill.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Taxes
on income
| | -- | ---------------

| | The
Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes (Statement
109). Under Statement 109, deferred tax assets or liabilities are recognized in
respect of the future tax consequences attributable to temporary differences between the
tax bases of assets and liabilities and their financial reporting amounts as well as tax
loss and credit carryforwards, based on enacted tax rates applicable to the periods in
which such temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statements of operations in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax assets to the
amount that is more likely than not to be realized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | M. | Taxes
on income (contd)
| | -- | ------------------------

| | In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48), which prescribes recognition threshold and
measurement process for recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure and transition. The Company adopted
FIN 48 on January 1, 2007. The effect of adoption on the Companys consolidated
results of operations, financial position and cash flows based on Company managements
evaluation is presented in Note 15.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company records interest related to unrecognized tax benefits in interest expense that is
included as part of the net financial expenses and penalties in general and
administrative expenses in the consolidated statements of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
July 2003, the Company issued a convertible note (the Note) in the amount of
$500 to Merhav M.N.F Ltd.  an Israeli private company controlled by the Companys
major shareholder (Merhav).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Note was due four years from its issuance date and bore interest at the rate of 10% per
year, compounded on a quarterly basis.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | In
January 2004, $200 of the principal amount of the Note was converted into 606,060
ordinary shares. The conversion price per share for the remaining $300 was 0.33.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2007, the remaining $300 of the principal amount of the Note and additional $25 of
accrued interest was converted into 985,796 ordinary shares. The remaining accrued
interest of $128 was paid to the Note holder in May.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | O. | Revenue
recognition
| | -- | -------------------

| | The
Company recognizes revenues upon shipment of the products and after the customer takes
ownership and assumes risk of loss, collection of the corresponding receivable is
probable, persuasive evidence of an arrangement exists, and the sale price is fixed or
determinable. Commission income is accounted for on the accrual basis.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 12

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | P. | Research
and development (contd)
| | -- | ---------------------------------

| | 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 by the consortium. The OCS reimburses 66% of such approved research and
development expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
OCS grants are contingent upon the Company submission of periodic reports prepared in
accordance with the requirement of the OCS and are not subject to royalties or any future
payments to be made by the Company. The Company has been in compliance with such OCS
requirements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | Stock
compensation plans to employees and directors
| | -- | ---------------------------------------------------

| | Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2005), Share-Based
Payment (SFAS No. 123R). This Statement requires compensation expense
relating to share-based payments to be recognized in net income using a fair-value
measurement method. Under the fair value method, the estimated fair value of awards is
charged to income on a straight-line basis over the requisite service period, which is
the vesting period. The Company elected the modified-prospective method and therefore
prior periods were not restated. Under the modified-prospective method, compensation
costs recognized in 2006 and 2007 includes also compensation costs for all share-based
payments granted prior to, but not yet vested, as of December 31, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-based
compensation recognized in the Consolidated Statement of Operations for the year ended
December 31, 2007 is based on awards ultimately expected to vest. As a result, the
expense has been reduced for estimated forfeitures. SFAS No. 123R required forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. In the Companys pro forma
information required under SFAS No. 123, Accounting for Stock-Based Compensation(SFAS
No. 123) for the periods prior to January 1, 2006, the Company accounted for
forfeitures as they occurred.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
implementation of SFAS No. 123R did not have a material effect the profit before taxes,
net profit or the earning per share for the years ended December 31, 2006 and 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to January 1, 2006, the Company has followed SFAS No. 123, which permitted entities to
recognize as an expense over the vesting period, the fair value on the date of grant of
all stock-based awards. Alternatively, Statement 123 allowed entities to continue to
apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations (APB Opinion No. 25)
and provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants as if the fair-value based method defined in Statement 123
had been applied.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | R. | Profit
(loss) per ordinary share
| | -- | --------------------------------

| | Basic
and diluted profit (loss) per ordinary share is presented in conformity with SFAS No.
128, Earnings Per Share, for all years presented. Basic profit (loss) per
ordinary share is calculated by dividing the net profit (loss) attributable to ordinary
shares, by the weighted average number of ordinary shares outstanding. Diluted profit
(loss) per ordinary share calculation is similar to basic earnings per share except that
the weighed average of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if the ordinary shares from
options had been exercised, to the extent that these options had diluted effect.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes information related to the computation of basic and diluted
earnings (loss) per ordinary share for the years indicated.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                              | Year ended December 31,
| | ------------------------------------------------------------ | -----------------------
|
|
|
|
| | Net earnings (loss) attributable to ordinary shares          |                        
| |                                                              |                        
| |                                                              |                        
| | Weighted average number of ordinary shares outstanding       |                        
| | used in basic earnings (loss) per ordinary share calculation |                        
| |                                                              |                        
| | Add assumed exercise of outstanding dilutive potential       |                        
| | ordinary shares                                              |                        
| |                                                              |                        
| |                                                              |                        
| | Weighted average number of ordinary shares outstanding       |                        
| | used in diluted earnings (loss) per ordinary share           |                        
| | calculation                                                  |                        
| |                                                              |                        
| |                                                              |                        
| | Basic earnings (loss) per ordinary share                     |                        
| |                                                              |                        
| |                                                              |                        
| | Diluted earnings (loss) per ordinary share                   |                        
| |                                                              |                        
| |                                                              |                        
| | Number of options excluded from the                          |                        
| | diluted earning per share calculation                        |                        
| | because of anti-dilutive effect                              |                        
| |                                                              |                        

| | S. | Derivative
financial instruments
| | -- | --------------------------------

| | The
Company applies Financial Accounting Standards Board (FASB) Statement No. 133, Accounting
for Derivative Instruments and Certain Hedging Activities, as amended, which
require that all derivative instruments be recorded on the balance sheet at their
respective fair values.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in fair value are recognized in the consolidated statements of operations, as a 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

# Note 1 
Organization and Summary of Significant Accounting Policies (contd)

| | T. | 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 Europe, the United
States, Japan, Australia and Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company performs ongoing credit evaluations of the financial condition of its customers.
The risk of collection associated with trade receivables is reduced by the large number
and geographical dispersion of the Companys customer base and the Companys
policy of requiring collateral or security with respect to receivables due from
distributors.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U. | Recent
accounting pronouncements
| | -- | --------------------------------

| | In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement(Statement
157). Statement 157 defines fair value, establishes a framework for the measurement
of fair value, and enhances disclosures about fair value measurements. The statement does
not require any new fair value measures. The statement is effective for fair value
measures already required or permitted by other standards for fiscal years beginning
after November 15, 2007. The Company is required to adopt Statement 157 beginning on
January 1, 2008. Statement 157 is required to be applied prospectively, except for
certain financial instruments. Any transition adjustment will be recognized as an
adjustment to opening retained earnings in the year of adoption. The FASB announced a one
year deferral of Statement 157s fair value measurement requirements for
non-financial assets and liabilities that are not required or permitted to be measured at
fair value on a recurring basis. The Company believes that the adoption of Statement 157
will not have a material impact on the Companys financial condition, results of
operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities  including an amendment of FASB No. 115 (Statement
159). Statement 159 gives the Company the irrevocable option to carry most
financial assets and liabilities at fair value that are not currently required to be
measured at fair value. If the fair value is elected, changes in fair value would be
recorded in earnings at each subsequent reporting date. SFAS 159 is effective for the
Companys 2008 fiscal year. The Company believes that the adoption of Statement 159
will not have a material impact on the Companys financial condition, results of
operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations(Statement
141R) and FASB Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements- an amendment to ARB No. 51 (Statement 160).
Statements 141R and 160 require most identifiable assets, liabilities, non-controlling
interests, and goodwill acquired in a business combination to be recorded at full
fair value and require non-controlling interests (previously referred to as
minority interests) to be reported as a component of equity, which changes the accounting
for transactions with non-controlling interest holders. Both Statements are effective for
periods beginning on or after December 15, 2008, and earlier adoption is prohibited.
Statement 141R will be applied to business combinations occurring after the effective
date. Statement 160 will be applied prospectively to all non-controlling interests,
including any that arose before the effective date. The Company is currently evaluating
the impact of adopting Statement 141R and Statement 160 on its results of operations and
financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

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

# Note 2  Cash and
Cash Equivalents

| |                                    | Interest rateas ofDecember 31 | December 31
| | ---------------------------------- | ----------------------------- | -----------
|
|
|
|
| | Denominated in U.S. dollars        |                               |            
| | Denominated in New Israeli Shekels |                               |            
| | Denominated in Euro                |                               |            
| | Others                             |                               |            
| |                                    |                               |            
| |                                    |                               |            
| |                                    |                               |            
| |                                    |                               |            

# Note 3  Other
Receivables

| |                                             | December 31
| | ------------------------------------------- | -----------
|
|
|
|
| | Employees                                   |            
| | Advances to suppliers                       |            
| | Government of Israel and other institutions |            
| | Government of Germany                       |            
| | Derivative instruments (Note 14)            |            
| | Other receivables                           |            
| |                                             |            
| |                                             |            
| |                                             |            
| |                                             |            

# Note 4  Inventories

| |                   | December 31
| | ----------------- | -----------
|
|
|
|
| | Raw materials     |            
| | Work-in-process   |            
| | Finished products |            
| |                   |            
| |                   |            
| |                   |            
| |                   |            

| | Finished
products are presented net of allowance for inventory obsolescence in the amounts of $887
and $1,400 as of December 31, 2006 and 2007, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

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

# Note 5  Fixed
Assets, Less Accumulated Depreciation

| |                                            | December 31
| | ------------------------------------------ | -----------
|
|
|
|
| | Machinery and equipment                    |            
| | Leasehold improvements                     |            
| | Motor vehicles                             |            
| | Office furniture and equipment             |            
| |                                            |            
| |                                            |            
| | Fixed assets                               |            
| |                                            |            
| | Accumulated depreciation                   |            
| |                                            |            
| |                                            |            
| | Fixed assets less accumulated depreciation |            
| |                                            |            

| | Depreciation
expense for the years ended December 31, 2005, 2006 and 2007 were $2,284, $2,330 and
$2,264, respectively.
| | -----------------------------------------------------------------------------------------------------------------------

# Note 6  Goodwill

| | Changes
in the carrying amount of goodwill for the years ended December 31, 2006 and 2007 are as
follows:
| | ---------------------------------------------------------------------------------------------------------

| |                                      | December 31
| | ------------------------------------ | -----------
|
|
|
|
| | Balance at the beginning of the year |            
| | Impairment                           |            
| | Effect of translation adjustments    |            
| |                                      |            
| |                                      |            
| |                                      |            
| |                                      |            

# Note 7  Short-Term
Credit and Current Maturities of Long-Term Debt

| |                                 | Annualinterest rate atDecember 312007 | December 31
| | ------------------------------- | ------------------------------------- | -----------
|
|
|
|
| | In NIS (unlinked)               |                                       |            
| | In U.S. dollars                 |                                       |            
| | Current maturities of long-term |                                       |            
| | debts due to banks (Note 9A)    |                                       |            
| |                                 |                                       |            
| |                                 |                                       |            
| |                                 |                                       |            
| |                                 |                                       |            

| | As
to pledges securing the credit, see Note 11A.
| | ------------------------------------------------

F - 17

---

---

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

# Note 8  Accounts
Payable  Other

| |                                                    | December 31
| | -------------------------------------------------- | -----------
|
|
|
|
| | Accrued payroll and related benefits               |            
| | Provision for vacation and other employee benefits |            
| | Net written put option (Note 1A)                   |            
| | Accrued expenses                                   |            
| | Other liabilities                                  |            
| |                                                    |            
| |                                                    |            
| |                                                    |            
| |                                                    |            

# Note 9  Long-Term
Debt, Excluding Current Maturities

| | A. | Banks
and others
| | -- | ----------------

| |                           | Annualinterest rate atDecember 312007 | December 31
| | ------------------------- | ------------------------------------- | -----------
|
|
|
|
| | Linkage terms             |                                       |            
| |                           |                                       |            
| | U.S. dollar               |                                       |            
| | CPI                       |                                       |            
| | Euro                      |                                       |            
| | Unlinked                  |                                       |            
| |                           |                                       |            
| |                           |                                       |            
| |                           |                                       |            
| | Less - current maturities |                                       |            
| |                           |                                       |            
| |                           |                                       |            
| |                           |                                       |            
| |                           |                                       |            

| | Financial
covenants in respect of the Companys credit facilities and long-term debt with one
of its banks require the Company to maintain the higher of shareholders equity,
excluding intangible assets, of NIS 24.0 million or 23% of the Companys total
assets (on an non consolidated basis). With another bank, the financial covenants require
the Company to maintain the higher of tangible shareholders equity of NIS 17.5
million or 17% of the Companys consolidated total assets. For these purposes,
shareholders equity excludes prepaid expenses (except insurance). As of December
31, 2007, the Company was in compliance with these covenants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

# Note 9  Long-Term
Debt, Excluding Current Maturities (contd)

| | B. | The
aggregate maturities of long-term debt for each of the five years subsequent           to
December 31, 2007 and thereafter are as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
to pledges securing the loans, see Note 11A.
| | -----------------------------------------------

# Note 10  Employee
Severance Benefits

| | 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 certain employees, the Company has an approval from the Israeli
          Ministry of Labor and Welfare, pursuant to the terms of Section 14 of the
          Israeli Severance Pay Law, 1963, according to which the current deposits in the
          pension fund and/or with the insurance company exempt it from any additional
          obligation to the employees for whom the said depository payments were made.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | 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 - 19

---

---

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

# Note 10  Employee
Severance Benefits (contd)

| | 4. | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Details
of the provision and amounts funded:
| | -- | --------------------------------------------

| |                                    | December 31
| | ---------------------------------- | -----------
|
|
|
|
| | Liability for employee severance   |            
| | benefits                           |            
| |                                    |            
| | Assets held for severance benefits |            
| |                                    |            
| |                                    |            
| | Employee severance benefits, net   |            
| |                                    |            

| | Expenses
recorded in respect of employee severance payments for the years ended December 31, 2005,
2006 and 2007 are $92, $118 and $79, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

# Note 11 
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 15A).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company has also pledged a machine and a computer system to suppliers to
               secure its indebtedness.
| | -- | --------------------------------------------------------------------------------------------------------------------

| | 4. | 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. During the years ended December 31, 2005 and 2006,
the consulting                company was entitled to a bonus of $115 and $106,
respectively. In the year                ended December 31, 2007, the consulting company
was not entitled to a bonus. The                agreement will expire on September 30, 2008.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

# Note 11 
Commitments and Contingent Liabilities (contd)

| | B. | 1. | The premises occupied by the Company and Kubatronik are leased under
               operating agreements which expire in February 2017 and June 2008,
respectively.
| | -- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Two
parking areas that serve the employees of Kubatronik are leased under
               operating agreements which expire in December 2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company has signed several lease and maintenance agreements for production
               equipment with suppliers of equipment. Of such agreements, two principal
               agreements will expire in September 2009 and March 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Two
production machines are leased under operating agreements which will expire
               in 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 at December 31, 2007 due under the above agreements over
               the next five years and thereafter are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------

| |                           | Operating
leases | Other
agreements
| | ------------------------- | ---------------- | ----------------
|
|
|
|
| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Rental
expenses under the lease agreements for the years ended December 31, 2005, 2006 and 2007
were $700, $527 and $725, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | C. | 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. Such indemnification amount shall be limited to the
lesser of $2,000 or 25% of the Companys shareholders equity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

# Note 12 
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 US$                             |            |                       
| | Ordinary shares of par value NIS 0.6 each |            |                       

| | B. | Stock
based compensation
| | -- | ------------------------

| | 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 expire on the fifth anniversary of the
date of grant, 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 prices of these options are equal
to the market price of the underlying stock on the date of the grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006 and 2007, options to purchase 20,000 ordinary shares with an
exercise price of $1.14 per share were outstanding under the 2000 Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 granted 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 on the
grant date, 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 equaled the market price
of the Companys ordinary shares on date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 11, 2007 all the remaining options granted under the 2005 plan expired.
| | -----------------------------------------------------------------------------------

F - 22

---

---

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

# Note 12 
Shareholders Equity (contd)

| | B. | Stock
based compensation (contd)
| | -- | ---------------------------------

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

| |                                 |  | Numberofoptions | Weightedaverageexercise price
| | ------------------------------- |  | --------------- | -----------------------------
|
|
|
|
| | Balance as at December 31, 2004 |  |                 |                              
| |                                 |  |                 | Granted                      
| |                                 |  |                 | Exercised                    
| |                                 |  |                 | Expired                      
| |                                 |  |                 | Forfeited                    
| |                                 |  |                 |                              
| | Balance as at December 31, 2005 |  |                 |                              
| |                                 |  |                
| |                                 |  |                 | Granted                      
| |                                 |  |                 | Exercised                    
| |                                 |  |                 | Forfeited                    
| |                                 |  |                 |                              
| | Balance as at December 31, 2006 |  |                 |                              
| |                                 |  |                
| |                                 |  |                 | Granted                      
| |                                 |  |                 | Exercised                    
| |                                 |  |                 | Expired                      
| |                                 |  |                 |                              
| | Balance as at December 31, 2007 |  |                 |                              
| |                                 |  |                 |                              

| | The
following table summarizes information concerning options outstanding at December 31,
2007:
| | -----------------------------------------------------------------------------------------------

| | Exercise prices | Number ofoptionsoutstanding atDecember 312007 | Number ofoptionsexercisable atDecember 312007 | Remainingcontractual life(in years)
| | --------------- | --------------------------------------------- | --------------------------------------------- | -----------------------------------
|
|
|
|
| | U.S.$           |                                               |                                               | 1.14                               
| |                 |                                               |                                               |                                    

| | As
of December 31, 2007, the intrinsic value of the outstanding options is $28.
| | -------------------------------------------------------------------------------

F - 23

---

---

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

# Note 13  Revenues

| | A. | Revenues
by activities
| | -- | ----------------------

| |                                     | Year ended December 31
| | ----------------------------------- | ----------------------
|
|
|
|
| | Sales of manufactured products      |                       
| | Sales of non- manufactured products |                       
| | Commissions                         |                       
| |                                     |                       
| |                                     |                       
| |                                     |                       
| |                                     |                       

| | Customer
who accounted for over 10% of the total consolidated revenues:
| | -----------------------------------------------------------------------

| |                                                | Year ended December 31
| | ---------------------------------------------- | ----------------------
|
|
|
|
| | Customer A - Sales of manufactured products    |                       
| |                                                |                       
| | Customer B ** - Sales of manufactured products |                       

| | * | Less
than 10%.
| | - | --------------

| | ** | Consisting
of two affiliated companies
| | -- | --------------------------------------

| | B. | Revenues
by geographic areas
| | -- | ----------------------------

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Israel            |                        
| | Europe            |                        
| | Rest of the world |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        

F - 24

---

---

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

# Note 14  Financial
Expenses, Net

| |                                                     | Year ended December 31
| | --------------------------------------------------- | ----------------------
|
|
|
|
| | Interest and exchange rate expenses on              |                       
| | long-term loans                                     |                       
| | Expenses on  short-term credit and bank charges     |                       
| | Effect of exchange rate differences on expenses and |                       
| | net gain from derivative instruments                |                       
| | Other financing expenses (income), net              |                       
| |                                                     |                       
| |                                                     |                       
| |                                                     |                       
| |                                                     |                       

| | The
Company uses forward contracts and option strategies to manage its foreign exchange rate
exposures. Contracts with notional amount that totaled $300 and $1,200 and with estimated
fair values that totaled $3 and $127, respectively, at December 31, 2006 and 2007,
respectively, which the Company did not designate as hedging instruments for accounting
purposes. The change in fair value of these contracts of $22, $(19) and $124 for the
years ended December 31, 2005, 2006 and 2007 have been recognized to finance income in
those years. The periodic net cash (receipts) settlements totaled $9, $63 and $380 for
the years ended December 31, 2005, 2006 and 2007, respectively. These amounts have been
recorded as reductions or additions to finance expense in those years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 15  Taxes on
Income

| | A. | Tax
benefits under the Israeli 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
Companys 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 profit 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 tax benefits relating to the approved
enterprise program that is applicable to the Company have not yet commenced, and
will expire no later than 2016. The period of tax benefits for all other approved
investment programs expired in 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 11A2 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

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

# Note 15  Taxes on
Income (contd)

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

| | 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 29% in 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | 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%. 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 Benefits track will receive
               those tax benefits without prior approval. In addition, there will be no
               requirement to file reports with the Investment Center. Companies will be
               required to notify the Israeli Tax Authorities regarding the
implementation of                the Alternative Benefits track. Audits will be the
responsibility of the Israeli                Income Tax Authorities as part of their tax
audits. Request for pre-ruling is                possible.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (c) | In
order to receive benefits in the Grant Path or the Alternative Benefits
               track, the industrial enterprise must contribute to the economic
independence of                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 foreign market of at           least
12 million residents.
| | -- | ------------------------------------------------------------------------------------------------------------------

| | 4. | Upon
the establishment of an enterprise, an investment of at least NIS 300           thousand
in production machinery and equipment within three years is required.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

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

# Note 15  Taxes on
Income (contd)

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

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

| | 5. | 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
amendments 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 prior 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 plans, 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 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 tax 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
to the Capital Gains Route.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

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

# Note 15  Taxes on
Income (contd)

| | D. | Taxation
under Inflationary Conditions
| | -- | --------------------------------------

| | The
Israeli Income Tax Law (Inflationary Adjustments)  1985 (hereinafter the
Inflationary Adjustments Law) is effective from the 1985 tax year. The Inflationary
Adjustments 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 Inflationary Adjustments Law are not identical to the earnings reported
according to the accounting standards. As a result, differences arise between the
reported income in the financial statements and the adjusted income for tax purposes.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No.
20)(Restriction of Period of Application)  2008 (the Amendment) was
passed by the Knesset. According to the Amendment, the Inflationary Adjustments Law will
no longer be applicable subsequent to the 2007 tax year, except for the transitional
provisions whose objectives are to prevent distortion of the income tax calculations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, according to the Amendment, commencing in the 2008 tax year, the adjustment of
income for the effects of inflation for tax purposes will no longer be calculated.
Additionally, depreciation on protected assets and tax loss carryforwards will no longer
be linked to the CPI, subsequent to the 2007 tax year, and the balances that have been
linked to the CPI through the end of the 2007 tax year, will be used going forward.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Tax
loss carryforwards
| | -- | ----------------------

| | As
of December 31, 2007, the Companys tax loss carryforwards were approximately $14.3
million while its principal foreign subsidiarys tax loss carryforwards were $0.9
million. The tax loss carryforwards in Israel are linked to the CPI in accordance with
the Inflationary Adjustments Law.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its principal foreign subsidiary tax loss carryforwards do not have an
expiration date.
| | -------------------------------------------------------------------------------------------------------

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

| | In
Israel, the Company has received final tax assessments through the 1995 tax year.
| | ------------------------------------------------------------------------------------

| | The
Companys principal foreign subsidiary has received final tax assessments through
the 2005 tax year.
| | --------------------------------------------------------------------------------------------------------

| | The
Companys other foreign subsidiaries have not yet received any final tax assessments
since their incorporation.
| | -------------------------------------------------------------------------------------------------------------------

F - 28

---

---

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

# Note 15  Taxes on
Income (contd)

| | G. | Profit
(loss) before income tax expense and minority interest included in the
          consolidatedstatements of operations
| | -- | ----------------------------------------------------------------------------------------------------------------------------

| |                                         | Consolidated
| | --------------------------------------- | ------------
|
|
|
|
| | Profit (loss) before income tax expense |             
| | and minority share:                     |             
| | Israel                                  |             
| | Foreign jurisdiction                    |             
| |                                         |             
| |                                         |             
| | Total                                   |             
| |                                         |             

| | H. | Reconciliation
of the theoretical income tax expense to the actual income tax           expense
| | -- | -----------------------------------------------------------------------------------------------

| | A
reconciliation of the theoretical income tax expense, assuming all income is taxable at
the statutory rates applicable in Israel, and the actual income tax expense, is as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | Consolidated
| | ---------------------------------------------------- | ------------
|
|
|
|
| | Income (loss) before income taxes as reported in the |             
| | consolidated statements of operations                |             
| |                                                      |             
| | Statutory tax rates                                  |             
| |                                                      |             
| |                                                      |             
| | Theoretical tax expense (benefit) calculated         |             
| |                                                      |             
| | Differences between the definition of capital and    |             
| | assets for tax purposes and other                    |             
| | Change in valuation allowance                        |             
| | Foreign tax rate differential in subsidiaries        |             
| |                                                      |             
| | Total                                                |             
| |                                                      |             
| |                                                      |             
| | Income tax expense                                   |             
| |                                                      |             

| | The
income tax expense recorded for the year ended December 31, 2006 is deferred tax expense
attributable to the foreign subsidiary.
| | ------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

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

# Note 15  Taxes on
Income (contd)

| | I. | Deferred
tax assets and liabilities
| | -- | -----------------------------------

| | Deferred
taxes reflect the tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and such amounts for income tax
purposes. Significant components of the Companys deferred tax liabilities and
assets are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                            | Consolidated
| | ------------------------------------------ | ------------
|
|
|
|
| | Deferred tax assets:                       |             
| |                                            |             
| | Tax loss carryforwards (in Israel)         |             
| | Tax loss carryforwards (outside Israel)    |             
| | Severance benefits                         |             
| | Vacation pay                               |             
| | Allowance for doubtful accounts            |             
| |                                            |             
| |                                            |             
| | Total gross deferred tax assets            |             
| |                                            |             
| | Less valuation allowance                   |             
| |                                            |             
| |                                            |             
| | Net deferred tax assets                    |             
| |                                            |             
| |                                            |             
| | Deferred tax liabilities:                  |             
| |                                            |             
| | Fixed assets - differences in depreciation |             
| |                                            |             
| |                                            |             
| | Total gross deferred tax liabilities       |             
| |                                            |             
| |                                            |             
| | Net deferred tax assets                    |             
| |                                            |             

| | The
valuation allowance for deferred tax assets as of January 1, 2006 and 2005, was $2,571
and $2,561, respectively. The net change in the total valuation allowance for each of the
years ended December 31, 2007, 2006 and 2005, was an increase of $641, $366 and $10,
respectively. The valuation allowance at 2007 and 2006 was primarily related to domestic
and foreign net operating loss carryforwards that, in the judgment of management are not
more likely than not to be realized. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets
depends on the generation of future taxable income during the periods in which those
temporary differences are deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected taxable income, and tax-planning strategies in making
this assessment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

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

# Note 15  Taxes on
Income (contd)

| | J. | Accounting
for uncertainty in income taxes
| | -- | ------------------------------------------

| | The
Company and its subsidiaries adopted the provisions of FIN 48 on January 1, 2007, and
there was no effect on the consolidated financial statements. As a result, the Company
and its subsidiaries did not record any cumulative effect adjustment related to adopting
FIN 48.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, and for the 12-month period ended December 31, 2007, the Company and
its subsidiaries did not have any unrecognized tax benefits and thus, no interest and
penalties related to unrecognized tax benefits were recognized. In addition, the Company
and its subsidiaries do not expect that the amount of unrecognized tax benefits will
change significantly within the next 12 months.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company files its income tax return in Israel while its principal foreign subsidiary
files its income tax return in Germany. The Israeli tax returns of the Company are open
to examination by the Israeli Tax Authorities for the tax years beginning in 2004 while
the German tax returns of its principal foreign subsidiary remain subject to audit for
the tax years beginning in 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 16  Financial
Instruments and Risk Management

| | The
Companys financial instruments include cash and cash equivalents, accounts
receivable, deposits, assets held for severance benefits, derivative instruments and
accounts payable. Their carrying amounts approximate fair value. The fair value of the
Companys derivative instruments is disclosed in Note 3.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is exposed to credit, interest and currency risks in the ordinary course of
business. The Company uses derivative instruments in order to reduce the exposure to
currency risks.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

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S I G N A T U R E S

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

| |  | ELTEK LTD.By: /s/ Arieh Reichart
Arieh ReichartPresident and Chief Executive Officer
| |  | --------------------------------------------------------------------------------------------------

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

Dated: April 28, 2008

- 68 -

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