---

---

# 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, 2006

# 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

|x | 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:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

5,624,011 Ordinary Shares, par value NIS 0.6 per share (as of December 31, 2006)

|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 x Item 18 o

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

Yes o No x

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



---

---

# INTRODUCTION

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

Our
consolidated financial statements appearing in this annual report are prepared in New
Israeli Shekels, or NIS, and in accordance with generally accepted accounting principles
in Israel, or Israeli GAAP, which vary in certain significant respects from generally
accepted accounting principles in the United States, or U.S. GAAP, as described in Note 29
to the consolidated financial statements. All references in this annual report to
dollars or $ are to U.S. dollars and all references in this annual
report to NIS are to New Israeli Shekels. Amounts stated in dollars in this
report, except where the context otherwise indicates, have been translated from NIS at a
specified rate solely for convenience and should not be construed as representations that
the NIS amount actually represents such dollar amount or could be converted into dollars
at the rate indicated. The translations of NIS amounts into dollars appearing throughout
this annual report have been made at the representative rate of exchange on December 31,
2006 of NIS 4.225 = $1.00, as published by the Bank of Israel. See Item 3.A. Key
Information  Selected Financial Data  Exchange Rate Information.

Effective
as of January 1, 2007, our consolidated financial statements are being prepared in
accordance with U.S. GAAP and our reporting currency has been changed from NIS to U.S.
dollars, while our functional currency will remain NIS. We believe that presenting our
consolidated financial statements in U.S. dollars in the future will provide more
meaningful and relevant financial information to our shareholders as the majority of our
shareholders (in terms of both the number of shareholders and numbers of shares they hold)
are U.S. persons.

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



---

---

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                              | 13      
|A.       | HISTORY AND DEVELOPMENT OF THE COMPANY                  | 13      
|B.       | BUSINESS OVERVIEW                                       | 14      
|C.       | ORGANIZATIONAL STRUCTURE                                | 17      
|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                         | 29      
|C.       | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES          | 32      
|D.       | TREND INFORMATION                                       | 32      
|E.       | OFF-BALANCE SHEET ARRANGEMENTS                          | 32      
|F.       | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS           | 32      
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 33      
|A.       | DIRECTORS AND SENIOR MANAGEMENT                         | 33      
|B.       | COMPENSATION                                            | 36      
|C.       | BOARD PRACTICES                                         | 36      
|D.       | EMPLOYEES                                               | 43      
|E.       | SHARE OWNERSHIP                                         | 44      
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 47      
|A.       | MAJOR SHAREHOLDERS                                      | 47      
|B.       | RELATED PARTY TRANSACTIONS                              | 49      
|C.       | INTERESTS OF EXPERTS AND COUNSEL                        | 49      
|ITEM 8.  | FINANCIAL INFORMATION                                   | 49      
|A.       | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 49      
|B.       | SIGNIFICANT CHANGES                                     | 50      
|ITEM 9.  | THE OFFER AND LISTING                                   | 50      
|A.       | OFFER AND LISTING DETAILS                               | 50      
|B.       | PLAN OF DISTRIBUTION                                    | 51      
|C.       | MARKETS                                                 | 51      
|D.       | SELLING SHAREHOLDERS                                    | 51      
|E.       | DILUTION                                                | 51      
|F.       | EXPENSE OF THE ISSUE                                    | 51      

- i -

---

---

|          |                                                                              |   
|--------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 51
|A.        | SHARE CAPITAL                                                                | 51
|B.        | MEMORANDUM AND ARTICLES OF ASSOCIATION                                       | 51
|C.        | MATERIAL CONTRACTS                                                           | 55
|D.        | EXCHANGE CONTROLS                                                            | 55
|E.        | TAXATION                                                                     | 55
|F.        | DIVIDENDS AND PAYING AGENTS                                                  | 64
|G.        | STATEMENT BY EXPERTS                                                         | 64
|H.        | DOCUMENTS ON DISPLAY                                                         | 65
|I.        | SUBSIDIARY INFORMATION                                                       | 65
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS                   | 65
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 66
|PART II   |                                                                              | 66
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 66
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 66
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 66
|ITEM 15T. | CONTROLS AND PROCEDURES                                                      | 66
|ITEM 16.  | [RESERVED]                                                                   | 66
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 66
|ITEM 16B. | CODE OF ETHICS                                                               | 66
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 67
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 67
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 67
|PART III  |                                                                              | 67
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 67
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 68
|ITEM 19.  | EXHIBITS                                                                     | 68

- ii -

---

---

# PART I

|ITEM 1. | IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------

Not
applicable.

|ITEM 2. | OFFER
STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

Not
applicable.

|ITEM 3. | KEY
INFORMATION
|------- | ---------------

|A. | SELECTED
FINANCIAL DATA
|-- | -----------------------

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

The
selected consolidated financial data as of December 31, 2005 and 2006 and for each of the
three years ended December 31, 2004, 2005 and 2006 have been derived from our audited
consolidated financial statements and notes thereto included elsewhere in this annual
report. The selected consolidated financial data as of December 31, 2002, 2003 and 2004
and for each of the two years ended December 31, 2002 and 2003 have been derived from our
audited consolidated financial statements and notes thereto which are not included in this
annual report.

Our
consolidated financial statements included in this annual report have been audited by the
firm of Somekh Chaikin, an independent registered public accounting firm in Israel, a
member firm of KPMG International, whose report appears elsewhere herein. Our consolidated
financial statements have been prepared in accordance with Israeli GAAP, which vary in
certain significant respects from U.S. GAAP, as described in Note 29 to the consolidated
financial statements.

For
the convenience of the reader, the reported consolidated NIS figures as at and for the
year ended December 31, 2006 have been presented in U.S. dollars (unaudited) translated at
the representative rate of exchange on December 31, 2006 of NIS 4.225 = $1.00, as
published by the Bank of Israel. The U.S. dollars amounts so presented should not be
construed as representing amounts receivable, payable or incurred in U.S. dollars or
convertible into U.S. dollars.

- 1 -

---

---

# STATEMENT OF
CONSOLIDATED OPERATIONS DATA:

|                                                                                    |  |  |     |          |    | Convenience
Translation
into Dollars
|----------------------------------------------------------------------------------- |  |  | --- | -------- | -- | ------------------------------------
|
|
|
|
|Israeli GAAP:                                                                       |  |  |     |          |    |                                     
|Revenues                                                                            |  |  | NIS | 108,035  |    | NIS                                 
|Cost of revenues                                                                    |  |  |     | (106,458 | )  |                                     
|                                                                                    |  |  |     |          |    |                                     
|Gross profit                                                                        |  |  |     | 1,577    |    |                                     
|Research and development income
    (expenses), net                                 |  |  |     | (116     | )  |                                     
|Selling, general and                                                                |  | 
|administrative expenses                                                             |  |  |     | (15,152  | )  |                                     
|Amortization of goodwill                                                            |  |  |     | (292     | )  |                                     
|                                                                                    |  |  |     |          |    |                                     
|Operating income (loss)                                                             |  |  |     | (13,983  | )  |                                     
|Financial expenses, net                                                             |  |  |     | (1,443   | )  |                                     
|                                                                                    |  |  |     |          |    |                                     
|Income (loss) before other income                                                   |  | 
|(expenses), net                                                                     |  |  |     | (15,426  | )  |                                     
|Other income (expenses),
    net                                                    |  |  |     | 290      |    |                                     
|                                                                                    |  |  |     |          |    |                                     
|Income (loss) before tax benefit                                                    |  | 
|(expenses) and minority interest                                                    |  |  |     | (15,136  | )  |                                     
|Tax benefit (expenses)                                                              |  |  |     | (380     | )  |                                     
|                                                                                    |  |  |     |          |    |                                     
|Income (loss) after tax benefit                                                     |  | 
|(expenses) before minority interest                                                 |  |  |     | (15,516  | )  |                                     
|Minority interests                                                                  |  |  |     | (198     | )  |                                     
|                                                                                    |  |  |     |          |    |                                     
|Net income (loss)                                                                   |  |  | NIS | (15,714  | )  | NIS                                 
|                                                                                    |  |  |     |          |    |                                     
|Basic net earnings (loss) per share                                                 |  |  | NIS | (3.22    | )* | NIS                                 
|                                                                                    |  |  |     |          |    |                                     
|Diluted net earnings (loss) per share                                               |  |  | NIS | (3.22    | )* | NIS                                 
|                                                                                    |  |  |     |          |    |                                     
|Weighted average shares used to
    compute basic net earnings
    (loss) per share |  |  |     | 4,886    |    |                                     
|                                                                                    |  |  |     |          |    |                                     
|Weighted average shares used to                                                     |  | 
|compute diluted net earnings
    (loss) per share                                   |  |  |     | 4,886    |    |                                     
|                                                                                    |  |  |     |          |    |                                     
|                                                                                    |  | 
|U.S. GAAP:                                                                          |  | 
|Net income (loss)                                                                   |  |  | NIS | (15,422  | )  | NIS                                 
|                                                                                    |  |  |     |          |    |                                     
|Basic net earnings (loss) per share                                                 |  |  | NIS | (3.16    | )  | NIS                                 
|                                                                                    |  |  |     |          |    |                                     
|Diluted net earnings (loss) per share                                               |  |  | NIS | (3.16    | )  | NIS                                 
|                                                                                    |  |  |     |          |    |                                     
|Weighted average shares used to
    compute basic net earnings
    (loss) per share |  |  |     | 4,886    |    |                                     
|                                                                                    |  |  |     |          |    |                                     
|Weighted average shares used to                                                     |  | 
|compute diluted net earnings
    (loss) per share                                   |  |  |     | 4,886    |    |                                     
|                                                                                    |  |  |     |          |    |                                     

---

* Restated, see Note 2S to consolidated financial statements.

- 2 -

---

---

CONSOLIDATED BALANCE SHEETS DATA:

|                                                       |  |  |     |         |   | Convenience
Translation
into Dollars
|------------------------------------------------------ |  |  | --- | ------- | - | ------------------------------------
|
|
|
|
|Israeli GAAP:                                          |  |  |     |         |   |                                     
|Working capital (deficit)                              |  |  | NIS | (4,521  | ) | NIS                                 
|Total assets                                           |  |  |     | 105,831 |   |                                     
|Long-term liabilities excluding current     maturities |  |  |     | 21,725  |   |                                     
|Shareholders' equity                                   |  |  |     | 30,919  |   |                                     
|                                                       |  | 
|US GAAP:                                               |  | 
|Total assets                                           |  |  | NIS | 106,123 |   | NIS                                 
|Shareholders' equity                                   |  |  |     | 31,211  |   |                                     

---

|(1) | Adjusted
amount. The nominal historical amount adjusted in accordance with the
                    provisions of Opinions 23, 34, 36 and 37 of the Institute of
Certified Public                     Accountants in Israel.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Reported
amount. Amount as at the transition date (December 31, 2003) with the
                    addition of amounts in nominal values that were added after the
transition date                     and less amounts eliminated after the transition
date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 3 -

---

---

# Exchange Rate Information

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

|Period                       | Average (1) | High | Low | Period End
|---------------------------- | ----------- | ---- | --- | ----------
|
|
|
|
|Year ended December 31, 2002 |             |      |     | 4.736     
|Year ended December 31, 2003 |             |      |     | 4.512     
|Year ended December 31, 2004 |             |      |     | 4.483     
|Year ended December 31, 2005 |             |      |     | 4.503     
|Year ended December 31, 2006 |             |      |     | 4.453     

---

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

|Period        | High | Low
|------------- | ---- | ---
|
|
|
|
|December 2006 |      |    
|January 2007  |      |    
|February 2007 |      |    
|March 2007    |      |    
|April 2007    |      |    
|May 2007      |      |    

At
June 25, 2007, the representative rate of exchange was NIS 4.251 = $1.00, as published by
the Bank of Israel.

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

Not
applicable.

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

Not
applicable.

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

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

# Risks Relating to Our
Business and Market

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

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

- 4 -

---

---

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
medical equipment industries and the defense and aerospace industries, which accounted for
approximately 33% and 24%, respectively, of our sales in the year ended December 31, 2006,
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 PCB Technologies Ltd.
and Melta Ltd., as well as with major international PCB exporters, mainly from the United
States, Europe and Asia. In the European market we mainly compete with Ruwel Werke GmbH
(Germany), Advanced Circuit Boards NV (Belgium), Dyconex (Switzerland) and certain other
German companies. In the United States market we mainly compete with TTM Technologies
Inc., Merix Corp. and DDI Corp. 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.

Our operating results
fluctuate significantly.

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

| |  | the
size and timing of significant orders and their fulfillment;
| | - | ----------------------------------------------------------------

| |  | demand
for the products produced by our customers;
| | - | --------------------------------------------------

| |  | competition
with our products;
| | - | ------------------------------

| |  | plant
utilization;
| | - | ------------------

| |  | changes
in currency fluctuation of the NIS against the U.S. dollar and the Euro;
| | - | --------------------------------------------------------------------------------

| |  | yields
in the manufacturing process;
| | - | ------------------------------------

| |  | timing
of expenditures based on projections of future sales;
| | - | ------------------------------------------------------------

| |  | availability
of raw materials;
| | - | ------------------------------

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

| |  | the
length of our sales cycles;
| | - | -------------------------------

| |  | changes
in our strategy;
| | - | ------------------------

- 5 -

---

---

| |  | the
number of working days in the quarter; and
| | - | ----------------------------------------------

| |  | changes
in seasonal trends and general domestic and international economic and political
conditions.
| | - | ----------------------------------------------------------------------------------------------------

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

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

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

We may encounter
difficulty in realizing the potential financial or strategic benefits of future business acquisitions
and investments.

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

| |  | difficulty
in combining the technology, operations or work force of the acquired business;
| | - | ------------------------------------------------------------------------------------------

| |  | adverse
effects on our reported operating results due to the amortization or write-down of
intangible               assets associated with acquisitions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | diversion
of management attention from running our existing business; and
| | - | -------------------------------------------------------------------------

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

Our results may be
adversely affected by product liability claims.

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

- 6 -

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

Technological
change in the PCB industry is rapid and continual. To satisfy customers needs for
increasingly complex products, PCB manufacturers must continue to develop improved
manufacturing processes, provide innovative solutions and invest in new facilities and
equipment. To the extent we determine that new technologies and equipment are required to
remain competitive, the acquisition and implementation of such technologies and equipment
are likely to require significant capital investment. This capital may not be available to
us in the future for such purposes and any new manufacturing processes developed by us may
not become or remain commercially viable. As a result, we may not be able to maintain our
current technological position. Furthermore, the PCB industry may in the future encounter
competition from new technologies that may reduce demand for PCBs or may render existing
technology less competitive or obsolete. Our future process development efforts may not be
successful or the emergence of new technologies, industry standards or customer
requirements may render our technology, equipment or processes obsolete or uncompetitive.

We depend on our key
customers and the loss of one or more of our key customers would result in a loss of a significant
amount of our revenues.

In
the years ended December 31, 2005 and December 31, 2006, our top ten customers accounted
for 63% and 60% of our revenues, respectively, and one customer accounted for
approximately 31% and 25% of our total revenues, respectively. The principal product of
our largest customer is at the end of its lifecycle and revenues from such customer
decreased to 17% of our total revenues in the three months ended March 31, 2007. In June
2007, such customer notified us to cease production of the PCB for its principal product.
The customer may not continue to purchase products from us in the future, or if it
continues to purchase products from us, the volume of purchases would likely be
significantly lower than previous volumes. 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 are dependent upon a
select number of suppliers of key raw materials and the loss of one or more of these suppliers
would adversely affect our manufacturing ability. If these suppliers delay or
discontinue manufacture or supply of these raw materials, we may experience delays in
production and shipments, increased costs and cancellation of orders for our products.

We
currently obtain our key raw materials from a select number of suppliers. We do not have
long-term supply contracts with our suppliers and our principal suppliers may not continue
to supply raw materials to us at current levels or at all. Any delays in delivery of or
shortages in these raw materials could interrupt and delay manufacturing of our products
and may result in the cancellation of orders for our products. In addition, these
suppliers could discontinue the manufacture or supply of these raw materials at any time.
During the year ended December 31, 2006, one supplier accounted for 21% 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 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;
| | - | ----------------------------

- 7 -

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| |  | 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, 2006, we had revolving lines of credit aggregating NIS 13.9 million ($3.3
million) with our banks, of which NIS 8.5 million ($2 million) was utilized as of such
date. As of December 31, 2006, we also had NIS 14.2 million ($3.4 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 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 15.0 million or 15% of our consolidated total assets, and
the higher of tangible shareholders equity of NIS14.0 million or 14% of our total
assets (on a non consolidated basis). For these purposes, shareholders equity
includes the outstanding convertible note and excludes prepaid expenses (except
insurance). As of December 31, 2006, 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.

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

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, and we expect these conditions to continue
through 2007. During 2005 and 2006, 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 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, 2004, 2005 and 2006 accounted for
38.4%, 50.6% and 46.0% of our consolidated revenues, respectively, of which 13.0%, 12.9%
and 11.7% 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:

- 8 -

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

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 affect our business,
operating results and financial condition.

We
use certain materials in our manufacturing processes that are classified as hazardous
substances. Proper waste disposal and environmental regulations are major considerations
for PCB manufacturers because metals and chemicals classified as hazardous substances are
used in the manufacturing process. Since May 2003, our environmental management system has
been ISO 14001 certified. This certification was based on successful implementation of
environmental management requirements and includes ongoing monitoring of our processes,
raw materials and products. The certification is subject to periodic compliance audits
conducted by the Israeli Institute of Standards. If, in the future, we are found to be in
violation of environmental laws, we could be liable for damages and costs of remedial
actions and could also be subject to revocation of permits necessary to conduct our
business or any part thereof. Any such revocation could require us to cease production,
which could have a material adverse effect on our financial condition and results of
operations. We are also subject to laws relating to the storage, use and disposal of
hazardous materials, as well as air quality regulations. Environmental laws could become
more stringent over time, imposing greater compliance costs and increasing risks and
penalties associated with a violation. For example, environmental regulations enacted in
Israel in September 2000 provide that a company that is found to have discharged water
containing contaminates will be liable for quadruple the amount normally charged for its
water consumption. Moreover, according to the same regulations, manufacturing plants were
required to reduce the quantity of the wastewater discharged by them by 90% within four
years. To be exempted from such legislation, a plant would have to show the Israeli
Ministry of the Environment that a partial or complete decrease in the quantity of
wastewater is not feasible. Since 1996 we have undertaken various actions to reduce the
use of water in our manufacturing facilities. We believe that we have materially complied
with the September 2000 regulations, but such compliance may not be sufficient in the
future.

Compliance with corporate
governance regulations could increase the cost of our operations.

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

- 9 -

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# Risk Factors Related to
Our Ordinary Shares

Our share price has been
volatile in the past and may continue to be susceptible to significant market price and volume
fluctuations in the future.

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

| |  | quarterly
variations in our operating results;
| | - | ----------------------------------------------

| |  | operating
results that vary from the expectations of securities analysts and investors;
| | - | ---------------------------------------------------------------------------------------

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

| |  | announcements
of technological innovations or new products by us or our competitors;
| | - | ------------------------------------------------------------------------------------

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

| |  | 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
| | - | -------------------------------------------------------

| |  | further
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.

- 10 -

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---

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

Conducting business in
Israel entails special risks.

We
are incorporated under the laws of the State of Israel, and our executive offices and
research and development facilities are located in Israel. Although most of our sales are
made to customers outside Israel, we are directly influenced by the political, economic
and military conditions affecting Israel. 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.

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, and a state of hostility, varying from time
to time in intensity and degree, has led to security and economic problems for Israel.
Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, 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
2006. 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 between
Israel and Hezbollah forces and to a lesser extent in the Gaza Strip, which involved
rocket attacks on populated areas in the northern parts of Israel. On August 14, 2006, a
cease-fire between Hezbollah and Israel took effect. This situation has had an adverse
effect on Israels economy, primarily in the geographical areas directly harmed by
this conflict. Any future armed conflict, political instability or violence in the region
may have a negative effect on our business condition, harm our results of operations and
adversely affect our share price. No predictions can be made as to whether or when a final
resolution of the areas problems will be achieved or the nature thereof and to what
extent the situation will impact Israels economic development or our operations.

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.

Our results of operations
may be harmed by currency fluctuations.

We
record our revenues and expenses in NIS. Our revenues are generally denominated in foreign
currencies, primarily the U.S. dollar and Euro, 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 and Euro
revenues decline if the NIS devaluates against the dollar and Euro. In addition, our
expenses other than those paid in Israeli currency that are not-linked to other currencies
are influenced by the devaluation of the NIS in relation to the U.S. dollar and the Euro.
The NIS value of our U.S. dollar and Euro expenses increase if the NIS devaluates against
the dollar and the Euro and other currencies other than NIS. In 2006, the U.S. dollar
devaluated against the NIS by 8.2%.

- 11 -

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From
time to time in the past we have engaged in hedging transactions in order to partially
protect ourselves from currency fluctuation and inflation risks and may use hedging
instruments from time to time in the future. If we were to determine that it is in our
best interests to enter into any other hedging transactions in the future, we may not be
able to do so or such transactions, if entered into, may not materially reduce the effect
of fluctuations in foreign currency exchange rates on our results of operations.

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.

The rights and
responsibilities of our shareholders are governed by Israeli law and differ in some
respects from the rights and responsibilities of shareholders under U.S. law.

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

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

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

- 12 -

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|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.

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
4-5 mils and hole diameters of 10 to 12 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 2006, 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 $28.8 million or 70% of our total sales in the year ended
December 31, 2006 as compared to approximately of $22.7 million or 72% of our total sales
in the year ended December 31, 2005.

In
June 2002, we acquired 76% of Kubatronik, a privately held German PCB manufacturer, for
approximately Euro 2.6 million. The remaining 24% of Kubatronik is held by Mr. Alois
Kubat, its founder and General Manager at that time. Kubatronik specializes in
manufacturing short run and prototype boards, including multi-layer, flex-rigid and HDI
boards. Its customers include companies engaged in the production of industrial, defense,
aerospace, telecom, networking, computer and data storage equipment, as well as contract
electronic manufacturers. This acquisition facilitated our entry into the German market,
while complementing our other relationships throughout the rest of Europe.

In
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. We expect to
introduce a PCB product using the STABLCOR technology in the third quarter of 2007.

- 13 -

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Since
2004 and through March 31, 2007, we have invested $7.4 million in facilities expansion,
restructuring our infrastructures and purchasing 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 2-3 mils and hole diameters of 3 to 6 mils.

# Manufacturing and
Engineering Processes

In
the PCB industry, significant investments in equipment are necessary to maintain
technological competitiveness. During the five years ended December 31, 2006, we invested
approximately$6.3 million for these purposes (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. In the year ended December 31, 2006,
approximately 27% of our manufactured products were ordered for delivery in less than 20
working days, of which approximately 6% were ordered for delivery within six to ten
working days and approximately 7% in five or less working days.

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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
and Environment Standards. Our quality management system has been ISO 9001:2000
certified since July 2002 (and prior to such date, was ISO 9002 certified 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 Glass Epoxy (FR4) Boards have been UL 94V-0 certified by
Underwriters Laboratories Inc. (a standards organization that offers product safety
testing and certification of product safety). Our environmental management system has been
ISO 14001:2004 certified since 2005 (and prior to such date was ISO 14001 certified from
2003). We are currently in the process of OHSAS 18001 certification for occupation health
and safety management systems, a standard of the Occupational Safety and Health
Administration of the U.S. Department of Labor, which we expect to complete during 2007.

# Sales, Customers and
Marketing

Sales.In the years ended December 31, 2004, December 31, 2005 and December 31,
          2006, the primary industries for which we produced PCBs were medical equipment
          (23%, 37% and 35% of production, respectively), defense and aerospace equipment
          (35%, 26% and 25% of production, respectively), telecom and networking
equipment           (18%, 5% and 7% of production, respectively) and industrial equipment
(16%, 11%           and 11% of production, respectively) as well as for contract
electronic           manufacturers (3%, 12% and 16% of production, respectively).

Customers.          During
the year ended December 31, 2006, we provided PCBs to approximately 180
          customers in Israel and approximately 280 customers outside of Israel
(including           Kubatroniks customers). Our customers outside of Israel are
located           primarily in Germany, Scandinavia, France (where our principal customer
is           located), the United States and the Netherlands. Sales to non-Israeli
customers           increased from $13.3 million (45.7% of revenues) in the year ended
December 31,           2004 to $18.1 million (57.7% of revenues) in the year ended
December 31, 2005 to           $22.3 million (54.2% of revenues) in the year ended
December 31, 2006.

In
the years ended December 31, 2004, 2005 and 2006, our ten largest customers accounted for
46%, 63% and 60% of our revenues in the years ended December 31, 2004, 2005 and 2006,
respectively, and one customer accounted for 12.3%, 30.6% and 25.2% of our total revenues,
respectively. The principal product of our largest customer is at the end of its lifecycle
and revenues from such customer decreased to 17% of our total revenues in the three months
ended March 31, 2007. In June 2007, such customer notified us to cease production of the
PCB for its principal product, which will be succeeded by a new internally developed
product. The customer may not continue to purchase products from us in the future, or if
it continues to purchase products from us, the volume of purchases would likely be
significantly lower than previous volumes. 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 18 persons (12 in Israel, one in the
United           States and five persons employed by our German subsidiary, Kubatronik).
In           Europe we market and sell our products through a full-time self-employed
          marketing and sales manager and also have sales agents in Sweden, Germany,
          Switzerland, France, Belgium and Spain. In the Netherlands, the United Kingdom
          and Italy we have PCB trading and manufacturing companies acting as
distributors           of our products. In the United States we market and sell our
products through a           full-time self-employed marketing and sales manager, who is
supported by six           representatives, as well as through a PCB manufacturing
company. In India we           have marketed our products since 2001 through a local
sales agent. We maintain           technical support services for our customers
world-wide. We also maintain           customer service support centers that handle all
logistical matters relating to           delivery and maintenance arrangements and
receive and handle complaints relating           to delivered products.

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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, and we expect these conditions to continue through 2007. During 2005 and 2006,
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
Ruwel Werke GmbH (Germany),Advanced Circuit Boards NV (Belgium) and Dyconex
(Switzerland) and certain other German companies.In the United States market we
mainly compete with TTM Technologies Inc., Merix Corp. and DDI Corp. 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.

# 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.

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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.

# 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 research and
development of new manufacturing technology that we believe will allow us to enhance our
product offerings.

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

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

In
May 2002, we established En-Eltek Netherlands 2002 B.V., a wholly-owned subsidiary
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.

|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, 2006, we paid NIS 2.1 million
($500,000) in rent for these premises.

Kubatroniks
executive offices as well as its design, production, storage and shipping facilities,
aggregating approximately 15,000 square feet, are located in an industrial building in
Geislingen, Germany. The lease for their facilities expires in June 30, 2008. A lease for
an adjoining 8,000 square feet parking area expires on December 31, 2010. In the year
ended December 31, 2006, Kubatronik paid an aggregate of NIS 422,000 ($100,000) in rent
for these premises.

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# Leased Equipment

We
lease manufacturing equipment under two operating lease agreements, pursuant to which as
of December 31, 2006 we are obligated to pay a total amount of NIS 2.3 million ($544,000),
through March 2010. Our monthly lease expense under these two agreements is approximately
NIS 60,000 ($14,250), linked to the U.S. dollar.

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

Kubatronik
leases manufacturing equipment under two operating lease agreements, which as of December
31, 2006 require us to pay a total of Euro 41,000 ($68,000) through April 2009. Our
monthly lease expense under these two agreements is approximately Euro 3,155 ($4,170).

# Investment in Equipment
and Infrastructure

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

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

In
2006, we invested approximately NIS 12.7 million ($3.0 million) in capital expenditures.
Of such amount, approximately NIS 10.7 million ($ 2.5 million) was used to purchase
production and manufacturing equipment and NIS 1.8 million ($ 0.4 million) was used for
leasehold improvements.

In
2007, we intend to invest approximately NIS 19 million ($ 4.5 million) in capital
expenditures, including approximately $ 2.9 million in manufacturing equipment and
approximately $ 1.6 million in leasehold improvements for the expansion of our production
facilities.

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

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Our
consolidated financial statements appearing in this annual report are prepared in NIS and
in accordance with Israeli GAAP, which vary in certain significant respects from U.S.
GAAP, as described in Note 29 to the consolidated financial statements.

Effective
as of January 1, 2007, our consolidated financial statements are being prepared in
accordance with U.S. GAAP and our reporting currency has been changed from NIS to U.S.
dollars, while our functional currency will remain NIS. We believe that presenting our
consolidated financial statements in U.S. dollars in the future will deliver more
meaningful and relevant financial information to our shareholders as the majority of our
shareholders (in terms of both the number of shareholders and numbers of shares they hold)
are U.S. persons. The financial statements for all years (or periods) presented will be
translated into U.S. dollars using the current rate method. Under that method, the income
statement and cash flow statement items for each year (or period) will be translated into
U.S. dollars using the exchange rates in effect at the date of the transactions and assets
and liabilities will be translated using the exchange rate at the end of each year (or
period), except for equity accounts which will be translated using the rates in effect at
the date of the transactions. All resulting exchange differences that do not affect our
earnings will be 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 financial
statements. The application of these policies requires management to make estimates and
assumptions that affect the valuation of assets and expenses during the reporting period.
There can be no assurance that actual results will not differ from these estimates.

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

Revenue Recognition

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

Inventories

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

Property and Equipment

Assets
are recorded at cost. Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. The cost of
maintenance and repairs is charged to expenses as incurred. The cost of significant
renewals and improvements is added to the carrying amount of the respective asset.

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Impairment in Value of
Assets

Since
January 1, 2003, we have applied the Israel Accounting Standards Board, or IASB,
Accounting Standard No. 15, Impairment in Value of Assets, to ensure
that our assets in the consolidated balance sheet are not stated at an amount exceeding
their recoverable value, which is the higher of the net sales price and the usage value,
which is the present value of the estimated future cash flows expected to be derived from
the use and realization of the asset. This standard, which is based on International
Accounting Standard No. 36, applies to all of our assets in the consolidated balance
sheet, except for tax assets and monetary assets. Likewise this Standard prescribes the
presentation and disclosure principles for assets that have declined in value. When the
carrying value of an asset in the consolidated balance sheet exceeds its recoverable
amount, we recognize an impairment loss equal to the difference between the book value of
the asset and its recoverable value. A loss recognized in this manner will be reversed
only if changes have occurred in the estimates used in determining the recoverable value
of the asset, from the date on which the last impairment loss was recognized. As of
December 31, 2006, no impairment losses have been identified. Under Israeli GAAP, in
accordance with Accounting Standard No. 15, certain procedures must be applied in order
ensure that our property and equipment in our consolidated balance sheet are not presented
at an amount which is in excess of our recoverable value, which is the higher of the net
selling price or the present value of the estimated future cash flows expected to be
derived from use and disposal of our property and equipment. If in the future the carrying
value of our property and equipment do not meet the requirements of Standard No. 15, we
may be required to accelerate the depreciation or write-off part of our property and
equipment. This could result in an increase of our operating expenses. For the impact
under the U.S. GAAP, see Note 29 to the consolidated financial statements.

Goodwill

Our
goodwill as of December 31, 2006 is the cost of our investment in Kubatronik over the
unamortized fair value of the assts acquired and liabilities assumed, determined as of the
acquisition date. Until January 1, 2006, we applied Israeli Accounting Standard No. 20
Amortization of Goodwill, according to which goodwill was
systematically amortized over the period of its useful life (ten years). Amortization of
identified goodwill was NIS 593,000 for each of the years ended December 31, 2005 and
2004.

As
of January 1, 2006, we implement the provisions of Israeli Accounting Standard No. 20
(Revised), The Accounting Treatment of Goodwill and Intangible Assets with
indefinite useful lives when Purchasing an Investee Company, according to which
goodwill is not systematically amortized. Instead, we examine whether there has been an
impairment in the value of the goodwill and intangible assets deriving from the
acquisition of a subsidiary, once a year or more frequently if events or changes in
circumstances indicate that there may have been an impairment in the value of the assets.
The financial statements for periods prior to the implementation of the revised Standard
were not restated. We obtained an appraisal from an independent appraiser to evaluate our
investment in Kubatronik as of December 31, 2006 and their conclusion was that no
impairment was required to be recorded as of such date.

# Recent Accounting
Pronouncements

Recent Accounting
Pronouncements in Israel

In
July 2006, the IASB published Accounting Standard No. 29, Adoption of
International Financial Reporting Standards, or Standard No. 29. Standard No. 29
provides that entities subject to the Israeli Securities Law, 1968 that are required to
report according to the regulations of such law, are to prepare their financial statements
for periods beginning as from January 2008 according to International Financial Reporting
Standards, or IFRS. Standard No. 29 permits early adoption as of financial statements
published after July 31, 2006. Standard No. 29 does not apply to entities subject to
Israeli Securities Regulations (Periodic and Immediate Reports of a Foreign Entity) -
2000, the financial statements of which are not prepared in accordance with Israeli GAAP.
Furthermore, Standard No. 29 provides that entities that are not subject to the Israeli
Securities Law, 1968 and not required to report according to the regulations of such law,
are also permitted to prepare their financial statements according to IFRS as of financial
statements published after July 31, 2006. The initial implementation of IFRS will be
effected along with the implementation of IFRS 1, the initial implementation of IFRS, for
purposes of the transition. In accordance with Standard No. 29, we are required to include
in our annual financial statements for the year ended December 31, 2007, balance sheet
data as at December 31, 2007 and statement of operations data for the year then ended that
have been prepared according to the recognition, measurement and presentation principles
of IFRS.

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In
August 2006, the Israeli Accounting Standards Board, or IASB, published Accounting
Standard No. 26, Inventory, or Standard No. 26. Standard No. 26
provides guidelines for determining the cost of inventory and its subsequent recognition
as an expenses as well as for determining impairment in value of inventory written down to
net realizable value. Standard No. 26 also provides guidelines regarding cost formulas
used to allocate costs to various types of inventory. Standard No. 26 applies to financial
statements for periods beginning on January 1, 2007 or thereafter.

In
September 2006, the IASB published Accounting Standard No. 27, Fixed
Assets, or Standard No. 27. Standard No. 27 prescribes rules for the
presentation, measurement and derecognition of fixed assets and for the disclosure
required in respect of the foregoing. Standard No. 27 provides that upon the initial
recognition of a fixed asset, the entity shall include in the cost of the item all the
costs it will incur in respect of a liability to dismantle and remove the item and to
restore the site on which it was located. Furthermore, Standard No. 27 provides that a
group of similar fixed asset items shall be measured at cost net of accumulated
depreciation, and less impairment losses or, alternatively, at its revalued amount less
accumulated depreciation, whereas an increase in the value of the asset to above its
initial cost as a result of the revaluation will be directly included in the
shareholders equity under a revaluation reserve. Any part of a fixed asset item with
a cost that is significant in relation to the total cost of the item shall be depreciated
separately, including the costs of significant periodic examinations. Standard No. 27 also
provides that a fixed asset that was purchased in consideration for another non-monetary
item in a transaction having a commercial substance shall be measured at fair value.
Standard No. 27 is effective for periods beginning on January 1, 2007. An entity that on
January 1, 2007 chooses for the first time to use the revaluation method for measuring
fixed assets shall on this date recognize a revaluation reserve in the amount of the
difference between the revalued amount of the asset on that date and its cost on the
books. Furthermore, an entity that in the past, upon the initial recognition of a fixed
asset, had not included in its cost the initial estimate of costs for dismantling and
removing the asset and for restoring the site on which it is located will measure these
costs as follows: (a) the liabilities to dismantle and remove the fixed asset and to
restore the site on which it was located as at January 1, 2007 should be measured in
accordance with generally accepted accounting principles; (b) the amount that would have
been included in the cost of the relevant asset on the date on which the liability was
initially incurred by capitalizing the amount of the liability mentioned in item (a) above
to the date on which the liability was initially incurred; and (c) the accumulated
depreciation on the capitalized amount under item (b) above as at January 1, 2007 should
be measured on the basis of the useful life of the asset as of that date. The difference
between the amount to be charged to the asset in accordance with items (b) and (c) above
and the amount of the liability in accordance with item (a) above are to be included in
retained earnings. Other than the foregoing, Standard No. 27 will be adopted on a
retroactive basis.

In
December 2006, the IASB published Accounting Standard No. 23, The Accounting
Treatment of Transactions Between an Entity and its Controlling Shareholder, or
Standard No. 23. Standard No. 23 replaces the main provisions of the Israeli Securities
Regulations (Financial Statement Presentation of Transactions between a Company and its
Controlling Shareholder) that were amended in February 2007. Standard No. 23 provides that
assets (other than an intangible asset with no active market) and liabilities included in
a transaction between the entity and its controlling shareholder shall be measured on the
date of the transaction at fair value and that the difference between the fair value and
the consideration from the transaction shall be included in shareholders equity. A
debit difference is a dividend and accordingly reduces the retained earnings. A credit
difference is an investment of the shareholder and therefore must be presented under a
separate item of shareholders equity titled capital reserve from transaction
between an entity and its controlling shareholder. Standard No. 23 applies to
transactions between an entity and its controlling shareholder that are executed after
January 1, 2007 and to a loan that was granted to a controlling shareholder or that was
received from it before the date Standard No. 23 came into effect as of the date of come
into effect.

In
March 2007 the Israel Accounting Standards Board published Accounting Standard No. 30.
Intangible Asset,or Standard No. 30. Standard No. 30 explains the
accounting treatment of intangible assets and defines how to measure the book value of
these assets, as well as the disclosures that are required. Standard No. 30 has been
initially implemented retroactively, except as described below. With regards to business
combinations, Standard No. 30 is implemented with respect to business combinations that
took place on January 1, 2007 or thereafter, whereas in respect of a research and
development project acquired in a business combination that took place before January 1,
2007 and which meets the definition of an intangible asset on the date of acquisition, and
was recorded as an expense on the date of acquisition, the entity shall recognize the
research and development project in process as an asset on January 1, 2007 and make an
allocation of taxes. A research and development asset shall be recognized in the amount of
its value on the date of acquisition less the amortization that would have accumulated
from the date of acquisition until December 31, 2006 on the basis of the useful life of
the asset, and less any accrued impairment losses. The amount of the adjustment shall be
included in the balance of retained earnings as at January 1, 2007. Implementation of
Standard No. 30 is not anticipated to have a material effect on our results of operation
and financial position.

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As
of January 1, 2007, our consolidated financial statements will be prepared in accordance
with U.S. GAAP. See Note 31 to the consolidated financial statements.

Recent Accounting
Pronouncements in the United States

In
July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation
No. 48 Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for income taxes
by prescribing the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that
a tax position, based solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) is only addressed if step one has been
satisfied (when the position is more-likely-than-not to be sustained). Under step two, the
tax benefit is measured as the largest amount of benefit, determined on a cumulative
probability basis that is more-likely-than-not to be realized upon ultimate settlement.
FIN 48 applies to all tax positions related to income taxes subject to the FASB Statement
of Financial Accounting Standard, or SFAS, or SFAS, No. 109, Accounting for
income taxes. This includes tax positions considered to be routine
as well as those with a high degree of uncertainty. FIN 48 has expanded disclosure
requirements, which include a tabular roll forward of the beginning and ending aggregate
unrecognized tax benefits as well as specific detail related to tax uncertainties for
which it is reasonably possible the amount of unrecognized tax benefit will significantly
increase or decrease within twelve months. These disclosures are required at each annual
reporting period unless a significant change occurs in an interim period. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The cumulative effect of
applying FIN 48 will be reported as an adjustment to the opening balance of retained
earnings. We do not expect the implementation of FIN 48 to have a material impact on our
consolidated results of operations and financial position.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
or SFAS No. 157. SFAS No. 157 provides a single definition of fair value, a framework for
measuring fair value, and expanded disclosures concerning fair value. Previously,
different definitions of fair value were contained in various accounting pronouncements
creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those
previously issued pronouncements that prescribe fair value as the relevant measure of
value, except SFAS No. 123(R) and related interpretations. SFAS No. 157 does not apply to
accounting standards that require or permit measurement similar to fair value but are not
intended to measure fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. We do not expect the implementation of SFAS No. 157 to have a material
impact on our consolidated results of operations and financial position

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at fair
value. Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial volatility in
earnings. The Standards objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year beginning after November 15, 2007. We do not expect the
implementation of SFAS No. 159 to have a material impact on our consolidated results of
operations and financial position.

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

Our
consolidated financial statements appearing in this annual report are prepared in NIS in
accordance Israeli GAAP, which vary in certain significant respects from U.S. GAAP, as
described in Note 29 to the consolidated financial statements. The differences between
Israeli GAAP and U.S. GAAP that have a material effect on net income (loss) and total
shareholders equity are also described in Note 29 to the consolidated financial
statements.

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

- 22 -

---

---

|                                                | As of and for the years ended December 31,
|----------------------------------------------- | ------------------------------------------
|
|
|
|
|Net income (loss) in accordance with:           |                                           
|Israeli GAAP                                    |                                           
|U.S. GAAP                                       |                                           
|                                                |                                           
|Total shareholders' equity  in accordance with: |                                           
|Israeli  GAAP                                   |                                           
|U.S. GAAP                                       |                                           

# 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 |                        
|Amortization of goodwill                           |                        
|                                                   |                        
|Operating income (loss)                            |                        
|Financial expenses, net                            |                        
|Other income (expenses), net                       |                        
|                                                   |                        
|Income (loss) before tax benefit (expenses) and    |                        
|minority interest                                  |                        
|Tax benefit (expenses)                             |                        
|                                                   |                        
|Income (loss) after tax benefit (expenses) before  |                        
|minority interest                                  |                        
|                                                   |                        
|Minority interest                                  |                        
|                                                   |                        
|Net income (loss)                                  |                        
|                                                   |                        

* Less than 0.1%

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

Revenues.          Revenues
increased by 20.4 % to NIS 173.9 million ($41.2 million) in the year           ended
December 31, 2006 from NIS 144.4 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
devaluation of the U.S. dollar against the NIS by 8.2% in 2006.

- 23 -

---

---

Cost
of Revenues. Cost of revenues increased by 18.0 % to NIS 136.5 million ($32.3million)
in the year ended December 31, 2006 from NIS 115.7 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 78.5 % in the year ended December 31, 2006 from 80.1% 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. The continued
increase in energy and commodity prices may result in our costs increasing at a higher
level than anticipated. In addition, if the devaluation of the dollar against the NIS
continues in 2007, the dollar value of NIS denominated expenses (primarily salaries and
other domestic expenses) will increase and as a result, our expenses as a percentage of
revenue will increase.

Gross
Profit. Gross profit increased by 30.4 % to NIS 37.4 million ($8.9 million) in the
year ended December 31, 2006 from NIS 28.7 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 21.5 % in the year ended December 31, 2006 from 19.9%
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. The continued increase in energy and commodity prices may result in our costs
increasing at a higher level than anticipated. In addition, if the devaluation of the
dollar against the NIS continues in 2007, the dollar value of NIS denominated expenses
(primarily salaries and other domestic expenses) will increase, and as a result our gross
margin as a percentage of revenue will decrease.

Research
and Development Expenses, Net.We generally do not engage in significant research and
developments efforts. In 2005 and 2006, we incurred NIS 1,115,000 and NIS 1,453,000
($343,000), 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, NIS 469,000 and NIS 766,000
($180,000), 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 22.4 % to NIS 24.3 million ($5.8 million) in the year ended December 31,
2006 from NIS 19.9 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.We expect that our
selling, general and administrative expenses will increase in 2007 as we intend to
increase the number of our sales personnel, as well as due to an anticipated increase in
commissions to sales representatives and increased export and delivery expenses as a
result of the anticipated increase in our export revenues.

Amortization
of Goodwill.We recorded amortizationof goodwill of NIS 593,000 in the year
ended December 31, 2005. Goodwill represents the goodwill that arose from our acquisition
of Kubatronik. As of January 1, 2006, we apply Israeli Accounting Standard No. 20
The Accounting Treatment of Goodwill and Intangible Asset when Purchasing an
Investee, according to which no amortization is recorded and instead, an
examination of impairment in value is performed once a year or more frequent if events or
changes in circumstances indicate that there may be an impairment in the value of
goodwill.

Operating
income.As a result of the foregoing, our operating income was NIS 12.4 million ($2.9
million) in the year ended December 31, 2006 compared to NIS 7.6 million in the year ended
December 31, 2005.

Financial
Expenses, Net. Financial expenses, net decreased to NIS 2.4 million ($568,000) in the
year ended December 31, 2006 from NIS 2.7 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 NIS 24,000 ($6,000) in the year ended
December 31, 2006 and NIS 103,000 in the year ended December 31, 2005. Other income, net
in the years ended December 31, 2006 and 2005 was attributable to the gain we recorded on
the disposal of fixed assets.

- 24 -

---

---

Tax
Expenses. 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 three years
ended December 31, 2006, we did not record a deferred tax asset in 2006 with respect to
our profits generated in Israel due to uncertainty about our ability to utilize such tax
asset in the foreseeable future. Such uncertainty is primarily due to the devaluation of
the U.S. dollar against the NIS, our dependency on one major customer whose product is 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 NIS 703,000 ($166,000) 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 NIS 266,000 ($63,000) in Kubatroniks net loss in the
year ended December 31, 2006, as compared to the minoritys interest of NIS 218,000
in its net loss in the year ended December 31, 2005.

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

Revenues.          Revenues
increased by 15.5% to NIS 144.4 million in the year ended December 31,           2005
from NIS 125 million in the year ended December 31, 2004. This increase in
          revenues was primarily attributable to the increase in sales of our flex-rigid
          boards, which have a higher price per PCB than our rigid PCBs, and the
increased           number of our PCBs sold in 2005.

Cost
of Revenues. Cost of revenues increased by 5.2 % to NIS 115.7 million in the
year ended December 31, 2005 from NIS 110.0 million in the year ended December 31, 2004.
This increase in cost of revenues is due to an increase in the volume of sales. Cost of
revenues as a percentage of revenues decreased to 80.1% in the year ended December 31,
2005 from 88% in the year ended December 31, 2004. This decrease in cost of revenues as a
percentage of revenues is primarily attributable to the increase in sales volume while
costs increased at a lower pace due to fixed costs being absorbed over a greater volume of
sales.

Gross
Profit. Gross profit increased by 91.3 % to NIS 28.7 million in the year ended
December 31, 2005 from NIS 15.0 million in the year ended December 31, 2004. This increase
in gross profit as a percentage of revenues is primarily attributable to the increase in
sales of flex-rigid boards, which yield higher gross margins.

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

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
increased by 8.7 % to NIS 19.9 million in the year ended December 31, 2005 from NIS 18.3
million in the year ended December 31, 2004. 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, travel expenses of
marketing personnel and costs of professional services resulting from our increased
revenues.

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

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

Financial
Expenses, Net. Financial expenses, net decreased to NIS 2.7 million in the year ended
December 31, 2005 from NIS 2.9 million in the year ended December 31, 2004. These
financial expenses were primarily attributable to interest on short-term debt and
long-term debt as well as exchange rate expenses net. The decrease in financial expenses
in 2005 is attributable to a reduction in our long-term debt and differences in foreign
currency exchange rates.

- 25 -

---

---

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

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

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

# Quarterly Results of
Operations

The
following table sets forth certain unaudited quarterly financial information in accordance
with Israeli GAAP expressed in NIS and as a percentage of revenues for each of the eight
fiscal quarters ended December 31, 2006. 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
|---------------------------------------------------- | -------------
|
|
|
|
|
|Israeli GAAP:                                        |              
|Revenues                                             |              
|Cost of revenues                                     |              
|                                                     |              
|Gross profit                                         |              
|Research and development
  income, net               |              
|Selling, general and                                 |              
|administrative expenses                              |              
|Amortization of goodwill                             |              
|                                                     |              
|Operating income                                     |              
|Financial expenses, net                              |              
|Other income (expenses), net                         |              
|                                                     |              
|Income before tax expenses and minority
  interest   |              
|Tax expenses                                         |              
|                                                     |              
|Income after tax expenses before
  minority interest |              
|Minority Interest                                    |              
|                                                     |              
|Net income                                           |              
|                                                     |              

- 26 -

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---

|                                                   | Quarter Ended
|-------------------------------------------------- | -------------
|
|
|
|
|Israeli GAAP:                                      |              
|Revenues                                           |              
|Cost of revenues                                   |              
|                                                   |              
|Gross profit                                       |              
|Research and development
  income, net             |              
|Selling, general and administrative                |              
|expenses                                           |              
|Amortization of goodwill                           |              
|Operating income                                   |              
|Financial expenses, net                            |              
|Other income (expenses), net                       |              
|                                                   |              
|Income before tax expenses and minority
  interest |              
|Tax expenses                                       |              
|                                                   |              
|Income after tax expenses                          |              
|Minority Interest                                  |              
|                                                   |              
|Net income                                         |              
|                                                   |              

* Less than 0.1%

Conditions in Israel

We
are incorporated under the laws of the State of Israel, and our executive offices and
research and development facilities are located in Israel. Although most of our sales are
made to customers outside Israel, we are directly influenced by the political, economic
and military conditions affecting Israel. 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.

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, and a state of hostility, varying from time
to time in intensity and degree, has led to security and economic problems for Israel.
Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, 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
2006. 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 between
Israel and Hezbollah forces and to a lesser extent in the Gaza Strip, which involved
rocket attacks on populated areas in the northern parts of Israel. On August 14, 2006, a
cease-fire between Hezbollah and Israel took effect. This situation has had an adverse
effect on Israels economy, primarily in the geographical areas directly harmed by
this conflict. Any future armed conflict, political instability or violence in the region
may have a negative effect on our business condition, harm our results of operations and
adversely affect our share price. No predictions can be made as to whether or when a final
resolution of the areas problems will be achieved or the nature thereof and to what
extent the situation will impact Israels economic development or our operations.

Furthermore,
there are a number of countries that restrict business with Israel and with Israeli
companies. Restrictive laws or policies of those countries directed towards Israel or
Israeli businesses had, and may in the future continue to have, an adverse impact on our
operations, our financial results or the expansion of our business. No predictions can be
made as to whether or when a final resolution of the areas problems will be achieved
or the nature thereof and to what extent the situation will impact Israels economic
development or our operations.

- 27 -

---

---

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

# Economic Conditions

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

# Trade Relations

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

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 2006 was 31%, which 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,
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,
2006. For additional information see Item 10E. Additional Information 
Taxation  Tax Benefits Under the Law for the Encouragement of Capital Investments,
1959 and Note 24 to our consolidated financial statements.

As
of December 31, 2006, we had approximately NIS 41.7 million ($9.9 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 1996-2001 tax years are considered final due
to the statute of limitations. Our principal foreign subsidiary, Kubatronik has received
final tax assessments through the 2003 tax year. We can not be reasonably assured as to
our ability to utilize the tax asset attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax
bases and our loss carry-forwards in the foreseeable future. Therefore we have recorded a
full valuation allowance on the deferred tax asset in respect of these differences and
loss carry-forwards.

- 28 -

---

---

# Impact of Currency
Fluctuations and of Inflation

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

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

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|
|U.S. dollar                  |                        
|Euro                         |                        
|Israeli consumer price index |                        

We
record our revenues and expenses in NIS. Our revenues are generally denominated in foreign
currencies, primarily the U.S. dollar and Euro, 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 and Euro
revenues decline if the NIS devaluates against the dollar and Euro. In addition, our
expenses other than those paid in Israeli currency that are not-linked to other currencies
are influenced by the devaluation of the NIS in relation to the U.S. dollar and the Euro.
The NIS value of our U.S. dollar and Euro expenses increase if the NIS devaluates against
the dollar and the Euro and other currencies other than NIS. In 2006, the U.S. dollar
devaluated against the NIS by 8.2%.

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

|B. | LIQUIDITY
AND CAPITAL RESOURCES
|-- | -------------------------------

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

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

We
spent approximately NIS 12.7 million ($3.0 million) for capital expenditures in the year
ended December 31, 2006 and NIS 12.6 million in the year ended December 31, 2005. In the
years ended December 31, 2006 and 2005, our capital expenditures mainly related to our
investments in production and manufacturing equipment, and leasehold improvements. We
expect to invest approximately NIS 19 million ($ 4.5 million) in capital expenditures and
capital leases in 2007 mainly for the expansion of our production facilities.

In
June 2002, we acquired 76% of Kubatronik for approximately Euro 2.6 million. The remaining
24% of Kubatronik is held by Mr. Alois Kubat. Pursuant to the agreement under which we
acquired our interest in Kubatronik (as amended), following the termination of Mr.
Kubats employment with Kubatronik and prior to December 31, 2007, Mr. Kubat 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 (including, among other things, an accrual of
annual interest at the rate of LIBOR + 1% from May 2005). Mr. Kubat retired in October
2003. Under Israeli GAAP, our right to purchase the remaining 24% of Kubatronik has no
accounting consequences. Under U.S. GAAP, such an arrangement gives rise to a derivative
instrument which should be marked to market every reporting period, in accordance with
SFAS 150, Accounting for Certain Financial Instruments with characteristics of
both Liabilities and Equity (see Note 29 of our financial statements,
Effect of Significant Differences Between Generally Accepted Principles in Israel
and the United States).

- 29 -

---

---

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:

|                                                                        |  |  | Convenience
Translation
into U.S.
Dollars
|----------------------------------------------------------------------- |  |  | -----------------------------------------
|
|
|
|
|Net provided by operating activities                                    |  |  | NIS                                      
|Net cash used in investing activities                                   |  |  |                                          
|Net cash provided by (used in) financing activities                     |  |  |                                          
|Adjustments from translation of financial statements of  foreign entity |  |  |                                          
|Net increase in cash and cash equivalents                               |  |  |                                          
|Cash and cash equivalents at beginning of period                        |  |  |                                          
|Cash and cash equivalents at end of period                              |  |  |                                          

Net
cash provided by operating activities was NIS 11.6 million ($ 2.8 million) for the year
ended December 31, 2006. This amount was primarily attributable to net income of NIS 9.6
million ($2.3 million), fixed asset depreciation of NIS 10.4 million ($2.5 million), a
decrease in other receivables and prepaid expenses of NIS 1.0 million ($0.2) and
cancellation of deferred taxes of NIS 0.7 million ($ 0.2). This amount was partially
offset by an increase in trade receivables of NIS 9.5 million ($2.3 million) and accrued
interest and inflationary and exchange rate impact on long-term debts of NIS 0.7 million
($0.2). Net cash provided by operating activities was NIS 14.3 million for the year ended
December 31, 2005. This amount was primarily attributable to net income of NIS 5.3
million, fixed asset depreciation of NIS 10.9 million, an increase in trade payables of
NIS 0.9 million, a decrease in trade receivables of NIS 0.8 million and amortization of
goodwill of NIS 0.6 million. This amount was partially offset by an increase in
inventories of NIS 2.5 million, an increase in other receivables and prepaid expenses of
NIS 1.3 million and a decrease in employee severance benefits, net of NIS 0.8 million.

Net
cash used in investing activities was NIS 9.6 million ($2.3 million) for the year ended
December 31, 2006 and NIS 12.5 million for the year ended December 31, 2005. Net cash used
in investing activities for the year ended December 31, 2005 and 2006 was primarily for
the purchase of fixed assets for our production lines.

Net
cash used in financing activities was NIS 0.7 million ($170,000) for the year ended
December 31, 2006, which was primarily attributable to new loans of NIS 11.2 million ($2.6
million) from our banks and cash from the exercise of employee stock options of NIS 0.4
million ($104,000), which was partly offset by the repayment of NIS 10.8 million ($2.6
million) in long-term and short-term credit from our banks and the repayment of NIS 1.5
million ($359,000) of credit from fixed assets payables. Net cash provided by financing
activities was NIS 1.3 million for the year ended December 31, 2005, which was primarily
attributable to new loans of NIS 8.3 million from our banks and cash from the exercise of
employee stock options of NIS 2.1 million, which was partly offset by a decrease NIS 9.1
million in long-term and short-term credit from our banks.

- 30 -

---

---

As
of December 31, 2006, we had NIS 8.6 million ($2.0 million) in cash and cash equivalents
and a working capital of NIS 7.8 million ($1.8 million), as compared to NIS 7.3 million in
cash and cash equivalents and a working capital deficit of NIS 4.4 million at December 31,
2005.

As
of December 31, 2006, the following revolving lines of credit and long-term loans were
outstanding.

| |  | a
revolving line of credit of approximately NIS 1.5 million ($347,000) with Bank Hapoalim
B.M.  Of such               amount, NIS 465,000 ($110,000) is linked to the U.S. dollar
and NIS 1.0 million               ($237,000) is not linked.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | long-term
loans from Bank Hapoalim B.M. aggregating NIS 6.1 million ($1.5 million).  Of such
amount, NIS               0.9 million ($222,000) is linked to the Israeli consumer price
index, NIS 222,000               ($53,000 is linked to the U.S. dollar and NIS 5.0
million ($1.2 million) is not               linked.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
revolving line of credit of approximately NIS 7 million ($1.7 million) with Israel
Discount Bank Ltd, which is not linked.
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | long-term
loans from Israel Discount Bank Ltd. in the aggregate amount of NIS 7.8 million ($1.8
million). Of such amount, NIS 0.8 million ($192,000) is linked to the Israeli consumer
price index, NIS 1.3 million ($309,000) is linked to the U.S. dollar and NIS 5.7 million
($1.3 million) is not linked.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | long-term
loans from Bank Leumi LeIsrael Ltd. in the aggregate amount of NIS 166,000($39,000).
Of such amount, NIS 148,000 ($35,000) is linked to the Israeli consumer price index and
NIS 18,000 ($4,000) is linked to the U.S. dollar.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
credit lines bear annual interest ranging from 6.95% to 7.1% for non-linked credit and
7.38% for credit which was linked to the dollar. Our long-term loans bear annual interest
ranging from 5.3% to 6.7% for long-term loans which were linked to the Israeli consumer
price index, 6.88% to 7.53% for long-term loans which were linked to the dollar and 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. In
July 2003, as part of this financing plan, we signed a factoring agreement with U Bank
Ltd. (formerly Investec Bank (Israel) Ltd.), or U Bank, for a $1.0 million factoring
facility, in consideration for the assignment to U Bank of an equal amount of our accounts
receivable. In December 2006, we replaced the factoring arrangement by 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 floating charge on the rest of our assets and by a fixed lien on goodwill
(intangible assets) and insurance rights (rights to proceeds on insured assets in the
event of damage). In addition, the agreements with our banks prohibit us from selling or
otherwise transferring any assets except in the ordinary course of business or from
placing a lien on our assets without the banks consent. Financial covenants in
respect of our credit facilities and long-term 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 15.0 million or 15% of our consolidated total assets, and the higher of
tangible shareholders equity of NIS 14.0 million or 14% of our total assets (on
a non-consolidated basis). For these purposes, shareholders equity includes the
outstanding convertible note and excludes prepaid expenses (except insurance). As of
December 31, 2006, we were in compliance with such covenants.

- 31 -

---

---

We
expect to finance our 2007 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, 2007.

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

We
generally do not engage in significant research and development.

In 2005,
we were granted membership in OptiPac, a consortium within the framework of the MAGNET
program of the Office of the Chief Scientist. OptiPac was created specifically to develop
generic optical packaging technologies for the microelectronics sector, technologies that
are critically important to the communications industry. Under the terms of the
consortium, each member of the consortium will be provided with an advance for its
research and development costs for a specific research and development project assigned to
it by the consortium. The Office of the Chief Scientist reimburses 66% of such approved
research and development expenses. These reimbursements are contingent upon our submitting
periodic reports prepared in accordance with the requirements of the Office of the Chief
Scientist We are not required to pay the Office of the Chief Scientist royalties with
respect to this grant. In 2005 and 2006, we incurred NIS 1,115,000 and NIS 1,453,000
($344,000), 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, NIS 469,000 and NIS 766,000
($181,000), 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, 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.

In
the years ended December 31, 2005 and December 31, 2006, one customer accounted for
approximately 31% and 25% of our total revenues, respectively. The principal product of
our largest customer is at the end of its lifecycle and revenues from such customer
decreased to 17% of our total revenues in the three months ended March 31, 2007. In June
2007, such customer notified us to cease production of the PCB for its principal product,
which will be succeeded by a new internally developed product. The customer may not
continue to purchase products from us in the future, or if it continues to purchase
products from us, the volume of purchases would likely be significantly lower
than previous volumes. We cannot assure you that we will be able to attract
sufficient new business to compensate for the loss of our largest customer.

Our
backlog at December 31, 2006 was approximately $5.9 million compared to a backlog of
approximately $4.9 million at December 31, 2005. 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, 2006.

- 32 -

---

---

|Contractual Obligations                                                                    | Payments due by period
NIS (in thousands)
|------------------------------------------------------------------------------------------ | -----------------------------------------
|
|
|
|
|Short-term bank credit (1)                                                                 |                                          
|Long-term debt obligations (2)                                                             |                                          
|Long-term debt related to fixed assets financing
     transactions (3)                     |                                          
|Operating lease and other contractual obligations                                          |                                          
|Purchase obligations                                                                       |                                          
|Convertible note (3)                                                                       |                                          
|Other long-term liabilities reflected on the company's
   balance sheet under Israeli GAAP |                                          
|Total                                                                                      |                                          

---

(1)    
          Our credit lines bear annual interest ranging from 6.95% to 7.1% for non-linked
          credit and 7.38% for credit which was linked to the dollar.

(2)    
          Our long-term loans bear annual interest ranging from 5.3% to 6.7% for long-term
          loans which were linked to the Israeli consumer price index, 6.88% to 7.53% for
          long-term loans which were linked to the dollar and 5% to 8.4% for non-linked
          long-term loans.

(3)    
          Our long-term debt related to fixed assets financing transactions bear annual
          interest ranging from 4%-5.88% for such long-debt which was linked to the dollar
          and 6.35% linked to the Israeli consumer price index.

(4)    
          In May 2007, the principal amount of the convertible note was converted in
          ordinary shares and we repaid the accrued interest on the principal amount. See
          Item 7B. Major Shareholders and Related Party Transactions  Related
          Party Transactions.

|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 December 31, 2006:

|Name                           | Age | Position                                                 
|------------------------------ | --- | ---------------------------------------------------------
|
|
|
|
|Nissim Gilam(1)(2)             | 68  | Chairman of the Board of Directors                       
|Arieh Reichart                 | 52  | President and Chief Executive Officer                    
|Amnon Shemer                   | 47  | Vice President, Finance and Chief Financial Officer      
|Dan Eshed                      | 56  | Senior Vice President, Subsidiaries                      
|Eli Dvora                      | 50  | Vice President, Operations                               
|Moshe Leibovich                | 49  | Vice President, Marketing and Sales                      
|Roberto Tulman                 | 48  | Vice President, Technologies and Chief Technology Officer
|Shlomo Danino                  | 44  | Vice President, Engineering and Quality Assurance        
|Vardit Dekel                   | 42  | Vice President, Human Resources                          
|David Banitt(1)(3)(4)          | 55  | Independent Director                                     
|Jack Bigio                     | 41  | Director                                                 
|Josef Maiman                   | 61  | Director                                                 
|Ophira Rosolio-Aharonson(1)(3) | 57  | Outside Director                                         
|Eliyaho Tov(1)(2)(3)(4)        | 63  | Outside Director                                         
|Joseph Yerushalmi              | 60  | 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

- 33 -

---

---

Mr.
          Joseph Yerushalmi, a Class I director, will serve as a director until our 2009
          general annual meeting of shareholders. Messrs. David Banitt and Jack Bigio,
          Class II directors, will serve as directors until our 2007 annual general
          meeting of shareholders. Messrs. 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.

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.

- 34 -

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---

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.

Jack
Bigiohas served as a director since May 2000. From May 2002 until October
2006, Mr. Bigio served as the president and chief executive officer of Ampal American
Israel Corporation. Mr. Bigio serves as a member of the board of directors of Ampal and
several companies within the Ampal group. From July 1995 until April 2002, Mr. Bigio
served as vice president  operations and finance of Merhav M.N.F. Ltd., an Israeli
company that constructs turnkey projects in, among other fields, refineries, energy and
agriculture. Prior thereto, Mr. Bigio served as an economist and executive assistant to
the president of Merhav M.N.F. Ltd. for five years. Mr. Bigio holds a B.A. degree in
Economics and Business Administration and M.B.A. degree, both from The Hebrew University
of Jerusalem.

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.

Ophira
Rosolio-Aharonson was appointed as an outside director 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 in December 2003. Since November
1999, Mr. Tov has been a freelance consultant as an economic advisor and management
advisor. Mr. Tov serves as a director of several other companies. From 1973 until
September 1999, Mr. Tov served as a senior economist of The Israel Corporation Ltd. and
during such period served as a director of several companies within The Israel Corporation
Ltd. group. Mr. Tov holds a B.A. degree in economics and political science and 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.

- 35 -

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---

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.

|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, 2006.

|                                                               | Salaries, fees,
commissions and
bonuses | Pension, retirement
and similar benefits
|-------------------------------------------------------------- | --------------------------------------- | ----------------------------------------
|
|
|
|
|All directors and executive officers as a group (consisting of |                                         |                                         
|16 persons)                                                    |                                         |                                         

During
the year ended December 31, 2006, we paid each of our outside and independent directors an
annual fee of NIS 16,200 ($3,840) and a per meeting attendance fee of NIS 1,020 ($241).
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
NIS 20,880 ($4,942). We also provide Mr. Gilam with a company car and pay all expenses in
connection therewith.

As
of December 31, 2006, our directors and executive officers as a group, consisting of 14
persons, held options to purchase an aggregate of 119,500 ordinary shares. Of such
options, options to purchase 20,000 ordinary shares have an exercise price of $1.14, and
vest over a three-year period (of which, options to purchase 13,332 ordinary shares had
vested at December 31 2006) and will expire in November 2009 and options to purchase
99,500 ordinary shares have an exercise price of NIS 21 ($ 4.97 ), were fully vested upon
grant and will expire in December 2007. The options were granted under our 2000 Stock
Option Plan and 2005 Stock Option Plan. See  Share Ownership  Stock
Option Plans.

The
compensation of our chief executive officer and all other executive officers is
recommended to our Board of Directors for determination by amajority of the
independent directors.

|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.

- 36 -

---

---

# 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.

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.

As
of 2006, 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.

- 37 -

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---

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.

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 the plan to improve our profitability that was adopted by our
management, and recommending to our board of directors future strategies for our company
and monitoring their implementation. Messrs. Gilam, Banitt and Tov and Ms.
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.

- 38 -

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---

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.

Stock Option Committee

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

# 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 (approximately $ 4,260 ), and provide him with a company
car and pay all expenses in connection therewith. Mr. Gilam may receive this compensation
directly or through his personal company, Nissim Gilam Ltd.

There
are no arrangements or understandings between us and any of our 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.

- 39 -

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# Approval of Related
Party Transactions Under Israeli Law

The
Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holder
is defined in the Israeli Companies Law as a director, general manager, chief business
manager, deputy general manager, vice general manager, or any person filling any of these
positions in a company even if he or she holds a different title, and also includes any
other manager directly subordinate to the general manager. An office holders
fiduciary duties consist of a duty of care and a duty of loyalty. An office holder must
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
information regarding the business feasibility of an action brought for his or her
approval or performed by him or her by virtue of his or her position and all other
important information pertaining to these actions.

The
duty of loyalty requires that an office holder act in good faith and for the benefit of
the company, including the duty to: avoid any conflict of interest between the office
holders position in the company and any other position he holds or his personal
affairs; avoid any competition with the companys business; avoid exploiting any
business opportunity of the company in order to obtain benefit for the office holder or
any other person; and disclose to the company any information or documents relating to the
companys affairs which the office holder received by virtue of his or her position
as an office holder.

Under
the Israeli Companies Law, transactions of a company with an office holder and
transactions of a company with another entity in which an office holder has a personal
interest and which are not extraordinary transactions, must be approved by the board of
directors or as otherwise provided for in a companys articles of association. An
extraordinary transaction 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. Extraordinary transactions with an office holder
that is not a director and transactions that involve the grant of an exemption, insurance,
indemnification or an undertaking to indemnify an office holder that is not a director
must be approved by the audit committee and the board of directors. Extraordinary
transactions with a director and transactions involving the conclusion of a contract by a
company with a director as to the terms of his office, including the grant of an
exemption, insurance, indemnification or an undertaking to indemnify, or the conclusion of
a contract by a company with a director as to the terms of his employment in other
positions, must be approved by the audit committee, board of directors and shareholders.
If the office holder is a controlling shareholder or a relative of a controlling
shareholder, any extraordinary transaction, compensation, exemption, indemnification and
insurance of the office holder must be approved by our audit committee, board of directors
and shareholders, supported by the vote of at least one-third of the shares of the
non-controlling shareholders voting on the matter, or provided that the total number of
shares held by non-controlling shareholders that voted against the proposal did not exceed
one percent of all of the voting rights in the company.

The
Israeli Companies Law requires that an office holder and a controlling shareholder
disclose promptly, and no later than by the first board meeting at which such transaction
is considered, any personal interest that he or she may have and all related material
information and documents, in connection with any existing or proposed transaction of the
company. Personal interest includes any personal interest of the persons relative,
or any corporation in which the person or any relative of such person is an interested
party. The disclosure requirement does not apply where the office holder or controlling
shareholders personal interest is created only by the personal interest of a
relative in a transaction that is not an extraordinary transaction.

A
director who has a personal interest in a matter, which is considered at a meeting of the
board of directors or the audit committee, may not be present during the discussions of
the board of directors or audit committee and may not vote on this matter, unless the
transaction under consideration 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 or the audit committee have a
personal interest, then the approval of the general meeting of shareholders is also
required.

Under
the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated
under the Israeli Companies Law, and amended in January 2002 and in March 2006, certain
transactions between a company and its controlling shareholder(s) do not require
shareholder approval. In addition, under such regulations, directors compensation
and employment arrangements do not require the approval of the shareholders if both the
audit committee and the board of directors agree that such arrangements only benefit the
company or if the directors compensation does not exceed the maximum amount
of compensation for outside directors determined by applicable regulations. Under very
limited circumstances, employment and compensation arrangements for an office holder that
is a controlling shareholder of the company or his relative do not require the approval of
shareholders. The foregoing relief 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 grant of such relief, 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 will require shareholders approval as detailed above.

- 40 -

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---

Board
of directors and shareholder approval is also required in the event a company issues its
securities in a private placement of securities that will cause a person to become a
controlling shareholder, or in the event 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, and that
issuance will (i) increase the relative holdings of a shareholder that holds 5% or more of
the companys outstanding share capital, or (ii) cause any person to become a holder
of more than 5% of the companys outstanding share capital.

Notwithstanding
all of the above, if any of the enumerated transactions requiring special approvals is
adverse to the companys interest, such approval would not be effective.

# 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.

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.

- 41 -

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---

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.

# 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:

- 42 -

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| |  | 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, 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.

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

In
addition, as of December 31, 2006, Kubatronik, our subsidiary in Germany, employed 40
full-time employees and 7 part-time employees, compared to 37 full-time employees and 9
part-time employees at December 31, 2005 and 32 full-time employees and 9 part-time
employees at December 31, 2004.

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.

- 43 -

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Pursuant
to Israeli law, we are legally required to pay severance benefits upon certain
circumstances, including the retirement or death of an employee or the termination of
employment of an employee without due cause. Some of our employees are covered by life and
pension insurance policies providing customary benefits to employees, including retirement
and severance benefits. Most of our employees are covered by pension funds providing
similar benefits. We contribute between 12.0% and 14% of base salaries to such plans and
employees contribute between 5.0% to 6.5% of base salaries. We also contribute 7.5% of
base salaries to certain professional advancement funds for managers,
engineers and others and such employees contribute 2.5% of base salaries. Our contribution
and employee contributions are not limited; however, a companys contribution above
certain specified maximum amounts are taxable income to the employee. Israeli employers
and employees are required to pay predetermined sums to the National Insurance Institute,
which is similar to the United States Social Security Administration. Subject to minimum
thresholds, the employer contribution to the National Insurance Institute is at the rate
of 5.29% of the salary and the employee contribution to the National Insurance Institute
is at the rate of 8.1% 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 $8.500). In the year ended December 31, 2006, our aggregate payments as an
employer to the National Insurance Institute amounted to approximately 5.3% of salaries.

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

# Beneficial Ownership of
Executive Officers and Directors

The
following table sets forth certain information as of June 25, 2007 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             |                                                  |                            
|Jack Bigio               |                                                  |                            
|Josef Maiman             |                                                  |                            
|Ophira Rosolio-Aharonson |                                                  |                            
|Eliyaho Tov              |                                                  |                            
|Joseph Yerushalmi        |                                                  |                            

---

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

|(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 June 25, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(3) | Subject
to currently exercisable options granted under our 2005 Stock Option                Plan,
having an exercise price of NIS 21 ($ 4.97) per share, which options
               expire in December 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (4) | Includes
30,000 ordinary shares subject to currently exercisable options granted
               under our 2005 Stock Option Plan, having an exercise price of NIS 21 ($
4.97 )                per share, which options expire in December 2007.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Of
such shares, 6,666 ordinary shares are subject to currently exercisable
               options granted under our 2000 Stock Option Plan, having an exercise price
of                $1.14 per share, which options expire in November 2009 and 4,000
ordinary shares                are subject to currently exercisable options granted under
our 2005 Stock Option                Plan, having an exercise price of NIS 21 ($ 4.97])
per share, which options                expire in December 2007.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Includes
985,796 ordinary shares held of record by Merhav M.N.F. Ltd., an                Israeli
private company controlled by Mr. Maiman. Also includes 571,993 ordinary
               shares held of record by Integral International Inc., a Panama
corporation, and                27,751 ordinary shares held of record by Integral
International Inc.s                wholly owned subsidiary, A. Sariel Ltd, an
Israeli corporation. Mr. Maiman,                a director, is the controlling
shareholder of Integral International Inc. and                its wholly owned
subsidiary, A. Sariel Ltd. Mr. Maiman may be deemed to be the                beneficial
owner of the aggregate 1,585,540 ordinary shares held directly by                Merhav
M.N.F. Ltd., Integral International Inc. and A. Sariel Ltd.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

- 45 -

---

---

| |  | 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, 2006, 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, 2006, options to purchase 7,600 ordinary shares
were exercised. Options to purchase 13,333 ordinary shares are currently exercisable under
the 2000 Plan. Of the options granted under the 2000 Plan (excluding options that expired
without being exercised), options to purchase 59,500 ordinary shares were granted to our
executive officers and the chairman of our board of directors, of which options to
purchase 13,333 ordinary shares are currently exercisable and options to purchase 39,500
ordinary shares have been exercised. 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 is designed to reflect the provisions of such new Section 102(c). Under the 2005
Plan we have granted options to those optionees who did not exercise their August 2000
options prior to the expiration, to the extent not exercised, and a few additional
employees.

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

- 46 -

---

---

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

The
exercise price per share of options granted under the 2005 Plan is NIS 21. All options
granted under the 2005 Plan are fully vested upon their award. The period for which an
option is granted under the 2005 Plan is two years. No option may be exercised after the
expiration of its term.

Options
are not assignable or transferable by the optionee, other than by will or the laws of
descent, and may be exercised during the lifetime of the optionee only by the optionee or
his or her guardian or legal representative. However, during the optionees lifetime,
the optionee may, with the consent of the board of directors, transfer without
consideration all or any portion of his options to (i) one or more members of the
optionees immediate family (as defined in the 2005 Plan), (ii) a trust established
for the exclusive benefit of one or more members of the optionees immediate family,
or (iii) a limited liability company in which all members are members of the
optionees immediate family.

As
of December 31, 2006, options for the purchase of 284,500 ordinary shares had been granted
under the 2005 Plan, all of which were fully vested upon grant and expire in December
2007. During the year ended December 31, 2006, options to purchase 13,900 ordinary shares
were exercised and options to purchase 3,200 ordinary shares were forfeited without being
exercised. No additional options may be granted in the future under the 2005 Plan. Of the
options granted under the 2005 Plan, options to purchase 99,500 ordinary shares were
granted to our executive officers and the chairman of our board of directors.

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

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

The
following table sets forth certain information as of June 25, 2007 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) | 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 June 25, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------

- 47 -

---

---

|(3) | Includes 985,796 held of record by Merhav M.N.F. Ltd., an Israeli private
                    company controlled by Mr. Maiman. Also includes 571,993 ordinary shares held of
                    record by Integral International Inc., a Panama corporation, and 27,751 ordinary
                    shares held of record by Integral International Inc.s wholly owned
                    subsidiary, A. Sariel Ltd. Mr. Maiman, a director, is the controlling
                    shareholder of Integral International Inc. and its wholly owned subsidiary, A.
                    Sariel Ltd. Mr. Maiman may be deemed to be the beneficial owner of the aggregate
                    599,744 ordinary shares held directly by Integral International Inc. and A.
                    Sariel Ltd.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes
571,993 ordinary shares held of record by Integral International Inc.,                a
Panama corporation, and 27,751 ordinary shares held of record by Integral
               International Inc.s wholly owned subsidiary, A. Sariel Ltd. Mr.
Maiman, a                director, is the controlling shareholder of Integral
International Inc. and its                wholly owned subsidiary, A. Sariel Ltd. Mr.
Maiman may be deemed to be the                beneficial owner of the aggregate 1,585,540
ordinary shares held directly by                Merhav M.N.F. Ltd , Integral
International Inc. and A. Sariel Ltd.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 June 26, 2007,
there were 21 holders of record of our ordinary shares, of which 12
record holders holding approximately 75% 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).

- 48 -

---

---

|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 NIS
24,000 ($5,680) on the convertible note.

|C. | INTERESTS
OF EXPERTS AND COUNSEL
|-- | --------------------------------

Not
applicable.

|ITEM 8. | FINANCIAL
INFORMATION
|------- | ---------------------

|A. | CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|-- | -------------------------------------------------------

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

# Legal Proceedings

In
June 2002, an action was initiated by a former employee, citing an alleged breach of an
agreement for the payment of royalties in exchange for the use of his invention. The
plaintiff is seeking damages of NIS 1.0 million. We have denied all liability under this
claim and asserted that no agreement was entered into between the parties, no compensation
was agreed upon and that the amount of the claim is baseless. In April 2005, the court
referred the parties to mediation proceedings. In 2006, we reached an agreement with the
plaintiff according to which the claim has been cancelled.

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

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.

- 49 -

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|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
| | ---- | ---- | ---
|
|
|
|
| | 2002 |      |    
| | 2003 |      |    
| | 2004 |      |    
| | 2005 |      |    
| | 2006 |      |    

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
| | -------------- | ---- | ---
|
|
|
|
| | 2005           |      |    
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    
| |                |      |    
| | 2006           |      |    
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    
| |                |      |    
| | 2007           |      |    
| | 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:

- 50 -

---

---

| |               | High | Low
| | ------------- | ---- | ---
|
|
|
|
| | Month         |      |    
| |               |      |    
| | December 2006 |      |    
| | January 2007  |      |    
| | February 2007 |      |    
| | March 2007    |      |    
| | April 2007    |      |    
| | May 2007      |      |    

|B. | PLAN
OF DISTRIBUTION
|-- | --------------------

Not
applicable.

|C. | MARKETS
|-- | -------

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

|D. | SELLING
SHAREHOLDERS
|-- | --------------------

Not
applicable.

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

Not applicable.

|F. | EXPENSE
OF THE ISSUE
|-- | --------------------

Not applicable.

|ITEM 10. | ADDITIONAL
INFORMATION
|-------- | ----------------------

|A. | SHARE
CAPITAL
|-- | -------------

Not
applicable.

|B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
|-- | --------------------------------------

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

# Purposes and Objects of
the Company

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

# 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.

- 51 -

---

---

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.

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.

- 52 -

---

---

# 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.

# 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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.

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.

- 54 -

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# 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.

|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
considerably lower. See this Item 10E. Additional Information  Taxation 
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959.

As
of December 31, 2006, we had approximately NIS 41.7 million ($9.9 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 1996-2001 tax years are considered final due
to the statute of limitations. Our principal foreign subsidiary, Kubatronik, has received
final tax assessments through the 2003 tax year. Despite our accumulated profits in Israel
during the three years ended December 31, 2006, we did not record a deferred tax asset in
2006 with respect to our profits generated in Israel due to uncertainty about our ability
to utilize such tax asset in the foreseeable future. Such uncertainty is primarily due to
the devaluation of the U.S. dollar against the NIS, our dependency on one major customer
whose product is 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 NIS 703,000
($166,000) 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.

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# Tax Benefits Under the
Law for the Encouragement of Industry (Taxes) 1969

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

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

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

Moreover,
Industrial Enterprises which are approved enterprises 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, 2006, 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 2017 (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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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 2017.

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 A,
which is approved after January 1, 1997, is exempt from corporate tax for a period of two
years and is subject to the above rates for the balance of the benefit period.

- 57 -

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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.

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.

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

# Taxation Under
Inflationary Conditions

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

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

Pursuant
to the Inflationary Adjustments Law to which we are subject, results for tax purposes are
measured in real terms in accordance with the changes in the Israeli consumer price index.

# 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.

- 59 -

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

The
capital gain from the sale of our shares by non-Israeli residents would be tax exempt as
long as our shares are listed on the NASDAQ Capital Market or any other stock exchange
recognized by the Israeli Ministry of Finance, and provided certain other conditions are
met, the most relevant of which are: (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.

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# 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.

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

| |  | investors
liable for alternative minimum tax,
| | - | ---------------------------------------------

| |  | tax-exempt
organizations,
| | - | -------------------------

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

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

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

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

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

This
summary does not address the effect of any U.S. federal taxation other than U.S. federal
income taxation. In addition, this summary does not include any discussion of state, local
or foreign taxation. You are urged to consult your tax advisors regarding the foreign and
United States federal, state and local tax considerations of an investment in ordinary
shares.

- 61 -

---

---

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

| |  | 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 earnings and profits will be treated as a non-taxable
return of capital to the extent of your tax basis in the ordinary shares, and any amount
in excess of your tax basis will be treated as gain from the sale of ordinary shares. See
  Disposition of Ordinary Shares below for the discussion on the
taxation of capital gains. Dividends will not qualify for the dividends-received deduction
generally available to corporations under Section 243 of the Code.

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

Subject
to complex limitations, any Israeli withholding tax imposed on such dividends will be a
foreign income tax eligible for credit against a U.S. Holders U.S. federal income
tax liability, subject to certain limitations set out in the Code (or, alternatively, for
deduction against income in determining such tax liability). The limitations set out in
the Code include computational rules under which foreign tax credits allowable with
respect to specific classes of income cannot exceed the U.S. federal income taxes
otherwise payable with respect to each such class of income. Dividends generally will be
treated as foreign-source passive income 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.

- 62 -

---

---

Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax
at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on
the ordinary shares should qualify for the 15 percent rate provided that either: (i) we
are entitled to benefits under the income tax treaty between the United States and Israel
(the Treaty) or (ii) the ordinary shares are readily tradable on an
established securities market in the United States and certain other requirements are met.
We believe that we are entitled to benefits under the Treaty and that the ordinary shares
currently are readily tradable on an established securities market in the United States.
However, no assurance can be given that the ordinary shares will remain readily tradable.
The rate reduction does not apply unless certain holding period requirements are
satisfied. With respect to the ordinary shares, the U.S. Holder must have held such shares
for at least 61 days during the 121-day period beginning 60 days before the ex-dividend
date. The rate reduction also does not apply to dividends received from passive foreign
investment companies, see discussion below, or in respect of certain hedged positions or
in certain other situations. U.S. Holders of ordinary shares should consult their own tax
advisors regarding the effect of these rules in their particular circumstances.

# Disposition of Ordinary
Shares

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

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

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

# 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:

- 63 -

---

---

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

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

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

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

Alternatively,
if the ordinary shares are considered marketable stock and if you elect to
mark-to-market your ordinary shares, you will generally include in income any
excess of the fair market value of the ordinary shares at the close of each tax year over
your adjusted basis in the ordinary shares. If the fair market value of the ordinary
shares had depreciated below your adjusted basis at the close of the tax year, you may
generally deduct the excess of the adjusted basis of the ordinary shares over its fair
market value at that time. However, such deductions generally would be limited to the net
mark-to-market gains, if any, that you included in income with respect to such ordinary
shares in prior years. Income recognized and deductions allowed under the mark-to-market
provisions, as well as any gain or loss on the disposition of ordinary shares with respect
to which the mark-to-market election is made, is treated as ordinary income or loss
(except that loss on a disposition of ordinary shares is treated as capital loss to the
extent the loss exceeds the net mark-to-market gains, if any, that you included in income
with respect to such ordinary shares in prior years). Gain or loss from the disposition of
ordinary shares (as to which a mark-to-market election was made) in a year in which we are
no longer a PFIC, will be capital gain or loss.

# Backup Withholding and
Information Reporting

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

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

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

Not
applicable.

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

Not applicable.

- 64 -

---

---

|H. | DOCUMENTS
ON DISPLAY
|-- | --------------------

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

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

This
annual report and the exhibits thereto and any other document we file pursuant to the
Exchange Act may be inspected without charge and copied at prescribed rates at the
following Securities and Exchange Commission public reference rooms at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549 and on the Securities and Exchange Commission Internet
site (http://www.sec.gov) and on our website www.eltekglobal.com You may
obtain information on the operation of the Securities and Exchange Commissions
public reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange
Commission filings is 0-28884.

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

|I. | SUBSIDIARY
INFORMATION
|-- | ----------------------

Not
applicable.

|ITEM 11. | QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
|-------- | ----------------------------------------------------------

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

# Foreign Currency
Exchange Risk

We
record our revenues and expenses in NIS. Our revenues are generally denominated in foreign
currencies, primarily the U.S. dollar and Euro, 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 and Euro
revenues decline if the NIS devaluates against the dollar and Euro. In addition, our
expenses other than those paid in Israeli currency that are not-linked to other currencies
are influenced by the devaluation of the NIS in relation to the U.S. dollar and the Euro.
The NIS value of our U.S. dollar and Euro expenses increase if the NIS devaluates against
the dollar and the Euro and other currencies other than NIS. In 2006, the U.S. dollar
devaluated against the NIS by 8.2%.

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.

- 65 -

---

---

# 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 6.95% to 7.10% as of December 31, 2006; and (ii) U.S. dollars and bear
interest of 7.38% as of December 31, 2006. For purposes of specific risk analysis, we use
sensitivity analysis to determine the impact that market risk exposure may have on the
financial expenses derived from our short-term credit lines, long-term loans and factoring
agreement. Our potential loss over one year that would result from a hypothetical change
of 1% in the interest rate would be approximately $58,000.

|ITEM 12. | DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

Not
applicable.

# PART II

|ITEM 13. | DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

None.

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

None.

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

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.

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

Not
applicable.

|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.

- 66 -

---

---

|ITEM 16C. | PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

# Fees Paid to Independent
Registered Public Accountants

The
following table sets forth, for each of the years indicated, the fees paid to our
independent registered public accountants, Somekh Chaikin, a member firm of KPMG
International. All of such fees were pre-approved by our Audit Committee.

| |           | Year Ended December 31,
| | --------- | -----------------------
|
|
|
|
| | 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,
               planning and advice.
| | --- | -----------------------------------------------------------------------------------------------------------------

# Pre-Approval Policies
and Procedures

Our
audit committee has adopted a policy and procedures for the pre-approval of audit and
non-audit services rendered by our independent registered public accounting firm, Somekh
Chaikin, a member firm of KPMG International. Pre-approval of an audit or non-audit
service may be given as a general pre-approval, as part of the audit committees
approval of the scope of the engagement of our independent auditor, or on an individual
basis. Any proposed services exceeding general pre-approved levels also require specific
pre-approval by our audit committee. The policy prohibits retention of the independent
registered public accounting firm to perform the prohibited non-audit functions defined in
Section 201 of the Sarbanes-Oxley Act or the rules of the 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 2006.

# PART III

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

# Consolidated and Company
Financial Statements.

| |                                                                        |    
| | ---------------------------------------------------------------------- | ---
|
|
|
|
| | Report of Independent Registered Public Accounting Firm                | F-1
| | Consolidated and Company Balance Sheets                                | F-2
| | Consolidated and Company Statements of Operations                      | F-4
| | Consolidated and Company Statements of Changes in Shareholders' Equity | F-5
| | Consolidated and Company Consolidated Statements of Cash Flows         | F-6
| | Notes to the Consolidated and Company Financial Statements             | F-9

- 67 -

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

Not
applicable.

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

Index
to Exhibits

|Exhibit |  | Description
|------- |  | -----------

|1.1 |  | Memorandum
of Association of the Registrant (1)
|--- |  | -----------------------------------------------

|1.2 |  | Articles
of Association of the Registrant, as amended (2)
|--- |  | ---------------------------------------------------------

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

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

|8.1 |  | List
of Subsidiaries of the Registrant
|--- |  | --------------------------------------

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

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

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

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

|15.1 |  | Consent
of Somekh Chaikin, a member firm of KPMG International
|---- |  | --------------------------------------------------------------

---

| | (1) | Filed
as an exhibit to our registration statement on Form F-1, registration
               number 333-5770, as amended, filed with the Securities and Exchange
Commission                and incorporated herein by reference.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Filed
as Exhibit 3.2 to our Annual Report on Form 20-F for the year ended
               December 31, 2003 and incorporated herein by reference.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Filed
as Exhibit 10.4 to our Annual Report on Form 20-F for the year ended
               December 31, 2000 and incorporated herein by reference.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------

- 68 -

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

- 69 -

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|Eltek Ltd.                                                           
|---------------------------------------------------------------------
|                                                                     
|Consolidated and Company Financial Statements as of December 31, 2006
|                                                                     
|                                                                     

# Contents

|                                                                                       | Page
|-------------------------------------------------------------------------------------- | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm                                | F-1 
|                                                                                      
|Consolidated and Company Balance Sheets as of December 31, 2005 and 2006               | F-2 
|                                                                                      
|Consolidated and Company Statements of Operations for each of the years ended         
|December 31, 2004, 2005 and 2006                                                       | F-4 
|                                                                                      
|Consolidated and Company Statements of Changes in Shareholders' Equity for each of the
|years ended December 31, 2004, 2005 and 2006                                           | F-5 
|                                                                                      
|Consolidated and Company Statements of Cash Flows for each of the years ended         
|December 31, 2004, 2005 and 2006                                                       | F-6 
|                                                                                      
|Notes to the Consolidated and Company Financial Statements                             | F-9 

- 70 -

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# Report of Independent
Registered Public Accounting Firm 
The Board of Directors
and Shareholders 
Eltek Ltd.

We have audited the accompanying
balance sheets of Eltek Ltd. (the Company) and the consolidated balance sheets
of the Company and its subsidiaries as of December 31, 2005 and 2006 and the related
consolidated and Company statements of operations, changes in shareholders equity,
and cash flows, for each of the years in the three-year period ended December 31, 2006.
These Company and consolidated financial statements are the responsibility of the
Companys Board of Directors and its Management. Our responsibility is to express an
opinion on these consolidated and Company financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and Management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial
statements, referred to above present fairly, in all material respects, the financial
position of the Company and of the Company and its subsidiaries as of December 31, 2005
and 2006 and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2006, in conformity with generally accepted
accounting principles in Israel.

As discussed in Note 2C to these
financial statements, the aforementioned financial statements are stated in reported
amounts, in accordance with the accounting standards of the Israel Accounting Standard
Board.

Generally accepted accounting
principles in Israel vary in certain significant respects from U.S. generally accepted
accounting principles. Information relating to the nature and effect of such differences
with respect to the financial statements of the Company and of the Company and its
subsidiaries is summarized in Note 29 to these financial statements.

As
discussed in Note 2E to the consolidated financial statements effective January 1, 2006,
the company applies Israeli Accounting Standard No. 20 (Revised) The Accounting
Treatment of Goodwill and Intangible Asset with indefinite useful lives when Purchasing on
Investee.

As discussed in Note 2O to the
consolidated financial statement effective January 1, 2006, the Company applies Israeli
Accounting Standard No. 22 Financial Instruments: Disclosure and Presentation.

As discussed in Note 2S to the
consolidated financial statement, effective January 1, 2006 the Company applies Israeli
Accounting Standard No. 21 Earnings per share.

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

Tel Aviv, Israel 
June 27, 2007

F - 1

---

---

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

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

|* | Reclassified
|- | ------------

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

F - 2

---

---

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

|                                                                                                                                              |  | Consolidated | Company | Convenience
translation
Consolidated
(Note 2H)
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ----------------------------------------------
|
|
|
|
|Liabilities and                                                                                                                               |  |              |         |                                               
|shareholders' equity                                                                                                                          |  |             
|                                                                                                                                              |  |             
|Current liabilities                                                                                                                           |  |             
|Short-term credit and current
 maturities of long-term debts                                                                                  |  |              |         | 10                                            
|Trade payables                                                                                                                                |  |              |         | 11                                            
|Other liabilities and accrued
 expenses                                                                                                       |  |              |         | 12                                            
|Convertible debenture note                                                                                                                    |  |              |         | 16                                            
|                                                                                                                                              |  |              |         |                                               
|Total current liabilities                                                                                                                     |  |              |         |                                               
|                                                                                                                                              |  |              |         |                                               
|Long-term liabilities                                                                                                                         |  |             
|Long-term debts, excluding
 current maturities                                                                                                |  |              |         | 13                                            
|Employee severance                                                                                                                            |  |             
|benefits, net                                                                                                                                 |  |              |         | 14                                            
|                                                                                                                                              |  |              |         |                                               
|Total long-term liabilities                                                                                                                   |  |              |         |                                               
|                                                                                                                                              |  |              |         |                                               
|Minority interests                                                                                                                            |  |              |         |                                               
|                                                                                                                                              |  |              |         |                                               
|                                                                                                                                              |  |             
|Convertible debenture note                                                                                                                    |  |              |         | 16                                            
|                                                                                                                                              |  |              |         |                                               
|Commitments and                                                                                                                               |  |             
|contingent liabilities                                                                                                                        |  |              |         | 15                                            
|Shareholders' equity                                                                                                                          |  |              |         | 17                                            
|Ordinary shares, NIS 0.6                                                                                                                      |  |             
|par value                                                                                                                                     |  |             
|Authorized 50,000,000
 shares, issued and
 outstanding 5,624,011 shares
 as of December 31, 2006
 (5,602,511 shares as of
 December 31, 2005) |  |              |         |                                               
|Additional paid-in capital                                                                                                                    |  |              |         |                                               
|Capital reserves related to loans
 from controlling shareholders                                                                              |  |              |         |                                               
|Cumulative foreign currency                                                                                                                   |  |             
|translation adjustments                                                                                                                       |  |              |         |                                               
|Capital reserves                                                                                                                              |  |              |         |                                               
|Accumulated deficit                                                                                                                           |  |              |         |                                               
|                                                                                                                                              |  |              |         |                                               
|Total shareholders' equity                                                                                                                    |  |              |         |                                               
|                                                                                                                                              |  |              |         |                                               
|Total liabilities and                                                                                                                         |  |             
|shareholders' equity                                                                                                                          |  |              |         |                                               
|                                                                                                                                              |  |              |         |                                               

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

Date: June 27, 2007

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

F - 3

---

---

|Eltek Ltd.                                         
|---------------------------------------------------
|                                                   
|Statements of Operations - Consolidated and Company
|                                                   
|Reported amounts (Note 2(B))                       

|                                               |  |  |  |    |  |  |          | ConvenienceTranslationinto US Dollars(Note 2H)
|---------------------------------------------- |  |  |  | -- |  |  | -------- | ----------------------------------------------
|
|
|
|
|                                               |  |  |  |    |  |  |          |                                               
|Revenues                                       |  |  |  | 18 |  |  | 125,002  |                                               
|Cost of revenues                               |  |  |  | 19 |  |  | (109,998 | )                                             
|                                               |  |  |  |    |  |  |          |                                               
|Gross profit                                   |  |  |  |    |  |  | 15,004   |                                               
|Research and development expenses, net         |  |  |  | 20 |  |  | -        |                                               
|Selling, general and administrative expenses   |  |  |  | 21 |  |  | (18,265  | )                                             
|Amortization of goodwill                       |  |  |  | 9  |  |  | (593     | )                                             
|                                               |  |  |  |    |  |  |          |                                               
|Operating income (loss)                        |  |  |  |    |  |  | (3,854   | )                                             
|Financial expenses, net                        |  |  |  | 22 |  |  | (2,948   | )                                             
|                                               |  |  |  |    |  |  |          |                                               
|                                               |  |  |  |    |  |  | (6,802   | )                                             
|Other income (expenses), net                   |  |  |  | 23 |  |  | 52       |                                               
|                                               |  |  |  |    |  |  |          |                                               
|Income (loss) before tax benefit (expenses)    |  |  |  |    |  |  | (6,750   | )                                             
|Tax  benefit (expenses)                        |  |  |  | 24 |  |  | 713      |                                               
|                                               |  |  |  |    |  |  |          |                                               
|Income (loss) after tax benefit (expenses)     |  |  |  |    |  |  | (6,037   | )                                             
|Company's share in losses of subsidiaries, net |  |  |  | 7  |  |  | -        |                                               
|Minority interests                             |  |  |  |    |  |  | 182      |                                               
|                                               |  |  |  |    |  |  |          |                                               
|Net income (loss)                              |  |  |  |    |  |  | (5,855   | )                                             
|                                               |  |  |  |    |  |  |          |                                               
|Basic net earnings (loss) per share            |  |  |  |    |  |  | * (1.07  | )                                             
|                                               |  |  |  |    |  |  |          |                                               
|Diluted net earnings (loss) per share          |  |  |  |    |  |  | * (1.07  | )                                             
|                                               |  |  |  |    |  |  |          |                                               
|Weighted average shares used to compute        |  | 
|basic net earnings (loss) per share            |  |  |  |    |  |  | 5,492    |                                               
|                                               |  |  |  |    |  |  |          |                                               
|Weighted average shares used to compute        |  | 
|diluted net earnings (loss) per share          |  |  |  |    |  |  | 5,492    |                                               
|                                               |  |  |  |    |  |  |          |                                               

|* | Restated, see Note 2S.
|- | ----------------------

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

F - 4

---

---

|Eltek Ltd.                                                              
|------------------------------------------------------------------------
|                                                                        
|Statements of Changes in Shareholders' Equity - Consolidated and Company
|                                                                        
|Reported amounts (Note 2(B))                                            

|                                   | Number ofordinaryShares* | Ordinaryshares | Additionalpaid-incapital | Capital reservesrelated to loansfrom controllingshareholders | Cumulativeforeign currencytranslationadjustments | Capitalreserves | Accumulateddeficit | Totalshareholders'equity
|---------------------------------- | ------------------------ | -------------- | ------------------------ | ------------------------------------------------------------ | ------------------------------------------------ | --------------- | ------------------ | ------------------------
|
|
|
|
|Balance as of December 31, 2003    |                          |                |                          | 4,885,651                                                    |                                                  |                 | 29,334             |                         
|Changes during the year            |                          |               
|Conversion of convertible note     |                          |                |                          | 606,060                                                      |                                                  |                 | 364                |                         
|Foreign currency translation       |                          |               
|adjustments                        |                          |                |                          | -                                                            |                                                  |                 | -                  |                         
|Net loss                           |                          |                |                          | -                                                            |                                                  |                 | -                  |                         
|                                   |                          |                |                          |                                                              |                                                  |                 |                    |                         
|Balance as of December 31, 2004    |                          |                |                          | 5,491,711                                                    |                                                  |                 | 29,698             |                         
|Changes during the year            |                          |               
|Exercise of employee stock options |                          |                |                          | 110,800                                                      |                                                  |                 | 67                 |                         
|Foreign currency translation       |                          |               
|adjustments                        |                          |                |                          | -                                                            |                                                  |                 | -                  |                         
|Net income                         |                          |                |                          | -                                                            |                                                  |                 | -                  |                         
|                                   |                          |                |                          |                                                              |                                                  |                 |                    |                         
|Balance as of December 31, 2005    |                          |                |                          | 5,602,511                                                    |                                                  |                 | 29,765             |                         
|Changes during the year            |                          |               
|Exercise of employee stock options |                          |                |                          | 21,500                                                       |                                                  |                 | 13                 |                         
|Foreign currency translation       |                          |               
|adjustments                        |                          |                |                          | -                                                            |                                                  |                 | -                  |                         
|Net income                         |                          |                |                          | -                                                            |                                                  |                 | -                  |                         
|                                   |                          |                |                          |                                                              |                                                  |                 |                    |                         
|Balance as of December 31, 2006    |                          |                |                          | 5,624,011                                                    |                                                  |                 | 29,778             |                         
|                                   |                          |                |                          |                                                              |                                                  |                 |                    |                         

|                                    | US$ in thousands (Note 2H)
|----------------------------------- | --------------------------
|
|
|
|
|Convenience translation year        |                           
|ended December 31, 2006 (Unaudited) |                           
|                                    |                           

|* | Ordinary
shares of a par value of NIS 0.6 each.
|- | -----------------------------------------------

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

F - 5

---

---

|Eltek Ltd.                                         
|---------------------------------------------------
|                                                   
|Statements of Cash Flows - Consolidated and Company
|                                                   
|Reported amounts (Note 2(B))                       

|                                                                       |  |  |  |         |   |  | Conveniencetranslationinto US Dollars(Note 2H)
|---------------------------------------------------------------------- |  |  |  | ------- | - |  | ----------------------------------------------
|
|
|
|
|                                                                       |  |  |  |         |   |  |                                               
|Cash flows from operating activities:                                  |  |  |  |         |   |  |                                               
|Net income (loss)                                                      |  |  |  | (5,855  | ) |  | 5,260                                         
|Adjustments to reconcile net income (loss) to net                      |  | 
|cash flows provided by operating activities:                           |  | 
|Accrued interest and inflationary and exchange rate impact on          |  | 
|long- term debts                                                       |  |  |  | 12      |   |  | 555                                           
|Depreciation                                                           |  |  |  | 13,428  |   |  | 10,904                                        
|Amortization of goodwill                                               |  |  |  | 593     |   |  | 593                                           
|Loss (gain) on disposal of fixed assets, net                           |  |  |  | (86     | ) |  | (103                                          
|Company's share in losses of subsidiaries, net                         |  |  |  | -       |   |  | -                                             
|Minority interests                                                     |  |  |  | (182    | ) |  | (218                                          
|Increase (decrease) in employee severance benefits, net                |  |  |  | 103     |   |  | (767                                          
|Decrease (increase) in trade receivables                               |  |  |  | *(3,813 | ) |  | *836                                          
|Decrease (increase) in other receivables and prepaid expenses          |  |  |  | *1,090  |   |  | *(1,331                                       
|Decrease (increase) in inventories                                     |  |  |  | (379    | ) |  | (2,544                                        
|Increase (decrease) in trade payables                                  |  |  |  | 1,192   |   |  | 904                                           
|Increase (decrease) in other liabilities and accrued expenses          |  |  |  | 2,452   |   |  | 15                                            
|Accrued interest on convertible note                                   |  |  |  | 147     |   |  | 172                                           
|Interest and exchange rate differentials relating to subsidiaries, net |  |  |  | -       |   |  | -                                             
|Deferred taxes                                                         |  |  |  | (753    | ) |  | -                                             
|                                                                       |  |  |  |         |   |  |                                               
|Net cash provided by operating activities                              |  |  |  | 7,949   |   |  | 14,276                                        
|                                                                       |  |  |  |         |   |  |                                               

|* | reclassified
|- | ------------

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

F - 6

---

---

|Eltek Ltd.                                                  
|------------------------------------------------------------
|                                                            
|Statements of Cash Flows - Consolidated and Company (cont'd)
|                                                            
|Reported amounts (Note 2(B))                                

|                                                       |  |  |  |        |   |  | Conveniencetranslationinto US Dollars(Note 2H)
|------------------------------------------------------ |  |  |  | ------ | - |  | ----------------------------------------------
|
|
|
|
|                                                       |  |  |  |        |   |  |                                               
|Cash flows provided by (used in) investing activities: |  |  |  |        |   |  |                                               
|Investment in subsidiary                               |  |  |  | -      |   |  | -                                             
|Purchase of fixed assets                               |  |  |  | (1,470 | ) |  | (12,628                                       
|Proceeds from sale of fixed assets                     |  |  |  | 188    |   |  | 164                                           
|                                                       |  |  |  |        |   |  |                                               
|Net cash used in investing activities                  |  |  |  | (1,282 | ) |  | (12,464                                       
|                                                       |  |  |  |        |   |  |                                               
|Cash flows provided by (used in) financing activities: |  | 
|Decrease in short- term credit                         |  |  |  | (726   | ) |  | (1,603                                        
|Repayment of long-term loans                           |  |  |  | (6,164 | ) |  | (7,499                                        
|Long-term loans received                               |  |  |  | -      |   |  | 8,310                                         
|Exercise of employee stock options                     |  |  |  | -      |   |  | 2,120                                         
|Repayment of credit from fixed assets payables         |  |  |  | -      |   |  | -                                             
|                                                       |  |  |  |        |   |  |                                               
|Net cash provided by (used in) financing activities    |  |  |  | (6,890 | ) |  | 1,328                                         
|                                                       |  |  |  |        |   |  |                                               
|Adjustments from translation of financial              |  | 
|statements of foreign entity                           |  |  |  | 126    |   |  | (156                                          
|                                                       |  |  |  |        |   |  |                                               
|Net increase (decrease) in cash and cash equivalents   |  |  |  | (97    | ) |  | 2,984                                         
|Cash and cash equivalents at beginning of the year     |  |  |  | 4,371  |   |  | 4,274                                         
|                                                       |  |  |  |        |   |  |                                               
|Cash and cash equivalents at end of the year           |  |  |  | 4,274  |   |  | 7,258                                         
|                                                       |  |  |  |        |   |  |                                               

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

F - 7

---

---

|Eltek Ltd.                                                  
|------------------------------------------------------------
|                                                            
|Statements of Cash Flows - Consolidated and Company (cont'd)
|                                                            
|Reported amounts (Note 2(B))                                

|                                      |  |  |  |     |  |  | Conveniencetranslationinto US Dollars(Note 2H)
|------------------------------------- |  |  |  | --- |  |  | ----------------------------------------------
|
|
|
|
|                                      |  |  |  |     |  |  |                                               
|Supplemental cash flow information    |  |  |  |     |  |  |                                               
|                                      |  | 
|Non-cash activities:                  |  | 
|                                      |  | 
|Conversion of convertible note into   |  | 
|share capital                         |  |  |  | 879 |  |  | -                                             
|                                      |  |  |  |     |  |  |                                               
|                                      |  | 
|Purchase of fixed assets not yet paid |  |  |  | -   |  |  | -                                             
|                                      |  |  |  |     |  |  |                                               

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

F - 8

---

---

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

# Note 1  General

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

| | b. | The
Companys stock has been publicly traded on NASDAQ Capital Market since
          1997.
| | -- | -------------------------------------------------------------------------------------------

| | 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 (NIS 11.8
million as of the date of acquisition)  See Note 2(E)(1).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the agreement, the seller has until December 31, 2007, the right to require the Company
to purchase (Put option), and the Company has the right to require the seller
to sell to the Company (Call option), the sellers remaining 24% interest
in Kubatroni. 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 option was
calculated based on the Black and Scholes model.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Note 2 
Significant Accounting Policies

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

| | The
financial statements have been prepared in accordance with accounting principles generally
accepted in Israel (Israeli GAAP), which vary in certain significant respects
from accounting principles generally accepted in the United States of America (U.S.
GAAP) as described in Note 29.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

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

| | (1) | Related
parties  as defined in Opinion No. 29 of the Institute of           Certified
Public Accountants in Israel (ICPAI) are:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

| | (a) | Parties,
one of which directly or indirectly 
| | --- | ----------------------------------------------

| | (1) | owns
10% or more of the issued share capital of the other party, or of its           voting
rights or of the rights to appoint its directors, or
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | has
the right to appoint its Chief Executive Officer (CEO), or
| | --- | ----------------------------------------------------------------

| | (3) | acts
as its director or CEO.
| | --- | ----------------------------

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

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

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

| | (1) | The
holder of five percent or more of the issued share capital or voting rights           of
a company, a person who has the right to appoint one or more directors of a
          company or its CEO, a person serving as the CEO or as a director, an entity in
          which a person as described above holds twenty five percent or more of its
          issued share capital or of its voting rights, or has the right to appoint
twenty           five percent or more of its directors.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | (6) | Reported
amount  The adjusted amount as at the transition date           (December 31,
2003), with the addition of amounts in nominal historical values           that were
added after the transition date and less amounts eliminated after the
          transition date. (See Note 2C).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 10

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

| | (1) | In
October 2001, the Israeli Accounting Standards Board (IASB)
          published Accounting Standard No. 12, Discontinuance of Adjustment of
          Financial Statements. Pursuant to this standard and in accordance with
          Israeli Accounting Standard No. 17 that was published in December 2002, the
          adjustment of financial statements for the effect of inflation was discontinued
          as of January 1, 2004. Until December 31, 2003, the Company continued to
prepare           adjusted financial statements in accordance with Opinion No. 36 of the
ICPAI.           The adjusted amounts included in the consolidated and Company financial
          statements as at December 31, 2003 became the new basis for the nominal
          financial report as of January 1, 2004. The Company has implemented the
          provisions of Accounting Standard No. 12 and has accordingly discontinued the
          adjustments as of January 1, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (3) | The
term cost in these financial statements means the reported           amount
of cost.
| | --- | ------------------------------------------------------------------------------------------

| | (4) | The
financial statements of certain subsidiaries are stated on the basis of the
          changes in the exchange rates of their relevant functional currencies.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Balance sheets:
| | ---------------

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

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

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

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

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

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

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

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

F - 11

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

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

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

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

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

| | E. | Principles
of consolidation
| | -- | ---------------------------

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

| | 2. | The
excess of cost of acquisition of Kubatronik over the fair value at date of
               acquisition of the identifiable assets and liabilities acquired, was
charged to                goodwill. Goodwill was amortized on the straight line basis
over a period of 10                years. As of January 1, 2006, the Company applies
Israeli Accounting Standard                No. 20 The Accounting Treatment of
Goodwill and Intangible Asset when                Purchasing an Investee (As No.
20). As a result, no amortization is                recorded and instead an examination
of impairment in value is performed once a                year or more frequent if events
or changes in circumstances indicate that there                may be an impairment in
the value of goodwill.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | All
intercompany transactions and balances were eliminated in consolidation.
| | -- | ----------------------------------------------------------------------------

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

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

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

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

F - 12

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

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

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

| |                     | Israeli
CPI | Exchange rate
of one US dollar | Exchange rate
of one Euro
| | ------------------- | ----------- | ------------------------------ | -------------------------
|
|
|
|
| | For the year ended: |             |                                |                          
| | December 31, 2004   |             |                                |                          
| | December 31, 2005   |             |                                |                          
| | December 31, 2006   |             |                                |                          

| |                                | % | % | %
| | ------------------------------ | - | - | -
|
|
|
|
| | Changes during the year ended: |   |   |  
| | December 31, 2004              |   |   |  
| | December 31, 2005              |   |   |  
| | December 31, 2006              |   |   |  

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

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

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

| | H. | Convenience
translation (unaudited)
| | -- | -----------------------------------

| | For
the convenience of the reader, the reported consolidated NIS figures of December 31, 2006
have been presented in U.S. dollar thousands (unaudited), translated at the representative
rate of exchange as of December 31, 2006 (NIS 4.225 = U.S. Dollar 1.00). The U.S. dollar
amounts so presented should not be construed as representing amounts receivable, payable
or incurred in U.S. dollars or convertible into U.S. dollars.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Cash
and cash equivalents
| | -- | -------------------------

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

F - 13

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

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

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

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

| | L. | Property
and equipment
| | -- | ----------------------

| | 1. | Assets
are recorded at cost.
| | -- | ----------------------------

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

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

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

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

| | 3. | Fixed
assets financing transactions
| | -- | -----------------------------------

| | Fixed
assets under a capital lease are stated as assets of the Company on the basis of ordinary
purchase prices (without the component of financing), and they are depreciated according
to the usual rates of depreciation applicable to such assets. The lease payments payable
in the forthcoming years, net of the interest component included in them, are included in
liabilities. The interest in respect of such amounts is accrued on a current basis and is
charged to earnings.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 14

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

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

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

| | Until
January 1, 2006, the Company applied Israeli Accounting Standard No. 20 Amortization
of Goodwill. According to the standard, goodwill was systematically amortized over
the period of its useful life (10 years).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
from January 1, 2006, the Company implements the provisions of Accounting Standard No. 20
(Revised), The Accounting Treatment of Goodwill and Intangible Assets with
indefinite useful lives when Purchasing an Investee Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
goodwill is not systematically amortized. Instead, the Company examines whether there has
been an impairment in the value of the goodwill and intangible assets deriving from the
acquisition of a subsidiary, once a year or more frequently if events or changes in
circumstances indicate that there may have been an impairment in the value of the assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
in respect of identified goodwill, the amortization of which was discontinued as of
January 1, 2006, amounts to NIS 593 thousand and NIS 593 thousand for the years ended
December 31, 2005 and 2004 respectively. The financial statements for periods prior to the
implementation of the Standard were not restated.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Effective
January 1, 2005, the Company applies Israeli Accounting Standard No. 19 
Accounting for Income Taxes. Income taxes are provided on the basis of the
liability method of accounting. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences of differences between the
carrying amounts of existing assets and liabilities and their respective tax bases, as
well as tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years when these temporary
differences are expected to be recovered or settled. A valuation allowance is established
to reduce the deferred tax asset to the amount expected to be realized. The transition to
the new standard did not have an effect on the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

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

# Note 2 
Significant Accounting Policies (contd)

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

| | The
debentures are convertible into a fixed number of the Companys ordinary shares at
the discretion of the holder of those debentures.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Until
December 31, 2005, convertible debentures, the conversion of which was not probable as at
balance sheet date, were presented as long-term liabilities according to their liability
value at that date. Convertible debentures, the conversion of which was probable as at
balance sheet date, were presented under a quasi-capital item at the higher of
their liability value or capital value as at balance sheet date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
from January 1, 2006, the Company applies Israeli Accounting Standard No. 22,
Financial Instruments: Disclosure and Presentation. As a result of the new
Standard, the Company classified the convertible note, net of issuance costs, as a current
liability (see also Note 16).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | AS
No. 15 applies to all the assets in the consolidated balance sheet except inventories, tax
assets and monetary assets (excluding monetary assets which are investments in investee
companies that are not subsidiaries). In addition, the standard provides rules for
presentation and disclosure with respect to assets whose value has been impaired. When the
value of an asset in the consolidated balance sheet is higher than its recoverable amount,
the Company recognizes an impairment loss for the difference between the carrying amount
of the asset and its recoverable amount. The loss thus recognized will be reversed only in
the event of changes occurring in the estimates that were used to determine the
recoverable value of the asset since the date on which the most recent impairment loss was
recognized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | Revenue
recognition
| | -- | -------------------

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

F - 16

---

---

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

# Note 2 
Significant Accounting Policies (contd)

| | R. | Research
and development
| | -- | ------------------------

| | Research
and development costs, net of grants from the Office of the Chief Scientist in the
Ministry of Industry and Trade of the Government of Israel (OCS), are expensed as
incurred. See also Note 20.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | Earnings
per share
| | -- | ------------------

| | As
from January 1, 2006, the Company implemented Accounting Standard No. 21, Earnings
per Share (hereinafter  the Standard) of the Israel Accounting Standards Board. In
accordance with the provisions of the Standard, the Company calculates basic earnings per
share with respect to earnings or loss, and basic earnings per share with respect to
earnings or loss from continuing operations, which is attributable to the ordinary
shareholders. The basic earnings per share is calculated by dividing the earnings or loss
attributable to the ordinary shareholders with the weighted average number of ordinary
shares outstanding during the period. In order to calculate the diluted earnings per share
the Company adjusted the earnings or loss attributable to the ordinary shareholders, and
the weighted average number of outstanding ordinary shares, in respect of the effects of
all the dilutive potential ordinary shares (such as convertible debentures and options).
The Companys share in the earnings of investee companies was calculated according to
its portion in the earnings per share of such investee companies multiplied by the number
of shares held by the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the initial implementation of the Standard, the comparative data regarding the earnings
(loss) per share for prior periods were restated. The effects of the initial
implementation of the Standard amounted to an increase (decrease) in the basic earnings
per share in the amount of NIS (0.35) and NIS 0.29 for the years ended December 31,
2005 and 2004, respectively, and to an increase (decrease) in the diluted earnings per
share in the amount of NIS (0.48) and NIS 0.29 for the year ended December 31, 2005 and
December 31, 2004, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Share-based
payments
| | -- | --------------------

| | Prior
to January 1, 2006, the Company applied the intrinsic-value-based method of accounting
presented by U.S. Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock
issued to Employees and related Interpretations including U.S. Financial Accounting
Standard Board (FASB) interpretation No. 44 Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25, to account for its
share-based payments. Under this method, compensation expenses are recorded only if the
market price of the underlying stock exceeds the exercise price on the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
from January 1, 2006, the Company implemented Israeli Accounting Standard No. 24,
Share-Based Payments (hereinafter  AS No. 24). In accordance with the
provisions of AS No. 24, the Company recognizes share-based payment transactions in the
financial statements, including transactions with employees or other parties that are
settled by equity instruments, cash or other assets. Share-based payment transactions in
which goods or services are received are recognized at their fair value. The Company did
not have share-based payment transactions to which AS No. 24 applies.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

# Note 2 
Significant Accounting Policies (contd)

| | U. | Segment
reporting
| | -- | -----------------

| | Segment
reporting is presented according to Israeli Accounting Standard No. 11 Segment
Reporting. Accordingly, the Company reports on geographical segments identified
based on the location of its markets and customers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | V. | Reclassification
| | -- | ----------------

| | Certain
prior years amounts have been reclassified in conformity with current years financial
statements presentation
| | ---------------------------------------------------------------------------------------------------------------------

| | W. | Derivative
financial instruments
| | -- | --------------------------------

| | Derivative
financial instruments, are stated in the financial statements at their fair value. Changes
in fair value are recognized in the Consolidated and Company statement of operations as
financing item.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | X. | Newly
published accounting standards
| | -- | ------------------------------------

| | 1. | In
August 2006, IASB published Accounting Standard No. 26, Inventory          (hereinafter
 AS No. 26). AS No. 26 provides guidelines for determining           the cost of
inventory and its subsequent recognition as an expenses as well as           for
determining impairment in value of inventory written down to net realizable
          value. AS No. 26 also provides guidelines regarding cost formulas used to
          allocate costs to various types of inventory. AS No. 26 will apply to financial
          statements for periods beginning on January 1, 2007 or thereafter.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Implementation
of AS No. 26 is not anticipated to have a material effect on the Companys and
consolidated results of operations and financial position.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2006, the Israel Accounting Standards Board published Accounting
          Standard No. 27, Fixed Assets (hereinafter  AS No. 27). AS
No.           27 prescribes rules for the presentation, measurement and derecognition of
fixed           assets and for the disclosure required in respect thereto. AS No. 27
provides,           inter alia, that upon the initial recognition of a fixed asset, the
entity shall           include in the cost of the item all the costs it will incur in
respect of a           liability to dismantle and remove the item and to restore the site
on which it           was located. Furthermore, AS No. 27 provides that a group of
similar fixed asset           items shall be measured at cost net of accumulated
depreciation, and less           impairment losses or, alternatively, at its revalued
amount less accumulated           depreciation, whereas an increased in the value of the
asset to above its           initial cost as a result of the revaluation will be directly
included in the           shareholders equity under a revaluation reserve. Any part
of a fixed asset           item with a cost that is significant in relation to the total
cost of the item           shall be depreciated separately, including the costs of
significant periodic           examinations. AS No. 27 also provides that a fixed asset
that was purchased in           consideration for another non-monetary item in a
transaction having a commercial           substance shall be measured at fair value.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

# Note 2 
Significant Accounting Policies (contd)

| | X. | Newly
published accounting standards (contd)
| | -- | ---------------------------------------------

| | 2. | (contd)
| | -- | --------

| | AS
No. 27 is effective for periods beginning on January 1, 2007. An entity that on January
1, 2007 chooses for the first time to use the revaluation method for measuring fixed
assets shall on this date recognize a revaluation reserve in the amount of the difference
between the revalued amount of the asset on that date and its cost on the books.
Furthermore, an entity that in the past, upon the initial recognition of a fixed asset,
had not included in its cost the initial estimate of costs for dismantling and removing
the asset and for restoring the site on which it is located will measure these costs as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | The
aforementioned liabilities as at January 1, 2007 should be measured in
               accordance with generally accepted accounting principles;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The
amount that would have been included in the cost of the relevant asset on
               the date on which the liability was initially incurred by capitalizing the
               amount of the liability mentioned in item (a) above to the date on which
the                liability was initially incurred hereinafter  the capitalized
amount);
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | The
accumulated depreciation on the capitalized amount as at January 1, 2007
               should be measured on the basis of the useful life of the asset as at that
date.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
difference between the amount to be charged to the asset in accordance with items (b) and
(c) above and the amount of the liability in accordance with item (a) above shall be
included in retained earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
than the aforementioned, the Standard will be adopted on a retroactive basis.
| | -----------------------------------------------------------------------------------

| | The
Company is examining the effect of the standard but at this point is unable to evaluate
the effect of its implementation on the financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
July 2006, the IASB published Accounting Standard No. 29, Adoption of
          International Financial Reporting Standards (IFRS)          (hereinafter
AS No. 29). AS No. 29 provides that entities subject to the           Israeli
Securities Law  1968 that are required to report according to the
          regulations of this law, are to prepare their financial statements for periods
          beginning as from January 2008 according to IFRS. AS No. 29 permits early
          adoption as from financial statements published after July 31, 2006. The
          Standard does not apply to entities subject to Israeli Securities Regulations
          (Periodic and Immediate Reports of a Foreign Entity)  2000, the
          financial statements of which are not prepared in accordance with Israeli GAAP.
          Furthermore, the Standard provides that entities that are not subject to the
          Israeli Securities Law  1968 and not required to report according to the
          regulations of this law, are also permitted to prepare their financial
          statements according to IFRS as from financial statements published after July
          31, 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
initial implementation of IFRS will be effected along with the implementation of IFRS 1,
the initial implementation of IFRS, for purposes of the transition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

# Note 2 
Significant Accounting Policies (contd)

| | X. | Newly
published accounting standards (contd)
| | -- | ---------------------------------------------

| | 3. | (contd)
| | -- | --------

| | In
accordance with the Standard, the Company is required to include in its annual financial
statements for December 31, 2007, balance sheet data as at December 31, 2007 and
statement of operations data for the year then ended, that have been prepared according
to the recognition, measurement and presentation principles of IFRS.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is examining the effect of the Standard on its financial statements and does not
intend to implement IFRS earlier than required.
| | --------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | In
December 2006, the Israel Accounting Standards Board published Accounting
          Standard No. 23. Standard No. 23 actually replaces the main provisions of
          the Israeli Securities Regulations (Financial Statement Presentation of
          Transactions between a Company and its Controlling Shareholder) that were
          amended in February 2007. Standard No. 23 provides that assets (other than an
          intangible asset with no active market) and liabilities included in a
          transaction between the entity and its controlling shareholder shall be
measured           on the date of the transaction at fair value and that the difference
between the           fair value and the consideration from the transaction shall be
included in           shareholders equity. A debit difference is actually a
dividend and           accordingly reduces the retained earnings. A credit difference is
actually an           investment of the shareholder and shall therefore be presented
under a separate           item of shareholders equity called capital reserve
from transaction           between an entity and its controlling shareholder.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Standard
No. 23 shall apply to transactions between an entity and its controlling shareholder that
are executed after January 1, 2007 and to a loan that was granted to a controlling
shareholder or that was received from it before the date this Standard came into effect
as from the date of it coming into effect.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Implementation
of Standard No. 23 is not anticipated to have a material effect on the Companys
results of operations and financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | In
March 2007 the Israel Accounting  Standards Board published  Accounting  Standard No.
                  30 "Intangible  Assets".  The Standard  explains the accounting
 treatment of intangible                   assets  and  defines  how to  measure  the
book  value of these  assets,  as well as the                   disclosures   that  are
  required.   The  Standard  has  been   initially   implemented
                  retroactively,  except  as  described  below.  As  regards  business
 combinations,  the                   Standard  is  implemented  with  respect  to
 business  combinations  that took place on                   January  1, 2007 or
 thereafter,  whereas  in  respect  of a  research  and  development
                  project  acquired in a business  combination  that took place before
January 1, 2007 and                   which meets the definition of an intangible  asset
on the date of  acquisition,  and was                   recorded  as an  expense on the
date of  acquisition,  the entity  shall  recognize  the                   research and
 development  project in process as an asset on January 1, 2007 and make an
                  allocation of taxes.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
research and development asset shall be recognized in the amount of its value on the date
of acquisition less the amortization that would have accumulated from the date of
acquisition until December 31, 2006 on the basis of the useful life of the asset, and
less any accrued impairment losses. The amount of the adjustment shall be included in the
balance of retained earnings as at January 1, 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Implementation
 of Standard No. 30 is not  anticipated to have a material  effect on the
                  Company's results of operation and financial position.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

# Note 2 
Significant Accounting Policies (contd)

| | Y. | Factoring
of financial assets
| | -- | -----------------------------

| | In
June 2003, the Company entered into an accounts receivable factoring agreement with U
Bank. Under the terms of the agreement, the Company is able to factor receivables, with U
Bank on a non-recourse basis, provided that U Bank approves the receivables in advance. In
some cases, the Company continues to be obligated in the event of commercial disputes,
(such as product defects) unrelated to the credit worthiness of the customer. The Company
accounted for the factoring of its financial assets in accordance with the provisions of
Statement of Financial Accounting Standard (SFAS) No. 140, Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities
issued by the FASB.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
have been no instances in which the Company has had to reimburse U Bank for accounts
receivables as a result of a commercial dispute.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2006, no trade receivables were factored. (As at December 31, 2005, net
trade receivables amounting to NIS 2,435 thousand were factored).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 3  Cash and
Cash Equivalents

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

| | As
for pledges on assets, see Note 15A.
| | ---------------------------------------

F - 21

---

---

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

# Note 4  Trade
Receivables

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

| | As
at December 31, 2006, two customers accounted for NIS 11,201 thousand of net trade
receivables (34.4% of the total consolidated net trade receivables) (Company  36%).
As at December 31, 2005,  one customer accounted for NIS 5,681 thousand of net trade
receivables (24.7% of the total consolidated net trade receivables) (Company 
26.2%).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | * Reclassified
| | --------------

# Note 5  Other
Receivables

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

| | * Reclassified
| | --------------

# Note 6  Inventories

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

F - 22

---

---

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

# Note 7  Long-Term
Investments

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

| | * | Reclassification
| | - | ----------------

| | ** | The
loans to subsidiaries do not bear interest and do not have repayment dates.
| | -- | -------------------------------------------------------------------------------

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

F - 23

---

---

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

# Note 8  Property
and Equipment, Net

| | A. | Consolidated
| | -- | ------------

| |                   | December 31, 2006
| | ----------------- | -----------------
|
|
|
|
| | Cost              |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| | Additions         |                  
| | Disposals         |                  
| | Translation       |                  
| | adjustments of    |                  
| | subsidiary        |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2006 |                  
| |                   |                  
| |                   |                  
| | Accumulated       |                  
| | Depreciation      |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| | Depreciation      |                  
| | during the year   |                  
| | Disposals         |                  
| | Translation       |                  
| | adjustments of    |                  
| | subsidiary        |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2006 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2006 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2005 |                  
| |                   |                  

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

F - 24

---

---

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

# Note 8  Property
and Equipment, Net (contd)

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

| |                   | December 31, 2006
| | ----------------- | -----------------
|
|
|
|
| | Cost              |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| | Additions         |                  
| | Disposals         |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2006 |                  
| |                   |                  
| |                   |                  
| | Accumulated       |                  
| | Depreciation      |                  
| | Balance as of     |                  
| | December 31, 2005 |                  
| | Depreciation      |                  
| | during the year   |                  
| | Disposals         |                  
| |                   |                  
| |                   |                  
| | Balance as of     |                  
| | December 31, 2006 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2006 |                  
| |                   |                  
| |                   |                  
| | Net balance as of |                  
| | December 31, 2005 |                  
| |                   |                  

| | As
for pledges on assets, see Note 15A.
| | ---------------------------------------

F - 25

---

---

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

# Note 9  Goodwill

| | The
changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2006
are as follows:
| | -------------------------------------------------------------------------------------------------------------

| |                                      | Consolidated
| | ------------------------------------ | ------------
|
|
|
|
| | Balance at the beginning of the year |             
| | Amortization                         |             
| | Translation adjustments              |             
| |                                      |             
| |                                      |             
| |                                      |             
| |                                      |             

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

| |                    | Annualinterest rate atDecember 312006 | Consolidated and Company
| | ------------------ | ------------------------------------- | ------------------------
|
|
|
|
| | In NIS (unlinked)  |                                       |                         
| | In U.S. dollars    |                                       |                         
| | Current maturities |                                       |                         
| | of long-term       |                                       |                         
| | debts due to       |                                       |                         
| | banks (Note 13A)   |                                       |                         
| |                    |                                       |                         
| |                    |                                       |                         
| |                    |                                       |                         
| |                    |                                       |                         

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

F - 26

---

---

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

# Note 11  Trade
Payables

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

# Note 12  Other Liabilities
and Accrued Expenses

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

F - 27

---

---

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

# Note 13  Long-Term
Debts, Excluding Current Maturities

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

| |                           | Annualinterest rate atDecember 312006 | Consolidated and Company
| | ------------------------- | ------------------------------------- | ------------------------
|
|
|
|
| | Linkage terms             |                                       |                         
| |                           |                                       |                         
| | U.S. dollar               |                                       |                         
| | CPI                       |                                       |                         
| | Unlinked                  |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| | Less - current maturities |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         

| | Financial
covenants in respect of the Companys credit facilities and long-term 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 15.0 million
or 15% of the Companys consolidated total assets, and the higher of tangible
shareholders equity of NIS 14.0 million or 14% of the Companys total
assets (on a non consolidated basis). For these purposes, shareholders equity
includes the Companys outstanding convertible note and excludes prepaid expenses
(except insurance). As of December 31, 2006, the Company was in compliance with these
covenants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                           | Annualinterest rate atDecember 312006 | Consolidated and Company
| | ------------------------- | ------------------------------------- | ------------------------
|
|
|
|
| | Linkage terms             |                                       |                         
| |                           |                                       |                         
| | U.S. dollars              |                                       |                         
| | CPI                       |                                       |                         
| | Less - current maturities |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| |                           |                                       |                         
| | Total long-term debt      |                                       |                         
| |                           |                                       |                         

F - 28

---

---

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

# Note 13  Long-Term
Debts, Excluding Current Maturities (contd)

| | Consolidated
and Company
| | ------------------------

| | C. | The
aggregate maturities of long-term debt for each of the five years subsequent           to
December 31, 2006 and thereafter are as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

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

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

# Note 14  Employee
Severance Benefits, net

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

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

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

| | 2. | In
respect of 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 - 29

---

---

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

# Note 14  Employee
Severance Benefits, net (contd)

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

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

# Note 15 
Commitments and Contingent Liabilities

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

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

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

| | 4. | The
Company has signed an agreement with a consulting company to incorporate the
               Theory of Constraint (TOC) into its operation. The
               purpose is to improve several operational measures identified by the
               Companys Management. Pursuant to the agreement in 2004, the Company
paid                consultation fees and agreed to pay bonuses to the consulting company
based on                its success. In the year ended December 31, 2004, the consulting
company was not                entitled to a bonus. During the year ended December 31,
2005 and 2006, the                consulting company was entitled to a bonus of NIS 517
thousand and NIS 470                thousand, respectively. The agreement will
expire on September 30, 2008.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

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

# Note 15 
Commitments and Contingent Liabilities (contd)

| | B. | As
of December 31, 2006, the Company and Kubatronik are committed to purchase
               equipment, services and inventories costing approximately NIS 9.2 million
               (Company  NIS 8.9 million).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

| | D. | Indemnification
agreement
| | -- | -------------------------

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

F - 31

---

---

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

# Note 16 
Convertible Note

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

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

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

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

| | As
of December 31, 2006, the Note including accrued interest is convertible into 1,322,558
ordinary shares which at such date would have constituted 17.01% of the Companys
ordinary shares after conversion.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 17 
Shareholders Equity

| | A. | Authorized,
issued and outstanding share capital in historical terms is as           follows:
| | -- | ---------------------------------------------------------------------------------------------

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

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

| | In
August 2000, the Company adopted the Eltek Ltd. 2000 Stock Option Plan (the 2000
Plan). The 2000 Plan authorized the issuance of options to purchase an aggregate of
750,000 ordinary shares. The options generally (i) expire on the fifth anniversary of the
date of grant, (ii) vest ratably over a three-year period and (iii) may not be exercised
for a period of one year from the date of grant. The exercise prices of these options are
equal to the market price of the underlying stock on the date of the grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 32

---

---

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

# Note 17 
Shareholders Equity (contd)

| | B. | Options
(contd)
| | -- | ----------------

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

| | In November 2005, the Board of
Directors of the Company adopted and the Shareholders subsequently approved the Eltek Ltd.
2005 Stock Option Plan (the 2005 Plan). The aggregate number of options
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 upon their being awarded, and each option
was designated as a Section 102(c) option of the Israeli tax ordinance. The exercise price
per option was set to NIS 21 which equals the market price of the Companys ordinary
shares on date of grant. See Note 24B.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006 the remaining unexercised option granted under the 2005 Plan are
267,400 options.
| | ---------------------------------------------------------------------------------------------------------

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

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

F - 33

---

---

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

# Note 17 
Shareholders Equity (contd)

| | B. | Options
(contd)
| | -- | ----------------

| | The
following table summarizes information concerning options outstanding at December 31,
2006:
| | -----------------------------------------------------------------------------------------------

| | Exercise prices | Number ofoptionsoutstanding atDecember 312006 | Number ofoptionsexercisable atDecember 312006 | Remainingcontractual life(in years)
| | --------------- | --------------------------------------------- | --------------------------------------------- | -----------------------------------
|
|
|
|
| |                 |                                               | U.S.$                                         | 1.14                               
| |                 |                                               | NIS                                           | 21                                 
| |                 |                                               |                                               |                                    
| |                 |                                               |                                              
| |                 |                                               |                                               |                                    
| |                 |                                               |                                               |                                    

# Note 18  Revenues

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

| |               | Consolidated | Company
| | ------------- | ------------ | -------
|
|
|
|
| | Sales of      |              |        
| | manufactured  |              |        
| | products      |              |        
| | Sales of non- |              |        
| | manufactured  |              |        
| | products      |              |        
| | Commissions   |              |        
| |               |              |        
| |               |              |        
| |               |              |        
| |               |              |        

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

| |  | Consolidated | Company
| |  | ------------ | -------
|
|
|
|
| |  |              |        

F - 34

---

---

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

# Note 19  Cost of Revenues

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

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

| | (1) | During
the year ended December 31, 2006, one major supplier accounted for NIS
                    12,423 thousand (21.2% of the total consolidated materials and
non-manufactured                     products purchase costs) (Company  NIS 12,423
thousand (22%)).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

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

# Note 20  Research
and Development Expenses (Income), Net

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

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

| | Under
the terms of the consortium, each member of the consortium is provided with an advance for
its research and development costs for a specific research and development project
assigned to it by the consortium. The OCS reimburses 66% of such approved research and
development expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 36

---

---

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

# Note 21  Selling,
General and Administrative Expenses

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

F - 37

---

---

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

# Note 22  Financial
Expenses, Net

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

# Note 23  Other
Income (Expenses), Net

| |                          | Consolidated | Company
| | ------------------------ | ------------ | -------
|
|
| | Gain (loss) on disposals |              |        
| | of fixed assets, net     |              |        
| | Other expenses           |              |        
| |                          |              |        
| |                          |              |        
| |                          |              |        

F - 38

---

---

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

# Note 24  Taxes on
Income

| | A. | Tax
benefits under the 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
investment programs are based on the Alternative Benefits track and provide for tax
benefits as follows: a zero tax rate on the Companys undistributed income arising
from the revenue that is derived from the approved enterprise, for a period
of two years, starting with the year in which the Approved Enterprise first
earns taxable income. The income so derived in the five subsequent years will be subject
to tax at a reduced rate of 25%. The period of tax benefit relating to one of these
programs has not yet commenced, and will expire no later than 2016. The period of tax
benefits for all other 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 15(A)(2) for a
pledge registered in this respect.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits described above is limited to 12 years from the commencement of
production, or 14 years from the approval date, whichever is earlier.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Law also grants entitlement to claim accelerated depreciation for tax purposes on
machinery and equipment used by the approved enterprise.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
of the Company not derived from the approved enterprise is subject to the
regular corporate tax rate, which is 31% in 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | Dividends
paid out of income derived from an approved enterprise (or out of dividends received from
a company whose income is derived from an approved enterprise) are generally subject to
withholding tax at the rate of 15% (deductible at source). The rate of 15% is limited to
dividends and distributions out of income derived during the benefits period and actually
paid at any time up to 12 years thereafter. A company which elects the Alternative
Benefits track will be subject to corporate tax at the otherwise applicable rate of 25%
in respect of the gross amount of the dividend if it pays a dividend out of income
derived from its approved enterprise during the tax exemption period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

F - 39

---

---

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

# Note 24  Taxes on
Income (contd)

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

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

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

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

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

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

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

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

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

| | B. | Taxation
of employee stock option plans
| | -- | ---------------------------------------

| | In
respect to employee stock incentive plan, the 2003 Israeli tax reform codified past
practice and determined three alternative tracks for taxing employee stock option plans.
Where a trustee arrangement is in place, the employer can either claim an expense for tax
purposes while the employee will be fully taxed up to the maximum marginal tax rate of 49%
(the Ordinary Income Route) or the Company can waive the tax expense deduction
and the employee will pay a reduced tax rate of 25% (the Capital Gains Route).
Where there is no trustee arrangement, the employee is fully taxed and no expense
deduction is allowed to the Company. There are detailed provisions for implementing these
tracks. The tax reforms new regulations do not apply for options granted before
December 31, 2002. The options granted by the Company during 2004 and 2005 were granted
pursuant to the Capital Gains Route.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

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

# Note 24  Taxes on
Income (contd)

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

| | 1. | On June 29, 2004, the Knesset (the Israeli Parliament) passed the Law for
          the Amendment of the Income Tax Ordinance (Amendment No. 140 and Temporary
          Order)  2004 (the 2004 Amendment). The 2004 Amendment
          provides for a gradual reduction in the corporate tax rate from 36% to 30% in
          the following manner: 35% for the 2004 tax year, 34% for the 2005 tax year, 32%
          for the 2006 tax year and 30% for the 2007 tax year and thereafter.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Company believes that both Amendments will have no significant impact on its financial
position or results of operations, since it had not recognized deferred tax assets as of
December 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | As of December 31, 2006, the
Companys tax loss carryforward was approximately NIS 41.7 million while its foreign
subsidiarys tax loss carryforward was NIS 3.4 million The carry-forward losses in
Israel are linked to the Consumer Price Index in accordance with the law mentioned in D
above, except for those of the subsidiary that keeps its books in foreign currency, and
which are linked to the change in the foreign currency exchange rate. As of December 31,
2006, the Company has recorded a full valuation allowance on the deferred tax asset in
respect of these losses, due to the uncertainty as to whether such assets will be realized
in the foreseeable future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 41

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---

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

# Note 24  Taxes on
Income (contd)

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

| | In
Israel, the Company has received final tax assessments through the 1995 tax year. The tax
years 1996-2001 are considered final due to limitation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys principal foreign subsidiary has received final tax assessments through
the 2003 tax year.
| | --------------------------------------------------------------------------------------------------------

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

| | G. | Reconciliation
of the theoretical tax expense to the actual tax expense
| | -- | -----------------------------------------------------------------------

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

| |                               | Consolidated | Company
| | ----------------------------- | ------------ | -------
|
|
| | Income (loss)                 |              |        
| | before taxes as               |              |        
| | Reported in the               |              |        
| | statement of operations       |              |        
| |                               |              |        
| | Primary tax rate              |              |        
| |                               |              |        
| |                               |              |        
| | Tax expenses                  |              |        
| | (benefit) calculated          |              |        
| |                               |              |        
| | Non-deductible                |              |        
| | operating                     |              |        
| | expenses                      |              |        
| | Amortization of               |              |        
| | goodwill                      |              |        
| | Unrecognized                  |              |        
| | Deferred taxes                |              |        
| | Depreciation and              |              |        
| | Inflation impact              |              |        
| | Translation                   |              |        
| | adjustments                   |              |        
| | Changes in tax                |              |        
| | Rate                          |              |        
| |                               |              |        
| | Foreign tax rate differential |              |        
| |                               |              |        
| | Total                         |              |        
| |                               |              |        
| | Tax (benefit)                 |              |        
| | Expenses                      |              |        
| |                               |              |        

| | All  tax  expenses  (benefits)  recorded  for  the
         years presented are deferred tax expenses (benefits) attributable to the foreign subsidiary.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

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

# Note 24  Taxes on
Income (contd)

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

| |                                                  | Consolidated
| | ------------------------------------------------ | ------------
|
|
|
|
| | Balance as at January 1, 2005                    |             
| |                                                  |             
| | Changes in 2005 that are not carried to income - |             
| | translation adjustments                          |             
| |                                                  |             
| |                                                  |             
| | Balance as at December 31, 2005                  |             
| |                                                  |             
| | Changes in 2006 that are not carried to income - |             
| | translation adjustments                          |             
| | Cancellation of deferred taxes during 2006       |             
| |                                                  |             
| |                                                  |             
| | Balance as at December 31, 2006                  |             
| |                                                  |             

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

| | (2) | As
of December 31, 2006, management has provided a full valuation allowance in
          respect of all the deferred tax asset.
| | --- | -------------------------------------------------------------------------------------------------------------------------------

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

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

F - 43

---

---

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

# Note 25  Financial
Instruments and Risk Management

| | 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 such
risks.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Credit
risks
| | -- | ------------

| | The
revenues of the Company and its subsidiaries derive mainly from sales to customers in
Israel, countries of the European Union and the USA. Management of the Company regularly
monitors the debts of customers, and the financial statements include specific provisions
for doubtful debts which properly reflect, in the opinion of management the loss included
in the debts the collection of which is doubtful.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2006, the trade receivables balance includes material debts of a number of
major customers, in respect of which there is a concentration of credit risk, as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                      | December 31
2006
| | ------------------------------------ | ----------------
|
|
|
|
| | Customers                            |                 
| | Less - Provisions for doubtful debts |                 
| |                                      |                 
| |                                      |                 
| | Customers, net                       |                 
| |                                      |                 

| | In
2006, the sales to these customers were NIS 75 million.
| | ----------------------------------------------------------

F - 44

---

---

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

# Note 25  Financial
Instruments and Risk Management (contd)

| | B. | Effective
interest rates analysis
| | -- | ---------------------------------

| | In
respect of income-earning financial assets and interest-bearing financial liabilities, the
following tables indicates their average effective interest rates at the reporting date
and the periods in which they mature.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       |  | Consolidated
| | ------------------------------------- |  | ------------
|
|
|
|
| | Instruments bearing fixed interest    |  |             
| |                                       |  |             
| | Cash and cash equivalents:            |  |             
| | U.S. dollars                          |  |             
| | Convertible debenture note            |  |             
| |                                       |  |             
| | Loans from banks:                     |  |             
| | In NIS                                |  |             
| | In NIS, linked                        |  |             
| |                                       |  |             
| | Loans from fixed asset supplier:      |  |             
| | In NIS, linked                        |  |             
| | U.S. dollars                          |  |             
| |                                       |  |             
| |                                       |  |             
| |                                       |  |             
| |                                       |  |             
| | Instruments bearing variable interest |  |             
| |                                       |  |             
| | Bank credit:                          |  |             
| | In NIS                                |  |             
| | U.S. dollars                          |  |             
| |                                       |  |             
| | Trade payables:                       |  |             
| | In NIS                                |  |             
| |                                       |  |             
| | Loans from banks:                     |  |             
| | In NIS                                |  |             
| | U.S. dollars                          |  |             
| |                                       |  |             
| | Loans from fixed asset suppliers:     |  |             
| | In NIS                                |  |             
| |                                       |  |             
| |                                       |  |             
| |                                       |  |             
| |                                       |  |             

F - 45

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---

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

# Note 25  Financial
Instruments and Risk Management (contd)

| | C. | Foreign
currency risks
| | -- | ----------------------

| | The
Company is exposed to foreign currency risks from sales, purchases and loans denominated
in currencies other than the Groups functional currency. The risks are mainly in
respect of the US dollar, the euro and the pound sterling. The Group hedges at least
40%-50% of balances with its customers and suppliers denominated in foreign currency. The
Company uses futures currency contracts in order to hedge its foreign currency risk. The
futures currency contracts have a maturity date of less than one year from the date of the
report. The futures currency contracts are renewed as necessary.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2006, the Company opened forward exchange contracts which are intended to
hedge exposure with respect to assets and liabilities in foreign currency, as described
below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | Currency
receivable | Currency
payable | Expiration
date | Amount
receivable | Amount
payable | Fair
value
| | -------------------- | ------------------- | ---------------- | --------------- | ----------------- | -------------- | ----------
|
|
|
|
| | Forward transaction: |                     |                  |                 |                   |                |           
| |                      |                     |                 
| |                      |                     |                  |                 | US dollars        |                |           
| |                      |                     |                  |                 | NIS               |                |           

| | D. | Disclosures
Regarding Fair Value of Financial Instruments
| | -- | ---------------------------------------------------------

| | The
Companys financial instruments consist primarily of cash and cash equivalents, trade
and other receivables, trade payables, short-term credit and long-term debt. The carrying
amounts of the short-term financial instruments, approximates their fair value because of
the short maturity of these instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the derivatives is based upon their quoted market price as of the date of
the balance sheet.
| | --------------------------------------------------------------------------------------------------------------

| | The
fair value of the long-term loans and convertible debentures note and the market interest
rates for computation of the fair values as at December 31, 2006 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                     | Consolidated and Company
| | --------------------------------------------------- | ------------------------
|
|
|
|
| | Current financial liabilities:                      |                         
| | Convertible debentures note                         |                         
| |                                                     |                         
| | Long-term financial liabilities:                    |                         
| | Long-term bank loans, including current maturities  |                         
| | Other long-term loans, including current maturities |                         

| | E. | Sensitive
analysis
| | -- | ------------------

| | In
managing its interest risks and currency risks, the Company strives to reduce the effect
of short-term fluctuations on its profits. Conversely, in the long term, changes in
foreign currency rates and interest have an effect on the profits of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2006, the Company estimates that an increase of one percent in interest
rates would reduce the pre-tax profits of the Company by the amount of NIS 245 thousand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company estimates that an increase of one percent in the exchange rate of
the dollar would have reduced the pre-tax profits of the Company by the amount of NIS 676
thousand for the year ended December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---

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

# Note 26  Segment
Reporting

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

| |                       | Year ended December 31, 2006
| | --------------------- | ----------------------------
|
|
|
|
| | External revenues     |                             
| | for the segment       |                             
| | Internal revenues for |                             
| | the segment           |                             
| |                       |                             
| | Total revenues for    |                             
| | the segment           |                             
| |                       |                             
| |                       |                             
| | Operating income      |                             
| | (loss)                |                             
| | Financial expenses    |                             
| | Financial income      |                             
| | Other income          |                             
| | (expenses), net       |                             
| | Company's share in    |                             
| | losses of             |                             
| | subsidiaries, net     |                             
| | Tax expenses          |                             
| | Minority interests    |                             
| |                       |                             
| | Net income (loss)     |                             
| |                       |                             
| |                       |                             
| | Total assets          |                             
| |                       |                             
| |                       |                             
| | Total liabilities     |                             
| |                       |                             
| |                       |                             
| | Capital expenditure   |                             
| |                       |                             
| |                       |                             
| | Depreciation and      |                             
| | amortization          |                             
| |                       |                             

F - 47

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---

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

# Note 26  Segment
Reporting (contd)

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

| | *
Reclassified
| | --------------

F - 48

---

---

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

# Note 26  Segment
Reporting (contd)

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

| | *
Reclassified
| | --------------

F - 49

---

---

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

# Note 27  Earnings
(Losses) Per Share

| |                                                      | Year ended December 31, 2006
| | ---------------------------------------------------- | ----------------------------
|
|
|
|
| | Weighted average number of shares and income         |                             
| | (loss) used to compute basic earnings (loss) per     |                             
| | share:                                               |                             
| | Income (loss) used to compute basic                  |                             
| | earnings (loss) per share                            |                             
| |                                                      |                             
| |                                                      |                             
| | Weighted average number of shares used to            |                             
| | compute basic net earnings (loss) per share          |                             
| | (in thousands)                                       |                             
| |                                                      |                             
| |                                                      |                             
| | Weighted average number of shares and                |                             
| | income (loss) used to compute diluted net            |                             
| | earnings (loss) per share:                           |                             
| |                                                      |                             
| | Income (loss) used to compute basic net              |                             
| | earnings (loss) per share                            |                             
| |                                                      |                             
| | Interest expenses and income (losses) of exchange    |                             
| | rate on convertible note                             |                             
| |                                                      |                             
| |                                                      |                             
| | Income (loss) used to compute diluted net earnings   |                             
| | (loss) per share                                     |                             
| |                                                      |                             
| |                                                      |                             
| | Weighted average number of shares used to compute    |                             
| | basic net earnings (loss) per share (in thousands)   |                             
| |                                                      |                             
| | Influence of conversion of convertible               |                             
| | convertible note (in thousands)                      |                             
| |                                                      |                             
| | Influence of conversion of option to share           |                             
| | (in thousands)                                       |                             
| |                                                      |                             
| |                                                      |                             
| | Weighted average number of shares used to compute    |                             
| | diluted net earnings (loss) per share (in thousands) |                             
| |                                                      |                             

F - 50

---

---

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

# Note 28  Related
and Interested Party Transactions

| |    |  | Consolidated and Company
| | -- |  | ------------------------
|
|
|
|
| | A. |  |                         
| |    |  |                         
| |    |  |                         
| |    |  |                         
| | B. |  |                         
| |    |  |                         

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

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

| | C. | Loans to and other receivables from the subsidiaries included in the financial
          statements of the Company as at December 31, 2006 and 2005 is NIS 2,186 thousand
          and NIS 2,147 thousand, respectively (see Note 7).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | (2) | The total cost of the above mentioned compensation in 2006 was NIS 519 thousand
          (in 2005  NIS 367 thousand, in 2004  NIS 321 thousand).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

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

|Note 29 |  Effect of Significant Differences Between Generally Accepted Accounting Principles
in Israel and the United States
|------- | --------------------------------------------------------------------------------------------------------------------

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

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

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

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

F - 51

---

---

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

|Note 29 |  Effect of Significant Differences Between Generally Accepted Accounting Principles
in Israel and the United States (contd)
|------- | -----------------------------------------------------------------------------------------------------------------------------

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

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

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

| | C. | Convertible
debenture note
| | -- | --------------------------

| | Until
December 31, 2005, under Israeli GAAP, the convertible note is presented on the balance
sheet as a separate item between long-term liabilities and shareholders equity,
whereas under U.S. GAAP it should be presented as a liability.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
from January 1, 2006, there is no difference in the presentation between Israeli GAAP and
U.S. GAAP.
| | -------------------------------------------------------------------------------------------------------

| | D. | Goodwill
amortization
| | -- | ---------------------

| | Until
December 31, 2005, under Israeli GAAP, goodwill derived from the acquisition of Kubatronik
(see Note 1) is being amortized on a straight-line basis over 10 years. Under U.S. GAAP,
goodwill is not amortized but is evaluated for impairment in accordance with SFAS No. 142
Goodwill and Other Intangible Assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
from January 1, 2006, goodwill is not amortized under both Israeli GAAP and U.S. GAAP.
At   the  end  of  fiscal   2006,   goodwill   was
         evaluated and an impairment of NIS 2,105 was recorded under U.S. GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
described in Note 1, the seller of Kubatroniks shares has the right to require the
Company to purchase (put option), and the Company has the right to require the seller to
sell to the Company (call option), the sellers remaining 24% stock ownership of
Kubatronik. Under Israeli GAAP, there are no accounting consequences. Under U.S. GAAP,
according to SFAS 150, Accounting for Certain Financial Instruments with
characteristics of both Liabilities and Equity, those options are measured at fair
value and presented as a net written put option.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | Under
U.S. GAAP, the effect of changes in exchange rates on cash and cash equivalents are
presented separately in the statement of cash flows (see Note 29(H)(6)).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Under
U.S. GAAP, as prescribed by SFAS 95, the above mentioned items are reflected as non-cash
financing activities (see Note 29(H)(6)).
| | ----------------------------------------------------------------------------------------------------------------------------------------

F - 52

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---

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

|Note 29 |  Effect of Significant Differences Between Generally Accepted Accounting Principles
in Israel and the United States (contd)
|------- | -----------------------------------------------------------------------------------------------------------------------------

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

| | SFAS
130, Reporting Comprehensive Income requires that all items that are required
to be recognized under accounting standards as components of comprehensive income be
reported in a financial statement and displayed in the same prominence as other financial
statements. It requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid in
capital in the equity section of the statement of financial position.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Effect
on financial statements
| | -- | ------------------------------

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

| |                                                     | Consolidated
| | --------------------------------------------------- | ------------
|
|
|
|
| | Israeli GAAP -                                      |             
| | Goodwill, net of amortization (D)                   |             
| |                                                     |             
| | Employee severance benefit, net (B)                 |             
| |                                                     |             
| |                                                     |             
| | U.S.GAAP -                                          |             
| | Goodwill                                            |             
| |                                                     |             
| | Assets held for severance pay benefits              |             
| |                                                     |             
| | Liability in respect of employee severance benefits |             
| |                                                     |             

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

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

| |                                          | Consolidated and Company
| | ---------------------------------------- | ------------------------
|
|
|
|
| | Net income (loss) reported under Israeli |                         
| | GAAP                                     |                         
| | Amortization of goodwill (D)             |                         
| | Impairment of goodwill (D)               |                         
| | Net written put option (E)               |                         
| |                                          |                         
| | Net income (loss) under U.S. GAAP        |                         
| |                                          |                         
| |                                          |                         
| | Basic net earnings (loss) per share      |                         
| |                                          |                         
| |                                          |                         
| | Diluted net earnings (loss) per share    |                         
| |                                          |                         

F - 53

---

---

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

|Note 29 |  Effect of Significant Differences Between Generally Accepted Accounting Principles
in Israel and the United States (contd)
|------- | -----------------------------------------------------------------------------------------------------------------------------

| | H. | Effect
on Financial Statements (contd)
| | -- | ---------------------------------------

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

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

| | 4) | Shareholders'
equity
| | -- | --------------------

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

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

| |                                          | 2004 | 2005 | 2006
| | ---------------------------------------- | ---- | ---- | ----
|
| | Balance as of January 1                  |      |      |     
| |                                          |      |     
| | Conversion of convertible note           |      |      |     
| |                                          |      |     
| | Exercise of employee stock options       |      |      |     
| |                                          |      |     
| | Net income (loss)                        |      |      |     
| |                                          |      |     
| | Foreign currency translation adjustments |      |      |     
| |                                          |      |      |     
| |                                          |      |     
| | Balance as of December 31                |      |      |     
| |                                          |      |      |     

F - 54

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---

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

|Note 29 |  Effect of Significant Differences Between Generally Accepted Accounting Principles
in Israel and the United States (contd)
|------- | -----------------------------------------------------------------------------------------------------------------------------

| | H. | Effect
on Financial Statements (contd)
| | -- | ---------------------------------------

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

| |                                             | Consolidated
| | ------------------------------------------- | ------------
|
|
|
|
| | Net cash provided by operating activities   |             
| | under Israeli GAAP                          |             
| |                                             |             
| | Changes in exchange rate included in above  |             
| | Note 29(F)(1)                               |             
| |                                             |             
| |                                             |             
| | Net cash provided by operating activities   |             
| | under U.S. GAAP                             |             
| |                                             |             
| |                                             |             
| | Net cash used in investing                  |             
| | activities under Israeli GAAP               |             
| | Purchase of fixed assets under financing    |             
| | arrangement - Note 29(F)(2)                 |             
| |                                             |             
| |                                             |             
| | Net cash used in investing activities       |             
| | under U.S. GAAP                             |             
| |                                             |             
| |                                             |             
| | Net cash provided by (used in) financing    |             
| | activities under Israeli GAAP               |             
| | Loans in respect of financing arrangement - |             
| | Note 29(F)(2)                               |             
| |                                             |             
| |                                             |             
| | Net cash used in financing                  |             
| | activities under U.S. GAAP                  |             
| |                                             |             
| |                                             |             
| | Effect of exchange rates - changes on cash  |             
| |                                             |             
| |                                             |             
| | Changes in cash and cash equivalents under  |             
| | Israeli GAAP                                |             
| |                                             |             
| |                                             |             
| | Changes in cash and cash equivalents        |             
| | under U.S. GAAP                             |             
| |                                             |             

| | The
Company paid NIS 2,055 thousand, NIS 1,709 thousand and NIS 2,261 thousand for interest in
2006, 2005 and 2004, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------

F - 55

---

---

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

# Note 30  Assets
and Liabilities Analyzed by Currency and Linkage Basis

| | Consolidated
| | ------------

| |                                                  | December 31, 2006
| | ------------------------------------------------ | -----------------
|
|
|
|
| | Cash and cash equivalents                        |                  
| | Trade and other receivables and prepaid expenses |                  
| | Inventories                                      |                  
| | Deferred taxes                                   |                  
| | Property and equipment, net                      |                  
| | Goodwill                                         |                  
| |                                                  |                  
| |                                                  |                  
| | Total assets                                     |                  
| |                                                  |                  
| |                                                  |                  
| | Short-term credit and current maturities         |                  
| | of long-term debts                               |                  
| | Trade payables                                   |                  
| | Other liabilities and accrued expenses           |                  
| | Convertible note                                 |                  
| | Long-term debt, excluding current maturities     |                  
| | Employee severance benefits, net                 |                  
| | Minority interests                               |                  
| |                                                  |                  
| |                                                  |                  
| | Total liabilities                                |                  
| |                                                  |                  
| |                                                  |                  
| | Total shareholders' equity                       |                  
| |                                                  |                  

F - 56

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---

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

# Note 30  Assets and
Liabilities Analyzed by Currency and Linkage Basis (contd)

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

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

F - 57

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---

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

Note 31  Subsequent Event

| | During
the first quarter of fiscal 2007,  the Companys  board of directors  approved,
 effective          as of  January  1,  2007,  that  the  consolidated  financial
 statements  will  be  prepared  in          accordance  with U.S. GAAP and the reporting
 currency will be changed from NIS to U.S.  dollars,          while the functional
 currency will remain NIS. The Company  management  believes that presenting
         consolidated  financial  statements  in U.S.  dollars in the future will provide
more  meaningful          and relevant financial information to the Company shareholders.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 58

---

---

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: June 27, 2007

- 71 -

---

---