The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for the five years ended December 31, ~~2011.~~2012. The selected consolidated financial data as of December 31, ~~2011~~2012 and ~~2010~~2011 and for each of the three years ended December 31, ~~2011,~~2012, have been prepared in accordance with U.S. GAAP, and are derived from our audited consolidated financial statements and accompanying notes included in Item 18, “Financial Statements.” The selected consolidated financial data as of December 31, 2010, 2009 ~~2008~~ and ~~2007~~2008 and for the years ended December 31, ~~2008~~2009 and ~~2007~~2008 have been derived from our previously published audited consolidated financial statements, which are not included in this annual report. The selected financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and Prospects” and our consolidated financial statements and notes thereto included elsewhere in this annual report.

CONSOLIDATED STATEMENT OF OPERATIONS DATA :

	Year Ended December 31,															Year Ended December 31,
	2011			2010			2009			2008			2007			2012			2011			2010			2009			2008
	($ and share data in thousands, except per share data)															($ and share data in thousands, except per share data)
Revenues	$	46,830		$	37,514		$	36,442		$	43,138		$	37,476			45,646		$	46,830		$	37,514		$	36,442		$	43,138
Cost of revenues		(38, 101	)		(32,690	)		(30,882	)		(37,282	)		(31,879	)		(37,836	)		(38, 101	)		(32,690	)		(30,882	)		(37,282	)
Gross profit		8,729			4,824			5,560			5,856			5,597			7,810			8,729			4,824			5,560			5,856
Research and development (expenses) income, net					--			--			100			(74	)								--			--			100
Selling, general and administrative expenses		(6,155	)		(6,033	)		(6,016	)		(7,199	)		(5,683	)		(6,040	)		(6,155	)		(6,033	)		(6,016	)		(7,199	)
Impairment on goodwill		-			--			--			(379	)		--			(481	)		-			--			--			(379	)
Total operating expenses		(6,155	)		(6,033	)		(6,016	)		(7,478	)		(5,757	)		(6,521	)		(6,155	)		(6,033	)		(6,016	)		(7,478	)
Operating profit (loss)		2,574			(1,209	)		(456	)		(1,622	)		(160	)		1,289			2,574			(1,209	)		(456	)		(1,622	)
Financial expenses, net		(740	)		(609	)		(424	)		(826	)		(145	)		(543	)		(740	)		(609	)		(424	)		(826	)
Other income, net		12			2			4			1			8			2			12			2			4			1
Profit (loss) before income tax expense		1,846			(1,816	)		(876	)		(2,447	)		(297	)		748			1,846			(1,816	)		(876	)		(2,447	)
Income tax expense		(31	)		(19	)		(34	)		--			--			(52	)		(31	)		(19	)		(34	)		--
Net profit (loss)		1,815			(1,835	)		(910	)		(2,447	)		(297	)		696			1,815			(1,835	)		(910	)		(2,447	)
Net profit (loss) attributable to non-controlling interest		31			113			30			1			(4	)		6			(31	)		(113	)		(30	)		1
Net profit (loss) attributable to Eltek Ltd. shareholders		1,846			(1,722	)		(880	)		(2,446	)		(301	)		690			1,846			(1,722	)		(880	)		(2,446	)
Basic and diluted net profit (loss) per ordinary share attributable to Eltek Ltd.		0.28			(0.26	)		(0.13	)		(0.37	)		(0.05	)		0.1			0.28			(0.26	)		(0.13	)		(0.37	)
Weighted average number of ordinary shares used to compute basic and diluted net profit (loss) per ordinary share		6,610			6,610			6,610			6,610			6,247			6,610			6,610			6,610			6,610			6,610

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CONSOLIDATED BALANCE SHEETS DATA :

CONSOLIDATED BALANCE SHEETS DATA :
	As at December 31,														As at December 31,
	2011			2010			2009			2008			2007		2012			2011			2010			2009			2008
	($ and share data in thousands)														($ and share data in thousands)
Working capital (deficit)		(1,787	)		(4,064	)		(1,984	)		(1,881	)	$	733		(2,712	)		(1,787	)		(4,064	)		(1,984	)		(1,881	)
Total assets		22,869			23,837			23,771			25,453			29,182		23,449			22,869			23,837			23,771			25,453
Long-term liabilities		1,754			2,849			4,057			3,970			5,631		943			1,754			2,849			4,057			3,970
Total shareholders’ equity		4,631			3,149			4,829			5,629			8,074		5,412			4,631			3,149			4,829			5,629
Number of issued and outstanding shares		6,610			6,610			6,610			6,610			6,610		6,610			6,610			6,610			6,610			6,610

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 a history of operating losses and may not be able to achieve and sustain profitable operations. We may not have sufficient resources to fund our operations in the future.

Although we ~~returned to profitability~~were profitable in ~~2011~~the past two years after four years of losses, there can be no assurance that we will continue to operate profitably in the future. To the extent that we incur operating losses in the future, we may have insufficient 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. If adequate funds are not available to us, our business, and results of operations and financial condition will be materially and adversely affected.

We will 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: (i) the timing of orders and deliveries; (ii) the purchase of new equipment; (iii) the build-up of inventories; (iv) the payment terms offered to our customers; (v) the payment terms offered by our suppliers; and (vi) approval of the current or additional lines of credit and long-term loans from banks.

As of December 31, ~~2011,~~2012, we had revolving lines of credit aggregating $3.9 million with our banks, all of which were fully utilized as of such date, and ~~$2.8~~$2.2 million of long-term loans, including supplier credits. These credit facilities may not remain available to us in the future. Furthermore, under certain circumstances the 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~~During the higher of shareholders’ equity of NIS 17.5 million ($4.8 million) or 17% of our consolidated total assets. For this purpose, shareholders’ equity excludes certain intangible assets and prepaid expenses (except insurance premiums). Our compliance with the financial covenants is measured annually based on the audited financial statements for December 31, each year. As of December 31, 2011,last several years we were not in compliance with such covenants. However, in February 2012, the bank granted us a waiver stating it would not take any measures against us arising from the breach of the covenants before the date of release ofunable to fully fund our technological development requirements due to our losses and limited financial statements for the year ending December 31, 2012, which we expect to release no later than April 30, 2013, by which time we must return to compliance. We have initiated discussions with this bank inresources. In order to ~~modify the financial covenants and to agree to terms which we believe~~remain competitive, we will be ~~able~~required to ~~meet. Our failure~~acquire new equipment and implement new technologies, which are likely to ~~reach compliance with the bank covenants, or negotiate an agreement with new covenant terms, or obtain additional financing, if required,~~require significant capital investment that may ~~adversely affect our business, results of operations and financial position. Financial covenants in respect of our credit facilities and long-term debt with another bank require us~~not be available to maintain the higher of shareholders’ equity, excluding certain intangible assets and prepaid expenses (except insurance premiums), of NIS 10.0 million ($2.6 million) or 11% of our total assets (on a non-consolidated basis), and as of December 31, 2011 we were in compliance with such covenants.

~~- 3 -~~

us. 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 will be required to raise additional funds through public or private financing or other sources. 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.

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We may not be in compliance with banks’ covenants in the future.

We are subject to financial covenants from the banks that provide us with our credit facilities and long-term loans. The borrowings from our banks are secured by specific liens on certain assets, by a first priority charge on the rest of our now-owned or after-acquired assets and by a fixed lien on goodwill (intangible assets) and insurance rights (rights to proceeds on insured assets in the event of damage). In addition, the agreements 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.

Both of our banks require us to maintain a specific set of covenants for each fiscal year. Our compliance with the financial covenants is measured annually based on our audited financial statements for December 31. In recent years, including the year ended December 31, 2011, we were forced to seek waivers of certain of these covenants. Both banks have the right to demand immediate repayment of the loans and lines of credit in the event of a change of control in our company, if such a change occurred without their prior approval. Our failure to remain in compliance with each of the banks’ covenants, obtain waivers, negotiate agreements with new covenant terms, or obtain additional financing, if required, may adversely affect our business, results of operations and financial position.

Economic downturns and disruptions in financial markets can adversely affect our business and results of operations.

Our results of operations can be materially affected by adverse conditions in the financial markets and depressed economic conditions generally. Worsening economic conditions, such as the continued European sovereign debt uncertainty, may result in diminished demand for our products and in decreased sales volumes. Recessionary environments adversely affect the demand for our products as a result of constraints on capital spending by our customers. In addition, this could result in longer sales cycles, slower acceptance of new products and increased competition for our products, which in turn could cause us to reduce prices for our products resulting in reduced gross margins. Furthermore, the value of our investment in our Germany-based subsidiary, Kubatronik Leiterplatten GmbH, or Kubatronik, may decrease further as a result of the weak economy and as a result, we may record ~~additional goodwill~~ impairment losses in the future. Any of these events would likely harm our business, operating results and financial condition.

~~Natural disasters or breaches~~Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.

~~Natural disasters, cyber-attacks~~Cyber attacks or other breaches of network or information technology (IT) security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations. ~~Cyber attacks or attempts to gain unauthorized access into~~Although we have not experienced any of these events as of the date of this annual report, we expect that our network system are detected and blocked from time to time. While we operate under IT general control standards and we use firewall and anti-virus systems, there is no assurance that such attempts will always be blocked or discovered, and as a result, we may encounter damages to our computer network servers, manipulation of our data (including production, financial and other information), and inability to operate our facilities ~~that~~as a result of such events, even for a limited period of time, may result in significant expenses and/or loss of market share to other competitors in the global PCB ~~market.~~industry. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. Any of these occurrences could adversely affect our results of operations and financial condition.

In particular, both unsuccessful and successful cyber attacks on companies have increased in frequency, scope and potential harm in recent years. We have been subject, and will likely continue to be subject, to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer viruses and other means of unauthorized access. However, to date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition. While we use firewall and anti-virus systems, there is no assurance that cyber attacks will always be blocked or discovered, and as a result, we may encounter damages to our computer network servers, manipulation of our data (including production, financial and other information).

- 4 -

Rapid changes in the Israeli and international electronics industries and recessionary pressure may adversely affect our business.

Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers. The electronics industry is 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 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 decline in the Israeli and international electronic markets may adversely affect our operating results and financial condition in the future.

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

~~- 4 -~~

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. We expect that we will need to invest large amounts in the next few years to replace or refurbish old equipment and to remain competitive in the market. 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.

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. ~~(which acquired the PCB segment of Melta Ltd. in late 2010)~~ and ~~also compete with~~ major international PCB exporters, mainly from ~~South-East~~South East Asia, Europe and North America. In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), ~~Printca (Denmark),~~ Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In the North American market we mainly compete with ~~DDI Corp,~~Viasystems North America, Inc. (previously known as DDi Corp.), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and TTM Technologies Inc. and certain other American companies. 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~~South East Asia (mainly in China), which have substantially lower production costs than us. Continued competitive pressures could cause us to lose significant market share.

- 5 -

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, 2012, 2011 ~~2010~~ and ~~2009,~~2010, our ten largest customers accounted for ~~55%~~59.7%, ~~50%~~55% and ~~54%~~50% of our revenues, respectively, of which one customer (consisting of two affiliated companies) accounted for ~~14.9%~~17.2%, ~~13.7%~~14.9% and ~~13.3%~~13.7% of our total revenues, respectively. 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.

Our results of operations may be harmed by currency fluctuations.

Our revenues and expenses are denominated in the NIS, U.S. dollar and Euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange between NIS and ~~non-NIS~~other currencies may affect our operating results and financial condition. The NIS value of our U.S. dollar and Euro denominated revenues are negatively impacted by the depreciation of the U.S. dollar and the Euro against the NIS. The average exchange rate for the NIS against the U.S. dollar was ~~4.1% lower~~7.8% higher in ~~2011~~2012 than in ~~2010,~~2011, which had a ~~negative~~positive impact on our operating results in ~~2011.~~2012. In the past, the NIS exchange rate against the dollar and other foreign currencies fluctuated, generally reflecting inflation rate differentials. We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation or appreciation of the NIS against the dollar. If NIS value of our dollar or Euro denominated revenues decreases, our results of operations will be adversely affected.

We have recently encountered difficulties in obtaining lines of credits from our banks to perform hedging transactions in order to protect ourselves from currency fluctuations. If we were to determine that it is in our best interests to enter into any other hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may not be able to do so, or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations and may result in additional expenses.

~~- 5 -~~

Our quarterly operating results fluctuate significantly.

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

the size and timing of significant orders and their fulfillment;

demand for our products and the mix of products purchased by our customers;

competition from lower priced manufacturers;

fluctuations in foreign currency exchange rates, primarily the NIS against the U.S. dollar and the Euro;

manufacturing yield;

plant utilization;

availability of raw materials;

plant or line shutdowns to repair or replace malfunctioning manufacturing equipment;

the length of our sales cycles;

changes in our strategy;

the number of working days in the quarter;

- 6 -

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~~there will be ~~adversely affected by these or other factors.~~significant differences between the results of one quarter to another.

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 30 working days. The delivery of such orders is subject to the number of available working days during the quarter, which can fluctuate significantly from quarter to quarter due to holidays and vacations. Certain prototype and pre-production runs require even shorter turn-around times stemming from customers’ product launches and design changes. In addition, there might be sudden increases, decreases or cancellations of orders for which there are commitments, which further characterize the electronics industry and the companies that operate in it. The industry practice is to make such changes without any penalties, except for the time and materials expended on the order.

Our business involves highly complex manufacturing processes that are subject to periodic failure. Process failures have occurred in the past and have resulted in delays in product shipments, and process failures may 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, it is very difficult to 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.

~~- 6 -~~

We are subject to environmental laws and regulations. Compliance with those laws and regulations requires us to incur costs and we are subject to fines or other sanctions for non-compliance.

Our operations are regulated under various environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials. Compliance with these laws and regulations is a major consideration 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 or regulations, we could be liable for damages, costs of remedial actions, may be subject to criminal prosecution including a range of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof. Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with a violation. A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment systems.

The cost of compliance with environmental laws and regulations depends in part on the requirements in such laws and regulations and on the method selected to implement them. If new or more restrictive standards are imposed, the cost of compliance could be very high and have an adverse impact on our revenues and results of operations if we cannot recover those costs through the rates that we charge our customers.

- 7 -

We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. If we are found to be in violation of environmental laws, we could be liable for damages and costs of remediation and may be subject to a halt in production, which may adversely affect our business, operating results and financial condition.

We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. We may be subject to further environmental claims ~~by governmental, municipal and other organizations~~ alleging that we are in violation of environmental laws. If we are unsuccessful in such claims and other future claims and litigations or if actual results are not consistent with our assumptions and judgments, we may be exposed to losses that could be material to our company.

On August 25, 2009, we received a notice from the Petach Tikva Municipality claiming that random automatic wastewater sampling in proximity of our plant indicates high levels of metal concentrations which exceed the amounts permitted by law. The Municipality requested our explanations to such alleged violation and further informed us that its environmental department has determined to initiate procedures against any plant that is not in compliance with the permitted concentrations. On September 16, 2009, we sent a letter to the Municipality explaining that we have invested extensive funds and resources each year in order to comply with all environmental legal requirements. We further indicated that we have been and are still engaged in several projects to reduce salt and metal concentrations in our plant wastewater and that we constantly update our procedures with respect to environmental matters. In addition, we proposed to collaborate with the Municipality and conduct mutual tests to ensure maximum protection of the environment. To date, we have not received any response from the Municipality to our letter dated September 16, 2009. If we are found to be in violation of environmental laws, we could be liable for damages, costs of remedial actions and a range of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof. Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations.

Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs.

Third parties may assert infringement claims against us or claims that we have violated a patent or infringed on a copyright, trademark or other proprietary right belonging to them. Any infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend against the claim. Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. We might not be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all. We also may not be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering the product. Infringement claims asserted against us could have a material adverse effect on our business, operating results and financial condition.

A supplier of one of our software packages requested to conduct an audit of our operation to verify that we do not breach any intellectual property rights he allegedly owns. We believe that we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that the supplier has no right to conduct any audit of our products or services and such audit may cause us to breach confidentiality obligations to other entities. If we are found to be in violation of such supplier's intellectual property rights, we could be liable for compensation and costs of an unknown amount. Such liability could have a material adverse effect on our business, financial condition and results of operations.

We may not succeed in our efforts to expand into the U.S. defense market. If we are unsuccessful, our future revenues and profitability would be adversely affected.

In January 2009, we received International Traffic in Arms Regulations (ITAR) registration from the U.S. Department of State, which certifies us to sell our PCBs to the U.S. defense market. Our business plan assumes an increase in revenues to the U.S. defense market based on our receipt of this certification. However, our efforts to enter into to the U.S. defense market may not succeed and sales to the defense and aerospace industries may be affected by cutbacks in U.S. government spending, and this may not become a substantial market for us. If we are unsuccessful in such efforts, our future revenues and profitability would be adversely affected. In addition, in the event of a change in control of our company, the ~~U.S~~U.S. Department of State may investigate the transfer of control and oppose the transaction. In such an event we may lose our ITAR certification, which could adversely affect our future revenues and profitability.

- 78 -

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

As the majority of PCB manufacturing is centered in South East Asia, raw material suppliers may focus their attention and give higher priority to manufacturers in those areas, which may interrupt the supply of raw materials to us. In addition, these suppliers could discontinue the manufacture or supply of these raw materials at any time. During the years ended December 31, 2012, 2011 and 2010, our purchases from one supplier accounted for 24.5%, 18.4% and 16.1% of our total consolidated raw material costs, respectively. 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.

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

In recent years, the significant increase in oil and energy costs and commodity prices (such as copper, gold and glass fibers) put pressure on our suppliers to increase their prices for most of our principal raw materials. We may not be successful in our attempts to negotiate lower price increases than requested by our suppliers. We have faced pressure to raise our prices for our products to compensate for supplier price increases in order to maintain our operating margins, and we may not be able to maintain moderate price increases as we have in the past. Future price increases for our principal raw materials may materially affect our operating margins and future profitability.

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. As the majority of PCB manufacturing is centered in the Far East, raw material suppliers may focus their attention and give higher priority to manufacturers in the Far East, which may interrupt the supply of raw materials to us. In addition, these suppliers could discontinue the manufacture or supply of these raw materials at any time. During the years ended December 31, 2011, 2010 and 2009, our purchases from one supplier accounted for 18.4%, 16.1% and 15.9% of our total consolidated raw material costs, respectively. We may not be able to identify and integrate alternative sources of supply in a timely fashion. Any transition to alternate suppliers may result in delays in production and shipment and increased expenses and may limit our ability to deliver products to our customers. Furthermore, if we are unable to identify an alternative source of supply, we may have to modify our products or a large portion of our production process to use a substitute raw material, which may cause delays in production and shipments, increased design and manufacturing costs and increased prices for our products.

We may encounter difficulties with our international operations and sales that may have a material adverse effect on our sales and profitability.

We have manufacturing facilities in Israel and Germany and generate a large percentage of our sales in Europe and North America. Our sales in Europe for the years ended December 31, 2012, 2011 ~~2010~~ and ~~2009~~2010 accounted for ~~28.6%~~25.4%, ~~27%~~28.6% and ~~26.4%~~27% of our consolidated revenues, respectively, of which ~~12%~~9.4%, ~~10.5%~~12% and ~~11.3%~~10.5% was generated in Germany, respectively. Our sales in North America for the years ended 2012, 2011 ~~2010~~ and ~~2009~~2010 accounted for ~~11.5%~~16.8%, ~~17.6%~~11.5% and ~~20%~~17.6% of our consolidated revenues, respectively. We intend to increase our business in North America, including sales to U.S. military contractors. However contracts with U.S. military agencies, as well as military equipment manufacturers in Europe, are subject to certain regulatory restrictions and approvals, which we may not be able to comply with or obtain. We may not be able to maintain or increase international market demand for our products. To the extent that we cannot do so, our business, operating results and financial condition may be adversely affected.

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

the impact of possible recessionary environments in multiple foreign markets;

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

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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.

Our results may be adversely affected by product liability claims.

The sale of our products may entail the risk of product liability claims, which are likely to be substantial in light of the use of our products in business-critical applications. Over the years we have been involved in claims or litigations relating to allegedly defective products. If such suits are brought against us in the future, our business, results of operations and financial condition may be adversely affected.

~~A significant portion of~~If our workforce iswill be represented by a labor union ~~and~~ we could incur additional costs or experience work stoppages as a result of the renegotiation of our labor contracts.

In November 2011, we were notified by the ~~Histadrut (~~ General Federation of Labor in ~~Israel)~~Israel, or the Histadrut, that more than one-third of our employees in Israel had decided to join the Histadrut and that they have established an employees’ union committee. ~~The union has made several demands that could result in~~In 2012, a significant ~~increase~~portion of our employees decided to resign their membership in the Histadrut, which then ceased to represent our ~~labor costs. We continue~~employees. If our employees decide to ~~be engaged in negotiations with~~re-join the ~~union and depending on the course of these negotiations,~~Histadrut, we could incur additional costs and/or experience work stoppages, which could adversely affect our business operations, including through a loss of revenue and strained relationships with customers.

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

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 North America. 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;

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diversion of management attention from running our existing business; and

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

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

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

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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

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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.

The uncertainty surrounding the continued ownership of our shares by our principal shareholder may result in a change in control and our operations and share price may be adversely affected.

Mr. Josef Maiman, through Merhav M.N.F. Ltd. and Integral International Inc., holds 24.1% of our shares and exercises a substantial influence over our management. Mr. Maiman is currently facing financial difficulties and should he divest all or a significant portion of his interest in us, it may result in a change in control and in our management and our operations could be adversely affected. As a result, we are currently investigating the possible sale of our company or substantially all of its assets. The uncertainty arising from this situation may negatively affect our operations as well as the market price for our shares.

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If we fail to maintain NASDAQ’s continued listing requirement of a minimum bid price of at least $1.00 per share for a period of 30 consecutive business days,, our shares may be delisted from the NASDAQ Capital Market.

Our ordinary shares are listed on the NASDAQ Capital Market under the symbol “ELTK.” To continue to be listed on NASDAQ, we need to satisfy a number of ~~conditions,~~requirements, including a minimum bid price for our ordinary shares of $1.00 per share for a period of 30 consecutive business days. If we fail to comply with such requirement, we would have a period of 180 calendar days to achieve compliance by meeting the applicable standard for a minimum of ten consecutive business days (and in some cases, NASDAQ may require a company to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days).days. If we are not deemed in compliance before the expiration of the 180 day compliance period, NASDAQ may afford us an additional 180 day compliance period, provided that on the 180th day of the first compliance period we have demonstrated that we meet all applicable standards for initial listing on the NASDAQ Capital Market (except the bid price requirement) based on our most recent public filings and market information.

Our ordinary shares have experienced significant market price and volume fluctuations in the past and for certain periods have traded below the $1.00 threshold requirement for continued trading. In ~~2011,~~2012, the price of our ordinary shares ranged from ~~$0.91~~$0.87 to ~~$1.85~~$1.69 and the closing price of our ordinary shares on December 31, ~~2011~~2012 was ~~$1.30~~$1.10 per share. If we fail to meet the minimum bid price requirement, our share may be delisted from the NASDAQ Capital Market. If we are delisted from NASDAQ, trading in our ordinary shares would be conducted on a market where an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of, our ordinary shares.

We do not expect to distribute dividends in the foreseeable future.

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 (as defined by 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, or otherwise upon the permission of the court. In the event cash dividends are declared, such dividends will be paid in NIS. The declaration of dividends is subject to the discretion of our board of directors and would depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors. You should not rely on an investment in our company if you require dividend income from your investment.

Risks Relating to Our Operations in Israel

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

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

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Since ~~the~~its establishment ~~of the State of Israel~~ in 1948, Israel ~~and its Arab neighbors have engaged~~has been involved in a number of armed ~~conflicts. A~~conflicts with 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.~~continued into 2013. In recent years, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups. Also, ~~during~~since 2011, riots and uprisings in several countries in the Middle East and neighboring regions, including Egypt and Syria, have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. To date, these matters have not had aany material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future. Ongoing violence between Israel and the Palestinians as well as tension between Israel and other countries in the Middle East may have a material adverse effect on our business, financial condition and results of operations.

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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.

~~Changes in the Israeli tax regime may adversely affect our results of operations.~~

~~In 2011, a special committee (the Trachtenberg Committee~~) was appointed by the Israeli government in order to find ways to reduce the high cost of living in Israel. The report of such committee was approved by the government on October 9, 2011. The committee's recommendations include, among other things, certain revisions to the Israeli tax regime, customs reductions and the implementation of regulations to increase competition in the Israeli market. The committee's recommendations regarding certain revisions to the Israeli tax regime were approved by the Israeli parliament on December 6, 2011 (see Item 5A “Operating and Financial Review and Prospects – Operating Results – Effective Corporate Tax Rate” and Item 9E – “The Offer and Listing – Taxation”). The implementation of such recommendations may have an adverse impact on our operations and financial results.

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

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

Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.

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

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

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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 and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her 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. Currently there is not a clear definition of the duty of fairness under Israeli law. However, a recent decision by a District Court provided that in addition to the duty to act in fairness towards the company, a controlling shareholder holds a direct duty of fairness towards the minority shareholders in a going-private merger transaction. Israeli corporate law has in recent years undergone and is currently undergoing extensive revision and there is relatively little case law available to assist in understanding the implications of these provisions that govern the rights and responsibilities of shareholders.

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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. We follow Israeli law and practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination process and quorum at shareholders’ meetings.

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~~the NASDAQ Stock Market Rules. We follow Israeli law and practice instead of ~~The~~the NASDAQ Stock Market Rules regarding the composition of the board of directors, director nomination process and quorum at shareholders’ meetings. As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice with regard to, among other things, compensation of officers and the requirement to 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). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission, or the SEC, each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.

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ITEM 4.

INFORMATION ON THE C OMCOMPANY~~PANY~~

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 that 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 +972-3-9395025. Our website is www.eltekglobal.com. The information on our website is not incorporated by reference into this annual report.

We manufacture and supply technologically advanced, custom made 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 North America. 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~~South East Asia when customers require high volume production runs, although such activity was not significant in ~~2011.~~recent years.

In June 2002, we acquired our majority-owned European manufacturing and marketing subsidiary, ~~Kubatronik Leiterplatten GmbH, or~~ Kubatronik, located in Geislingen, Germany. In July 2007, we established Eltek USA Inc., a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing in the North American market. In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and marketing activities for certain European customers.

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During the three years ended December 31, ~~2011,~~2012, we invested approximately ~~$2.2~~$5.2 million in new equipment and the expansion of our facilities and ~~infrastructure and for the purchase~~infrastructure. Subject to availability of ~~equipment. In 2012,~~financial resources, we expect to invest approximately ~~$2.0~~$2.2 million in capital expenditures in 2013, primarily for our operations in Israel and Germany, mainly in manufacturing equipment to expand our manufacturing capacity and to upgrade our technological capabilities. We intend to finance these expenditures with suppliers’ credit, cash flow from operations and bank loans; however, external financing may not be available, or, if available, may not be on terms favorable to us. If adequate funds are not available to us, our business, and results of operations and financial condition may be adversely affected.

B. Business Overview

Industry Overview

PCBs are constructed from a variety of base 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~~Photolithographic 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 30 layers, although some PCBs are composed of 42 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 30 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.

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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 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 64 to 106 mils.

Manufacturing and Engineering Processes

In the PCB industry, significant investments in equipment are necessary to maintain technological competitiveness. During the three years ended December 31, ~~2011,~~2012, we invested approximately ~~$0.9~~$4.7 million in machinery and equipment for that purpose.

Manufacturing Capabilities. We have the capability to manufacture PCBs with layer counts in excess of 36 layers, flex-rigid boards, blind and buried vias and designs using materials as thin as 1 mil. 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 30 units of simple type PCBs within four to five working days, and a few hundred units within ten working days and are capable of producing such number of boards within five working days when production line scheduling permits. During 2007, we applied new technologies to enable us to manufacture “via-in-pad” multilayer PCBs, microvia filling, through hole via filling and copper overplating. In July 2012, we purchased a new Orbotech Paragon™ Laser Direct Imaging, or LDI, system for increasing capacity and shortening production time and improving product time-to-market. We acquired and installed a new Hakuto Cut-Sheet-Laminator and the latest Chemplate Indubond model, both purchased during 2012. These ~~technologies enable~~new pieces of equipment improve our technological capabilities. These machines improve the outer layer accuracy and the registration between the inner-layers, enabling us to offer our customers solutions and participate in bids in which we were not able to participate in the past.

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We ~~are continuing~~continue to develop ~~this technology~~advanced registration technologies and to improve the copper etching accuracy to comply with new specifications and requirements of our customers and potential customers. In the year ended December 31, ~~2011,~~2012, approximately ~~21%~~15% of our revenues from manufactured products were ~~ordered~~for orders for delivery in less than 20 working days, of which approximately 4%3% were ~~ordered~~for orders for delivery within six to ten working days and approximately 5%4% in five or less working days.

Computer Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD system developed by Frontline PCB Solutions Ltd., an Israeli-based company, ~~jointly owned by Orbotech Ltd. and Valor Ltd.,~~ and can receive CAD data by electronic data transmission. Our CAD workstations perform design rule checks on transmitted designs, incorporate any customer-specific design modifications and perform manufacturability enhancements that increase PCB quality.

Advanced Finishing Capabilities for Dense Packaging Designs. We provide a wide assortment of alternative surface finishes, including hot air solder leveling, electroless gold over nickel, ~~tin~~ immersion silver, outsource nickel/palladium/gold and immersion ~~and Entek, which is produced by Enthone-Omi Inc.,~~tin, 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, mechanical and laser drilling equipment and clean room environments (ISO-7) to produce technologically advanced products.

Quality, Environmental and Safety Standards. Our quality management system has been ISO 9001:2008 certified since July 2002 (and prior to such date, was ISO 9002 certified from January 1995). Such 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-55110G and MIL-P-50884E) for our products. Since 1976, our rigid glass epoxy (FR4 and FR5) and flex-rigid boards have been UL 94V-0 certified by Underwriters Laboratories Inc. (a standards organization that offers product safety testing and certification of product safety). Our environmental management system has been ISO 14001:2004 certified since 2005 (and prior to such date was ISO 14001 certified from 2003). We are OHSAS 18001:2007 certified for occupation health and safety management systems since December 2007. In November 2009, we became certified to the AS 9100B quality management standard for the aerospace ~~industry.~~industry and in August 2012 we were upgraded to AS 9100C.

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Sales, Customers and Marketing

Sales. In the years ended December 31, 2012, 2011 ~~2010~~ and ~~2009,~~2010, the primary industries for which we produced PCBs were defense and aerospace equipment ~~(52%~~(48%, ~~43%~~52% and ~~50%~~43% of production, respectively), medical equipment ~~(19%~~(24%, ~~23%~~19% and ~~20%~~23% of production, respectively), industrial equipment ~~(19%~~(18%, ~~21%~~19% and ~~20%~~21% of production, respectively) and telecom and networking equipment ~~(4%~~(2%, 5%4% and 4%5% of production, respectively). To a lesser degree we produce PCBs for distributors, contract electronic manufacturers and others ~~(6%~~(8%, 8%6% and 6%8% of production, respectively).

Customers. During the year ended December 31, ~~2011,~~2012, we provided PCBs to approximately ~~150~~148 customers in Israel and approximately ~~250~~235 customers outside of Israel. Our customers outside of Israel are located primarily in North America, ~~Italy,~~Germany, the Netherlands, ~~Germany, Scandinavia, India,~~ China, Switzerland, Italy and ~~Switzerland.~~India. Sales to non-Israeli customers were $23.7 (51.9% of revenues) for the year ended December 31, 2012, $23.9 million (50.9% of revenues) for the year ended December 31, 2011 and $20.4 million (54.2% of revenues) for the year ended December 31, ~~2010 and $19.4 million (53.2% of revenues) for the year ended December 31, 2009.~~2010.

In the years ended December 31, 2012, 2011 ~~2010~~ and ~~2009~~2010 our ten largest customers accounted for ~~55.3%~~59.7%, ~~49.7%~~55.3% and ~~54.0%~~49.7% of our revenues, respectively, of which one customer accounted for ~~14.9%~~17.2%, ~~13.7%~~14.9% and ~~13.3%~~13.7% of our total revenues, respectively. We expect that a significant portion of our future revenues will continue to be dependent on a small number of customers.

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Marketing. We market and sell our products primarily through our direct sales personnel, sales representatives and through PCB trading and manufacturing companies. We currently have 13eleven persons involved in sales, of which ~~eight (8)~~seven persons are in Israel, two ~~(2)~~ persons are in the United States employed by our U.S. subsidiary, Eltek USA Inc.~~, one (1) person is employed by our European subsidiary, Eltek Europe GmbH~~ and two ~~(2)~~ persons are employed by our German subsidiary, Kubatronik. We also have sales representatives in Germany and Sweden. In the Netherlands and Italy, PCB trading and manufacturing companies act as distributors of our products. In North America we market and sell our products through Eltek USA Inc.~~, our U.S. subsidiary,~~ as well as through ~~eight~~two independent local sales representatives and a PCB manufacturing company. In India we market our products through a local sales representative. We maintain technical support services for our customers world-wide. We also maintain customer service support centers that handle all logistical matters relating to the delivery of our products and receive and handle complaints relating to delivered products. Our customer service personnel currently consist of 13fifteen persons, of which seven ~~(7)~~ persons are in Israel, one ~~(1)~~ person is ~~in the United States~~ employed by our U.S. subsidiary, Eltek USA Inc. and ~~five (5)~~seven persons are employed by our German subsidiary, Kubatronik.

Our strategy is to focus on the high end of the PCB market, mainly in flex-rigid PCBs, in which margins are better. We are currently focusing our marketing efforts on the defense and medical industries. To penetrate the U.S. defense market, we applied for ~~International Traffic in Arms Regulations, or~~ ITAR registration from the U.S. Department of State, Bureau of Political-Military Affairs, which we received in January 2009. ITAR regulates the manufacture, export and transfer of defense articles, information and services. ITAR is a set of U.S. government regulations that controls the export and import of certain defense-related articles and services. The regulations restrict sensitive information and technologies only to be shared with U.S. persons, unless special approval is acquired. To qualify for ITAR registration, we met strict requirements for corporate structure, security, record keeping and procedures to allow us to sell our PCBs for use in U.S. defense products. In November 2009, we became certified to the AS 9100B quality management standard for the avionic industry in order to strengthen our position in the avionic and aerospace market in North America and Europe. In June 2012, we expanded our sales network with the appointment of Endicott Interconnect Technologies, Inc. as a sales partner in the United States. We believe that Endicott Interconnect Technologies, one of the world's leading providers of full turnkey services for printed circuit board and integrated circuits assembly, will strengthen our presence in the U.S. market.

We have ongoing programs to upgrade our processes by implementing high-quality standards, employee training and special training activities for clients. Marketing efforts include recruiting independent sales representatives in various geographic areas, the distribution of promotional materials, seminars for engineers, the supply of technical information to business publications and participation in trade shows and industry conferences.

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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, North America and ~~the Far East.~~South East Asia. Some of the materials are purchased directly from the manufacturer, while others are purchased from local distributors.

~~During 2011,~~Other than the price of gold, there were no significant ~~increase~~price increases for our principal raw materials in ~~oil and energy costs and~~2012. We expect some ~~commodity prices (such as gold and glass fibers) put pressure on our~~ suppliers will seek to increase their prices in 2013, especially for ~~most of our principal raw materials. We expect prices to further increase in 2012.~~chemicals. During recent years, price negotiations with our suppliers resulted in lower price increases than requested by our suppliers; however we may not continue to be successful in such negotiations in the future. We have also faced pressure to raise our prices for our products to compensate for these price increases and although we have managed to date to maintain our sales prices with moderate price increases, we may not be able to so in the future. Future price changes for 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. The global PCB industry 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. ~~(which acquired the PCB segment of Melta Ltd. in late 2010)~~ and ~~also compete with~~ major PCB exporters, mainly from ~~the Far~~South East Asia, North America and Europe. In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), ~~Printca (Denmark),~~ Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In the North American market we mainly compete with ~~DDI Corp, Endicott Interconnect Technologies~~Viasystems North America, Inc (previously known as DDi Corp), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and TTM Technologies Inc. Many of these competitors have significantly greater financial, technical and marketing resources than us. Although capital requirements are a significant barrier to entry for manufacturing complex PCBs, the basic interconnect technology is generally not protected by patents or copyrights. Our current competition in the rigid PCB segment is mainly from PCB manufacturers in the Far-East (mainly in China), which have substantially lower production costs than us. Continued competitive pressures could cause us to lose market share and reduce prices.

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Environmental Matters

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

PCB manufacturing requires the use of metals and chemicals classified as hazardous substances. Water used in the manufacturing process must be treated to remove metal particles and other contaminates before it can be discharged into the local sewer systems. 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. 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. Over the years, we have undertaken various actions to reduce the use of water in our manufacturing facilities. From 2008 through 2011, we invested in improving our effluent wastewater treatment system to lower the amounts of inorganic salts and copper concentration in the discharged water. All our actions were coordinated with the Israeli Ministry of Environment and in August 2008, we received a waiver for a period of two years that ~~enables~~enabled us to increase the amount of minerals disposed of by ~~wastewater, and in July 2010, the~~wastewater. The waiver was subsequently extended until August ~~2012.~~2014. During ~~2012,~~2013, we expect to further invest in reducing the amount of metal concentrations in our wastewater to the permitted levels. A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment systems.

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For information regarding environmental claims, see Item 8A. “Financial Information – Consolidated and Other Financial Information – Legal Proceedings.”

Intellectual Property Rights

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

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C. Organizational Structure

In May 2002, we ~~established En-Eltek Netherlands 2002 B.V., a wholly-owned subsidiary organized in the Netherlands, for the purpose of our acquisition of~~acquired a 76% interest in Kubatronik. Kubatronik is a PCB manufacturer that specializes in short run and prototype boards, including multi-layer, flex-rigid and HDI boards. Its customers include companies engaged in the production of industrial equipment, defense and aerospace equipment, telecom and networking equipment, and computer and data storage equipment as well as contract electronic manufacturers. ~~In 2011, we transferred our interest in Kubatronik to our company so that the ownership interest will be held directly by us.~~ Mr. Alois Kubat, Kubatronik’s founder, holds the remaining ~~24%~~21% 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. The price for Mr. Kubat’s remaining holdings in Kubatronik under the put option is Euro 552,000 ($715,000). The price for Mr. Kubat’s remaining holdings in Kubatronik under the call option is Euro 582,000 ($754,000). In ~~January~~May 2012, Mr. Kubat ~~sent us a notice that he is exercising~~exercised his option with respect to 3% of his remaining shares of Kubatronik for approximately Euro 69,000 ~~($89,000)~~and reduced his ownership percentage from 24% to 21%. The price for Mr. Kubat’s remaining holdings in Kubatronik under the put option is Euro 483,000, while the price for such ~~shares.~~holdings under the call option is Euro 513,000.

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

In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and marketing activities for certain European customers.

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, ~~2011,~~2012, we incurred ~~$847,000~~$775,000 of rent expenses 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, owned by the wife of the former owner of Kubatronik. The lease for the facilities expires on June 30, ~~2013.~~2014. In the year ended December 31, ~~2011,~~2012, Kubatronik paid an aggregate of approximately Euro ~~78,000~~87,000 ($~~108,000)~~114,000) in rent for these premises.

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~~We also lease~~Our U.S. subsidiary, Eltek USA Inc., leases approximately 950 square feet office space in New ~~Hampshire for our U.S. subsidiary.~~Hampshire. The lease for the facilities will expire on November 30, 2013. In the year ended December 31, ~~2011,~~2012, we paid ~~an aggregate of $24,000~~$27,000 in rent for these premises and ~~from 2012 we are expected~~expect to pay ~~$26,000 per year.~~the same amount on a pro-rated basis in 2013.

Leased Equipment

We lease manufacturing equipment under an ~~operating lease~~ agreement ~~pursuant to which as of December 31, 2011 we were obligated~~that obligates us to pay a total ~~amount~~ of ~~$420,000~~$1.3 million through ~~March 2015.~~June 2017. Our monthly lease expense under this agreement is ~~$7,000.~~$33,000 in 2013.

Kubatronik leases manufacturing equipment under six ~~operating~~ lease agreements, which as of December 31, ~~2011~~2012 require usKubatronik to pay a total of Euro ~~194,606 ($251,500)~~33,000 through ~~December 2014. Our~~May 2015. Kubatronik’s monthly lease expense under these agreements is approximately Euro ~~9,185~~3,835 ($~~11,870)~~5,000).

ITEM 4A. ~~UNRESOLV~~ED UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

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

Overview

We were incorporated under the laws of the State of Israel in 1970. Since our initial public offering in January 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol: ELTK) and are presently listed on the NASDAQ Capital Market. We have production facilities in Israel and Germany and marketing subsidiaries in Germany and the United States.

Mr. Josef Maiman, through Merhav M.N.F. Ltd. and Integral International Inc., holds 24.1% of our shares and exercises a substantial influence over our management. Mr. Maiman is currently facing financial difficulties and should he divest all or a significant portion of his interest in us, it may result in a change in control and in our management, and our operations could be adversely affected. As a result, we are currently investigating the possible sale of our company or substantially all of its assets.

We develop, manufacture, market and sell PCBs, including high density interconnect (HDI) multi-layered and flex-rigid boards for the defense and aerospace, medical technology, telecommunications and electronics 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.

Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars in accordance with U.S. GAAP. Our functional currency is the NIS. The consolidated financial statements appearing in this annual report are translated into U.S. dollars at the representative rate of exchange under the current rate method. Under such method, the income statement and cash flows statement items for each year (or period) stated in this report are translated into U.S. dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year (or period) are translated using the exchange rate as of December 31 of each year (as published by the Bank of Israel), except for equity accounts, which are translated using the rates in effect at the date of the transactions. All resulting exchange differences that do not affect our earnings are reported in the accumulated other comprehensive income as a separate component of shareholders’ equity.

Our business is subject to the effects of general global economic conditions. As a result of our loss in prior years, we were not in compliance with the covenants of one of our banks as of December 31, 2011. However, in February 2012, such bank granted us a waiver until the release of our audited financial statements for December 31, 2012 (no later than April 30, 2013). Our failure to reach compliance with the bank covenants, or negotiate an agreement with new covenant terms, or obtain additional financing, if required, may adversely affect our business, results of operations and financial position. Financial covenants in respect of our credit facilities and long-term debt with another bank require us to maintain the higher of shareholders’ equity, excluding certain intangible assets and prepaid expenses (except insurance premiums), of NIS 10.0 million ($2.6 million) or 11% of our total assets (on a non-consolidated basis), and as of December 31, 2011 we were in compliance with such covenants. Our ability to be in compliance is dependent on factors that are out of our control, such as the stability of the U.S. dollar/NIS exchange rate, the demand for our products, including the impact of changes in customer buying, conditions in the PCB industry, our manufacturing process and other factors detailed in Item 3D “Key Information - Risk Factors.”

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Critical Accounting Policies

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

The significant accounting policies described in Note 1 of our consolidated financial statements, which we believe to be most important to fully understand and evaluate our financial condition and results of operation under U.S. GAAP, are discussed below.

~~Revenue Recognition~~

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

Allowance for doubtful accounts ~~receivable~~

receivable. The allowance for doubtful accounts receivable is calculated on the basis of specific identification of customer balances. The allowance is determined based on management’s estimate of the aged receivable balance considered uncollectible, based on historical experience, aging of the receivable and information available about specific customers, including their financial condition and the volume of their operations.

Fixed ~~assets~~

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

Impairment in Value of ~~Assets~~

Assets. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset or asset group to the undiscounted future net cash flows expected to be generated by the asset or the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

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~~Goodwill~~

Goodwill. Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment at least annually. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value. An indication of goodwill impairment exists if the fair value of the reporting unit is less than its carrying value, and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

Following an evaluation performed for our investment in Kubatronik, we ~~concluded~~determined that ~~as at December 31, 2011,~~the value of our investment in Kubatronik ~~exceeded step one~~decreased and that as a result, goodwill in the amount of $481,000 relating to our investment in Kubatronik had been impaired. As a result, for the year ended December 31, 2012, we recorded a goodwill impairment ~~test, as the evaluated fair value~~loss of ~~Kubatronik exceeded its carrying value by 4.3%. The amount~~$481,000. We did not record any impairment of goodwill ~~allocated to Kubatronik is $518,000 at~~for the years ended December 31, ~~2011.~~ 2011 and 2010.

The fair value of an asset is estimated using estimated future cash flows of the asset discounted by a rate commensurate with the risk involved with such asset while incorporating marketplace assumptions. The estimate of future cash flows requires management to make certain assumptions and to apply judgment, including forecasting future sales, PCB market prices, raw material consumption, labor and other manufacturing expenses, and the useful lives of the assets. We exercise our best judgment based on the most current facts and circumstances surrounding our business when applying these impairment rules. The estimates used in these calculations are based upon our historical experience, knowledge of the PCB industry and by incorporating third-party data. Nevertheless, changes in the assumptions used could have an impact on our assessment of recoverability. For example, changing the terminal growth rate from 2% to 1% will result in a net change of Euro 23,000 in the fair value of Kubatronik (and Euro 18,000 for our 79% holding). Changing the discount rate from 15.31% to 17% will result in a net change of Euro 60,000 in the fair value of Kubatronik (and Euro ~~46,000~~47,000 for our ~~76% holding). Changing the discount rate from 13.9% to 15% will result in a net change of Euro 103,000 in the fair value of Kubatronik (and Euro 78,000 for our 76%~~79% holding). Changing the short term revenue growth by 1% each year until ~~2016~~2017 will result in a net change of Euro ~~97,000~~199,000 in the fair value of Kubatronik (and Euro ~~74,000~~157,000 for our ~~76%~~79% holding).

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Use of ~~estimates~~

estimates. The preparation of the consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowance for doubtful accounts, valuation of derivatives, deferred tax assets, inventory, goodwill, put/call option, income tax uncertainties and other contingencies.

Commitments and ~~contingencies~~

contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of environmental remediation costs from third parties that are probable of realization are separately recorded as assets, and are not offset against the related environmental liability.

Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of expected future expenditures for environment remediation obligations are not discounted to their present value.

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Results of Operations

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

	Year Ended December 31,									Year Ended December 31,
	2011			2010			2009			2012			2011			2010
Revenues		100	%		100.0	%		100.0	%		100	%		100	%		100.0	%
Cost of revenues		(81.4	)		(87.1	)		(84.7	)		(82.9	)		(81.4	)		(87.1	)
Gross profit		18.6			12.9			15.3			17.1			18.6			12.9
Selling, general and administrative expenses		(13.1	)		(16.1	)		(16.5	)		(13.2	)		(13.1	)		(16.1	)
Impairment loss on goodwill											(1	)		-			-
Operating profit (loss)		5.5			(3.2	)		(1.2	)		2.8			5.5			(3.2	)
Financial expenses, net		(1.6	)		(1.6	)		(1.2	)		(1.2	)		(1.6	)		(1.6	)
Other income, net		*			*			*			*			*			*
Profit (loss) before income tax expense and non-controlling interest		3.9			(4.8	)		(2.4	)		1.6			3.9			(4.8	)
Income tax expense		(0.1	)		(0.1	)		(0.1	)		(0.1	)		(0.1	)		(0.1	)
Net profit (loss)		3.8			(4.9	)		(2.5	)		1.5			3.8			(4.9	)
Net profit (loss) attributable to non-controlling interest		0.1			0.3			0.1			*			0.1			0.3
Net loss attributed to shareholders		3.9			(4.6	)		(2.4	)
Net profit (loss) attributed to shareholders											1.5			3.9			(4.6	)

___________________

* Less than 0.1%

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Revenues. Revenues decreased by 2.5% to $45.6 million for the year ended December 31, 2012 from $46.8 million for the year ended December 31, 2011. The decrease in revenues is primarily attributable to a temporary production line problem, which reduced our revenues in the third quarter of 2012.

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Cost of Revenues. Cost of revenues decreased by 0.7% to $37.8 million for the year ended December 31, 2012 from $38.1 million for the year ended December 31, 2011. The decrease in cost of revenues is primarily attributable to the decrease in revenues. Cost of revenues as a percentage of revenues increased to 82.9% for the year ended December 31, 2012 from 81.4% for the year ended December 31, 2011. The increase in cost of revenues as a percentage of revenues is primarily attributable to the decrease in revenues in 2012, without a corresponding reduction in the fixed portion of our cost of sales.

Gross Profit. Gross profit decreased by 10.5% to $7.8 million for the year ended December 31, 2012 from $8.7 million for the year ended December 31, 2011. The decrease in gross profit is primarily due to the decrease in revenues. Gross profit as a percentage of revenues decreased to 17.1% for the year ended December 31, 2012 from 18.6% for the year ended December 31, 2011. The decrease in gross profit as a percentage of revenues is primarily attributable to decrease in revenues in 2012, without corresponding reduction in the fixed portion of our cost of sales

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by 1.9% to $6 million for the year ended December 31, 2012 from $6.2 million for the year ended December 31, 2011. The decrease in selling, general and administrative expenses is mainly attributable to commissions paid to sales representatives.

Impairment loss on goodwill. We recorded a goodwill impairment loss of $481,000 in 2012 following our annual impairment test of goodwill, in which we determined that the value of our investment in Kubatronik had decreased by that amount. We did not record any impairment of goodwill for the year ended December 31, 2011.

Operating Profit (Loss)). As a result of the foregoing, we recorded operating profit of $1.3 million for the year ended December 31, 2012 compared to an operating profit of $2.6 million for the year ended December 31, 2011.

Financial Expenses, Net. Financial expenses, net, decreased by 26.6% to $543,000 for the year ended December 31, 2012 from $740,000 for the year ended December 31, 2011. Our financial expenses in 2012 were primarily attributable to interest paid on short-term and long-term debt, the impact of the NIS exchange rate on outstanding U.S. dollar and Euro denominated balances of our creditors and debtors, gains and losses on hedging transactions and changes in the fair value of the put/call option held by the owner of 21% interest in Kubatronik. The decrease in financial expenses compared to 2011 is primarily attributable to a decrease in interest expenses, mainly as a result of loan repayments to our banks.

Other Income, Net. We had other income, net of $2,000 for the year ended December 31, 2012, compared with other income, net of $12,000 for the year ended December 31, 2011, both of which are attributable to gains recorded on the disposal of fixed assets.

Income Tax Expense. During the years ended December 31, 2012 and 2011, we recorded income tax expenses of $52,000 and $31,000, respectively, attributable to our subsidiaries in the United States and Germany. During the years ended December 31, 2012 and 2011, we did not record a deferred tax asset and related tax benefit with respect to our net operating losses generated in Israel due to uncertainty about our ability to utilize such losses in the foreseeable future. Such uncertainty is primarily due to the global economic climate, the fluctuations of the PCB industry, possible fluctuations of the NIS against the U.S. dollar, which may have an adverse impact on our financial results and our history of losses. For the years ended December 31, 2012 and 2011, we did not record a deferred tax asset and related tax benefit with respect to the net operating losses of Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.

Non-controlling interest. Non-controlling interest reflects the $6,000 other shareholder’s proportionate share in Kubatronik’s net profit for the year ended December 31, 2012, as compared to the $31,000 minority share in Kubatronik’s net loss for the year ended December 31, 2011.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010~~(Oz)~~

Revenues. Revenues increased by 24.8% to $46.8 million for the year ended December 31, 2011 from $37.5 million for the year ended December 31, 2010. The increase in revenues is primarily attributable to an improvement in our manufacturing process, which enabled us to translate the increased demand into increased revenues and reduced manufacturing capacity in the local market.

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Cost of Revenues. Cost of revenues increased by 16.5% to $38.1 million for the year ended December 31, 2011 from $32.7 million for the year ended December 31, 2010. The increase in cost of revenues is primarily attributable to the increase in revenues. Cost of revenues as a percentage of revenues declined to 81.4% for the year ended December 31, 2011 from 87.1% for the year ended December 31, 2010. The reduction in cost of revenues as a percentage of revenues is primarily attributable to the increase in revenues in 2011, while our expenses increased at a lesser rate than the increase in our revenues.

Gross Profit. Gross profit increased by 80.9% to $8.7 million for the year ended December 31, 2011 from $4.8 million for the year ended December 31, 2010. The increase in gross profit is primarily due to the increase in revenues. Gross profit as a percentage of revenues increased to 18.6% for the year ended December 31, 2011 from 12.9% for the year ended December 31, 2010. The increase in gross profit as a percentage of revenues is primarily attributable to the reduction in cost of revenues as a percentage of revenues, since our expenses increased at a lesser rate than the increase in our revenues.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 2% to $6.2 million for the year ended December 31, 2011 from $6.0 million for the year ended December 31, 2010.

Operating Profit (Loss)). As a result of the foregoing, we recorded operating profit of $2.6 million for the year ended December 31, 2011 compared to an operating loss of $1.2 million for the year ended December 31, 2010.

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Financial Expenses, Net. Financial expenses, net, increased by 21.5% to $740,000 for the year ended December 31, 2011 from $609,000 for the year ended December 31, 2010. Our financial expenses in 2011 were primarily attributable to interest paid on short-term and long-term debt and the impact of the NIS exchange rate on outstanding U.S. dollar and Euro denominated balances of our creditors and debtors, as well as gains and losses on hedging transactions. The increase in financial expenses compared to 2010 is primarily attributable to losses on hedging transactions.

Other Income, Net. We had other income, net of $12,000 for the year ended December 31, 2011, compared with other income, net of $2,000 for the year ended December 31, 2010, both of which are attributable to gains recorded on the disposal of fixed assets.

Income Tax Expense. During the years ended December 31, 2011 and 2010, we recorded income tax expenses of $31,000 and $19,000, respectively, attributable to our subsidiaries in the United States and Germany. During the years ended December 31, 2011 and 2010, we did not record a net deferred tax asset and related tax benefit with respect to our net operating losses generated in Israel due to uncertainty about our ability to utilize such losses in the foreseeable future. Such uncertainty is primarily due to the global economic climate, the fluctuations of the PCB industry, possible fluctuations of the NIS against the U.S. dollar, which may have an adverse impact on our financial results and our history of losses. For the years ended December 31, 2011 and 2010, we did not record a net deferred tax asset and related tax benefit with respect to the net operating losses of Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.

Non-controlling interest. Non-controlling interest reflects the $31,000 ~~minority~~other shareholders propionate share in Kubatronik’s net loss for the year ended December 31, 2011, as compared to the $113,000 minority share in Kubatronik’s net loss for the year ended December 31, 2010.

~~Year Ended December 31, 2010 Compared with Year Ended December 31, 2009~~

~~Revenues.~~ Revenues increased by 3.0% to $37.5 million for the year ended December 31, 2010 from $36.4 million for the year ended December 31, 2009. The increase in revenues is primarily attributable to the recovery of the global PCB markets.

~~Cost of Revenues~~. Cost of revenues increased by 5.8% to $32.7 million for the year ended December 31, 2010 from $30.9 million for the year ended December 31, 2009. The increase in cost of revenues is primarily attributable to the increase in revenues and the appreciation of the NIS against the U.S. dollar in 2010, which increased the U.S. dollar value of our NIS denominated expenses. Cost of revenues as a percentage of revenues increased by 2.4% to 87.1% for the year ended December 31, 2010 from 84.7% for the year ended December 31, 2009. The increase in cost of revenues as a percentage of revenues is primarily attributable to the appreciation of the NIS against the U.S. dollar in 2010, as a result of which the U.S. dollar value of our NIS denominated costs increased.

~~Gross Profit.~~ Gross profit decreased by 14.3% to $4.8 million for the year ended December 31, 2010 from $5.6 million for the year ended December 31, 2009. The decrease in gross profit is primarily due to the increase in cost of revenues. Gross profit as a percentage of revenues decreased to 12.9% for the year ended December 31, 2010 from 15.3% for the year ended December 31, 2009. The decrease in gross profit as a percentage of revenues is primarily attributable to depreciation of the U.S. dollar against the NIS in 2010, which increased the U.S. dollar value of our NIS denominated expenses.

~~Research and Development (Expenses) Income, Net.~~ ~~We generally do not engage in significant research and development efforts and did not have any research and development expenses or income in 2010 and 2009.~~

~~Selling, General and Administrative Expenses.~~ ~~Selling, general and administrative expenses remained constant at approximately $6.0 million for the years ended December 31, 2010 and 2009.~~

~~Operating Loss (Profit). As a result of the foregoing, our operating loss was $1.2 million for the year ended December 31, 2010 compared to an operating loss of $456,000 for the year ended December 31, 2009.~~

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~~Financial Expenses, Net.~~ Financial expenses, net increased to $609,000 for the year ended December 31, 2010 from $424,000 for the year ended December 31, 2009. These financial expenses were primarily attributable to interest paid on short-term and long-term debt and the impact of the NIS exchange rate on outstanding U.S. dollar and Euro denominated balances of our creditors and debtors, as well as gains or losses on hedging transactions. The increase in financial expenses is primarily attributable to the impact of the NIS exchange rate on outstanding U.S. dollar and Euro denominated balances of our creditors and debtors.

~~Other Income, Net~~. We had other income, net of $2,000 for the year ended December 31, 2010, compared with other income, net of $4,000 for the year ended December 31, 2009, both of which are attributable to gains recorded on the disposal of fixed assets.

~~Income Tax Expense~~. During the years ended December 31, 2010 and 2009, we recorded income tax expenses of $19,000 and $34,000, respectively, attributable to our subsidiaries in the United States and Germany. During the years ended December 31, 2010 and 2009, we did not record a net deferred tax asset and related tax benefit with respect to our net operating losses generated in Israel due to uncertainty about our ability to utilize such losses in the foreseeable future. Such uncertainty is primarily due to continued losses resulting from fluctuations of the NIS against the U.S. dollar, which may have an adverse impact on our financial results, the global economic climate, the fluctuations of the PCB industry and our history of losses. For the years ended December 31, 2010 and 2009, we did not record a net deferred tax asset and related tax benefit with respect to the net operating losses of Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.

~~Non-controlling interest~~. Non-controlling interest reflects the $113,000 minority share in Kubatronik’s net loss for the year ended December 31, 2010, as compared to the $30,000 minority share in Kubatronik’s net loss for the year ended December 31, 2009.

Impact of Currency Fluctuations and Inflation

Our revenues and expenses are denominated in the NIS, U.S. dollar and Euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange between NIS and ~~non-NIS~~other currencies may affect our operating results and financial condition. In addition, the NIS value of our U.S. dollar or Euro denominated revenues are negatively impacted by the depreciation of the U.S. dollar and the Euro against the NIS. The average exchange rate for the NIS against the U.S. dollar was 7.8% higher in 2012 than 2011 and the average exchange rate for the NIS against the Euro was 0.5% lower in 2012 than 2011, and in total, these changes had a positive impact on our operating results in 2012. The average exchange rate for the NIS against the U.S. dollar was 4.1% lower in 2011 than 2010 and the average exchange rate for the NIS against the Euro was 0.6% higher in 2011 than 2010, which had a negative impact on our operating results in 2011. The average exchange rate for the NIS against the U.S. dollar was 4.9% lower in 2010 than 2009 and the average exchange rate for the NIS against the Euro was 9.5% lower in 2010 than 2009, which had a negative impact on our operating results in 2010.

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The following table sets forth, for the periods indicated, (i) depreciation or appreciation of the NIS against the most important currencies for our business, the U.S. dollar and Euro, between December 31 each year and the year before, and (ii) inflation as reflected in changes in the Israeli consumer price ~~index.~~index, or the CPI.

	Year Ended December 31,															Year Ended December 31,
	2011			2010			2009			2008			2007			2012			2011			2010			2009			2008
U.S. dollar		7.7	%		(6.0	)%		(0.7	)%		(1.1	)%		(9.0	)%		(2.3	)%		7.7	%		(6.0	)%		(0.7	)%		(1.1	)%
Euro		4.2	%		(12.9	)%		2.7	%		(6.4	)%		1.7	%		(0.4	)%		4.2	%		(12.9	)%		2.7	%		(6.4	)%
Israeli consumer price index		2.2	%		2.7	%		3.9	%		3.8	%		3.4	%
Israeli CPI																	1.6	%		2.2	%		2.7	%		3.9	%		3.8	%

~~Hagay Ackerman~~Galit Odded joined us in ~~November 2011~~December 2012 as vice president, human resources. Prior to joining us, from 1999 to 2012, Ms. Odded held training and organizational development positions in the following companies: Intel Corp (from 1999 to 2006); Eltek Ltd. (from February ~~2004~~2007 to ~~April 2011, Mr. Ackerman was human resources manager~~July 2010); and ~~management member at Neviot – Teva Hagalil Ltd, a leading manufacturer~~Siemens (from September 2010 to October 2012), where she gained experience in training, employee and ~~distributor of natural mineral water in Israel. From April 2003 to February 2004, Mr. Ackermann served as human resources manager at Solel Solar Systems Ltd,~~talent development, organizational change, recruiting, team building and ~~from November 2001 to December 2002 he served as hi-tech department placement manager at Keinan-Sheffy Group. Mr. Ackerman~~employee integration. Ms. Odded holds a ~~B.A.~~B.Sc degree in ~~Psychology & Communication~~Biology and Nutrition Science from ~~Haifa~~the Hebrew University of Jerusalem and an ~~M.B.A.~~M.A degree ~~majoring~~ in ~~human resources management & organizational development consulting,~~Labor Studies from ~~Ono Academic College.~~the Tel Aviv University, graduated with honors.

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Avi Gal was appointed as our vice president, 5S and chief information officer in December 2009. Mr. Gal joined us in August 1986 as an Industrial engineer in shop floor control department. In 1988, Mr. Gal established our IT department and led the adaptation of a generic ERP system to the PCB sector. Between 1994 and 2005, Mr. Gal managed his own business, mainly in developing and implementing an ERP System for maintenance, repair and overhaul for the aviation sector. In 2005, Mr. Gal returned to our company as chief information officer. Mr. Gal holds a B.Sc. degree in Management and Industrial Engineering from the Technion - Israel Institute of Technology.

Eva Zilberleib was appointed as our vice president, quality assurance and product marketing director in December 2009. Ms. Zilberleib joined us in January 1979 and during her over 30 years of employment with our company, she has served as final inspection and quality assurance lab manager and technical customer support manager. MsMs. Zilberleib holds B. Sc. degree in Chemistry from the Hebrew University of Jerusalem.

James Barry joined us in September 2008 as the president of Eltek USA Inc. Prior to that and from May 2003, Mr. Barry served as a consultant to us in a sales, marketing and applications engineering role. Mr. Barry has over 30 ~~years~~years’ experience within the PCB industry. Mr. Barry has held management positions within engineering, sales and operations for some of the top PCB producers. Mr. Barry attended Northern Essex Community College.

Axel Herrmann joined us in March 2006 as commercial manager of Kubatronik, our German subsidiary and was appointed as general manager, Eltek Europe in August 2009. From July 2003 until February 2006, Mr. Herrmann served as commercial manager for Heinrich Heiland GmbH, a supplier for the automotive industry. From October 2000 until June 2003, Mr. Herrmann worked as commercial manager for Helukabel GmbH, a company that produces and sells cables and wires. From ~~July1989~~July 1989 until September 2000, Mr. Herrmann worked at Pfisterer, a producer of electrical devices for power plants, initially as a department head in bookkeeping, advanced to commercial manager and his last position was managing director. Mr. Herrmann holds a B.A. degree in economics from Hohenheim University in Stuttgart, Germany.

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

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B. Compensation

The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December 31, ~~2011.~~2012.

Salaries, fees,
commissions and bonuses

Pension, retirement
and similar benefits

All directors and executive officers as a group (then consisting of 19 persons)
$ 2,323,000 (1) $ 204,000 (2)

		Salaries, fees, commissions and bonuses				Pension, retirement and similar benefits
All directors and executive officers as a group (then consisting of 19 persons)		$	2,311,000	(1)(2)		$	197,000

___________

(1)

During the year ended December 31, ~~2011,~~2012, we paid each of our outside and independent directors an annual fee of ~~$10,400~~$9,800 and a per meeting attendance fee of ~~$640.~~$600. These fees are included in the above amount.

(2)

The ~~benefit~~salaries amount includes expenses for automobiles and other benefits that we provide to certain of our executive officers.

~~As of December 31, 2011, none of our directors and executive officers held any options.~~

C. Board Practices

Introduction

According to the Israeli Companies Law, the role of the board of directors is to formulate a company's policy and to supervise the chief executive officer and his acts. ~~The management of our company is vested in our chief executive officer, who is appointed by our board of directors.~~ According to our articles of association, our chief executive officer has the power to appoint our other executive officers who, together with our chief executive officer, are responsible for our day-to-day management. The board of directors may exercise any power of the company which was not assigned to another organ of the company by law or by the articles of association. The executive officers have individual duties as determined by our chief executive officer and board of directors.

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Election of Directors

Our articles of association provide for a board of directors consisting of no less than three and no more than nine members or such other number as may be determined from time to time at a general meeting of shareholders, and the number of directors must be odd. Our board of directors is currently composed of ~~seven directors.~~six directors after the resignation of Mr. Itamar Levy on April 25, 2013. We intend to fill this vacancy promptly.

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 that at least one or more directors will have “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. Eytan Barak (an outside director within the meaning of the Israeli Companies Law) has the requisite “accounting and financial expertise.”

We do not follow the requirements of the NASDAQ Stock Market Rules with regard to the nomination process of directors, and instead, we follow Israeli law and practice, in accordance with which our board of directors is authorized to recommend to our shareholders director nominees for election. See Item 16G. “Corporate Governance.”

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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 (i) the person is a relative of a controlling shareholder; (ii) 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 the controlling shareholder or its relative; (iii) in a company that does not have a controlling shareholder, such person has an affiliation (as such term is defined in the Israeli Companies Law), at the time of his appointment, to the chairman, chief executive officer, a shareholder holding at least 5% of the share capital of the company or the chief financial officer; (iv) such person is an employee of the Israeli securities authority or stock exchange; and (v) such person's relative, partner, employer, supervisor, or an entity he controls, has other than negligible business or professional relations with any of the persons with which the outside director himself may not be affiliated. The term “relative” means a spouse, sibling, parent, grandparent, child or child, sibling or parent of spouse or spouse of any of the above. The term “affiliation” includes an employment relationship, a material business or professional relationship maintained on a regular and continuous 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 who are not the controlling shareholders or their relatives, are of the same gender, then that outside director must be of the other gender. A director of one company may not be appointed as an outside director of another company if a director of the other company is acting as an outside director of the first company at such time.

At least one of the outside directors elected must have “accounting and financial expertise” and any other outside director must have “accounting and financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law. Our outside director, Mr. Eytan Barak, 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.

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Outside directors are elected by shareholders. The shareholders voting in favor of their election must include at least a majority of the shares of the non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) of the company who voted on the matter (not including abstaining votes). This majority approval requirement need not be met if the total shareholdings of those non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) who vote against their election represent 2% or less of all of the voting rights in the company. Outside directors serve for a three-year term, which may be renewed for two additional three year periods through one of the following mechanisms: (i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint outside directors for their initial term; or (ii) a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes cast by the shareholders of the company on the matter, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relationship with any controlling shareholder, provided that the aggregate votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their relationship with the controlling shareholders voted in favor of the reelection of the nominee constitute more than 2% of the voting rights in the company.

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 that is authorized to exercise powers that are usually vested in 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 promulgated under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.

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Ms. Ophira Rosolio-Aharonson was elected to serve as an outside director at our ~~2006 annual general meeting of shareholders for an initial three-year term and was elected to serve as an outsider director at our 2009~~2012 annual general meeting of shareholders for a ~~second~~third three-year term, pursuant to the provisions of the Israeli Companies ~~Law, following which the service of Ms. Rosolio-Aharonson as an outside director may be renewed for one additional three year term.~~Law. Mr. Eytan Barak was elected to serve as an outside director at our 2011 annual general meeting of shareholders for a second three-year term, pursuant to the provisions of the Israeli Companies Law, following which the service of Mr. Barak as an outside director may be renewed for one additional three-year term.

Independent Directors. In general, NASDAQ Stock Market 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.~~SEC. 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 Stock Market 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 Item 16G. “Corporate Governance.”)~~as previously discussed. In addition, in accordance with the rules of the ~~Securities and Exchange Commission~~SEC and NASDAQ, we have the mandated three independent directors, as defined by the rules of the ~~Securities and Exchange Commission~~SEC and NASDAQ, on our audit committee.

Also, pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an outside director; or (ii) a director who complies with the following requirements: (y) he or she is eligible for nomination as an outside director and the audit committee has approved such eligibility; and (z) he or she has not acted as a director of the company for a period exceeding nine consecutive years.

Our board of directors has determined that each of Messrs. Banitt and Barak and Ms. Rosolio-Aharonson qualifies as an independent director under the requirements of the ~~Securities~~SEC and ~~Exchange Commission~~NASDAQ. Our outside directors, Mr. Barak and ~~NASDAQ.~~Ms. Rosolio-Aharonson also qualify as independent directors under the Israeli Companies Law.

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Committees of the Board of Directors

~~Executive Committee~~

Our board of directors established an executive committee, which is responsible for monitoring the implementation of our annual work plan that is adopted each year by our board of directors, and recommending to our board of directors future strategies for our company and monitoring their implementation. Messrs. Banitt and Barak and Ms. Rosolio-Aharonson are the current members of our executive committee.

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 and must have a majority of independent directors.

In accordance with Amendment No. 16 to the Israeli Companies Law, or the Amendment, adopted in March 2011, (A) the majority of the members of the audit committee must be “independent directors,” which are defined as: (i) an outside director; or (ii) a director who complies with the following requirements: (y) he is eligible for nomination as an outside director and the audit committee has approved such eligibility; and (z) he has not acted as a director of the company for a period exceeding nine consecutive years; (B) theThe audit committee may not include the chairman of the board of directors, the controlling shareholder (or any of the controlling shareholder's relatives), any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any director who derives most of his income from the controlling ~~shareholder; (C) the~~shareholder. The chairman of the audit committee must be an outside ~~director; and (D) a~~director. A majority of the members of the audit committee ~~will constitute~~constitutes a quorum, provided that the majority of the members present at the meeting are independent directors (within the meaning of the Israeli Companies Law) and at least one outside director is present at the meeting.

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In addition, the NASDAQ Stock Market 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~~SEC and NASDAQ and one of whom has accounting or related financial management expertise at senior levels within a company.

Our audit committee meets at least once each quarter. 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.

In ~~accordance with the Amendment, in~~ the event the audit committee has discovered a material defect in the company’s business operations, it must hold at least one meeting regarding such defect, at which the internal auditor or the independent accountants must be present and office holders who are not members of the audit committee may not participate in the meeting, except for the presentation of their position.

Our audit committee consists of three members of our board of directors who satisfy the respective ~~“independence”~~ requirements of the ~~Securities and Exchange Commission,~~SEC, NASDAQ and Israeli law for the composition of the audit ~~committee members.~~committee. Our audit committee is currently composed of Messrs. Banitt and Barak and Ms. Rosolio-Aharonson. ~~The audit~~

Compensation Committee

Effective December 2012, Israeli law requires our Board of Directors to appoint a compensation committee, ~~meets~~composed of at least ~~once each quarter.~~three members, and can include only those persons who are eligible to serve as a member of the audit committee. All of our outside directors must be members of the Compensation Committee and must constitute the majority of the committee. The committee’s chairman must be an outside director. The compensation of the committee's members shall be as prescribed by Israeli law for outside directors.

The compensation committee is required to recommend a compensation policy to the Board of Directors by September 2013. The policy must describe the terms of office and employment of office holders, including compensation, equity awards, severance and other benefits, exemption from liability and indemnification. The policy must be approved every three years by the Board of Directors, after having considered the recommendations of the compensation committee and by a majority of our shareholders, provided that (i) such majority includes at least a majority of the shares of the non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) of the company who voted on the matter (not including abstaining votes), or (ii) the total shares of the non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) who vote against the policy, represent 2% or less of all voting rights in the company. Even in the absence of such shareholders' approval, the compensation committee and the board of directors may nonetheless approve the policy, following further discussion of the matter and for specified reasons.

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Our compensation committee is currently composed of Ms. Rosolio-Aharonson (Chairman of the committee) and Messrs. Banitt and Barak.

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

Directors’ Service Contracts

There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.

~~Approval of Related Party Transactions Under Israeli Law~~

~~Fiduciary Duties of Office Holders~~

The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office holder” is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the business feasibility of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty requires that an office holder act in good faith and for the benefit of the company, including (i) avoiding any conflict of interest between the office holder’s position in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has received by virtue of his position as an office holder.

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

The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their possession, in connection with any existing or proposed transaction relating to our company. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing, or by any corporation in which the office holder or a relative (as such term is described above) is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.

Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors and exculpation, insurance and indemnification of, or an undertaking to, indemnify an office holder who is not a director requires both board of directors and audit committee approval. However, such arrangements may be approved by a compensation committee instead of the audit committee, provided that all provisions that apply to the audit committee apply to such compensation committee. The compensation of office holders who are directors must be approved by our audit committee, board of directors and shareholders.

Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s interest may not be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may be required. Any person who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the majority of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority of the members of the board of directors or the audit committee have a personal interest, then the approval of the general meeting of shareholders is also required. In addition, an officer who has a personal interest in a certain transaction may be present during the deliberations regarding such transaction for purposes of its presentation, if the chairman of the audit committee or the chairman of the board of directors has determined that such presence is required for the presentation of the transaction.

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

The disclosure requirements that apply to an office holder also apply to a transaction in which a controlling shareholder of the company has a personal interest. The Israeli Companies Law provides that an extraordinary transaction with a controlling shareholder or an extraordinary transaction with another person in whom the controlling shareholder has a personal interest or a transaction with a controlling shareholder or his relative regarding terms of service and employment, must be approved by the audit committee, the board of directors and shareholders in that order. The shareholder approval for such a transaction must include at least a majority of the shareholders who have no personal interest in the transaction who voted on the matter (not including abstentions). The transaction can be approved by shareholders without this majority approval requirement if the total shareholdings of those shareholders who have no personal interest and voted against the transaction do not represent more than two percent of the voting rights in the company. Any such extraordinary transaction whose term is more than three years requires the approval as described above every three years, unless the audit committee approves that a longer term is reasonable under the circumstances.

Among other things, the Amendment added to the Israeli Companies Law a requirement that an engagement with a controlling shareholder, including with an entity controlled by the controlling shareholder or his or her relative, regarding the provision of services to the company by such person or entity, be approved by the audit committee, the board of directors and a special majority of the shareholders (in that order). In accordance with the Amendment, any such transaction must be presented to the shareholders for approval prior to three years from the date of the original approval of the transaction by the shareholders (if previously approved by the shareholders), and every three years thereafter (if such engagement is for a period of more than three years). Under the Israeli Companies Law as in effect prior to the Amendment, only an “extraordinary transaction” of a public company with a controlling shareholder, or an “extraordinary transaction” of a public company with another person in which the controlling shareholder has a personal interest, required the approval of a special majority at the shareholders meeting (following audit committee and board of directors approval).

~~- 38 -~~

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

In accordance with the Amendment, the chief executive officer of a public company or his relative may not act as the chairman of the board of directors of such public company unless the shareholders have approved such nomination (which nomination shall not exceed a period of three years). The shareholders voting in favor of such nomination must include at least two-thirds of the shares of the non-controlling shareholders (and who do not have a personal interest in approving the nomination) who voted on the matter (not including abstaining votes). This two-thirds approval requirement need not be met if the total shareholdings of those non-controlling shareholders (who do not have a personal interest in approving the nomination) who vote against their election represent 2% or less of all of the voting rights in the company. In addition, any person subordinated to the chief executive officer will be prohibited from serving as chairman of the board of directors.

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

If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the acquisition must be made by means of a full tender offer for all of the outstanding shares or a class of shares. In such event, if less than 5% of the outstanding shares are not tendered in such full tender offer, all of the outstanding shares or class of shares will be transferred to the acquirer. The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer. The acquirer may elect that any shareholder tendering his shares will not be entitled to appraisal rights (such election must be specified in the tender offer). If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.

~~- 39 -~~

Exculpation, Indemnification and Insurance of Directors and Officers

Exculpation of Office Holders

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

Insurance of Office Holders

The Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract to insure office holders in respect of liabilities incurred by the office holder with a respect to an act or omission performed in his or her capacity as an office holder, as a result of: (i) a breach of the office holder’s duty of care to the company or to another person; (ii) a breach of the office holder’s duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice the company’s interests; or (iii) a monetary liability imposed upon the office holder in favor of another person.

Our articles of association provide that, subject to any restrictions imposed by applicable law, we may procure, and/or undertake to procure, insurance covering any past or present or future office holder against any liability which he or she may incur in such capacity, including insurance covering us for indemnifying such office holder, to the maximum extent permitted by law.

- 38 -

Indemnification of Office Holders

The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for liabilities or expenses imposed on him or her, or incurred by him or her concerning acts or omissions performed by the office holder in such capacity for: (i) a monetary liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court; (ii) reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or concluded without an indictment against the office holder but with the imposition of a monetary liability on the office holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and (iii) reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on him or her by a court, in an action instituted by the company or on the company’s behalf, or by another person, against the office holder, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a criminal offense which does not require proof of criminal intent.

The Israeli Companies Law provides that a company’s articles of association may permit the company to indemnify an office holder following a determination to this effect made by the company after the occurrence of the event in respect of which the office holder will be indemnified. It also provides that a company’s articles of association may permit the company to undertake in advance to indemnify an office holder, except that with respect to a monetary liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of events which the company’s board of directors deems foreseeable considering the company’s actual operations at the time of the undertaking, and to an amount or standard that the board of directors has determined as reasonable under the circumstances.

Our articles of association provide that we may undertake to indemnify in advance an office holder, in accordance with the conditions set under applicable law, against any liabilities he or she may incur in such capacity, provided that such undertaking is limited with respect to categories of events that can be expected as determined by our board of directors when authorizing such undertaking, and with respect to such amounts determined by our board of directors as reasonable in the circumstances. Furthermore, under our articles of association, we may indemnify any past or present office holder, in accordance with the conditions set under any law, with respect to any past occurrence, whether or not we are obligated under any agreement to indemnify such office holder in respect of such occurrence.

~~- 40 -~~

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 (other than the chief executive officer) must be approved by the company’s ~~audit~~compensation committee and board of directors and, if such office holder is a director, also by the company’s shareholders. Exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, the chief executive officer must be approved by the company’s compensation committee, board of directors and by a special majority of the shareholders.

We have agreed to indemnify our office holders to the fullest extent permitted by law. The aggregate amount we may pay our office holders pursuant to our indemnification undertaking may not exceed, jointly and in the aggregate, $2 million but in any event not more than 25% of our company’s net equity. We currently maintain directors and officers liability insurance with a per claim and aggregate coverage limit of $10 million. Under our current directors and officers liability insurance policy, losses will be paid in accordance with the following order of priority: first, on behalf of officers and directors, for all loss that they will be obligated to pay as a result of a claim made against them; thereafter, on our behalf, for all loss that an officer or director will be obligated to pay as a result of a claim made against them, to the extent that we are required or permitted by law to indemnify our officers and directors; and thereafter, on our behalf, for all loss that we will be obligated to pay as a result of a securities claim made against us.

- 39 -

D. Employees

As of December 31, 2012, we employed 343 full-time employees in Israel, of which 221 were employed in manufacturing services, 39 in process and product engineering, 43 in quality assurance and control, 15 in sales and marketing and 25 in finance, accounting, information service and administration. As of December 31, 2011, we employed 335 full-time employees in Israel, of which 215 were employed in manufacturing services, 39 in process and product engineering, 43 in quality assurance and control, 15 in sales and marketing and 23 in finance, accounting, information service and administration.

As of December 31, 2010, we employed 312 full-time employees in Israel, of which 203 were employed in manufacturing services, 37 in process and product engineering, 37 in quality assurance and control, 12 in sales and marketing and 23 in finance, accounting, information service and administration.

As of December 31, 2009, we employed 317 full-time employees in Israel, of which 212 were employed in manufacturing services, 38 in process and product engineering, 37 in quality assurance and control, 13 in sales and marketing and 17 in finance, accounting, information service and administration.

In addition, Kubatronik, our subsidiary in Germany, employed 45 full-time employees and five part-time employees as of December 31, 2012, compared to employed 46 full-time employees and five part-time employees as of December 31, 2011 ~~compared to employed~~and 41 full-time employees and three part-time employees as of December 31, ~~2010 and 37 full-time employees and seven part-time employees as of December 31, 2009.~~2010.

Eltek USA, a wholly-owned Delaware subsidiary, ~~incorporated in Delaware in July 2007,~~ employed ~~four~~4 full-time employees as of December 31, ~~2011,~~2012, the same as of December 31, ~~2010~~2011 and ~~2009.~~2010.

~~- 41 -~~

Our relationships with our employees in Israel are governed by Israeli labor ~~legislation and regulations,~~law, extension orders of the Israeli Ministry of Labor and personal employment agreements. 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 Israeli employees with benefits and working conditions beyond the minimums required by law.

In November 2011, we were notified by the Histadrut ~~(General Federation of Labor in Israel)~~ that more than one-third of our employees in Israel had decided to join the Histadrut and that they have established an employees’ union committee. ~~The union has made several demands that could result in~~In 2012, a significant ~~increase~~portion of our employees decided to resign their membership in the Histadrut, which then ceased to represent our labor costs. We continue to be engaged in negotiations with the union and depending on the course of these negotiations, we could incur additional costs and/or experience work stoppages, which could adversely affect our business operations, including through a loss of revenue and strained relationships with customers.employees.

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

Pursuant to Israeli law, we are legally required to pay severance benefits upon certain circumstances, including the retirement or death of an employee or the termination of employment of an employee without due cause, equivalent to a one month salary for each year of employment with the company. Most of our employees are covered by pension plans providing customary benefits including retirement and severance benefits. Some of our employees are covered by life and pension insurance policies providing similar benefits. We contribute 8.33% of base salaries to the employees’ pension funds or life pension insurance policies to cover our liability for severance pay. Pursuant to Section 14 of the Israeli Severance Pay Law, if a company contributes to an employee’s pension fund or severance fund, then the employee is entitled only to the severance amounts accumulated in such fund(s) upon resignation from the company, and the company is not obligated to make additional payments to the employee upon termination of employment with the company.

- 40 -

With respect to pension benefits, we contribute between 6.0% to 7.5% of base salaries to the employees’ pension plans and ~~5.7%~~6.0% to those employees who have life insurance policies. The employees who have pension plans contribute between 5.5% to 7.0% of base salaries to their pension plans, and the employees who have life insurance policies contribute 5.0% of their base salaries to their policies.

~~Eltek Ltd. and its Subsidiaries~~

Consolidated Financial Statements as of December 31, ~~2011~~

2012

Contents

Page

	~~Page~~

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets	F-2

Consolidated Statements of ~~Operations~~Comprehensive Income (Loss)	F-4

Consolidated Statements of Changes in Shareholders’ Equity ~~and~~ ~~Comprehensive Income (Loss)~~	F-5

Consolidated Statements of Cash Flows	F-6

Notes to the Consolidated Financial Statements	F-7

F - 0

~~F - 0~~

Report of ~~Independent~~Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Eltek Ltd.

We have audited the accompanying consolidated balance sheets of Eltek Ltd. and its Subsidiaries (the “Company”) as of December 31, ~~2011~~2012 and ~~2010~~2011 and the related consolidated statements of ~~operations,~~comprehensive income (loss), changes in shareholders' equity ~~and comprehensive income (loss)~~ and cash flows for each of the years in the three-year period ended December 31, ~~2011.~~2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, ~~2011~~2012 and ~~2010,~~2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, ~~2011,~~2012, in conformity with U.S. generally accepted accounting principles.

/s/ Somekh Chaikin

Somekh Chaikin

Certified Public Accountants (Isr.)

Member firm of KPMG International

Tel-Aviv, Israel,

April ~~2, 2012~~

29, 2013

F - 1

Eltek Ltd. and its Subsidiaries

~~Consolidated Balance~~ ~~Sheets~~

Consolidated Balance Sheets

December 31

Note

2011

2010

$ in thousands

Assets

Current assets

Cash and cash equivalents 2 892 1,513
Trade accounts receivable, net of allowance for doubtful
accounts 8,885 7,490
Inventories 3 4,434 4,282
Prepaid expenses and other current assets 355 315

Total current assets 14,566 13,600

Assets held for employees' severance benefits 9 39 1,545

Fixed assets, net 4 7,746 8,162

Goodwill 5 518 530

Total assets 22,869 23,837

			December 31
	Note		2012		2011
			$ in thousands

Assets

Current assets

Cash		2		1,935		892
Trade accounts receivable, net of allowance for doubtful
accounts				6,662		8,885
Inventories		3		5,244		4,434
Prepaid expenses and other current assets				417		355

				14,258		14,566

Assets held for employees' severance benefits		9		47		39

Fixed assets, net		4		9,075		7,746

Goodwill		5		69		518

Total assets				23,449		22,869

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

F - 2

Eltek Ltd. and its Subsidiaries

~~Consolidated Balance Sheets~~

Consolidated Balance Sheets

		December 31								December 31
	Note	2011			2010			Note		2012			2011
		$ in thousands								$ in thousands
Liabilities and shareholders’ equity

Current liabilities
Short-term credit and current maturities of long-term debt	6		4,856			6,862			6		5,105			4,856
Accounts payable:
Trade			6,456			6,087					6,110			6,456
Related parties	16		1,046			742			16		1,336			1,046
Other current liabilities	7		3,995			3,973			7		4,419			3,995

Total current liabilities			16,353			17,664
											16,970			16,353

Long-term liabilities
Long-term debt, excluding current maturities	8		1,604			1,253			8		728			1,604
Employee severance benefits	9		150			1,596			9		215			150

Total long-term liabilities			1,754			2,849					943			1,754

Commitments and contingent liabilities	10								10

Shareholders’ equity	11								11
Ordinary shares, NIS 0.6 par value
Authorized 50,000,000 shares, issued and
outstanding 6,610,107 shares as of December 31, 2011
and 2010			1,384			1,384
outstanding 6,610,107 shares as of December 31, 2012
and 2011											1,384			1,384
Additional paid-in capital			14,328			14,328					14,328			14,328
Cumulative foreign currency translation adjustments			2,622			2,986					2,713			2,622
Capital reserves			695			695					695			695
Accumulated deficit			(14,398	)		(16,244	)				(13,708	)		(14,398	)

Total Eltek Ltd. shareholders’ equity			4,631			3,149					5,412			4,631

Non-controlling interest			131			175					124			131

Total equity			4,762			3,324					5,536			4,762

Total liabilities, shareholders’ equity and non-
controlling interest			22,869			23,837					23,449			22,869

/s/ Arieh Reichart	/s/ Amnon Shemer	/s/ Erez Meltzer
Arieh Reichart	Amnon Shemer	Erez Meltzer
President, Chief Executive Officer	Vice President, Finance and Chief Financial Officer	Chairman of the Board of Directors

Date: April ~~2, 2012~~30, 2013

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

~~F - 3~~

~~Eltek Ltd. and its Subsidiaries~~

~~Consolidated~~ ~~Statements of~~ ~~Operations~~

Year ended December 31

Note

2011

2010

2009

$ in thousands

(except loss per share data)

Revenues 12 46,830 37,514 36,442
Cost of revenues 16B (38,101 ) (32,690 ) (30,882 )

Gross profit 8,729 4,824 5,560

Operating expenses

Selling, general and administrative expenses (6,155 ) (6,033 ) (6,016 )

Operating profit (loss) 2,574 (1,209 ) (456 )
Financial expenses, net 13 (740 ) (609 ) (424 )
Other income, net 12 2 4

Profit (loss) before income tax expense 1,846 (1,816 ) (876 )
Income tax expense 14 (31 ) (19 ) (34 )

Net profit (loss) 1,815 (1,835 ) (910 )
Net loss attributable to non-controlling
interest 31 113 30

Net profit (loss) attributable to Eltek Ltd. 1,846 (1,722 ) (880 )

Basic and diluted net profit (loss) per ordinary

share attributable to Eltek Ltd. shareholders
0.28 (0.26 ) (0.13 )

Weighted average number of ordinary
shares used to compute basic and diluted net
profit (loss) per ordinary share attributable to

Eltek Ltd. shareholders
6,610,107 6,610,107 6,610,107

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

F - 43

Eltek Ltd. and its Subsidiaries

Consolidated Statements of ~~Changes in Shareholders’~~ ~~Equity and~~ Comprehensive Income (Loss)

			Year ended December 31
	Note		2012			2011			2010
			$ in thousands
			(except loss per share data)
Revenues		12		45,646			46,830			37,514
Cost of revenues		16B		(37,836	)		(38,101	)		(32,690	)

Gross profit				7,810			8,729			4,824

Operating expenses

Selling, general and administrative expenses				(6,040	)		(6,155	)		(6,033	)
Impairment on goodwill				(481	)		-			-

Operating profit (loss)				1,289			2,574			(1,209	)
Financial expenses, net		13		(543	)		(740	)		(609	)
Other income, net				2			12			2

Profit (loss) before income tax expense				748			1,846			(1,816	)
Income tax expense		14		(52	)		(31	)		(19	)

Net profit (loss)				696			1,815			(1,835	)
Net (profit) loss attributable to non-controlling
Interest				(6	)		31			113

Net profit (loss) attributable to Eltek Ltd.				690			1,846			(1,722	)

Basic and diluted net profit (loss) per ordinary
share attributable to Eltek Ltd. shareholders				0.1			0.28			(0.26	)

Weighted average number of ordinary
shares used to compute basic and diluted net
profit (loss) per ordinary share attributable to
Eltek Ltd. shareholders				6,610,107			6,610,107			6,610,107

Other comprehensive income (loss):
Foreign currency translation adjustments				78			(377	)		20
Comprehensive income (loss)				774			1,438			(1,815	)

Comprehensive income (loss) attributable to
non-controlling interest				(7	)		(44	)		(135	)

Comprehensive income (loss) attributable to
Eltek Ltd.				781			1,482			(1,680	)

Company’s shareholders

Equity
Accumulated attributed to
Other Eltek Non-
Ordinary Additional comprehensive Capital Accumulated Ltd. and controlling

shares

Amount

Paid-in capital

income

reserves

deficit

Subsidiaries

interest

Total

($ thousands, except number of shares)

Balance as of January 1, 2009 6,610,107 1,384 14,328 2,864 695 (13,642 ) 5,629 330 5,959

Changes during the year
Foreign currency translation adjustments - - - 80 - - 80 10 90
Net loss - - - - - (880 ) (880 ) (30 ) (910 )

Comprehensive loss - - - - - - (800 ) (20 ) (820 )

Balance as of December 31, 2009 6,610,107 1,384 14,328 2,944 695 (14,522 ) 4,829 310 5,139

Changes during the year
Foreign currency translation adjustments - - - 42 - - 42 (22 ) 20
Net loss - - - - - (1,722 ) (1,722 ) (113 ) (1,835 )

Comprehensive loss - - - - - - (1,680 ) (135 ) (1,815 )

Balance as of December 31, 2010 6,610,107 1,384 14,328 2,986 695 (16,244 ) 3,149 175 3,324

Changes during the year
Foreign currency translation adjustments - - - (364 ) - - (364 ) (13 ) (377 )
Net profit (loss) - - - - - 1,846 1,846 (31 ) 1,815

Comprehensive income (loss) - - - - - - 1,482 (44 ) 1,438

Balance as of December 31, 2011 6,610,107 1,384 14,328 2,622 695 (14,398 ) 4,631 131 4,762

* Less than one thousand.

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

F - 54

Eltek Ltd. and its Subsidiaries

Consolidated Statements of ~~Cash~~ ~~Flows~~Changes in Shareholders’ Equity

Year ended December 31

2011

2010

2009

$ thousands

Cash flows from operating activities:
Net income (loss) 1,815 (1,835 ) (910 )

Adjustments to reconcile net loss to net

cash flows provided by operating activities:
Depreciation 2,091 2,054 2,030
Capital gain on disposal of fixed assets, net - (18 ) -
Revaluation of long term loans 58 49 13

Increase (decrease) in employee severance benefits, net 68 45 (104 )
Decrease (increase) in trade receivables (2,016 ) (186 ) 391
Decrease (increase) in other receivables and prepaid expenses (68 ) 178 (35 )
Decrease (increase) in inventories (487 ) (138 ) 510
Increase (decrease) in income tax payable 8 - -
Increase (decrease) in trade payables 621 1,152 (763 )
Increase (decrease) in other liabilities and accrued expenses 324 203 (169 )

Net cash provided by operating activities 2,414 1,504 963

Cash flows from investing activities:
Purchase of fixed assets (882 ) (489 ) (600 )
Proceeds from sale of fixed assets - 38 -

Net cash used in investing activities (882 ) (451 ) (600 )

Cash flows from financing activities:

Increase (decrease) in short- term credit (802 ) 355 648
Repayment of long-term loans (1,135 ) (1,222 ) (2,468 )
Proceeds from long-term loans 474 452 1,341
Repayment of credit from fixed asset payables (539 ) (400 ) (140 )

Net cash used in financing activities (2,002 ) (815 ) (619 )

Effect of translation adjustments (151 ) 17 (42 )

Net increase (decrease) in cash and cash equivalents (621 ) 255 (298 )
Cash and cash equivalents at beginning of the year 1,513 1,258 1,556

Cash and cash equivalents at end of the year 892 1,513 1,258

Supplemental cash flow information:
Income tax paid 55 - -
Interest paid 480 421 336

Non-cash activities:

Purchase of fixed assets not yet paid 1,377 124 306

					Company’s shareholders
															Equity
							Accumulated								attributed to
							Other								Eltek			Non-
	Ordinary				Additional		comprehensive			Capital		Accumulated			Ltd. and			controlling
	shares		Amount		Paid-in capital		income			reserves		deficit			Subsidiaries			interest			Total
	($ thousands, except number of shares)
Balance as of January 1, 2010		6,610,107		1,384		14,328		2,944			695		(14,522	)		4,829			310			5,139

Changes during the year
Foreign currency translation adjustments		-		-		-		42			-		-			42			(22	)		20
Net loss		-		-		-		-			-		(1,722	)		(1,722	)		(113	)		(1,835	)

Comprehensive loss		-		-		-		-			-		-			(1,680	)		(135	)		(1,815	)

Balance as of December 31, 2010		6,610,107		1,384		14,328		2,986			695		(16,244	)		3,149			175			3,324

Changes during the year
Foreign currency translation adjustments		-		-		-		(364	)		-		-			(364	)		(13	)		(377	)
Net loss		-		-		-		-			-		1,846			1,846			(31	)		1,815

Comprehensive income ( loss)		-		-		-		-			-		-			1,482			(44	)		1,438

Balance as of December 31, 2011		6,610,107		1,384		14,328		2,622			695		(14,398	)		4,631			131			4,762

Changes during the year
Foreign currency translation adjustments		-		-		-		91			-		-			91			(13	)		78
Net profit (loss)		-		-		-		-			-		690			690			6			696

Comprehensive income (loss)		-		-		-		-			-		-			781			(7	)		774

Balance as of December 31, 2012		6,610,107		1,384		14,328		2,713			695		(13,708	)		5,412			124			5,536

* Less than one thousand.

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

F - 5

Eltek Ltd. and its Subsidiaries

Consolidated Statements of Cash Flows

	Year ended December 31
	2012			2011			2010
	$ thousands
Cash flows from operating activities:
Net profit (loss)		696			1,815			(1,835	)

Adjustments to reconcile net profit (loss) to net
cash flows provided by operating activities:
Depreciation and Amortization		2,253			2,091			2,054
Capital gain on disposal of fixed assets, net					-			(18	)
Revaluation of long term loans		25			58			49

Increase in employee severance benefits, net		53			68			45
Decrease (increase) in trade receivables		2,339			(2,016	)		(186	)
Decrease (increase) in other receivables and prepaid
expenses		(58	)		(68	)		178
Increase in inventories		(670	)		(487	)		(138	)
Increase in income tax payable		-			8			-
Increase (decrease) in trade payables		(147	)		621			1,152
Increase in other liabilities and accrued expenses		281			324			203

Net cash provided by operating activities		4,772			2,414			1,504

Cash flows from investing activities:
Purchase of fixed assets		(1,234	)		(882	)		(489	)
Proceeds from sale of fixed assets		-			-			38

Net cash used in investing activities		(1,234	)		(882	)		(451	)

Cash flows from financing activities:
Increase (decrease) in short- term credit		(192	)		(802	)		355
Repayment of long-term loans		(1,149	)		(1,135	)		(1,222	)
Proceeds from long-term loans		-			474			452
Repayment of credit from fixed asset payables		(1,049	)		(539	)		(400	)

Net cash used in financing activities		(2,390	)		(2,002	)		(815	)

Effect of translation adjustments		(105	)		(151	)		17

Net increase (decrease) in cash		1,043			(621	)		255
Cash at beginning of the year		892			1,513			1,258

Cash at end of the year		1,935			892			1,513

Supplemental cash flow information:
Income tax paid		43			55			-
Interest paid		386			480			421

Non-cash activities:
Purchase of fixed assets not yet paid		1,212			1,377			124

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

F - 6

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies

A. General

Eltek Ltd. ("the Parent”) was incorporated in Israel in 1970, and the Parent’s shares have been publicly traded on the NASDAQ Capital Market since 1997. Eltek Ltd. and its subsidiaries (see below) are collectively referred to as “the Company”.

The Company manufactures, markets and sells custom made printed circuit boards (“PCBs”), including high density interconnect, flex-rigid and multi-layered boards. The principal markets of the Company are in Israel, Europe and North America.

The Company markets its product mainly to the medical technology, defense and aerospace, industrial, telecom and networking equipment, as well as to contract electronic manufacturers, among other industries, and its business is subject to numerous risks. The major risks include, but are not limited to, (1) the impact of currency exchange rates (mainly NIS/US$), (2) the Company’s success in implementing its sales and manufacturing plans, (3) the impact of competition from other companies, (4) the Company’s ability to receive regulatory clearance or approval to market its products or changes in regulatory environment, (5) domestic and global economic conditions and industry conditions, and (6) compliance with environmental laws and regulations. Further, the Company’s liquidity position, as well as its operating performance, may be negatively affected by other financial business factors, many of which are beyond its control. Although the Company anticipates that its existing capital resources, including availability of its lines of credit, supplier financing and cash flows from operations, will be adequate to satisfy its liquidity requirements through calendar year 2012, its liquidity could be negatively affected by a decrease in demand for its products, including the impact of changes in customer buying, general economic downturn, instability of the US dollar/ New Israel Shekel exchange rate, its results of operations, its suppliers’ payment terms and its customers’ demand for extending their payment terms and other risk factors beyond the Company’s control. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management’s plans include pursuing alternative financing arrangements or reducing expenditures as necessary to meet the Company’s cash requirements throughout 2012. However, there is no assurance that, if required, the Company will be able to raise additional capital or reduce discretionary spending to provide the required liquidity.

As of December 31, 2011, the Company was not in compliance with financial covenants in respect of its credit facilities and long-term debt with one of its banks. However, in February 2012, such bank granted the Company a waiver, stating that the bank would not take any measures against it arising from the breach of the covenants before the date of the release of its audited financial statements for the year ending December 31, 2012, which is expected to be released no later than April 30, 2013, by which time it must return to compliance. The Company has initiated discussions with this bank in order to modify the financial covenants and to agree to terms which the Company believes it will be able to meet. There can be no assurance that the Company will return to compliance or new covenant terms will be agreed upon with the bank.

Failure to reach compliance through operating results, or reach an agreement on new covenant terms or to obtain additional financing, if required, may have a material adverse effect on the Company’s business, results of operations and financial position.

F - 7

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies ~~(cont'd)~~(cont’d)

A. General (cont’d)

Kubatronik Leiterplatten GmbH

In June 2002, the Parent established a wholly-owned subsidiary, EN-Eltek Netherlands 2002 B.V. ("EN-Eltek"), for the purpose of the acquisition of Kubatronik Leiterplatten GmbH (“Kubatronik”).

On June 10, 2002, the Parent acquired 76% of the shares of Kubatronik for the consideration of € 2.6 million ($2.4 million as of the date of acquisition).

The acquisition resulted in the recognition of goodwill in the amount of €1.1 million ($1 million as of the date of acquisition) - see Note 5. Goodwill has subsequently been impaired by approximately ~~$0.5~~$1 million and its balance as of December 31, ~~2011~~2012 is ~~$518.~~$69.

Pursuant to the acquisition agreement, the seller has until December 31, ~~2012,~~2014, (at which time the period is automatically extended for additional consecutive two-year periods unless otherwise notified in writing by either party upon at least six months prior notice) the right to require the Parent to purchase ("Put Option"), and the Parent has the right to require the seller to sell to the Parent ("Call Option") the seller’s remaining 24% interest in Kubatronik. In May 2012, the seller exercised his option with respect to 3% of his remaining shares of Kubatronik for approximately Euro 69 ($89) for such shares and reduced his share in Kubatronik from 24% to 21%. The exercise price for the seller’s ~~remaining holdings~~21% interest in Kubatronik under the Put Option is Euro ~~552~~483 ($~~715)~~628), and the exercise price for the seller’s remaining holdings in Kubatronik under the Call Option is Euro ~~582~~513 ($~~754). In January 2012, the seller submitted to the Company an exercise notice to sell to the Company 3% of the shares of Kubatronik for approximately Euro 69 ($89)~~667). The fair value of the above options is calculated based on the Binomial model. Changes in fair value are recorded in the Consolidated Statement of Operations. See Note 15.

Eltek USA Inc.

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

Eltek Europe GmbH

In 2008, the Parent established a wholly-owned subsidiary, Eltek Europe GmbH for the purpose of sales, promotion and marketing to certain customers in Europe. Eltek Europe GmbH commenced operations in 2009.

F - 8

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

B. Basis of presentation

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

The consolidated financial statements include the accounts of the Parent and its ~~subsidiaries (EN-Eltek, Kubatronik, Eltek USA Inc. and Eltek Europe GmbH).~~subsidiaries.

The Parent sells goods through its subsidiaries that function as distributors.

All intercompany transactions and balances were eliminated in consolidation.

~~F - 8~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

C. Functional and reporting currency

The Parent’s functional currency is the New Israeli Shekel (“NIS”). Transactions denominated in foreign currencies are translated into NIS using the prevailing exchange rates at the date of the transactions. Gains and losses from the translation of foreign currency transactions are recorded in financial income or expenses.

The Company’s reporting currency is the U.S. dollar. Assets and liabilities are translated to the reporting currency using the exchange rate at the end of the year. Revenues and expenses are translated to the reporting currency using the average exchange rate for each quarter. Translation adjustments are reported separately as a component of accumulated other comprehensive income.

~~Translation of foreign entity operations~~

D. Translation of foreign entity operations

The financial statements of foreign subsidiaries are translated into the Parent's functional currency as follows:

Assets and liabilities are translated according to the exchange rate on the consolidated balance sheet date including goodwill arising from the acquisition of the subsidiary.

Income and expense items are translated according to the weighted average exchange rate on a quarterly basis.

The resulting exchange rate differences are classified as a separate item in shareholders’ equity.

F - 9

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

E. Exchange rates and linkage bases

Balances linked to the Israeli Consumer Price Index (“CPI”) are recorded pursuant to contractual linkage terms of the specific assets and liabilities.

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

Israeli Exchange rate Exchange rate

CPI

of one US dollar

of one Euro

Points

NIS

NIS

For the year ended:
December 31, 2011 216.26 3.821 4.938
December 31, 2010 211.67 3.549 4.738
December 31, 2009 206.19 3.775 5.442

%

%

%

Changes during the year ended:
December 31, 2011 2.2 7.66 4.22
December 31, 2010 2.7 (5.99 ) (12.94 )
December 31, 2009 3.9 (0.71 ) (2.73 )

~~F - 9~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

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

~~(All amounts in thousands of $, except where otherwise stated)~~

	Israeli		Exchange rate			Exchange rate
	CPI		of one US dollar			of one Euro
	Points		NIS			NIS
For the year ended:
December 31, 2012		219.80		3.733			4.9206
December 31, 2011		216.26		3.821			4.938
December 31, 2010		211.67		3.549			4.738

	%		%			%

Changes during the year ended:
December 31, 2012		1.6		(2.30	)		(0.35	)
December 31, 2011		2.2		7.66			4.22
December 31, 2010		2.7		(5.99	)		(12.94	)

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

F. Use of estimates

The preparation of the consolidated financial statements in accordance with U.S. GAAP requires the management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowance for doubtful accounts, valuation of derivatives, deferred tax assets, inventory, goodwill, put/call options, income tax uncertainties and other contingencies.

G. Cash ~~and cash~~ equivalents

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

H. Trade accounts receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio.

F - 10

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

H. Trade accounts receivable (cont’d)

The allowance for doubtful accounts receivable is calculated on the basis of specific identification of customer balances. The allowance is determined based on management’s estimate of the aged receivable balance considered uncollectible, based on historical experience, aging of the receivable and information available about specific customers, including their financial condition and volume of their operations.

The activity in the allowance for doubtful accounts for the three years ended December 31, ~~2011~~2012 is as follows:

	Year ended December 31									Year ended December 31
	2011			2010			2009			2012		2011			2010
	$ thousands									$ thousands
Opening balance		340			347			555			93		340			347
Additions during the year		14			10			20			1		14			10
Write off of allowance		(263	)		(20	)		(256	)		-		(263	)		(20	)
Foreign currency translation adjustments		2			3			28			1		2			3

Closing balance		93			340			347			95		93			340

I. Inventories

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

~~F - 10~~

~~Eltek Ltd.~~goods, the cost is determined pursuant to calculation of accumulated actual direct and ~~its Subsidiaries~~indirect costs.

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

J. Assets held for employees' severance payments

Assets held for employees' severance payments represent contributions to insurance policies and deposits to a central severance pay fund, and are recorded at their current redemption value.

K. Fixed assets

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

	%
Machinery and equipment		5-33
Leasehold improvements		6-14
Motor vehicles		15
Office furniture and equipment		6-33

F - 11

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

K. Fixed assets (cont’d)

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

Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

L. Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually. ~~The~~In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which provides an entity the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step ~~test. Under~~goodwill impairment test is not required. The Company adopted this guidance in 2011.

If the two-step goodwill impairment test is required, first, ~~step,~~ the fair value of the reporting unit is compared with its carrying ~~value~~amount (including goodwill). If the fair value of the reporting unit is less than its carrying ~~value,~~amount, an indication of goodwill impairment exists for the reporting unit and the ~~enterprise~~entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

~~F - 11~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

~~L. Goodwill (cont'd)~~

Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying ~~value,~~amount, step two does not need to be performed.

The Company performs its impairment review of goodwill on an annual basis and ~~when~~if a triggering event occurs between annual impairment tests.

~~In 2011 and 2010,~~ For 2012, the Company ~~concluded~~performed a qualitative assessment of goodwill based on a valuation for the Kubatronik, utilizing a forecast of expected cash inflows and cash outflows and determined that ~~there~~the fair value of Kubatronik was lower than its carrying value. As a result, the Company recorded an impairment loss of $481 in 2012. Based on a similar qualitative assessment of Kubatronik, no impairment loss was recorded for 2011. See Note 5.

F - 12

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of ~~goodwill.~~$, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

M. Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expense.

N. Revenue recognition

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

O. Earnings (loss) per ordinary share

Diluted earnings per ordinary share calculation is similar to basic earnings per share except that the weighted average of ordinary shares outstanding is increased to include the number of additional ordinary shares that would have been outstanding if the outstanding options had been exercised, to the extent that these options had a diluted effect. The Company does not presently have ~~any~~ such dilutive instruments.

~~F - 12~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

P. Derivative financial instruments

The Company utilizes derivative financial instruments principally to manage market risks and reduce its exposure resulting from fluctuations in foreign currency exchange rates. The Company ~~also~~ holds put/call options with the minority shareholder of Kubatronik for the purchase/sale of the minority holding in Kubatronik (see Note 15). Derivatives and the put/call options are adjusted to fair value through income.

Changes in fair value are recognized in the consolidated statements of operations as a financing item.

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

F - 13

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

Q. Concentration of credit risk

Financial instruments that may subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are deposited with major financial institutions in Israel, Europe and the United States.

The Company performs ongoing credit evaluations of the financial condition of its customers. The risk of collection associated with trade receivables is reduced by the large number and geographical dispersion of the Company's customer base, and the Company’s policy of obtaining credit evaluations of the financial condition of certain customers, requiring collateral or security with respect to certain receivables, or purchase of insurance for certain other receivables.

R. Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

~~F - 13~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

S. Fair value measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

~~In January 2010, the FASB issued ASU 2010-06,~~ ~~Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,~~ which provides additional disclosures for transfers in and out of Levels I and II and for activity in Level III. This ASU also clarifies certain other existing disclosure requirements including level of desegregation and disclosures around inputs and valuation techniques. The provisions of the ASU were effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. In the period of initial adoption, the reporting entity shall not be required to provide the disclosures required for any previous periods presented for comparative purposes. The Company adopted the provisions of the ASU in 2010, except for the requirements to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis, which were adopted in 2011. The adoption of ASU 2010-06 did not have a material effect on the Company’s consolidated financial statements. See Note 15 to the Consolidated Financial Statements.

~~T. Recently issued accounting standards~~

~~In September 2011, the FASB issued ASU 2011-08,~~ ~~Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment~~. This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. ~~The Company will implement the provisions of ASU 2011-08 as of January 1, 2012.~~

~~F - 14~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)~~

~~T. Recently issued accounting standards (cont’d)~~

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new ~~standards do~~standard does not extend the use of fair value but, rather, ~~provide~~provides guidance about how fair value should be applied where it is already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. The ASU also requires additional disclosures for nonpublic entities to provide quantitative information about significant unobservable inputs used for all Level 3 measurements and a description of the valuation process used. The provisions of the ASU are effective for annual or interim reporting periods beginning after December 15, 2011. The Company adopted the provisions of the ASU in 2012. The adoption of ASU 2011-04 did not have a material effect on the Company’s consolidated financial statements. See Note 15.

F - 14

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

T. Recently issued accounting standards (cont’d)

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and ~~Liabilities~~.Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company ~~will implement~~does not expect the ~~provisions of ASU 2011-11 as of January 1, 2013.~~new standards to have a significant impact on its consolidated financial statements.

~~In June 2011, the FASB issued ASU 2011-05,~~ ~~Comprehensive Income (Topic 220): Presentation of Comprehensive Income.~~ Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. An entity should apply the ASU retrospectively. In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive income in Accounting Standards Update 2011-05. ~~The~~ ~~Company plans to implement the provisions of ASU 2011-05 in 2012.~~

Note 2 - Cash ~~and Cash Equivalents~~

	December 31				December 31
	2011		2010		2012		2011
Denominated in U.S. dollars		204		331		431		204
Denominated in NIS		196		616		872		196
Denominated in Euro		492		566		632		492

		892		1,513		1,935		892

Note 3 - Inventories

	December 31
	2012		2011
Raw materials		2,078		2,185
Work-in-process		2,270		1,475
Finished products		896		774

		5,244		4,434

F - 15

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

~~Note 3 - Inventories~~

December 31

2011

2010

Raw materials 2,185 1,894
Work-in-process 1,475 1,736
Finished products 774 652

4,434 4,282

~~Finished products are presented net of allowance for inventory obsolescence in the amounts of $2,422 and $1,635 as of December 31, 2011, and 2010, respectively.~~

Note 4 - Fixed Assets, Net

	December 31
	2012			2011
Machinery and equipment		36,424			34,678
Leasehold improvements		8,558			8,149
Motor vehicles		102			99
Office furniture and equipment		1,530			1,481

Fixed assets		46,614			44,407

Accumulated depreciation		(37,539	)		(36,661	)

Fixed assets less accumulated depreciation		9,075			7,746

December 31

2011
2010

Machinery and equipment 34,678 35,658
Leasehold improvements 8,149 8,625
Motor vehicles 99 107
Office furniture and equipment 1,481 1,596

Fixed assets 44,407 45,986

Accumulated depreciation (36,661 ) (37,824 )

Fixed assets less accumulated depreciation 7,746 8,162

Depreciation expense for the years ended December 31, 2012, 2011 and 2010 were $1,772, $2,091 and ~~2009 were $2,091,~~ $2,054 ~~and $2,030~~ respectively.

Note 5 - Goodwill

Changes in the carrying amount of goodwill for the years ended December 31, ~~2011~~2012 and ~~2010~~2011 are as follows:

	December 31						December 31
	2011			2010			2012			2011
Balance at the beginning of the year		530			573			518			530
Increase due to increase in holding								20			-
Impairment on goodwill								(481	)		-
Effect of translation adjustments		(12	)		(43	)		12			(12	)

		518			530			69			518

~~F - 16~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

Note 6 - Short-Term Credit and Current Maturities of Long-Term Debt

~~Banks~~

Annual
interest rate at
December 31
December 31

2011

2011

2010

%

In NIS (linked to the Prime rate) 5.25 - 7.0 3,795 4,903
In U.S. dollars 3.81 - 4.41 110 110
Current maturities of long-term
debt from banks (Note 8) 951 1,849

4,856 6,862

~~Note 7 – Other Current Liabilities~~

December 31

2011

2010

Accrued payroll and related benefits 1,064 1,123
Provision for vacation and other employee benefits 1,321 1,336
Net written put option (Note 1A) 366 299
Accrued expenses 1,022 900
Other liabilities 222 315

3,995 3,973

Banks

	Annual
	interest rate at
	December 31		December 31
	2012		2012		2011
	%
In NIS (linked to the Prime rate)		5.25 - 7.0		3,774		3,795
In U.S. dollars		3.81 - 4.41		110		110
Current maturities of long-term
debt from banks (Note 8)				1,221		951

				5,105		4,856

F - 1716

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 7 – Other Current Liabilities

	December 31
	2012		2011
Accrued payroll and related benefits		1,177		1,064
Provision for vacation and other employee benefits		1,642		1,321
Net written put option (Note 1A)		497		366
Accrued expenses		859		1,022
Other liabilities		244		222

		4,419		3,995

Note 8 - Long-Term Debt, Excluding Current Maturities

Banks and others

	Annual
	interest rate at
	December 31		December 31
	2012		2012			2011
	%
Linkage terms
U.S. dollar		1.88 - 5		1,133			950
NIS - linked to the CPI		4.5 - 6.5		-			57
Euro		2.17 - 3		95			554
NIS - linked to the Prime rate		P+0.9 - P+3		980			472
NIS - not linked		7.6 - 8.4		-			746

				2,208			2,779
Less - current maturities (banks and others)				(1,480	)		(1,175	)

				728			1,604

Annual
interest rate at
December 31
December 31

2011

2011

2010

%

Linkage terms
U.S. dollar 2.14 - 3.86 950 888
NIS - linked to the CPI 4.5 - 6.5 57 204
Euro 2.17 - 3 554 140
NIS - linked to the Prime rate P+0.9-P+3 472 1,898
NIS - not linked 7.6 - 8.4 746 42

2,779 3,172
Less - current maturities (1,175 ) (1,919 )

1,604 1,253

Minimum future payments at December 31, ~~2011~~2012 due under the long term debt is as follows:

	Long-Term
	Loan
First year		~~1,175~~1,480
Second year		~~1,325~~259
Third year and ~~onwards~~thereafter		~~279~~469

		~~2,779~~2,208

F - 17

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 8 - Long-Term Debt, Excluding Current Maturities (cont’d)

Long-term debt (excluding current maturities) includes capital leases in the amounts of ~~$330~~$650 and ~~$70~~$330 for the years ended December 31, 2012 and 2011, ~~and 2010,~~ respectively.

~~Financial~~

For the year ended December 31, 2012, financial covenants in respect of the Company’s credit facilities and long-term debt with one of the Company’s banks require the Company to maintain all of the ~~higher~~following financial covenants: (i) maintaining the greater of adjusted shareholders’ equity of ~~NIS 17.5~~$2.1 million ~~($4.9 million)~~ or ~~17%~~9% of ~~the Company’s~~its consolidated total ~~assets.~~assets; (ii) EBITDA of $3.0 million; and (iii) a debt service ratio of 1.5. For this purpose, shareholders’ equity excludes leasehold improvements and certain intangible ~~assets and prepaid expenses (except insurance premiums).~~assets. Debt service ratio is defined as annual EBITDA divided by annual repayments of debt including interest. As of December 31, ~~2011,~~2012, the Company was ~~not~~ in compliance with such covenants. However, in February 2012 the bank granted the Company a waiver, stating that the bank would not take any measures against the Company arising from the breach of such covenants, before the date of the release of its audited financial statements forFor the year ending December 31, ~~2012, which are expected to be released no later than April 30,~~ 2013 ~~by which time~~ the Company must ~~return to compliance.~~meet the following: (i) maintaining the greater of adjusted shareholders’ equity of $2.6 million or 12% of its consolidated total assets; (ii) EBITDA of $3.4 million; and (iii) a debt service ratio of 1.5. These amounts increase every year until December 31, 2016 when the Company must meet the following targets: (i) maintaining the greater of adjusted shareholders’ equity of $4.2 million or 20% of its consolidated total assets, (ii) EBITDA of $4.0 million and (iii) debt service ratio of 1.5.

Financial covenants in respect of the Company’s credit facilities and long-term debt with another bank require the Company to maintain the ~~higher~~greater of shareholders’ equity, excluding certain intangible assets and prepaid expenses (except insurance premiums), of NIS 10 million ($2.6 million), or 11% of the Parent’s total assets (on a non-consolidated basis). As of December 31, ~~2011,~~2012, the Company was in compliance with such covenants. As part of the Company's discussions with this bank for obtaining new lines of credits, the financial covenants may be amended including a possible requirement of the Parent's subsidiaries, Eltek Europe GmbH and Eltek USA Inc. to pledge all their assets towards, and to sign a letter of guaranty in favor of the bank.

As to pledges securing the loans, see Note 10A.

~~F - 18~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

Note 9 - Employee Severance Benefits

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

The Parent has an approval from the Israeli Ministry of Labor and Social 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 such depository payments were made.

F - 18

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 9 - Employee Severance Benefits (cont’d)

The Parent’s employees participate in a pension plan or individual insurance policies are purchased. The Parent’s liability for severance obligations for the employees employed for one year or more is discharged by making regular deposits with a pension fund or the insurance policies. Under Israeli law, there is no liability for severance pay in respect of employees who have not completed one year of employment. The amount deposited with the pension fund or the insurance policies 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 Parent and accordingly, such amounts funded and related liabilities are not reflected in the balance sheet.

For the non-management employees, the Parent deposits 72% of its liability for severance obligations with a pension fund for such employees, and upon completion of one year of employment with the Parent, it makes a one-time deposit with the pension fund for the remaining balance.

In 2011, the Parent made a transfer of funds from a central severance fund to individual funds in the name of the employees for the unfunded liability in respect of the employees, which pursuant to Section 14 of the Israeli Severance Pay Law, it discharged its liability in respect of such employees severance pay. As a result, the balance of assets held for employees severance pay was reduced, and the liability was reduced accordingly.

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 December 2012 the employee resigned from Kubatronik, however his pension entitlement up to the end of his employment with the Company continues.

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.

Expenses recorded in respect of the unfunded liability for employee severance payments for the years ended December 31, 2012, 2011, and 2010 are $57 $102 and ~~2009 are $102,~~ $157, ~~and $77,~~ respectively.

~~F - 19~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

Note 10 - Commitments and Contingent Liabilities

Pledges and guarantees

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.

The Company has pledged certain items of its equipment as a guarantee for the implementation of its benefited enterprise. The Company ~~believes~~has determined that it is in compliance with the conditions of the approval (see Note 14A).

The Company has also pledged machines to secure its indebtedness to certain ~~suppliers.~~suppliers that provided financing to such equipment.

F - 19

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 10 - Commitments and Contingent Liabilities (cont’d)

Operating leases and other agreements

The premises occupied by the Parent and Kubatronik are leased under two operating agreements that expire in February 2017 and June ~~2013,~~2014, respectively.

~~The parking area that serves Israeli employees is leased under an operating agreement that expires in December 2012.~~

The Parent has signed several lease and maintenance agreements for production equipment with suppliers of equipment and software. Of such agreements, the main principal agreement expires in January 2015.

4.3.

Several production machines are leased by Kubatronik under operating agreements which will expire in June 2014.

5.4.

The Parent’s motor vehicles are leased under operating lease agreements, mainly for three-year terms.

6.5.

Minimum future payments at December 31, ~~2011~~2012 due under the above agreements over the next five years and thereafter are as follows:

	Premises		Other		Premises		Other
	leases		agreements		leases		agreements
First year		855		406		1,077		704
Second year		803		233		1,025		476
Third year		754		189		975		293
Fourth year		754		196		975		212
Fifth year and thereafter		943		140		456		109

		4,109		1,164		4,508		1,794

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

~~F - 20~~

~~Eltek Ltd. and its Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(All amounts in thousands of $, except where otherwise stated)~~

~~Note 10 - Commitments and Contingent Liabilities (cont'd)~~

~~Operating leases and other agreements (cont'd)~~

Expenses recorded under these agreements for the years ended December 31, 2012, 2011, and 2010 were $ 1,183, $1,519, and ~~2009 were $1,519,~~ $1,330, ~~and $1,360,~~ respectively.

C. Indemnification agreement

The Parent entered into an indemnification agreement with its directors and officers and undertook to enter into the same agreement with future directors and officers, for losses incurred by a director or officer. Such indemnification amount is limited to the lesser of $2,000 or 25% of the Parent’s shareholders' equity.

F - 20

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 10 - Commitments and Contingent Liabilities (cont’d)

D. Contingent Liabilities

Environmental Related Matters

On August 25, 2009, the Parent received a notice from the Petach Tikva Municipality claiming that random automatic wastewater ~~sampling~~samplings in proximity of its plant ~~indicates~~indicate high levels of metal concentrations which exceed the amounts permitted by law. The Municipality requested ~~explanations to~~an explanation of such alleged violation and further informed the Parent that its environmental department ~~has~~had determined ~~that it will~~to initiate procedures against any plant that is not in compliance with the permitted concentrations. On September 16, 2009, the Parent sent a letter to the Municipality explaining that ~~the Parent has~~it had invested ~~extensive~~significant funds and resources each year in order to comply with all environmental legal requirements. The Parent further indicated that it ~~has~~had been and continued to be engaged in several projects to reduce salt and metal concentrations in ~~the plant’s~~its plant wastewater and that ~~the Parent~~it constantly updates its procedures with respect to environmental matters. In addition, the Parent ~~has~~ proposed to collaborate with the Municipality and conduct mutual tests to ensure maximum ~~possible~~ protection of the environment. ~~The~~To date, the Parent has not received ~~any~~a response from the Municipality to its letter dated September 16, 2009.

~~The Company has taken several measures to improve the concentration of hazardous minerals and metals in its affluent waste water and see positive results.~~ If the ~~Company~~Parent is found to be in violation of environmental laws, it could be liable for damages and costs of remedial actions ~~and a range of potential penalties,~~ and could also be subject to revocation of the permits necessary to conduct its ~~business or any part thereof.~~business. Any such liability or revocation could have a material adverse effect on ~~its~~the Company’s business, financial condition and results of operations.

On May 4, 2010, the Parent received legal notice from the Magistrate's Court that the Public Council for the Prevention of Noise and Pollution in Israel (the “Public Council”) had filed a lawsuit against it and certain of its directors regarding several alleged environmental damages caused by ~~the Parent with respect to~~ its release of industrial waste water. ~~The Parent entered into discussions with the Public Council in an attempt to reach a settlement and on~~On May 3, 2011, the Parent and its directors entered into a settlement agreement with the Public Council. The settlement agreement recognizes the significant improvement in the quality of the Parent’s wastewater and the contribution of the Public Council to this effort. The Public Council undertook not to ~~not~~ take any action (civil, criminal, or administrative) against the Parent and its directors or file any complaint with any regulatory agency regarding the matter for a one year period from the date on which the Court approves the settlement. The Parent undertook to pay the Public Council NIS 75 ($22) (plus applicable V.A.T.) for its expenses. On May 4, 2011, the Court approved the settlement agreement and the settlement was given the effect of a judgment.

F - 21

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 10 - Commitments and Contingent Liabilities ~~(cont'd)~~(cont’d)

D. Contingent Liabilities (cont’d)

Employee Related Matters

Three lawsuits ~~had been~~were filed against the Parent by ~~one~~an employee and two former employees regarding personal ~~injury~~injuries that they allegedly had suffered during their employment with the Parent, seeking financial compensation of approximately ~~$270~~$330 for past damages and an additional amount for future lost income, pain and suffering in such amount as the Court may determine. Four other employees notified the Parent that they also allegedly suffered personal injuries during their employment. Of these four employees, one is seeking compensation of $150 and the others did not state their claim amount. The Parent submitted the claims to its insurance company, which informed the Parent that it is reviewing the ~~statement~~statements of ~~claim~~claims without prejudicing its rights to deny coverage.

~~The Company did not accrue for any of the above contingencies in its Consolidated Financial Statements, since it believes that such claims will be covered by its insurance company.~~

Note 11 - Shareholders' Equity

Authorized, issued and outstanding share capital in historical terms is as follows:

	Authorized		Issued and outstanding				Authorized		Issued and outstanding
	December 31		December 31		December 31		December 31		December 31		December 31
	2010 and 2011		2011		2010		2011 and 2012		2012		2011
Number of shares:
Ordinary shares of par value NIS 0.6 each		50,000,000		6,610,107		6,610,107		50,000,000		6,610,107		6,610,107

Amount in US$
Ordinary shares of par value NIS 0.6 each				1,384,318		1,384,318				1,384,318		1,384,318

F - 22

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

(All amounts in thousands of $, except where otherwise stated)

Note 12 - Revenues

A. Customers who accounted for over 10% of the total consolidated revenues:

	Year ended December 31									Year ended December 31
	2011			2010			2009			2012			2011			2010
Customer A (consisting of two affiliated companies) - Sales of
Customer A - Sales of
manufactured products		14.9	%		13.7	%		13.3	%		17.2	%		14.9	%		13.7	%

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

Contractual Obligations	Payments due by period ($ in thousands)
	Total		less than 1 year		2-3 years		4-5 years		more than 5 years
Short-term bank credit (1)		3,905		3,905
Long-term debt obligations (1)		2,779		1,175		1,421		76		107
Operating lease		4,109		855		1,557		1,697
Other contractual obligations		1,164		406		422		336
Purchase obligations		1,530		1,530
Other short-term liabilities reflected on the company’s balance sheet (2)		3,995		3,995
Other long-term liabilities reflected on the company’s balance sheet		150								150
Estimate of interest payments on long-term debt obligations (3)		121		49		72
Total		17,753		11,915		3,472		2,109		257

Contractual Obligations	Payments due by period ($ in thousands)
	Total		less than 1 year		2-3 years		4-5 years		more than 5 years
Short-term bank credit (1)		3,884		3,884
Long-term debt obligations (1)		2,208		1,480		447		281
Operating lease		4,508		1,077		2,000		1,245		186
Other contractual obligations		1,794		704		769		321
Purchase obligations		2,539		2,539
Other short-term liabilities reflected on the company’s balance sheet (2)		4,419		4,419
Other long-term liabilities reflected on the company’s balance sheet		215								215
Estimate of interest payments on long-term debt obligations (3)		107		72		35
Total		19,674		14,175		3,251		1,847		401

Name	Number of Ordinary Shares Beneficially Owned (1)		Percentage of Ownership (2)
Erez Meltzer		-		-
David Banitt		-		-
Eytan Barak		-		-
Ophira Rosolio-Aharonson		-		-
Joseph Yerushalmi		-		-
Amit Mantsur		-		-
Arieh Reichart		85,515		1.3	%
Amnon Shemer		-		-
Dan Eshed		-		-
Eli Dvora		-		-
Shay Shahar		-		-
Roberto Tulman		-		-
Shlomo Danino		-		-
Hagay Ackerman		-		-
Avi Gal		-		-
Eva Zilberleib		-		-
James Barry		-		-
Axel Herrmann		-		-

Name	Number of Ordinary Shares Beneficially Owned (1)			Percentage of Ownership (2)
Josef Maiman		1,589,440	(3)		24.1	%
Merhav M.N.F. Ltd.		989,696	(4)		15.0	%
Integral International Inc.		599,744	(5)		9.1	%

Name	Age		Position
Erez Meltzer	54	55	Chairman of the Board of Directors
David ~~Banitt(1)~~Banitt (1)(2)	60	61	Independent Director
Eytan ~~Barak(1)~~Barak (1)(2)	67	68	Outside Director
Amit Mantsur	41	42	Director
Ophira Rosolio-Aharonson(1)(2)	62	63	Outside Director
~~Joseph Yerushalmi~~ Irit Eluz	73	45	Director

Year	High		Low		High		Low
2007	$	4.92	$	2.35
2008	$	3.10	$	0.50	$	3.10	$	0.50
2009	$	1.70	$	0.66	$	1.70	$	0.66
2010	$	1.82	$	0.84	$	1.82	$	0.84
2011	$	1.85	$	0.91	$	1.85	$	0.91
2012					$	1.69	$	0.87

	High		Low
2010
First Quarter	$	1.66	$	1.05
Second Quarter	$	1.82	$	1.03
Third Quarter	$	1.36	$	0.84
Fourth Quarter	$	1.69	$	0.90
					High		Low
2011
First Quarter	$	1.55	$	1.04	$	1.55	$	1.04
Second Quarter	$	1.85	$	1.07	$	1.85	$	1.07
Third Quarter	$	1.54	$	0.91	$	1.54	$	0.91
Fourth Quarter	$	1.59	$	0.94	$	1.59	$	0.94

2012
First Quarter	$	1.69	$	1.21	$	1.69	$	1.21
Second Quarter					$	1.67	$	1.14
Third Quarter					$	1.52	$	1.03
Fourth Quarter					$	1.39	$	0.87

2013
First Quarter					$	1.40	$	1.09

	High		Low
Month
September 2011	$	1.21	$	0.91
October 2011	$	1.29	$	0.94
November 2011	$	1.59	$	1.09
December 2011	$	1.44	$	1.13
January 2012	$	1.39	$	1.21
February 2012	$	1.64	$	1.28
March 2012	$	1.69	$	1.43

	High		Low
Month
September 2012	$	1.20	$	1.03
October 2012	$	1.14	$	1.00
November 2012	$	1.39	$	0.87
December 2012	$	1.28	$	1.06
January 2013	$	1.31	$	1.09
February 2013	$	1.33	$	1.15
March 2013	$	1.40	$	1.15
April 2013 (thorough April 26, 2013)	$	1.40	$	1.14

Services Rendered	2011		2010		2012		2011
Audit (1)	$	105,000	$	104,400	$	105,000	$	105,000
Audit Related Fees						--		--
Tax (2)		9,253		5,000	$	5,000	$	9,253
Total	$	114,253	$	109,400	$	110,000	$	114,253

Exhibit	Description

1.1	Memorandum of Association of the Registrant (1)


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


4.1	Form of Indemnification Agreement between Registrant and its officers and directors (3)


~~4.4~~4.3	Extension of Put/Call Option Agreement, dated May 4, 2005, by and between En-Eltek Netherlands 2000 B.V. and Mr. Alois Kubat ~~(6)~~(5)


~~4.5~~4.4	Second Extension of Put/Call Option Agreement Provisions under the Share Purchase Agreement, dated December 28, 2007, by and between En-Eltek Netherlands 2000 B.V. and Mr. Alois Kubat ~~(7)~~(6)


~~4.6~~4.5	English Translation of Lease Agreement dated June 26, 2002, by and between the Registrant and A.Z. Baranovitz – Assets and Rental Ltd. ~~(8)~~(7)


~~4.7~~4.6	Addendum to Lease Agreement dated May 13, 2007, by and between the Registrant and A.Z. Baranovitz – Assets and Rental Ltd. ~~(9)~~(8)


~~4.8~~4.7	Amendment and Supplement to a Lease Agreement dated June 7, 2002, by and between Kubatronik Leiterplatten GmbH and Ms. Karin Kubat. ~~(10)~~(9)


~~4.9~~4.8	English Translation of Letter of Extension dated December 18, 2007 to Lease Agreement dated June 7, 2002, by and between Kubatronik Leiterplatten GmbH and Ms. Karin Kubat. ~~(11)~~(10)


12.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.


12.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1924, 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

101.INS*	XBRL Instance Document. ~~(12)~~(11)
101.SCH*	XBRL Taxonomy Extension Schema Document. ~~(12)~~(11)
101.PRE*	XBRL Taxonomy Presentation Linkbase Document. ~~(12)~~(11)
101.CAL*	XBRL Taxonomy Calculation Linkbase Document. ~~(12)~~(11)
101.LAB*	XBRL Taxonomy Label Linkbase Document. ~~(12)~~(11)
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document. ~~(12)~~(11)

	Year ended			Year ended			Year ended
	December 31			December 31			December 31
	2011			2010			2009
Profit (loss) before income tax expense:
Israel		2,136			(1,460	)		(807	)
Foreign jurisdictions		(290	)		(356	)		(69	)

Total		1,846			(1,816	)		(876	)

					Quoted prices		Significant								Quoted prices		Significant
	December 31,				in active		other		Significant		December 31,		December 31,		in active		other		Significant
	2011		December 31,		markets for		observable		unobservable		2012		2012		markets for		observable		unobservable
	Carrying		2011		identical assets		inputs		inputs		Carrying				identical assets		inputs		inputs
	amount		Fair value		(Level 1)		(Level 2)		(Level 3)
Assets:
Foreign currency
derivative
contracts, net		5		5		-		5		-

Total		5		5		-		5		-
											Amount		Fair value		(Level 1)		(Level 2)		(Level 3)
Liabilities :

Long-term debt		2,226		2,102		-		2,102		-		1,296		1,271		-		1,271		-

Net written put
option		366		366		-		-		366		497		497		-		-		497

Total		2,592		2,468		-		2,102		366		1,793		1,768		-		1,271		497

	ELTEK LTD.

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