The Company’s products for Digital Preprint are used for generation and production of high-resolution, color, printed media such as marketing and advertising material, magazines, newspapers, catalogs, inserts, packaging and annual reports. The digital preprint process includes image capture, page assembly, storage retrieval, retouching, editing, integration and proofing of color images (photographs and artwork) and integration of text to produce color separation films or plates, or direct digital output, for high quality printing. The products employ an open architecture approach and offer a high level of connectivity with products from other vendors. The digital preprint products allow users to work throughout the process in a digital workflow and efficiently manage digital assets, thus significantly reducing production time, materials and labor costs while improving image and color quality. The digital workflow extends into digital printing.

The following are the principal companies in the Scitex Group:

·   Scitex Corporation Ltd., the Registrant, located in Herzlia, Israel, comprises corporate management and the operations of “Scitex Israel” - the Company’s Israel operations, other than Idanit Technologies Ltd. It has a total workforce of approximately 1,050 (including part-time and temporary employees), and includes research and development, engineering and manufacturing facilities. Scitex Israel, formerly part of the Graphic Arts Group, includes a number of product line divisions (both Digital Preprint and Digital Printing), each responsible for research and development, production, integration and product marketing. Also included is Scitex Middle East / Africa, a division formed to market, sell and support the Company’s products in Africa and the Middle East, including Israel.

·   Iris Graphics, Inc. (“Iris Graphics”), part of the Company’s Digital Preprint business (formerly part of the Graphic Arts Group), is based in Bedford, Massachusetts, and is a leading developer and manufacturer of high quality color digital inkjet printers and proofing systems. A wholly-owned Scitex subsidiary, it has a workforce of approximately 350, was founded in 1985 and acquired by Scitex in 1990.

·   Scitex Digital Printing, Inc. (“SDP”), a wholly-owned Scitex subsidiary based in Dayton, Ohio, with approximately 750 employees, is the premier entity of the Company’s Digital Printing business. It develops and manufactures very high speed, computer-driven, variable-data inkjet printers, which it also markets, sells and supports. Ancillary operations in Europe and the Far East, including a Scitex subsidiary, Scitex Digital Printing (Asia Pacific) Pte. Ltd., based in Singapore, are generally responsible for the sale and service of SDP’s products outside the United States. SDP was formerly the Dayton Operations division of Eastman Kodak Company (“Kodak”), from which it was purchased in 1993.

·   Karat Digital Press (“Karat”), part of the Company’s Digital Printing business, is a joint venture for the development, manufacture and marketing of a direct digital offset press for the short-run to medium-run printing market. Scitex and the German corporation, Koenig & Bauer-Albert A.G., each have a 50% interest in the joint venture. Research, development and production take place in both Radebeul, Germany and Herzlia, Israel.

·   Scitex Digital Video, Inc. (“SDV”), a wholly-owned Scitex subsidiary, develops, manufactures, markets, sells and supports digital video manipulation equipment and non-linear video workstations. SDV was formed in 1995 by the merger of Abekas Video Systems, Inc. (“Abekas”) with ImMIX, Inc. (“ImMIX”). Both ImMIX and Abekas were previously part of the Carlton Communications Plc Group, ImMIX having been acquired by Scitex in September 1994 and Abekas in September 1995. SDV’s headquarters are located in Redwood City, California, with a second major facility in Grass Valley, California. In addition, ancillary European operations, located in Aldermaston, Berkshire, U.K., provide broad support for marketing, sales and customer service of SDV’s products in Europe and adjoining regions. The total workforce, including the European operations, numbers approximately 170. The Digital Video operations are not considered part of the Company’s core businesses.

·   Scitex America Corp. (“Scitex America”), a wholly-owned Scitex subsidiary formed in 1972, with its headquarters in Bedford, Massachusetts, has almost 500 employees. It is responsible principally for marketing and sales of the Company’s Digital Preprint products and Idanit printers, as well as customer support and customer training for such products, in North and South America. It has a network of regional offices and other facilities throughout the United States and Canada, and uses both direct sales channels and selected dealers and distributors. Scitex America sells to Latin America through dealers and distributors.

·   Scitex Europe S.A. (“Scitex Europe”), a wholly-owned Scitex subsidiary with headquarters in Waterloo (near Brussels), Belgium, was incorporated in 1974. It is responsible principally for marketing and sales of the Company’s Digital Preprint products and Idanit printers, as well as customer support and customer training, throughout Europe, and has a network of regional sales offices and other facilities. Scitex Europe uses both direct sales channels and selected dealers and distributors. Scitex Europe’s workforce, including employees of Scitex’s European regional subsidiaries, numbers approximately 450.

·   Nihon Scitex Ltd. (“Nihon Scitex”), a joint venture based in Tokyo, Japan, was formed in 1985, and-markets, sells and supports the Company’s Digital Preprint products and Idanit printers in Japan. It is owned 50% by Scitex and 50% by the Japanese corporation, Toyo Ink Mfg. Co. Ltd. (“Toyo Ink”). It operates four regional sales offices, as well as additional customer support centers, and has approximately 180 employees.

·   Scitex Asia Pacific (H.K.) Ltd., a wholly-owned Scitex subsidiary, was formed in Hong Kong in 1992 and has over 80 employees. It is responsible principally for the marketing, sales and customer support of the Company’s Digital Preprint products and Idanit printers in Asia and the Pacific Rim (apart from Japan).

The following table sets forth amounts and relative percentages of total revenues for the years 1995 through 1997 for the Company’s three strategic business units for such years, the Graphic Arts Group, Scitex Digital Printing and Scitex Digital Video. (Effective from the beginning of 1998, the Company will generally report activities by reference to the current classification of its principal businesses.)

Preprint refers to all the processes and procedures required to prepare the color separation films, printing plates or direct digital output, prior to printing, and includes design & layout, image input, editing and digital asset management, proofing, and image output.

The Company’s Digital Preprint products encompass a broad range of digital imaging devices and systems (which generally combine industry standard and custom-made hardware and software) that automate the preprint tasks required to prepare color images and pages for high resolution, high quality printing. These products operate on a stand-alone basis or are combined in systems and networks that meet the application requirements and production environments of its customers. Most of the preprint products are designed to be easily upgraded, to communicate with a wide variety of products provided by other vendors, including desktop publishing (“DTP”) systems and software applications, and to have sophisticated networking and telecommunications capability. This open architecture allows end-users to select from a wide variety of configurations to best address their needs.

The development of these markets, together with trends in preprint and general computing, has resulted in an increasing proportion of the Company’s total revenues being generated by sales of stand-alone devices, such as imagesetters, platesetters, proofers, printers, scanners and digital cameras, while the proportion of integrated system sales has declined.

The Company’s Digital Preprint operations comprise the Input Systems and Output Systems divisions of Scitex Israel together with the operations of Iris Graphics. Also included in Digital Preprint is the Company’s projects and products in the field of Telecommunication Solutions and Networking.

In the image input stage, color images are scanned and separated into the four colors used in commercial printing - cyan, magenta, yellow and black - and the separated images and text are digitized for manipulation and refining in the editing process. Color images and text can be scanned from a wide variety of media, including color transparencies, printed pictures and negatives. Alternatively, images can be input through digital cameras without the use of film, and as computer generated designs, directly into the digital workflow.

The Input Systems division also includes the Leaf^tm product line of digital cameras. These primarily include products for digital photography that consists of digital cameras backs mounted on high-quality 2¼ x 2¼ inch cameras and connected to a Macintosh computer. They capture images electronically, without use of film or chemicals, and are a high-quality efficient replacement for conventional photography, especially for catalog applications. The high-resolution, digital images are transferred to the hard disk of the computer and displayed in full color on the monitor. The Leaf DCB II^tm is used for the capture of stationary images in color or images in motion in monochrome, and the Leaf DCB II Live^tm offers real-time viewing of the picture on the computer screen before the actual capture. The Leaf CatchLight^tm can also photograph images in motion in color, and is therefore particularly suitable for portraits and fashion photography.

In the output stage, high-resolution films or plates are produced for each of the four (or more) colors used in commercial printing. The films are subsequently used to produce the printing plates used on color presses. Alternatively, digital files of each of the four colors separations can be sent directly to a short-run or medium-run printer.

The Output Systems division also includes systems for data management based on client-server architecture that provide automation tools for fast access to any data element and better control of data in process and data archiving. These systems facilitate input, output, exchange, storage, access and communication of the large amounts of data needed to accurately describe color images. As an 8½ x 11 inch color page can require up to 40 megabytes of computer memory for an accurate description, the requirements placed on high-quality color electronic graphic arts systems for data access, storage and internal and external data communications are substantial.

The products of the Output Systems division also include a number of tools that support a smooth workflow from DTP applications, used in connection with design and layout, to Scitex systems. They consist primarily of software supplied by Scitex, which can integrate with PostScript language, offer scanning and proofing, and permit the creation of Scitex files for more sophisticated work on Scitex products

High quality printed proofs are used in the color prepress process to proof the images and pages during and after the editing stage, to check the imposition layout, and for final quality control as well as customer acceptance and approval before preparation of final color separation films (used to prepare plates) or plates for the initiation of high volume printing.

Networking technologies are an integral part of the Scitex system architecture. The Company has developed a variety of affordable, modular products to support market needs for high speed, high volume communications products known as SciNet^tm. SciNet products can integrate systems, locally in nearby rooms or adjacent buildings and globally across continents.

In April 1997, Scitex and BT (British Telecom) announced the joint development of secure network-based applications for the digital preprint and printing industries. This new managed communications service, the Vio^tm digital graphics network, is being designed to allow remote file transfer in key stages from image capture to printing, thereby extending the ability of those in these industries to offer their services beyond organizational and geographic boundaries.

The Company’s Digital Printing operations comprise: SDP; Idanit; Karat Digital Press; and the Print-on-Demand Systems Division at Scitex Israel.

The Company believes it is preeminent in inkjet printing and has recently added digital offset printing to its technology line. The inkjet product line includes: high-speed, variable-data inkjet printing systems for mass customized documents. They are used by specialized printers, in-house printers and data centers for printing business forms, bills and direct mail. The Idanit inkjet system is used to print short and medium color runs of point-of-purchase displays, banners and outdoor advertising. Certain silk-screen printers are incorporating this printer in their operations.

Other digital printing products include front ends supplied to the Xerox Corporation to drive and control their color xerographic printers. They are used for short-run, on-demand printing, including advanced customization and personalization. A digital offset press, being developed by Karat Digital Press, is intended for printers who depend on high quality, high productivity, and wish to integrate their color offset printing into the digital workflow.

SDP’s systems produce hardcopy output of digital data files generated entirely on a computer or originating from a computer. Scitex Digital Printing focuses on long-run, high-volume, printing in monochrome and spot color, typically with print runs from thousands to millions. Large amounts of variable data from a computer database can be printed by SDP products at very high speeds. Among the applications included are personalization of mass mailings, billings, statements, bar codes and serially-numbered lottery tickets.

SDP inkjet printing systems offer sharp character definition, flexible font selection and pinpoint registration. They primarily serve commercial and in-plant printers, in both the narrow format and wide format, variable information, digital printing market.

Narrow format systems, with 1-inch printheads, are used for speed and print quality, in applications such as direct addressing, bar coding, spot color or highlighting.

The Scitex Dijit^tm printing system prints variable information for automatic direct addressing, personalization, messaging, numbering and dating at speeds up to 1,000 feet per minute (fpm). The system is compact and modular and can be used with a variety of graphic arts equipment such as folders, web presses or mailing bases. The printing modules for the Scitex Dijit printing system are the Scitex 5240^tm and Scitex 5120^tm printers, the former offering significantly higher resolution than the latter.

Wide format systems, with multiple 4.25-inch printheads, are used for full-page, variable printing up to 17 inches wide on one or two sides.

The Scitex 6240^tm inkjet printing system prints business forms, tags and labels, direct mail, booklets and billing statements. It is used for bar coding, numbering, addressing, personalization, and spot color or highlighting. This modular printing system, available in three models with speeds up to 300, 500 or 1,000 fpm, easily merges with web presses, collators, mail bases, folders and a variety of other on-line and off-line equipment. Output from two print stations can be "stitched" together to create an image area up to 8½ inches wide. The system’s controller can drive a mix of 4 inch and 1 inch widths.

The Scitex 3500^tm and Scitex 3600^tm high speed printing systems can change 100% of the printed data from one piece to the next "on the fly". The former prints at 500 fpm while the latter prints at 1,000 fpm. These Scitex 3000 series printing systems are used for high volume personalized direct mail, sweepstakes, lottery tickets, business forms, financial statements and other variable data printing applications, and can print full-page images with letter quality text, bit-mapped graphics and bar codes.

A range of black and selected spot color inks are manufactured and sold for use with the 4.25 inch and 1.00 inch print stations. Different inks are available for optimal use with different substrates and applications.

In addition, under a distribution agreement entered into with NUR Macroprinters Ltd. (“NUR”), an Israeli company, the Company markets (in Africa, Asia and Australia) the NUR Blueboard^tm color inkjet device, with superlarge format developed by NUR, for printing outdoor advertising billboards up to 16.4 feet wide with for seamless posting and flex-face capability.

Karat Digital Press, a Scitex joint venture with KBA-Planeta A.G., a subsidiary of Koenig & Bauer-Albert A.G., the world's third largest press manufacturer, is developing the four-color, four-page 74 Karat^tm digital offset press. The 74 Karat press is intended to offer commercial printers ease-of-use with a high level of automation and speed, delivering high quality offset printing.

In April 1998, at the National Association of Broadcasters (“NAB”) tradeshow in Las Vegas, SDV introduced version 2.0 of software and networking capability for the ImMIX Sphere^tm line of digital video post-production systems. This line comprises the MicroSphere^tm, VideoSphere^tm and StrataSphere^tm nonlinear finishing workstations and the DigiSphere^tm acquisition/distribution workstation. They offer a range of features and prices to meet the needs of a wide variety of video professionals. The ImMIX Sphere products incorporate Abekas-developed application specific integrated circuits (“ASIC’s”) used in the Abekas ASWR8150 digital switcher for keying and wipe generation. The product line also offers Abekas Dveous effects capabilities, which creates surface textures that can interact with 3D light sources.

In January 1998, SDV adopted a revitalization plan aimed at returning the company to profitability. The plan included significant reduction in workforce, focusing engineering resources on certain key products, rationalization of dealer distribution channels and the consolidation of manufacturing capabilities.

The following table sets forth the amounts and relative percentages of the Company’s total revenues by geographical markets, for the years indicated:

** Revenues from graphic arts in Japan were mainly through Nihon Scitex, and these are reflected at the prices charged by the Company to Nihon Scitex and not at subsequent retail prices charged by Nihon Scitex to customers.

Scitex has several wholly-owned subsidiaries in North America, Europe and the Far East and a joint venture in Japan (Nihon Scitex) which operate primarily for the marketing and sale of the Company’s products in the digital preprint and, to a lesser extent, the digital printing markets.

As an integral part of the Company’s marketing efforts into the digital preprint market, the Company employs a distribution strategy, which combines direct distribution outlets (primarily in North America, Western Europe and Japan), with the utilization of other selective distribution strategies, including dealers, distributors and value added resellers (VAR’s), including in regions where it had traditionally sold only directly. During 1997, 45% of Scitex America’s sales and 65% of Scitex Europe’s sales were being effected through these indirect channels (compared to 54% and 57%, respectively, in 1996 and 41% and 43%, respectively, in 1995). By the end of 1997, the Company’s indirect channels included over 100 dealers and distributors, and over 180 resellers, worldwide.

OEM sales are also an integral part of the Company’s sales strategy. In 1997, such sales through the Company’s eight major OEM partners together accounted for over 6.4% of the equipment sales (including all sales by the Print-on-Demand Systems division).

The Company’s digital preprint customers include primarily commercial printers and digital trade services. Historically, color prepress activities had been conducted primarily by specialized color trade shops and large commercial printers and publishers, the initial market for the Company’s high-end color prepress products. As the cost of color electronic prepress systems declined and the demand for color in printed material increased, the use of color electronic prepress systems expanded, and the Company substantially expanded its marketing efforts and product offerings in the graphic arts market, in order to address the needs of smaller commercial printers and digital trade services.

Scitex user group organizations are important factors in its sales and marketing efforts, and also provide substantial feedback about future requirements on which the Company can base its development efforts. In recent years, more than half the Company’s sales revenues have been derived from sale of additional products to its existing customer base. Customers can generally expand or upgrade their existing systems over time to add features, increase production or add new sites, as well as improve communication between sites.

SDP generally markets and sells its own products through a global direct sales force. Sales organizations are strategically located throughout the United States and, through several Scitex subsidiaries, in Europe and the Far East. In certain areas, SDP also utilizes dealers, VAR’s and OEM agreements.

The traditional customers of SDP include professional mailers, commercial printers, publication printers (such as magazines and catalogs), and form printers. Although the traditional markets and applications for SDP’s systems have been direct mail, lottery and addressing, there are several emerging markets and applications, including data center billing, newspapers, tag and label, as well as the high volume demand publishing industry.

SDV markets and sells its products in the United States (where it maintains six regional sales offices) and the United Kingdom through a combination of direct sales efforts and professional video distributors. Elsewhere, SDV’s products are generally sold through professional video distributors, although SDV also uses VAR’s for the sale of certain products, in particular the digital disk recorder. SDV’s customers include various post-production facilities, television broadcasters, advertising agencies, graphic artists, independent video producers and corporate communications departments.

The Company’s equipment sales are typically made on terms requiring an advance payment, with the balance of the purchase price payable in stages, generally on delivery and on or shortly after acceptance of installation. The Company has agreements with various financing companies for long-term third party financing of purchases of the Company’s equipment by certain customers, including an agreement with General Electric Capital Corporation, signed in December 1993 for a term of five years. The terms of these agreements grant the financing companies recourse against the Company in an amount equal to either a fixed amount established at the time of financing or a percentage of the outstanding balance, including interest, owed by the customer to the financing company. Approximately $146 million of trade receivables which had been financed under these programs were outstanding at December 31, 1997 (approximately $247 million outstanding at December 31, 1996). (See Note 9(b)(1) to the Consolidated Financial Statements listed in Item 19.)

In each of the years 1997 and 1996, no end-user customer nor distributor accounted for more than 10% of net revenues.

The primary competitive factors affecting the Company’s sales of digital preprint and digital printing equipment are performance relative to price, productivity and throughput of systems, product features and technology, quality, reliability, cost of operation, the quality and costs of training, support and service, and (with particular reference to digital printing) flexibility of adapting to customers’ applications. Other competitive factors in this market include the ability to provide access to product financing, reputation of the supplier and customer confidence in continuing development programs for additional accessories and features compatible with the equipment offered.

The Company’s principal competitors in the digital preprint market are: Agfa-Gevaert, headquartered in Belgium (part of the German Bayer Group); Heidelberger PrePress of Germany (formerly Linotype-Hell A.G. and now part of the Heidelberger Group – “Heidelberg”); Fuji Photo Film Co. Ltd. (primarily through its new wholly-owned subsidiary, Fuji Film Electronic Imaging Ltd.); Barco NV of Belgium; and Dainippon Screen of Japan (operating in the United States under the name Screen). In addition, certain other companies offer equipment that competes with specific products or product capabilities within the Company’s product line.

The principal competitors of SDP in the narrow format digital printing market are U.S.-based Videojet Systems International, Inc. (owned by General Electric Plc of the U.K.), Domino Printing Sciences Plc of the U.K. and Imaje of France. In the wide format digital printing market, SDP’s principal competition comes from alternative technologies of companies such as the U.S. corporations, Delphax Systems, Inc. (electron beam imaging, recently acquired by Xerox) and Nipson Printing System, Inc. (a subsidiary of Bull Corporation of America) (magnetography), as well as Océ Printing Systems GmbH (formerly Siemens Nixdorf Printing Systems) and IBM Pennant Printing Systems (both electrophotography).

The principal competition for Idanit’s wide-format printing systems comes from the Scotchprint 2000^tm printer produced by Minnesota Mining & Manufacturing Co. (3M). In addition, Idanit’s products compete with the superwide printers manufactured by a number of companies, including Vutek, Inc. and SignTech of the United States, and Nur Macroprinters Ltd. and Matan Digital Printing Ltd. of Israel.

Electronics for Imaging, Inc. (EFI) and Splash Technology Holdings, Inc. are the Company’s principal competitors in the Print-on-Demand Systems market. Karat Digital Press’s principal competitor is likely to be Heidelberg.

The primary competitive factors affecting sales of the Company’s digital video products are image quality, real-time processing, complete post-production functionality and price. Although the principal, broad-based competitors of SDV’s Abekas product line are Sony, Tektronix, Inc. (formerly Grass Valley Group) and BTS (part of the Philips Group, based in Germany, largely Dutch owned), a number of other companies, including Accom, Inc., Pinnacle Systems, Inc., Chyron Corp., Questech and Aston Electronic Designs Ltd., have emerged as spot competitors on single products. Historically, the principal competitors of SDV’s ImMIX product line have been the U.S. corporations, Avid Technology, Inc. and Data Translations, Inc. However, as SDV expands the ImMIX product offering, such products draw closer to those of other companies from whom it can expect increased competition, including Discreet Logic Inc., Tektronix, Inc. and, possibly, Sony.

Technical support, training and customer service are important factors in system sales and the achievement of high levels of customer satisfaction. The Company has established full-time support centers for its products in its major geographic markets offering rapid deployment of service engineers, telephone support and, for certain products, electronic on-line information services.

Sales support includes site preparation and inspection, equipment installation and basic training in equipment operation and preventive maintenance. Subsequently, the Company provides regular updates to software and assists its customers in achieving full utilization of its equipment by conducting classes for operators, advanced application training and management seminars.

The Company provides an equipment warranty for an agreed period following completion of installation. After the warranty period, the Company offers service contracts providing for equipment and software maintenance at a fixed quarterly charge for each product. While the majority of systems that are beyond their warranty period are covered by service contracts, in recent years a significant proportion of customers prefer to pay for service on a time and materials basis.

As of December 31, 1997, the Company’s customer support operations, including those of Nihon Scitex, employed approximately 750 engineers, technical and application specialists as well as logistics and management personnel in several dozen locations, in North America, Europe, Japan and the Pacific, as well as at the Company’s headquarters in Israel. In certain areas, the Company also provides services through distributors and agents, who provide technical and applications support through locally trained engineers.

In 1997, over 20.5% of the Company’s total revenues (nearly $139 million) was generated from service operations.

In addition, during 1997, the Company generated nearly $57 million of revenue from the supply of consumables, primarily ink and paper for the inkjet printing products produced by SDP and Iris, representing 8.4% of the Company’s total revenues.

The Company’s research and development efforts, engaging approximately 675 employees as at December 31, 1997, are focused on the development of new products and technologies, as well as enhancing the quality and performance relative to price of its existing products, reducing manufacturing costs and upgrading and expanding its product line through the development of additional features and improved functionality.

Although the Company carries out the greater part of its engineering, research and development activities in Israel (at Scitex Israel and, from 1998, at Idanit), a significant part of such activities is also conducted in the United States, principally by SDP, SDV and Iris Graphics.

The Company has taken advantage of royalty-bearing grants in the form of participations in industrial research provided by the Government of Israel. The following table shows the amounts and relative percentages of total research and development expenditures and the royalty-bearing participations therein, for the years indicated:

The Company expects that Israel Government participations will, in future years, decline as a percentage of the Company’s total research and development expenditure, due in part to an increasing proportion of such expenditure being incurred in operations outside Israel (and therefore ineligible to receive such funding).

Under the terms of the Israel Government participations, the Company is required to pay a royalty on the proceeds of sales of products resulting from funded projects up to the amount of the grants received (and for certain projects approved prior to 1994, the limit is 150% of the grants received). The royalties payable in respect of projects approved prior to 1995 are generally 2% of the amount of such sales. However, on projects approved subsequently, the royalties generally payable are 3% for the first three years of product sales, 4% for the next three years and thereafter 5% up to the amount of the grant received (such rates being increased by 1% in respect of certain special projects). Royalties expensed by the Company pursuant to the Israel Government and other programs amounted to approximately $4.3 million in 1997 (approximately $2.6 million in 1996 and $2.5 million in 1995). There can, however, be no assurance that the program for Israel Government participations will continue in the future or that the available benefits thereunder will not be reduced or that the Company will continue to meet the conditions to benefit from such program.

The Company has manufacturing facilities in both Israel and the United States. In both countries, the Company also uses subcontractors in connection with certain types of work and activities.

Product quality control tests and inspections are performed at various steps throughout the manufacturing process, and each product is subjected to a final test prior to delivery.

Most of the parts and components used by the Company in the manufacture and assembly of subsystems are available from several sources, although the Company currently purchases a substantial number of items from single suppliers. In some cases, there is only one source of supply for a component used by the Company. The Company generally purchases certain major data processing components used in its products under annually renewable supply agreements with its principal suppliers. To date, the Company has not generally experienced difficulty in obtaining timely deliveries. Although increased demand for these components or future unavailability could result in production delays which might adversely affect the Company’s business, the Company believes that, if required, it could develop alternative sources of supply for all parts and components which it uses.

The Company owns, licenses or otherwise has rights in over 630 issued patents (primarily in the United States) and has over 480 patent applications pending in the United States and elsewhere. A large number of these issued patents were acquired with the Company’s purchase of SDP from Kodak in 1993. In addition, the Company claims proprietary rights in various technology and trade secrets relating to its products and operations.

In September 1996, an action was commenced in the United States District Court of the Northern District of California by Dainippon Screen of Japan (and certain of its subsidiaries) and Harlequin Limited of the UK (and its US subsidiary) to invalidate certain Scitex patents relating to Scitex’s core “trapping” technology. The complaint was later expanded to include claims that certain Scitex products infringe Dainippon Screen patents. Scitex is vigorously defending the claims presented in the action and has itself filed counterclaims against the plaintiffs for infringement of the trapping patents. The suit is continuing and is scheduled for trial in November 1998.

The Company also holds a number of trademarks and service marks in the United States and elsewhere.

As of December 31, 1997 the Company had a total worldwide workforce of approximately 3,400. The workforce in Israel numbered approximately 1,050 (including approximately 130 positions filled by part-time and temporary employees) and there were 1,750 employees in the United States (including nearly 200 temporary employees) and 600 employees in Europe and elsewhere. In addition, Nihon Scitex employed nearly 200 persons. The Company considers its relations with its employees to be good and has never experienced a strike or work stoppage.

Other than certain employees in the Company’s German and Belgian operations, the Company’s employees are not generally represented by labor unions. Nevertheless, as regards the Company’s employees in Israel, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and Israel’s Coordination Bureau of Economic Organizations (including the Manufacturers’ Association) are applicable to such employees by order of the Israel Ministry of Labor and Welfare. However, the Company generally provides its employees with benefits and conditions beyond the required minimums, including contributing to funds to provide severance.

The Company’s corporate headquarters and executive offices, together with a significant part of its research and development, engineering and manufacturing operations, are located in Israel, and therefore its operations are directly affected by economic, political and military conditions in Israel. In addition, the Company is heavily dependent upon components imported into Israel, primarily from the United States, and all but a small percentage of the Company’s sales are made outside Israel. Accordingly, the Company’s operations could be adversely affected if major hostilities involving Israel should occur in the Middle East or if trade between Israel and its present trading partners should be curtailed or interrupted.

From the establishment of the State of Israel in 1948, a state of hostility existed, varying as to degree and intensity, between Israel and its various Arab neighbors and from 1987 Israel had experienced civil unrest from the local Arab population in territories which Israel had administered following a war in 1967 (the “Territories”).

Many of the Company’s officers and Israeli male employees are obligated to perform annual reserve duty in the Israel Defense Forces and an emergency situation involving a mobilization in Israel could require a substantial increase in the time such personnel are required to devote to active service in the military, which could result in disruption of the Company’s Israeli operations.

Israel has signed peace treaties with two of its principal Arab neighbors, Egypt in 1979 and Jordan in 1994, and has entered into a series of agreements with the Palestine Liberation Organization (the “PLO”) relating to the Territories, pursuant to which civil administration of a significant part of the Territories, including the major areas of population, has been transferred by Israel to a self-rule Palestinian Authority. However, negotiations between Israel and its other neighboring Arab countries, in particular Syria, have not, so far, resulted in agreement and there are still a number of major unresolved issues between Israel and the Palestinian Authority . No predictions can be made as to whether a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or the operations of the Company.

The Company has been favorably affected by certain Israel Government programs and tax legislation, principally related to research and development grants and capital investment incentives. The Company’s operations could be adversely affected if these programs or tax benefits are reduced or eliminated and not replaced with equivalent programs or benefits, or if the Company’s ability to participate in the programs were significantly reduced. There can be no assurance that such programs and tax legislation will continue in the future or that the available benefits will not be reduced or that the Company will continue to meet the conditions to benefit from such programs and legislation.

The defense burden, the absorption of a substantial number of new immigrants, development of the economy and the provision of a minimum standard of living have resulted in high balance of payments deficits for Israel for many years. The main sources of capital imports to finance the deficits in the Israeli balance of payments have been military and economic aid from the United States, personal remittances, sales of bonds (primarily in the United States), inter-governmental, institutional and free market loans and guarantees, as well as contributions from world Jewry. Israel’s economy could suffer serious adverse consequences if current sources of capital were to be reduced by material amounts.

Israel has the benefit of a free trade agreement with the United States which, generally, permits tariff free access of the Company’s products into the United States. In addition, as a result of an agreement entered into by Israel with the European Union (the “EU”) and countries remaining in the European Free Trade Association (“EFTA”), the EU and EFTA have abolished customs duties on Israeli industrial products.

The administrative offices of the Company’s corporate management and the principal facilities of Scitex Israel are located in several adjacent buildings within an industrial park located in Herzlia, Israel. One of these buildings (consisting of approximately 85,000 square feet of floor space) is owned by the Company and the others are leased. In addition, Idanit leases its principal facility, which is situated within an industrial park located in Rishon Lezion, Israel, to the south of Tel Aviv.

The property leased and occupied by the Company in Israel currently comprises, net, approximately 180,000 square feet of floor space, of which approximately 161,000 square feet of floor space in Herzlia is leased from Bayside Land Corporation Ltd., an affiliate of PEC Israel Economic Corporation and Discount Investment Corporation Ltd., two major shareholders of the Company. (See “Item 4. Control of Registrant”.)

The Company, through its subsidiaries, leases various facilities outside Israel, the main locations of which are in Bedford, Massachusetts; Dayton, Ohio; Redwood City and Grass Valley, California; Waterloo, Belgium; and Hong Kong. These facilities currently comprise approximately 875,000 square feet of floor space. In addition, Nihon Scitex leases approximately 70,000 square feet of floor space in Japan.

A new manufacturing facility in Radebeul, near Dresden, Germany, comprising approximately 10,000 square feet, was inaugurated by Karat Digital Press in May 1998 for the production of the 74 Karat digital press.

The Company has invested substantial sums in improving the properties which it occupies in order to adapt them to its various activities. In the case of leased properties, the majority of these improvements have been integrated into the leasehold facilities. The Company believes that its facilities are in good working order and suitable for the intended purposes.

The Company’s manufacturing operations in Israel are conducted at the facilities in both Herzlia and Rishon Lezion. The Company’s other principal manufacturing facilities are the new SDP facilities in Dayton, Ohio, specifically tailored to SDP’s printhead manufacturing workflow, the Iris Graphics facilities in Bedford, Massachusetts and the SDV facilities in Redwood City and Grass Valley, California.

The Company and certain of its current and former officers and directors were defendants in a purported class action lawsuit filed in December of 1995 in the United States, captioned Lyons v. Scitex Corporation Ltd., et al., 95 Civ. 10594 (S.D.N.Y.). The complaint in this case sought damages based on allegations that the defendants violated certain provisions of federal securities law in connection with certain reports concerning the Company’s results of operations during the period May 1994 to November 1995, in that they were allegedly aware of certain adverse business and financial information which they allegedly failed to disclose. In March 1997, the parties in the action entered into a stipulation of settlement, which provided for settlement of the action for a payment of $2.875 million, a substantial portion of such payment being paid by the Company’s insurance carrier. The settlement was approved by the court in December 1997.

The Company is from time to time named as a defendant in certain routine litigation incidental to its business. The Company does not believe that the results of such litigation will have a material adverse effect on its business or its financial condition.

(See Note 9b(2) and 9b(3) to the Consolidated Financial Statements listed in Item 19.)

See also “Item 1. Description of Business - Patents and Trademarks” for details of certain patent litigation.

Unless otherwise stated, all data in this Item is as of May 31, 1998.

The Company has authorized one class of equity securities, designated Ordinary Shares (NIS 0.12 nominal value) (in this Item “Shares”), of which 42,957,158 are outstanding.

On May 6, 1998, the Company announced that its Board of Directors had approved a program for the repurchase by the Company of up to two million of the Company’s Shares, to be held for the benefit of employees within the framework of the Company’s existing stock option plans (see “Item 12. Options to Purchase Securities of the Registrant or Subsidiaries”). Under the approved program the Company may not purchase Shares from its principal shareholders. As of May 31, 1998, no Shares had yet been repurchased pursuant to the program.

The following table sets forth the number of fully paid Shares of the Company owned by (1) any person who is known to the Company to own beneficially more than 10% of the Company’s Shares, and (2) all Directors and executive officers as a group:

CEI (an Israeli company that holds investments in Israeli companies operating in the electronics field), PEC (a Maine corporation that holds equity interests in companies, predominately companies which are located in Israel or are Israel related) and DIC (an Israeli corporation that holds investments in Israeli companies operating mainly in the fields of industry, electronics, communications, energy, shipping and services) own beneficially, in the aggregate, 26.19% of the outstanding Shares. CEI is controlled by Clal Industries and Investments Ltd. (“Clal Industries”) which in turn is controlled by Clal (Israel) Ltd. (“Clal”). Based on the foregoing, Clal and Clal Industries may be deemed to share with CEI the power to vote and dispose of the Company’s outstanding Shares held by CEI.

PEC and DIC (which own approximately 6.61% and 6.59%, respectively, of the Company’s outstanding Shares) are both controlled by IDB Development Corporation Ltd. (“IDBD”). Companies controlled by Raphael Recanati, Elaine Recanati, Leon Y. Recanati and Judith Yovel Recanati together beneficially own approximately 52.61% of the equity and voting power in IDB Holding Corporation Ltd. (“IDBH”), the parent of IDBD. Raphael Recanati and Elaine Recanati are brother-in-law and sister-in law, and the uncle and aunt of Leon Y. Recanati and Judith Yovel Recanati, who are brother and sister. Raphael Recanati is Chairman of the Boards of Directors of IDBH and IDBD. Leon Y. Recanati is a Joint Managing Director of IDBH, Chairman of the Board of Clal and Clal Industries and a Director of IDBD and the Company. IDBD owns approximately 46.6% of the shares of Clal.

Based on the foregoing, IDBH and IDBD (by reason of their control of PEC and DIC and by reason of the ownership by IDBD of the aforesaid shares of Clal) and Raphael Recanati, Elaine Recanati, Leon Y. Recanati and Judith Yovel Recanati may be deemed to share with CEI, PEC and DIC the power to vote and dispose of the Company’s outstanding Shares held by such companies.

In May 1992, contemporaneously with a private placement in which the United States corporation, IP (a worldwide producer of printing papers, packaging and forest products, which also operates specialty business and a broadly based paper distribution network), acquired from the Company 4,752,914 newly issued Shares, IP, CEI, PEC and DIC entered into a shareholders’ agreement (in this Item, the “1992 Shareholders Agreement” or the “Agreement”) for a term of ten years.

Under the Agreement, PEC and DIC may be considered as one party. Each party and its affiliates may be deemed to share the power to vote and dispose of the Shares held by the other parties and their affiliates to the extent provided in the Agreement. Although each party disclaims beneficial ownership of the other parties’ Shares, the parties to the Agreement may be deemed to own beneficially in the aggregate approximately 39.39% of the Company’s outstanding Shares as a result of the combined ownership of IP, CEI, PEC and DIC.

Under the Agreement, at each annual general meeting of the Company, the parties are to vote their Shares for the election to the Board of Directors of the Company of up to four nominees designated by each of PEC and DIC (jointly), CEI and IP. (Currently, the parties to the Agreement have designated only three Directors each as nominees for Board of Directors.) In the event of a substantial change in the proportional voting power of the parties, the composition of the Company’s Board of Directors will be adjusted to allow each party to designate such number of nominees to the Company’s Board of Directors as is compatible with each party’s voting power at such time. The Agreement also provides that, in the event of the Company being required by law to appoint additional Directors, such directorships shall be filled by persons mutually agreed upon by the parties. (The Company’s Board of Directors currently includes two Independent Directors – neither officers of the Company nor affiliates of the Principal Shareholders, nor designated by a Principal Shareholder as a nominee pursuant to the Agreement.)

Pursuant to the Agreement, Mr. Dov Tadmor, Managing Director of DIC, was recommended to continue to serve as Chairman of the Company’s Board of Directors and Executive Committee. The Agreement provides that it is the intention of the parties that members of committees of the Board of Directors be drawn from the parties’ nominees on the Board of Directors in proportion to their voting power in the Company.

The Agreement further provides for the parties to confer before voting on any matter coming before any general meetings of the Company, in an effort to reach a common understanding, and to vote their Shares in accordance with such common understanding. The Agreement does not create a legal obligation to reach a common understanding on any matter. The Agreement also contains restrictions relating to the acquisition and disposition of, and certain rights of first refusal on sales of, the Company’s Shares owned by the parties to the Agreement.

A voting agreement relating to the Company, dated December 1, 1980, as amended, among CEI, Clal Industries, PEC and DIC, is suspended during the term of the 1992 Shareholders Agreement.

The Company’s Shares trade on The Nasdaq Stock Market under the symbol SCIXF.

The following table sets forth the high and low sales prices of the Shares on The Nasdaq Stock Market’s National Market for each calendar quarter during the periods indicated, rounded to the nearest U.S. cent:

As of May 31, 1998, there were approximately 585 shareholders of record of the Company, of whom approximately 545 were registered with addresses in the United States, representing approximately 84.2% of the outstanding Shares.

On May 14, 1998, the Controller of Foreign Currency at the Bank of Israel granted of a new General Permit (the "General Permit") under the Currency Control Law, 1978, aimed at the liberalization of Israel’s foreign currency regulations. Certain changes in Israel tax legislation are expected as a result of the liberalization.

Under the new General Permit, all foreign currency transactions are generally permitted, except for certain transactions specified in the General Permit. Nonresidents of Israel who purchase Shares of the Company are able to receive any dividends thereon (and any amounts payable upon the dissolution, liquidation and winding up of the affairs of the Company) freely repatriable in non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid or withheld on such amounts (see “Item 7. Taxation – Capital Gains, Income and Estate Taxes Applicable to non-Israeli Shareholders”).

The transactions still subject to restrictions are foreign currency transactions by Israeli institutional investors, including, without limitation, investments outside of Israel by Israeli pension funds and insurers, and certain types of forward transactions. The General Permit also provides for various forms for reporting foreign currency transactions.

Non-residents of Israel may freely hold and trade the Company’s Shares, and the proceeds of sale thereof are not subject to Israel currency control restrictions. The Memorandum of Association and Articles of Association of the Company do not restrict in any way the ownership of Shares by non-residents of Israel and neither the Company’s Memorandum of Association and Articles of Association nor Israel law restricts the voting rights of non-residents, except with respect to citizens of countries that are in a state of war with Israel.

Israeli law generally imposes an income tax on capital gains on the sale of securities and any other capital assets. From 1996, the basic tax rate applicable to corporations is 36%. The maximum tax rate for individuals is 50%. These rates are subject to the provisions of any applicable bilateral double taxation treaty. A treaty between the United States and Israel relating to relief from double taxation (the “U.S. – Israel Tax Treaty”) came into effect on January 1, 1995.

Under existing regulations, the Ordinary Shares of the Company are exempt from the Israeli tax on capital gains as long as they are listed on an approved foreign securities market (which term includes stock exchanges and the over-the-counter stock market in the United States) and provided the Company continues to qualify as an “Industrial Company” pursuant to the Law for the Encouragement of Industry (Taxes), 1969.

Non-residents of Israel are generally subject to Israel graduated tax on income derived from sources in Israel. This tax is required to be withheld at source on the distribution of dividends, other than stock dividends (bonus shares). The withholding rate is generally 25% but is reduced to 15% for dividends distributed from taxable income attributable to and accrued during the benefits period of an “Approved Enterprise” under the Law for the Encouragement of Capital Investments, 1959. These rates are applicable unless a bilateral double taxation treaty is in effect between Israel and the shareholder’s country which provides for a lower tax rate in Israel on dividends. Pursuant to the U.S. - Israel Tax Treaty, in instances where the dividend is not derived from Approved Enterprise income, the maximum tax on dividends paid to a holder of Ordinary Shares of the Company who is a resident of the United States within the meaning of the U.S.-Israel Tax Treaty, is 25%, or 12.5%, if such U.S. resident holds, directly or indirectly, shares representing 10% or more of the voting power of the Company during any part of the 12-month period preceding such sale. The tax withheld at source is the final tax in Israel on dividends for non-resident individuals and corporations and for individual Israeli residents.

Subject to compliance with certain procedures, an exemption is available from the payment of income tax on the receipt of cash dividends from the Company by provident funds or institutions which are charities, religious, health, educational or other such institutions, which qualify as such under Israel law and which are exempt from the payment of such taxes pursuant to the provisions of the tax laws of their countries of residence.

A non-resident of Israel who has earned passive income derived from sources in Israel, from which tax was withheld at source and which constitutes income from, inter alia, interest, dividends or royalties, is generally exempt from the duty to file an Israel tax return in respect of such income, provided such income was not derived from a business carried on in Israel.

United States taxpayers will generally have the option of claiming the amount of any Israeli income taxes withheld at source as either a deduction from gross income or as a credit against Federal income tax liability, subject to detailed rules contained in United States tax legislation.

At present, no estate or gift taxes are imposed in Israel.

The Company declared a cash dividend each quarter from the beginning of 1990 until the third quarter of 1996. No dividend was declared in respect of 1997. The Company continually reviews its dividend policy and the payment, or non-payment, of a dividend should not be considered indicative as to the payment of future dividends.

The following table sets forth details in respect of the cash dividends paid by the Company in respect of the last five years, including the rate of tax generally withheld at source at the time of payment:

*16.8% was the then rate of tax applicable to individual shareholders. The rate applicable to corporate shareholders was 16%.

For shareholders of record registered with an address in a country, other than the United States, with which a bilateral double taxation treaty with Israel was in effect, the rate of tax withheld at source was 15.0% on all dividends paid by the Company to date.

The Company is an Israeli corporation which designs, manufactures and markets digital visual information communication systems for the graphic arts, printing and video markets.

The Company considers the dollar to be the functional currency of the Company and most of its subsidiaries (see Note 1a(2) to the Consolidated Financial Statements listed in Item 19). Transactions and balances originally denominated in dollars are presented at their original amounts. Gains and losses arising from non-dollar transactions and balances are included in the determination of net income or loss.

Certain information contained in this Annual Report on Form 20-F, including, without limitation, information appearing under “Item 1. Description of Business”, “Item 3. Legal Proceedings” and “Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, are forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The following important factors, together with others that appear with the forward-looking statements, or in the Company’s other Securities and Exchange Commission filings, could affect the Company’s actual results and could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company in this Annual Report on Form 20-F.

The Company’s markets are characterized by rapid technological change. The Company’s growth is dependent upon its ability continuously to develop, introduce and deliver commercially viable products and technologies that offer its customers enhanced performance at competitive prices on a timely basis and the market’s rate of acceptance of new technologies offered by the Company. The ongoing introduction of new technologies across all of the Company’s product lines is intended to enable the Company to keep pace with rapid market changes and to minimize the effect of competitive product offerings and pricing. However, there can be no assurance that the Company will have the financial resources, marketing and distribution capability, or the technology to compete successfully.

Additional factors that may cause actual results to differ materially from management’s expectations include the Company’s ability to manage expense levels, the continued financial strength of the Company’s customers, dealers and distributors, the ability accurately to anticipate customer demand, the ability to offer financing vehicles to customers and the ability to manage accounts receivable.

The Company entered into several strategic alliances with other companies to address new and emerging markets. While the Company believes that these ventures are strategically important, there are substantial uncertainties associated with the development of new products and technologies of evolving markets. The success of these ventures will be determined by the efforts of both the Company and its partners. Initial timetables for the introduction of new technologies and products may not be achieved and external factors, such as the introduction of competitive alternatives, may cause new markets to evolve in unanticipated directions. In addition, results of operations could be adversely affected if the Company is unable effectively to implement and manage the competitive risks associated with these alliances.

The Company’s operating results may be subject to quarterly fluctuations as a result of a number of factors. In particular, the Company does not typically have a significant backlog of orders at the beginning of each quarter and therefore receives orders, ships and records a significant portion of its revenue within the same quarter, primarily in the last month of the quarter. Thus, the Company may not learn of shortfalls in sales until late in, or shortly after the end of, the reporting periods.

Future quarterly financial results may also be affected by the Company’s ability to anticipate accurately customer demand patterns and manage inventory levels in line with anticipated demand. Variations in sales channels, product costs or mix of products sold, changes in exchange rates and general economic conditions in the Company’s geographic areas of operations, could also have a material adverse impact on operations and financial results.

Other uncertainties that could affect the Company’s future operating results, include, without limitation, the Company’s ability to maintain or increase market share in its core business while expanding its product base and the ability to integrate acquired products and operations effectively.

The Company reviews long-lived assets, certain identifiable intangibles, and goodwill related to those assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121 of the FASB, ‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of’. As such, the Company evaluates regularly whether conditions may warrant revised estimates of the recoverability of the carrying amount of these assets and which, in certain situations, may result in the recognition of an impairment loss. Consequently, the Company’s future results could be adversely affected by changes in events and circumstances that would result in a permanent impairment of the carrying amount of long-lived assets.

The Company’s operations could be adversely affected if Israel Government programs in which the Company participates, primarily related to research and development, were reduced, or if political or military events curtailed or interrupted trade between Israel and its present trading partners or if major hostilities involving Israel should occur in the Middle East. (See also “Item 1. Description of Business - Political, Military and Economic Conditions in Israel”)

The Company’s gross margins may be adversely affected by heightened competitive pressures on pricing of products, a higher proportion of lower margin products in the sales mix, increased volume of sales through dealer and OEM channels direct, and increases in manufacturing costs of certain products. The Company is attempting to improve manufacturing efficiencies, but there can be no assurance that it will be able to do so, or that any efficiencies attained will be sufficient to maintain gross margins. Gross margins could also be affected by the Company’s ability effectively to manage product quality problems and warranty costs. The Company believes that its industry will continue to be characterized by rapid technological advances and short product life cycles resulting in continued risk of product obsolescence.

In January 1998, a revitalization plan was initiated by Scitex Digital Video aimed at improving its operating results, including improved focus in the sales, marketing and research and development areas and consolidation of manufacturing facilities. There can be no assurance that such plan will have the desired results.

The Company’s stock price, like that of other technology companies, is subject to significant volatility. If revenues or earnings in any quarter fail to meet the investment community’s expectations, there could be an immediate impact on the Company’s stock price. The stock price may also be affected by broader market trends or the economic and political situation in the Middle East.

The Company is in the process of dealing with year 2000 issues related to internal financial, production and other systems as well as issues related to products sold to its installed base of customers. The remaining efforts are not expected to cause a material financial burden for the Company.

Virtually all the Company’s revenues are in non-Israel currencies. Sales in the United States and other areas outside of Western Europe and Japan are typically made in dollars. Sales in Europe are primarily in Deutschmarks, French francs or pounds sterling. Sales in Japan are made in Japanese yen (although prices at which the Company sells to Nihon Scitex are periodically linked to the dollar).

A large proportion of the Company’s costs relate to its operations in Israel. However, approximately 75% of these costs are denominated in dollars, some of which are paid in Israel currency at the prevailing exchange rates. Costs not effectively denominated in dollars are translated to dollars, when recorded, at prevailing exchange rates for the purposes of the Company’s financial statements, and will increase if the rate of inflation in Israel exceeds the devaluation of Israel’s currency, the New Israel Shekel (the “shekel” or “NIS”), against the dollar or if the timing of such devaluations were to lag considerably behind inflation. Consequently, the Company is and will be affected by changes in the prevailing shekel/dollar exchange rate.

In the calendar years 1993 through 1997, the annual rates of inflation in Israel were 11.2%, 14.5%, 8.1%, 10.6% and 7.0%, respectively. The shekel is linked to a weighted basket of major currencies, of which the dollar now constitutes approximately 50%. From time to time, the central Bank of Israel resets the target (middle of the range) exchange rate of the Israel currency in relation to the currency basket, and allows the actual exchange rate to float within a range of plus or minus 7% around the target rate. During 1997, the shekel was devalued 3.9% against the basket of currencies. The annual rates of devaluation of the shekel against the dollar for the calendar years 1993 through 1997 were 8.0%, 1.1%, 3.9%, 3.7% and 8.8%, respectively. The representative dollar exchange rate for converting the shekel to dollars, as reported by the Bank of Israel, was NIS 3.536 on December 31, 1997 (NIS 3.251 on December 31, 1996).

In addition to the financial exposure resulting from the existence of large non-dollar balances of assets, since sales to Europe and Japan are generally made in local currencies, the Company’s competitive position and future results of operations, including its ability to maintain attractive profit margins, could be adversely affected if the dollar significantly increased in value in comparison to the primary European currencies and the Japanese yen. From time to time, the Company purchases currency options for a portion of its unfilled sales orders net of certain expense commitments in the corresponding periods. The Company is thereby able to secure the dollar value of such orders prior to their being recorded as sales. Gains and losses from such transactions are recorded in revenues in the period when revenue from the related transaction is recognized, while the premiums on the options are amortized equally over the period from the time of purchase until expiration, and are included under “Financial Expenses”. During the year 1997, the dollar strengthened compared to primary European currencies. At December 31, 1997, one dollar equaled 1.79 Deutschmarks compared to 1.55 Deutschmarks at December 31, 1996. In 1997, the Company’s hedging activity regarding future period sales had a positive impact on revenues of $5.7 million. In 1996, such activity also had a positive impact on revenue, of $2.5 million.

The Company’s hedging policy is decided upon from time to time by the Company’s management under approval of the Board of Directors, as appropriate. However, this type of hedging is limited in its time horizon and therefore cannot eliminate the longer term impact on the Company’s competitive position and results of operations of a sustained change in the value of the dollar.

(See Notes 1m, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.)

Net income in 1997 was $0.6 million, the first profit reported since 1994, and compared with a net loss of $178 million in 1996.

Total revenues in 1997 declined 3% to $676 million from $695 million in 1996.

In 1997 and 1996, the operations of the Company consisted of three strategic business units: Graphic Arts Group (GAG), Scitex Digital Printing (SDP) and Scitex Digital Video (SDV). Total revenues of GAG for 1997 were $479 million, an increase of 4% from $462 million in 1996. SDP revenues for 1997 were $138 million, down 14% from $162 million in 1996. Total revenues of SDV for 1997 were $58 million compared with $71 million in 1996, a decrease of 18%.

Sales of equipment were $480 million in 1997, down 8% from $520 million in 1996. The decline from the 1996 level was primarily due to lower sales of SDP, which in 1996, included $34 million of sales to Nippon Telephone and Telegraph of Japan (NTT), and to lower sales of SDV. This decline was partly offset by a modest growth in sales of GAG. The level of equipment sales in 1998 will be dependent on the successful introduction of several new products.

Revenues in Europe were $236 million, almost unchanged from 1996. Higher sales in Europe were eroded by the unfavorable impact of the stronger dollar versus the major European currencies. Future results of the Company, particularly revenue and gross profit, will be affected by the exchange rate between the dollar and the major European currencies as the Company expects to continue to derive a significant portion of its revenues in Europe. However, the Company operates a hedging program designed to protect operating profits from being eroded by exchange rate fluctuations (see “Impact of Inflation and Exchange Rates” above and Notes 1m and 13 to the Consolidated Financial Statements listed in Item 19, for further discussion of derivatives used by the Company). Revenues in North and South America were $311 million, 10% above 1996. This was largely the result of a 17% growth in SDP’s sales and of higher sales to the Graphic Arts market, which was only partly offset by a 13% decline in SDV’s sales in the region. Sales to Japan were $67 million, a decrease of 39% from the 1996 level of $110 million. The decrease is due principally to SDP’s 1996 one-time major sale to NTT, which did not repeat in 1997. Revenues in the rest of the world were $61 million compared to $62 million in 1996.

Gross profit margin in 1997 was 39% compared with 33% in 1996. Equipment gross margin was 44% compared with 39% in 1996. The improvement in equipment gross margin in 1997 compared with 1996 was primarily due to an improvement in the quality of operations, including higher manufacturing efficiencies, which resulted in lower inventory provisions and a lower cost of sales. Service gross margin was 17% in 1997 compared with a negative 0.3% in 1996. The improvement in service contribution in 1997 was primarily due to better reliability of products and efficient management. Gross margin on sales of supplies, mainly paper and inks, for the Company’s digital inkjet printers was 50% and 55% in 1997 and 1996, respectively. The margin decline in 1997 mainly reflects increasing competition in this market.

A portion of the Company’s research and development expenses incurred in Israel is funded by the Government of Israel pursuant to programs entitling the Government to receive royalties on sales of products developed therein. Total R&D funding was $11 million in 1997 (13% of gross R&D expenditures) and $12 million in 1996 (14%). Royalty expense pursuant to the Government of Israel funding programs, included in selling expenses, were $4.3 million and $2.6 million in 1997 and 1996, respectively. The increase reflects product mix and an increase in the average royalty percentage.

Selling expenses in 1997 declined 15% to $105 million (16% of revenues) from $124 million (18%) in 1996. The decline is principally due to lower personnel-related costs at the United States and European graphic arts distribution units following the restructuring plan which was initiated primarily in the third quarter of 1996 (see discussion below) and the favorable impact on expenses of the stronger dollar versus the European currencies. General and administrative expenses were $76 million and $146 million in 1997 and 1996, respectively. The large decrease in G&A expenses is primarily due to lower bad debt expense.

Amortization of goodwill and other intangible assets was $13 million in 1997 and $16 million in 1996. The decrease is mainly due to goodwill balances that were written off in 1996, and is partly offset by the increase in goodwill resulting from a $7 million contingent payment in 1997 based on the 1996 financial results of SDP, in accordance with the acquisition agreement. Based on SDP’s performance in 1997, a further (and final) contingent payment of $7 million is payable in 1998, which will increase the aggregate acquisition price of SDP to $69 million.

Net financial income was $6 million in 1997 compared with $5 million in 1996, due principally to higher average cash balances.

The Company recorded a tax provision in 1997 of $1.5 million compared with tax benefits of $1.7 million in 1996. After valuation allowances, the Company has a net deferred tax asset of $20 million at December 31, 1997 which primarily relates to net operating loss and credit carryforwards, allowances for doubtful accounts, inventory reserves and other accrued liabilities (see Note 12d to the Consolidated Financial Statements listed in Item 19). The realizability of the net deferred tax asset will depend upon the timing of reversal of the temporary differences as well as the timing, amount and geographic distribution of future taxable income. A number of factors may impact future taxable income, including those discussed above under “Certain Factors That May Affect Future Results” as well as any tax planning strategies. To the extent that estimates of future taxable income are reduced or not realized, the amount of the deferred tax asset considered realizable could be adversely affected.

The Company’s share in the losses of equity investments, in particular Nihon Scitex, a joint venture distribution and support organization in Japan, was $2.7 million in 1997, compared with an income of $0.2 million in 1996.

In 1997, the Company substantially completed the restructuring of GAG (see Note 11 to the Consolidated Financial Statements listed in Item 19). Although the Company believes these restructuring actions were necessary and successful, no assurance can be given that similar actions will not be required in the future.

Total revenues in 1996 declined 5% to $695 million from $730 million in 1995. Total revenues of GAG for 1996 were $462 million compared with $582 million in 1995. SDP revenues for 1996 were $162 million, up 57% from $103 million in 1995. Total revenues of SDV for 1996 were $71 million compared with $45 million in 1995, an increase of 57% due mainly to the inclusion for a full year of the results of Abekas, acquired in September 1995.

Sales of equipment were $520 million in 1996 compared with $576 million in 1995, representing 75% and 79% of total revenues, respectively. The decline from the 1995 level was due primarily to lower sales at Scitex America and Scitex Europe, resulting largely from lower market demand and actions by the Company to tighten credit and shipment policies and to reduce inventories in dealer channels. This decline was only partly offset by significant sales growth at SDP and at SDV.

Sales of equipment by SDP grew 69% to $130 million in 1996 and accounted for 25% of equipment sales compared with 13% in 1995. These sales include the supply of printing systems to Nippon Telephone and Telegraph of Japan (NTT) with an order value of $34 million in 1996. During 1996 the Company launched an on-demand direct digital color printing system, developed jointly with Xerox Corporation. Sales of such systems and digital front-ends to Xerox on an OEM basis accounted for more than 5% of equipment sales in 1996. Sales of the Company’s color inkjet printers, primarily the Iris Realist 5015 and Iris Realist 5030, declined 21% in 1996. As a result of the above, sales of digital printing products, by both SDP and GAG, represented 43% of equipment sales in 1996, up from 28% in 1995. Imagesetter sales, principally the Dolev product line, declined to 28% to approximately $116 million in 1996 from approximately $162 million in 1995. Sales of workstations and server products fell 54% in 1996 to approximately $58 million from approximately $124 million in 1995. Input device sales, including the Smart line of high performance scanners, declined 35% compared with 1995 due primarily to lower sales in North America. Total sales of video systems and devices, including over 200 ImMIX Sphere workstations, rose 54% in 1996 to 67 million from $43 million in 1995, due mainly to the inclusion for a full year of the results of Abekas.

Income from service maintenance contracts, time and material charges and advanced customer training rose 5% to $123 million in 1996 from $118 million in 1995. Sales of supplies for the Company’s inkjet printer products rose 42% in 1996 to $51 million after increasing 49% in 1995. The slower growth rate was due in part to increasing competition in this market.

Revenues in Europe fell 19% to $239 million. The decline was due primarily to soft market demand for the Company’s prepress products, management changes at Scitex Europe, as well as the unfavorable impact on sales of the weakening of the major European currencies to the dollar.

Revenues in America were $284 million, 6% below 1995. This was largely the result of lower sales of prepress products and tighter shipment policies at Scitex America only partly offset by the inclusion for a full year of the results of Abekas and a 9% growth in SDP’s sales in this region. Sales to Japan were $110 million, an increase of 54% from the 1995 level of $72 million. The increase was due principally to SDP’s major sale to NTT. Revenues in the rest of the world were $62 million compared with $60 million in 1995.

Gross profit margin decreased to 33% in 1996 from 42% in 1995. Equipment gross margin declined to 39% from 47% in 1995. The decline in equipment gross margin in 1996 compared with 1995 was due primarily to lower sales volume while fixed costs remained essentially flat; inventory valuation adjustments related primarily to prepress products; a higher proportion of equipment purchased on an OEM basis; and a higher proportion of sales through dealer channels, which generally have a lower gross margin than sales made by the Company’s direct sales force. Service gross margin was negative in 1996 compared with a 16% positive contribution in 1995. The decline in contribution in 1996 was due mainly to incremental service and repair costs associated with the Iris Realist printers and increased levels of service inventory reserves required due to the continued accelerated rate of product transitions and the resulting reduction in service inventory valuations. Gross margin on sales of Supplies, mainly paper and inks, for the Company’s digital inkjet printers was 55% and 54% in 1996 and 1995, respectively.

As demand for prepress equipment continued to contract in 1996, due in part to consolidation in the industry and customer uncertainty stemming from rapidly changing technologies, graphic arts equipment sales fell by 29%, which resulted in significant operating losses. In the third quarter of 1996, the Company announced a restructuring plan for GAG, comprised of a series of planned actions aimed at downsizing the business consistent with the anticipated level of sales in order to restore GAG’s profitability, which included: reduction in staffing levels of GAG personnel in Israel, the United States and Europe of approximately 400 positions; the closure of certain facilities in the United States and Europe; rationalization of product lines; disposition of impaired assets and assets no longer required as a result of the plan; optimization of the use of direct and indirect distribution channels and associated sales activities; and reengineering of the customer support organization on regional and worldwide levels. As a result, the Company recorded a $56 million charge in that quarter in respect of the restructuring plan. The charge was comprised of $18 million for employee severance and other benefits; $12 million for closure of facilities and excess purchase commitments; $18 million for impairment of goodwill associated with product and program discontinuances; and $8 million for the write-off of assets not required for continuing activities.

Research and development expenditures, before participations, were $84 million in both 1996 and 1995. Although the gross outlays for research and development in 1996 remained in line with the previous year, efforts devoted to digital printing technologies and future product development rose 58% from 1995; resources allocated to prepress product maintenance and development declined 40% due to reductions in the scope of certain development projects, as well as other cost reduction benefits realized from the GAG 1995 restructuring program.

Total research and development participations by the Government of Israel were $11.5 million in 1996 (14% of gross research and development expenditures) and $9.9 million in 1995 (12%). The increase in 1996 was due mainly to additional funding received with respect to prior years’ expenditures. Royalties payable pursuant to the Government of Israel funding programs, included under Selling expenses, were $2.6 million and $2.5 million in 1996 and 1995, respectively.

Selling expenses in 1996 declined 9% to $124 million (18% of revenues) from $136 million (19%) in 1995. The decline was due principally to lower personnel-related costs at the United States and European graphic arts distribution and customer support companies, as a result of the restructuring plans, lower sales-related expenses as a result of reduced net sales and lower advertising and promotional expenditures. General and administrative expenses were $146 million and $119 million in 1996 and 1995, respectively. The results of 1996 included $70 million of additions to allowances for doubtful debts and direct bad debt write-offs compared with $47 million in 1995. Most of the net increase resulted from a deterioration in the collectibility of older accounts receivable as well as changes in estimates of the Company’s exposure under third party financing arrangements in view of acceleration in customer defaults.

Amortization of goodwill and other intangible assets was $16 million in 1996 and $12 million in 1995. The increase was due to the inclusion for a full year of amortization of intangibles from the acquisition of Abekas and the increase in goodwill resulting from a $7 million contingent payment in 1996 based on the 1995 financial results of SDP, in accordance with the acquisition agreement.

Net financial income was $4.7 million in 1996 compared with $9.9 million in 1995 due principally to lower average cash balances.

The Company recorded a tax benefit in 1996 of $1.7 million compared with $13.5 million in 1995. The decrease in the tax benefit in 1996 was due primarily to the increase in valuation allowances recorded in respect of deferred tax assets.

The Company’s share in the earnings of equity investments, mainly Nihon Scitex, was $0.2 million in 1996 compared with a loss of $1.1 million in 1995.

As a result of the above factors, the net loss in 1996 was $178 million compared with $35 million in 1995. Loss per share in 1996 was $4.16 compared with $0.81 in 1995. Dividends declared for 1996 were $0.39 per share, compared to $0.52 per share in 1995.

Cash, cash equivalents and short-term marketable investments at the end of 1997 were $159 million. Net cash provided by operating activities in 1997 totaled $67 million compared with $42 million in 1996. The increase in cash generated from operations was primarily the result of improvement in results, and decreases in inventories and collection of trade receivables, partly offset by decreases in accrued liabilities.

Net cash used in investing activities was $85 million in 1997 compared with $21 million in 1996. The increase in cash used was due principally to net purchases of short-term investments and capital expenditures. Capital expenditures, included investments in information management systems, research and development, manufacturing and demonstration equipment.

The Company regularly reviews its cash funding requirements on a consolidated basis and attempts to meet those requirements through a combination of cash on hand, cash provided by operations, and available borrowings under revolving credit facilities. The Company believes that existing cash and short-term investments together with available credit lines and funds generated from operations will be sufficient to meet operating requirements in 1998.

In February 1998, the Company acquired Idanit for approximately $60 million in cash. (see Note 17 to the Consolidated Financial Statements listed in Item 19). The Company may use its remaining cash resources to acquire other technology-related businesses and to fund strategic opportunities.

In January 1991, the Company reached agreements with its principal banks, under which all floating and specific charges over the Company’s assets in favor of such banks were removed. The Company undertook a negative pledge commitment as well as obligations to meet certain covenants common in such cases, if it wishes to draw upon certain lines of credit.

The Directors, executive officers and corporate secretary of the Company, at May 31, 1998, are as follows:

Dov Tadmor, Chairman of the Board of Directors of the Company since November 1991 and of its Executive Committee since 1988, has served as Managing Director of DIC since 1985. He is also a director of Property & Building Corporation Ltd. (“PBC”) (of which he is Chairman of the Board), IDBH, IDBD, Bayside Land Corporation Ltd. (“Bayside”), American Israeli Paper Mills Ltd., Elbit Medical Imaging Ltd., Elbit Systems Ltd. (“Elbit Systems”), Elscint Ltd., Gilat Satellite Networks Ltd., Gilat Communications Ltd., NICE Systems Ltd. and a number of other companies associated with DIC. Mr. Tadmor holds a bachelors degree in law from the School of Law and Economics in Tel Aviv.

Yoav Z. Chelouche was appointed President and Chief Executive Officer of the Company in November 1995, having previously held the office of Executive Vice President - Marketing and Business Development from December 1993. Prior to then, Mr. Chelouche had served as Corporate Vice President - Marketing from 1983, such position being expanded in 1986 to include Business Development. He joined the Company in 1979 as Vice President for Finance and Administration at Scitex Europe and from 1982 to 1983 held the position of Corporate Marketing Manager. He holds a bachelors degree in economics and statistics from Tel Aviv University and a masters degree in business administration from INSEAD, Fontainebleau, France.

Rimon Ben-Shaoul was appointed President of Clal Industries in May 1997. For the previous eleven years, Mr. Ben-Shaoul was President of Clal Insurance Company Ltd. and a member of its Board of Directors. He serves as Chairman of the Board of CEI and is a director of a number of other companies within the Clal group, or in which it has an interest, including ECI Telecom Ltd. (“ECI”). Mr. Ben-Shaoul holds a bachelors degree in economics and a masters degree in business administration, both from Tel Aviv University.

Mendy (Menachem) Erad, Vice Chairman of the Board of the Company since November 1996, was appointed Managing Director of CEI in February 1995. He was previously General Manager of Koor Tourist Enterprises Ltd. from October, 1993 to January, 1995 and, prior thereto, General Manager, Group Systems Division at Tadiran Ltd. from May, 1990. He serves as a director of a number of companies within the Clal group, or in which it has an interest, including ECI. Mr. Erad holds a bachelors degree in electrical engineering from the Ben Gurion University of the Negev, Beersheba, Israel.

Jacob Eshel recently retired as a Director and Senior Manager of DIC, after having held various executive positions with DIC and PEC for over thirty years. He served as DIC’s designee on the Boards of Directors of a large number of Israeli industrial enterprises associated with DIC and PEC, and, in addition to Scitex, he continues to serve as a Director of Elbit Ltd., Elbit Systems and Elron Electronic Industries Ltd. (“Elron”). Mr. Eshel holds a bachelors degree in economics from the School of Law and Economics in Tel Aviv.

Roger Gallois was, until March 1994, a Senior Vice President and a member of the Executive Committee of Groupe Bull, a major French-based information technology concern (having been appointed to such posts in 1981 and 1982, respectively). Subsequently, Mr. Gallois continued to serve as a consultant to Groupe Bull until December 1996. Mr. Gallois also held the posts of General Counsel and Board Secretary of Bull from 1976 to March 1994. He holds a degree in electrical engineering from E.S.M.E. (Ecole Spéciale Mécanique Electricité), Paris and a law degree from Paris University and was a registered European Patent Attorney.

Frank J. Klein was appointed President of PEC on January 1995. Prior to such appointment, he served as Executive Vice President of Israel Discount Bank of New York from 1985. Mr. Klein also held the position of Executive Vice President of PEC from November 1977 to November, 1991, and Treasurer of PEC from May 1980 to November, 1991. He is a director of PEC, as well as a number of companies associated with it, including Bayside, Elron, Level 18 Systems, Inc., PBC, Super-Sol Ltd. and Tambour Ltd. Mr. Klein holds bachelors degrees in both law and business from New York University.

Andrew R. Lessin was appointed Vice President and Controller of IP in November 1995, having previously held the position of Controller since 1990. He serves as an Alternate Director in Carter Holt Harvey Limited, a 50.2% subsidiary of IP, registered in New Zealand. Mr. Lessin is a Certified Public Accountant and holds a bachelors degree in business administration from Hofstra University, Hempstead, New York.

James P. Melican has served as Executive Vice President - Legal and External Affairs of IP since 1991. His previous position with IP was Senior Vice President and General Counsel, which he held from 1984 to 1991. Mr. Melican is a director of the National Association of Manufacturers. He holds a bachelors degree in history from Fordham University, New York, a masters degree in business administration from Michigan State School of Business Administration and a law degree from Harvard Law School.

Leon Y. Recanati was appointed Chairman of the Board of Clal with effect from March 1997 and has served as Joint Managing Director of IDBH since 1986. From 1986 until November 1996, Mr. Recanati was also Joint Managing Director of IDBD. Prior to such appointments, Mr. Recanati had been a director of Clal since June 1988, and of IDBH and IDBD since 1981. Mr. Recanati also serves as Chairman of the Board of Clal Industries, and is a director of other companies within the IDB and Clal groups, or in which they have an interest. He holds a bachelors degree in economics and a masters degree in business administration, both from the Hebrew University of Jerusalem.

Elisha Shahmoon is President of Global B.I.M. Ltd., a company engaged in the development of business investment and management in the area of communications and electronics. Until December 31, 1991, he was President and Chief Executive Officer of Motorola Israel Ltd. from 1975, and a Corporate Vice President of Motorola, Inc. from 1985. Mr. Shahmoon serves as a director of Mars Information Products Group Ltd. and Inventech Venture Capital Ltd. He was formerly President of the Israel Electronic Industries Association and Chairman of the Israel Export Institute. Mr. Shahmoon holds a bachelors degree in economics from Tel Aviv University, a masters degree in business administration from the Hebrew University of Jerusalem and is qualified as a Certified Public Accountant in Israel.

Dr. Sasson Somekh was appointed Senior Vice President, Office of the President, of Applied Materials, Inc. (“Applied”) in 1998 and a member of Applied’s Executive Committee from 1996. Prior to his appointment to the Office of the President, Dr. Somekh was Senior Vice President - Worldwide Products Operations of Applied, a position held by him from 1993. He joined Applied in 1980. Dr. Somekh holds a bachelors degree in physics from Tel Aviv University and a masters degree and a Ph.D. in electrical engineering from the California Institute of Technology.

Dwight T. Johnson, an Executive Vice President of the Company since June 1996, was appointed President of SDP at the time of its acquisition by Scitex in June 1993, having previously served, since September 1990, as General Manager of Kodak’s Dayton Operations division (under which name SDP operated prior to Scitex’s acquisition). Mr. Johnson joined Kodak in 1963, in which he held numerous management positions, including President of Kodak Japan Industries Ltd. He holds a bachelors degree in electrical engineering from the University of Detroit and a masters degree in business administration from Rochester Institute of Technology.

Eyal Desheh joined Scitex as Corporate Vice President and Chief Financial Officer in November 1996. He was previously Vice President for Business Development and Strategy of Bezeq The Israel Telecommunication Corporation Ltd. from March 1996. Prior thereto, Mr. Desheh was Deputy Chief Financial Officer of Teva Pharmaceuticals Ltd. from 1989. He holds a bachelors degree in economics and a masters degree in business administration from the Hebrew University of Jerusalem.

Itai Halevy was appointed Corporate Vice President, Business Development and Strategic Planning in October 1997, having previously held the position of Director of Strategic Planning and Business Development from August 1995. He joined Scitex in 1991 and subsequently held various product and industry marketing positions. Mr. Halevy holds a bachelors degree in industrial engineering from Tel Aviv University and a masters degree in business administration from INSEAD, Fontainebleau, France.

Erez Meltzer, who joined Scitex in March 1997 as a Corporate Vice President with special responsibility for the implementation of the restructuring plan for the Company’s Graphic Arts Group, was appointed to the position of Corporate Vice President, Global Operations, later that year. Prior thereto, Mr. Meltzer was President of Adir International Telecommunication Service Ltd. (“Adir”), which he co-founded in June 1991. Mr. Meltzer holds a bachelors degree in economics and business administration from the Hebrew University of Jerusalem and a masters degree in business administration from Boston University.

Dr. Michael Nagler was appointed Corporate Vice President and General Manager, Graphic Arts Products in November 1996. From November 1994 until such appointment, Dr. Nagler was a Vice President of Scitex Israel and Manager of its Output Imaging Systems Division. He joined Scitex in 1983 and held a number of managerial and product development positions before serving as Vice President - Research & Development of Iris Graphics from January 1992 until November 1994. He holds a bachelors degree in physics from Tel Aviv University, a masters degree in applied physics from the Weizmann Institute of Science and a Ph.D. in optics and electro-optics from the University of Arizona, and is a graduate of the Senior Executive Course of the Sloan School of Management, Cambridge, Massachusetts.

David Ofek, a Corporate Vice President of the Company, was appointed Managing Director of Scitex Europe in November 1996, having earlier held the position of Vice President - Marketing of the Graphic Arts Group from November 1995. Previously he was Corporate Vice President - Marketing from December 1993. Mr. Ofek joined Scitex in 1985, was Regional Manager for Sales and Customer Support in the Asia-Pacific Region from 1986 to 1989 and Director - Corporate Marketing from 1990 to 1993. Mr. Ofek has a bachelors degree in economics from Tel Aviv University and is a graduate of the Advanced Management Course of the Wharton Business School.

Dr. Shlomo Shamir joined Scitex as Corporate Vice President - Operations in November 1994 and remained a Corporate Vice President of the Company following his appointment as President of Scitex America in February 1997. From August 1991 until joining the Company, he was Israel’s Military Attache to Germany. Prior thereto, Dr. Shamir served for 22 years in the Israeli Army, attaining the rank of Brigadier General and was responsible, inter alia, for the creation and operation of the overall planning system. He holds a bachelors degree in physics from the Technion - Israel Institute of Technology, as well as a masters degree and Ph.D. in engineering-economic systems from Stanford University, California.

David Shulman joined the Company in May 1987 and, in July of that year, was appointed Corporate Secretary of the Company. He is a lawyer and practiced as a Solicitor of the Supreme Court in England from 1971 to 1979 and qualified as an Advocate in Israel in 1980. Prior to joining the Company, Mr. Shulman was an in-house attorney with Bank Leumi le-Israel B.M.

(See “Item 3. Legal Proceedings” for terms of settlement of certain lawsuits affecting the composition of the Board of Directors of the Company, and “Item 4. Control of Registrant” for details of agreement among principal shareholders relating to the election of Directors.)

The Articles of Association of the Company provide that the Board of Directors may delegate any or all of its powers to one or more committees of the Board, subject to the limitations and restrictions that the Board may from time to time prescribe. The Board has appointed an Executive Committee to which it has delegated full powers, and has also appointed Audit, Remuneration and Financial Investments Committees. The Board also may appoint one or more persons to the position of General Manager and confer upon such person or persons any or all duties and authorities of the Board, subject to such limitations and restrictions as the Board may from time to time prescribe.

In addition, the Articles of Association of the Company provide that any Director may appoint, by written notice to the Company, another person to serve as an alternate Director and may remove such alternate. Any alternate Director shall have all the rights and obligations of the Director who appointed him, except the alternate cannot appoint a further alternate and has no standing at any meeting while the appointing Director is present. Any individual, whether or not a Director, may act as an alternate Director, and the same person may act as the alternate for several Directors and have a corresponding number of votes. According to the Articles of Association, an alternate Director is solely responsible for his own acts, and is not the agent of the appointing Director. Unless the appointing Director limits the time or scope of the appointment, the appointment is effective for all purposes until the appointing Director ceases to be a Director or terminates the appointment. Messrs. Tadmor and Eshel have each appointed the other as his alternate and Mr. Recanati has appointed Mr. Erad as his alternate on the Financial Investment Committee. The appointment of an alternate Director does not in itself diminish the responsibility of the appointing Director, as a Director.

The Company is subject to the provisions of the Israel Companies Ordinance [New Version] 1983, as amended (the “Companies Ordinance”). The Companies Ordinance requires disclosure by an “Office Holder” (as defined below) to the Company in the event that an Office Holder has a direct or indirect personal interest in transactions to which the Company intends to be a party, and codifies the duty of care and fiduciary duty which an Office Holder owes to the Company. An “Office Holder” is defined in the Companies Ordinance as a director, managing director, chief business manager, executive vice president, vice president, other manager directly subordinate to the managing director and any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title.

The Companies Ordinance requires that certain transactions, actions and arrangements be approved by an audit committee of the Company’s Board of Directors, which meets certain criteria defined in the Companies Ordinance, and by the Board of Directors itself. In certain circumstances shareholder approval is also required. The Company believes that its Audit Committee complies with the criteria set forth in the Companies Ordinance. An Office Holder (including a Director) who has a personal interest in a matter which is considered for approval at a meeting of the Board of Directors or the Audit Committee may not be present nor may he vote on any such matter.

The following table sets forth with respect to all Directors and executive officers of the Company as a group, including all persons who were at any time during the period indicated Directors or executive officers of the Company, all cash and cash-equivalent forms of remuneration paid by the Company during the fiscal year ended December 31, 1997:

The above figure includes directors’ fees, which are paid in respect of each Director of the Company, other than a Director who is an officer. Each of the Company’s Independent Directors receive an annual director’s fee of $20,000 and an attendance fee of $1,000 for each meeting attended outside his country of residence. A director’s fee of $10,000 per annum is paid in respect of each of the other Directors (other than the Director who is an officer of the Company). Except as aforesaid, the Company has not compensated Directors who are not officers of the Company.

Upon termination of their employment within one year following a change in control of the Company, certain members of management of the Company are entitled to receive a severance payment in the amount of one to two years of annual compensation, the acceleration of vesting of stock options then held by them and certain other benefits.

All data in this Item is as of May 31, 1998.

In September 1991, the shareholders of the Company approved two plans, the Scitex Israel Key Employee Share Incentive Plan 1991 primarily designed for employees of the Company and its subsidiaries located in Israel (the “Israel Plan”) and the Scitex International Key Employee Stock Option Plan 1991 designed for employees of the Company’s non-Israel subsidiaries (the “International Plan”, and together with the Israel Plan, the “Plans”).

The Israel Plan permits the granting of options, through approved sub-plans, for the purchase of Ordinary Shares (NIS 0.12 nominal value) of the Company (the “Shares”) to officers, key or other employees (including Directors who are also officers or employees), consultants or contractors of the Company and its subsidiaries, and it is proposed to seek Shareholder approval to amend the Israel Plan to permit the grant thereunder of options to Directors who need not be officers or employees of the Company. The International Plan permits the granting of such options to officers, management employees or other key employees, including employees who are also Directors, of the Company’s non-Israel subsidiaries. The aggregate number of Shares that have been authorized and reserved for issuance under the Plans is 2,000,000 Shares under the Israel Plan and 1,750,000 Shares under the International Plan. However, as a result of recent option awards under the Israel Plan, options have been granted in respect of an aggregate number of Shares in excess of the former figure, which option awards are conditional upon an appropriate increase in the number of Shares reserved for issuance under such Plan. It is proposed to seek Shareholder approval to amend the Israel Plan to increase, by 650,000 Shares, the number of Shares reserved for issuance thereunder.

Each Plan is administered by its own committee (the “Committee”), appointed by the Board of Directors, which has the authority to designate the recipients of grants, amounts of grants and, subject to certain restrictions, the price and other terms of the option grants.

Under the Israel Plan, the exercise price per share will be determined by the Committee, subject to such guidelines as shall from time to time be established by the Board of Directors and provided that the term of any grant may not exceed 10 years.

Under the International Plan, the exercise price of options intended to qualify as incentive stock options within the meaning of Section 422 of the United States Internal Revenue Code of 1986, as amended, may not be less than the fair market value of the Shares on the date of grant. Options that are not intended to qualify as incentive stock options may be granted at such exercise prices as may be determined by the Committee, subject to such guidelines as shall from time to time be established by the Board of Directors. Options become exercisable pursuant to a schedule specified by the Committee at the time of grant. However options that are intended to qualify as incentive stock options do not become exercisable earlier than six months after the date of grant.

Outstanding options under the Plans will expire at various dates from 2001 through 2007. The following table sets forth certain information with respect to the Plans.

* Including 150,199 outstanding options granted subject to Shareholder approval to increase the number of Shares allocated to the Israel Plan.

Directors and executive officers of the Company hold under the Plans unexercised options aggregating 1,251,875 Shares, including options for the purchase of an aggregate of 40,000 Shares awarded to the two Independent Directors serving on the Company’s Board of Directors (see “Item 10. Directors and Officers of the Registrant”) at an exercise price of $11.375 per Share. Such latter options are subject to Shareholders approval, including approval of the proposal to amend the Israel Plan to permit the award thereunder of options to Directors who need not be officers or employees of the Company.

The Company has announced approval by its Board of Directors to a program for the repurchase by the Company of up to two million of the Company’s Shares, to be held for the benefit of employees within the framework of the Plans. These Shares are to be held by a trustee for the reissue to employees upon the exercise of existing stock options. Under the approved program the Company may not purchase Shares from its principal shareholders. (see “Item 4. Control of Registrant”)

(See also Note 10b to the Consolidated Financial Statements listed in Item 19.)

The Company leases part of its principal administrative, engineering and systems integration facilities from Bayside Land Corporation Ltd., an affiliate of PEC and DIC. The rent attributable to such premises for the year 1997 was approximately $2.4 million. (See “Item 2. Description of Property”, “Item 4. Control of Registrant” and Note 9a(2) to the Consolidated Financial Statements listed in Item 19.)

The Company purchased insurance policies with a number of insurance companies in respect of which Clal Insurance Company Ltd. (“Clal Insurance”), an affiliate of CEI, acted as leader. During the year ended December 31, 1997, the Company paid premiums on such insurance in the amount of $2.8 million. The extent to which Clal Insurance, or other insurance companies to which it is affiliated, participated varied from policy to policy. All insurance was effected at normal business rates. (See “Item 4. Control of Registrant” and Note 16a to the Consolidated Financial Statements listed in Item 19.)

During 1997, the Company maintained business relationships and entered into various other transactions in the ordinary course of business with a number of other companies affiliated with its principal shareholders (including with subsidiaries and divisions within the IP group) (see “Item 4. Control of Registrant”), all on terms which the Company’s management believes were no less favorable to the Company than would be obtained in transactions with unaffiliated third parties. (See Notes 8a and 16a to the Consolidated Financial Statements listed in Item 19.)

Not applicable.

None.

None.

Not applicable.

Incorporated by reference from the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 1997, attached hereto as Exhibit 2.3. See Item 19(a).

All Schedules have been omitted since they are not required under the applicable instructions or the substance of the required information is shown in the financial statements.

(b) Exhibits:

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

SCITEX CORPORATION LTD.

(Registrant)

By: /s/ Yoav Chelouche

Yoav Z. Chelouche

President of the Company

& Chief Executive Officer

Date: June 29, 1998