The Report in Form-20F for the year ended December 31, 1998 appearing on this web site contains certain changes as to format from the Report filed by the Company with the Securities and Exchange Commission. You may download a Conformed Copy of the filed Report (pdf format).

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

Commission File Number 0-12332
SCITEX CORPORATION LTD.
(Exact name of Registrant as specified in its charter and translation of Registrant's name into English)

                       ISRAEL                    
(Jurisdiction of incorporation or organization)

Hamada Street, Industrial Park, 46103 Herzlia B, Israel
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
None Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.12 nominal (par) value per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Ordinary Shares, NIS 0.12 nominal (par) value per share
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as at the close of the period covered by the annual report: 43,038,852 Ordinary Shares, NIS 0.12 nominal (par) value per share, at December 31,1998.

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

x Yes o No

Indicate by check mark which financial statement item the Registrant has elected to follow.

o Item 17 x Item 18

TABLE Of CONTENTS

PART I

• ITEM 1. DESCRIPTION OF BUSINESS
  • General
  • Digital Preprint Business
  • Digital Printing Business
  • Discontinued Operations
  • Marketing and Sales
  • Competition
  • Customer Support
  • Research and Development
  • Manufacturing
  • Patents and Trademarks
  • Employee and Labor Relations
  • Political, Military and Economic Conditions in Israel
• ITEM 2. DESCRIPTION OF PROPERTY
• ITEM 3. LEGAL PROCEEDINGS
• ITEM 4. CONTROL OF REGISTRANT
• ITEM 5. NATURE OF TRADING MARKET
• ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
• ITEM 7. TAXATION - CAPITAL GAINS, INCOME AND ESTATE TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
• ITEM 8. SELECTED FINANCIAL DATA
  • Statement of Operations Data
  • Balance Sheet Data
  • Dividends
• ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  • General
  • Certain Factors That May Affect Future Result
  • Impact of Inflation and Exchange Rates
  • 1998 Compared With 1997
  • 1997 Compared With 1996
  • Liquidity & Capital Resources
  • Year 2000 Readiness Disclosure
• ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
• ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
• ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
• ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
• ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

PART II

• ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

PART III

• ITEM 15. DEFAULTS UPON SENIOR SECURITIES
• ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS

PART IV

• ITEM 17. FINANCIAL STATEMENTS
• ITEM 18. FINANCIAL STATEMENTS
• ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Scitex Corporation Ltd. (the "Registrant) and its subsidiaries design, develop, manufacture, market and support digital graphics communications products. Unless indicated otherwise by the context, all references in this report to "we", "us", "our", the "Company" or "Scitex" include Scitex Corporation Ltd. and its wholly-owned subsidiaries. The operations of Scitex principally comprise two related businesses, digital preprint and digital printing, operating within a single industry.

Preprint (also known as prepress) refers to all the processes and procedures required to prepare color separation films, printing plates or direct digital output before printing. It includes design and layout, image input, editing and digital asset management, proofing, and image output. Our digital preprint products are used for generating and producing 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 and 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. Both the digital preprint and digital printing 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. We also offer (including through a joint venture) communication products and services that allow customers and clients worldwide to collaborate over networks.

Our digital printing products are based primarily on inkjet technology and produce hardcopy output directly from digital data files generated entirely on a computer or originating from a computer, allowing the digital printing process to integrate into the digital workflow. These products include high-speed inkjet printing systems used for variable-data printing in monochrome and spot color for personalized promotional mailings, billings, statements, books, lottery tickets and other addressing/personalized applications. Such products range from stand-alone addressing systems to large printing systems used on-line with various finishing equipment. Digital printing products also include wide format, color inkjet printing systems used for point-of-purchase displays, banners, outdoor advertising posters and fleet markings, as well as digital color servers for driving and managing short-run variable-data color printers. Scitex is also engaged in a joint venture for developing, manufacturing and marketing a direct on-press imaging digital offset press for the short-to-medium run printing market.

Scitex Corporation Ltd. was incorporated in Israel in 1971, succeeding a predecessor corporation, Scientific Technology Ltd., which was founded in 1968.

Our corporate headquarters and executive offices are located in Herzlia, Israel, approximately eight miles north of Tel Aviv. Our telephone number in Israel is (972) 9 - 959 7222. Nearly all Scitex’s sales are outside of Israel.

In December 1998, Scitex sold its digital video business, consisting primarily of the operations of Scitex Digital Video, Inc. ("SDV"), having previously announced its proposed exit from the digital video business. Accordingly, unless otherwise indicated, all financial information and other data presented herein relate solely to the Company's continuing operations and digital video is presented as discontinued operations. Amounts for all prior years have been reclassified for the effect of the discontinued operations.

The following table sets forth amounts and relative percentages of total revenues from the Company’s equipment sales, service operations and supplies of consumables, for the years indicated:

The following are the principal development and manufacturing companies in the Scitex Group (see under the caption "Marketing and Sales" of this Item, for details of Scitex’s distribution and support subsidiaries):

• Scitex Corporation Ltd., the Registrant, located in Herzlia, Israel, comprises corporate functions and the operations of "Scitex Israel" - all of the Company’s operations in Israel, other than Scitex Wide Format Printing Ltd. It has a workforce of approximately 1,070 (including part-time and temporary employees), and includes research and development, engineering and manufacturing facilities. Scitex Israel includes a number of product line divisions (in 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 Scitex products in the Middle East, including Israel, and Africa
• Scitex Digital Printing, Inc. ("SDP"), a wholly-owned Scitex subsidiary based in Dayton, Ohio, with approximately 675 employees (including part-time and temporary employees). 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 provide general assistance for marketing and support 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.
• Iris Graphics, Inc. ("Iris Graphics"), part of the Company’s digital preprint business, 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, with a workforce of approximately 250, it was founded in 1985 and acquired by Scitex in 1990.
• Scitex Wide Format Printing Ltd., formerly Idanit Technologies Ltd. ("Idanit"), part of the our digital printing business, is a wholly-owned Scitex subsidiary, with approximately 100 employees. Idanit, founded in 1994, was acquired by Scitex in February 1998 for approximately $63 million. Its operations were expanded in October 1998 with the purchase of the super-wide format product line from the Matan group of companies, for approximately $12.2 million plus a performance based earn-out. Scitex Wide Format Printing Ltd. is a leading developer and manufacturer of wide-format, color inkjet printing systems used for point-of-purchase displays, banners and outdoor advertising posters. Its headquarters are in Rishon Lezion, Israel.
• Karat Digital Press ("Karat"), part of our digital printing business, is a joint venture for developing, manufacturing and marketing of a direct digital offset press for the short-run to medium-run printing market. Scitex and the German corporation, Koenig & Bauer A.G., each have a 50% interest in the joint venture. Research, development and production take place in both Radebeul, Germany and Herzlia, Israel. Karat carries out its operations through a German corporation, Karat Digital Press GmbH and an Israeli limited partnership, Karat Digital Press LP. It has a total workforce of approximately 140, divided almost equally between Israel and Germany.
• Vio Worldwide Limited ("Vio"), a 50/50 joint venture with British Telecommunications plc, incorporated in the UK, provides a global managed network service for the graphic arts industry. It commenced operations in late 1998, and has approximately twenty employees. Vio’s headquarters are in Watford, Herfordshire, UK, with a subsidiary in Pennsylvania.

The following table sets forth the Company’s total revenues for the years 1996 through 1998 and amounts and relative percentages attributable to the principal businesses: digital preprint and digital printing.

Digital Preprint Business

Introduction

Our digital preprint products encompass a broad range of digital imaging devices and systems that automate the preprint tasks required to prepare color images and pages for high resolution, high quality printing. They generally combine industry standard and custom-made hardware and software. These products operate on a stand-alone basis or are combined in systems and networks that meet customer requirements and production environments. Most of the preprint products can be easily upgraded, to communicate with a variety of products from other vendors, including desktop publishing ("DTP") systems and software applications, and to have networking and telecommunications capability. This open design allows end-users to select from many configurations to best address their needs.

Our preprint market consists of graphic arts enterprises, such as color trade shops, commercial printers, publishers, and digital trade services. Scitex develops products that address this broad segment of customers, emphasizing superior productivity and a high return on investment, as well as affordable price, easy operation and ability to communicate with DTP systems. We design versions of our products that permit input and output of PostScript® language and PDF (portable document format) files. PostScript language is the computerized page description software most widely used by desktop publishing systems in the graphic arts and related markets. PDF preserves the layout, type font and graphics as one unit, for electronic transfer and viewing.

Our digital preprint operations comprise the Input Systems and Output Systems divisions of Scitex Israel and the operations of Iris Graphics. Also included with the digital preprint business are our projects and products in telecommunication solutions and networking.

Input Systems Division

The Input Systems Division develops, manufactures and markets image capture solutions, such as scanners and digital cameras, as well as color management applications.

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 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.

Scitex scanners include the Smart® series of flatbed color scanners of continuous-tone images and line art in reflective and transparent forms and in sizes from 35mm to 26 x 36 inches. The scanners feature charge-coupled device ("CCD") sensors and automated scanner setup and operation. Their high speed and sophisticated capabilities provide high throughput of color and monochrome images to the digital workflow. The scanners include prescan and postscan viewing to boost productivity by virtually eliminating rescanning. In 1997, we introduced the EverSmarttm and EverSmart Protm large format, tabletop scanners that integrate well with PostScript and DTP systems, and added the top-of-the-line EverSmart Supremetm scanner in 1998. Their revolutionary XY Stitchtm technology allows the scanning head to scan along both the x and the y axes, which provides a uniformly high resolution over the entire scanner format, thereby breaking the traditional dependence of enlargement on original size. Scitex FinalTouchtm, a software application, enhances the quality of a scanned image by automatically removing imperfections that were in the original image. The EverSmart DOTtm film scanning application accurately scans preseparated films dot by dot and integrates them into the digital workflow. Scitex also markets the Monoscantm series of large format scanners, supplied under an OEM agreement with Purup-Eskofot A/S.

The Input Systems division products also include the Leaftm line of digital cameras, consisting of digital camera backs mounted on high-quality 2¼ x 2¼ inch cameras and connected to a Macintosh computer. The digital cameras capture images electronically, without using film or chemicals, and are efficient, high-quality replacements 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 Livetm captures stationary images in color and offers a real-time video view of the picture on the computer screen before the actual capture. In 1998, Scitex introduced the Leaf Volaretm, an especially high resolution camera back with live video preview and with Leaf Vhtwisttm technology for quick switching between landscape and portrait orientation. A similar product for images in motion will be introduced shortly, and is particularly suited to portraits and fashion photography.

Output Systems Division

The Output Systems Division develops, manufactures and markets imagesetters, platesetters, digital front ends and data management systems, either combined with other Scitex® products or as stand-alone devices, and provides communications solutions for integrating preprint products and systems in a digital workflow.

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

Imagesetters are used to output color separation films, at high resolutions and high-quality, for the preparation of printing plates. The current line of Dolev® imagesetters covers three formats based on the number of full-sized pages that can be imaged at one time: two pages up - about 14½ by 19½ inches (Dolev 2press Plustm), four pages up - 25¼ by 19½ inches (Dolev 4presstm and Dolev 4pressVtm), and eight pages up - 32 x 44 inches (Dolev 800Vtm). A specialized series of four-pages up imagesetters (Dolev 4news) is designed for newspapers. A compact, 2 pages up imagesetter (Dolev 2drytm, with a 4 pages-up model to follow) has a built-in dry film processor. By eliminating wet chemical processing and waste it is environmentally friendly and the image quality is high. The Scitex Class Screeningtm technology offers screening modules for high quality printing.

Computer-to-Plate ("CTP") technology is a major leap in the digital workflow. The Company offers complete color solutions that include platesetters, imposition workstations and proofers for direct plate production. In CTP, the platesetter outputs electronic data to plates ready for printing presses. Bypassing the film stage achieves significant savings in labor, materials and time, and improves the quality of the press output. CTP is also more environmentally responsible. The Scitex Lotem 800Vtm thermal platesetter, designed for high-quality CTP color production, has an imaging format of eight pages up. Additions to the Lotemtm line of platesetters are currently being planned with different capabilities. Integrating seamlessly into the Scitex digital workflow, these fully automated and comprehensive CTP solutions are driven by a Brisque Imposetm digital front end ("DFE") that also outputs the same files for proofing.

The family of Brisquetm digital front ends (DFE’s) for output devices such as imagesetters, platesetters and proofers, was launched in July 1996. A complete workflow automation solution, the Brisque DFE includes a unique job ticket mechanism, and provides higher predictability, reduces the chance of errors and produces faster and higher quality output. The front ends handle PostScript, TIFF/IT and PDF file formats, as well as Scitex CTtm and Scitex NLWtm formats. They also accept copydot files (color separation films that have been scanned and digitized) from Scitex EverSmart and Scitex Monoscan scanners.

The DFE’s can export the processed files in various formats, preserving all enhancements. The DFE’s link to a variety of digital printers in the pressroom and provide them with proofing files. The Scitex InkProtm application, an option in the Brisque and other Scitex DFE’s, is designed for commercial printers. It completely digitizes the labor-intensive process of setting the ink keys on offset presses, thereby reducing the make-ready time and increasing productivity, while minimizing waste of ink and paper.

The Brisque Impose DFE provides a full digital imposition for large-format imagesetters, platesetters and proofers. It stores each page independently, enabling fast and easy changes and corrections with minimum downtime. The Brisque Impose includes a RIP-Once workflow, drag-and-drop design and parallel processing. Recently, the Company introduced two new and powerful imposition front ends – the Brisque2 Imposetm DFE and the Brisque4 Imposetm DFE. They include two and four parallel RIPs, respectively, which provide symmetric multiple processing that allow them to handle several input devices in parallel, as well as very large files. The Brisque Imposetm DFE’s interface to third party proofers output imposition proofs to verify page layout, positioning and content, in monochrome or color, and can be used to assemble dummy books.

The Output Systems division’s products also include 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. Since 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.

We offer several data management system solutions to improve the productivity and profitability of Scitex customers. Acting as the hub of production systems and centralizing all data, these systems ensure a smooth, transparent flow and exchange of files among workstations, from input devices and to output devices, and on a wide variety of storage media. The Scitex Server line includes three models differing in performance and hardware configuration: entry level (3000 series), midrange (4000 series) and high end (5000 series). Each runs on an IBM® RS/6000tm* RISC computer, and enables file sharing between networked stations based on various platforms in a DTP or Scitex environment. All Scitex Servers can optionally include the Scitex Timnatm data management software solution with an advanced database for tracking all job elements and managing the data flow, particularly in operations with intensive archiving and last-minute changes. Emphasizing high speed and efficiency, these data management systems provide the infrastructure required for today’s demanding computer-to-film and computer-to-plate environments.

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

Iris Graphics – High Quality Inkjet Printers and Proofers

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 press-ready plates for the initiation of high volume printing. The Iris® direct digital color printers, produced by Iris Graphics, consist of high quality, continuous flow, color inkjet devices. In the inkjet process, special ink-delivery systems form and microscopically control uniform ink droplets with diameters measured in microns. The ink nozzles fire up to one million droplets per second on the printing medium.

In 1998, Iris Graphics replaced the Iris RealistFX 5015tm and the Iris RealistFX 5030 tm printers with the Iris2PRINT tm and Iris4PRINT tm digital contract proofers. These self-calibrating proofers offer improved resolution (up to 600 dpi) and removeable printing nozzles, called IrisPENs. For the Iris2PRINT and Iris4PRINT devices, Iris offers DCP (digital contract proofing) capabilities in addition to special application software. The DCP system is designed to output an authoritative proof of how the final printed piece will be printed. The Iris 3047 tm family of printers use the same technology; they include the Iris 3047G tm and IrisGPRINT tm, large format devices capable of printing a 34 x 46-inch sheet. Iris printers are also used for certain other applications, including fine arts, textile and industrial design, and the printing can be on paper, acetate and other media. All Iris products have versions that can be linked to DTP systems through PostScript language interpreters and a variety of front-end systems and software.

Telecommunications Solutions & Networking

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. These products can integrate systems, locally in nearby rooms or adjacent buildings and globally across continents.

Companies in the Scitex group offer communication products and services that allow customers and clients worldwide to benefit from close collaborative working, enhanced production efficiency and higher speed to market. These products offer rapid file transfer that improves turnaround time. Two of these products, both recently introduced, are the Vio® network and the Scitex RenderViewtm server.

In 1998, Vio Worldwide Limited (a Scitex joint venture with British Telecom) launched its secure, global, network for the preprint and printing industries. The Vio digital graphics network, a 24-hour, managed communications service, allows remote and secure file transfer in key stages from image capture to printing. One command can send the file to an unlimited number of pre-selected subscribers. The Vio network extends the ability of those in the graphic arts industry to offer their services beyond organizational and geographic boundaries. The service is currently operational in Europe and the US.

An alliance between Scitex and RTImage has resulted in the Internet-based Scitex RenderView server. The server is Internet-based, which allows real-time examination of jobs globally, before they are printed. It enables all clients in the preprint chain to view high-resolution files, including ready-to-print pages, at high speed and with great precision, and exchange comments on the screen.

Digital Printing Business

Our digital printing operations are comprised of: Scitex Digital Printing; Scitex Wide Format Printing; the Print-on-Demand Systems Division at Scitex Israel, as well as the Karat Digital Press joint venture.

We believe that Scitex is preeminent in inkjet printing and have recently added digital offset printing to our technology line. The inkjet product line includes high-speed, variable-data inkjet printing systems for high volume personalized and customized documents, used by specialized printers, in-house printers and data centers for printing business forms, bills and direct mail. The Scitex Wide Format Printing inkjet systems are used to print short and medium runs in color of point-of-purchase and point-of-sales displays, banners and outdoor advertising. Many screen printers are incorporating this printer in their operations.

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

Scitex Digital Printing (SDP) – High Speed Variable Information Printing

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. 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 promotional mailings, billings, statements, books, 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 digital printing of variable information, in narrow, partial page and wide formats.

Narrow Format Products

Narrow format systems, with 1-inch, 2.13 inch and 2.75 inch printheads, are used in applications such as direct addressing, bar coding, spot color or highlighting.

The Scitex Dijittm 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 compact and modular system can be used with a variety of third party equipment such as folders, web presses or mailing bases. The printing modules for the Scitex Dijit printing system are the Scitex 5120tm, Scitex 5240tm and Scitex 5300tm printers, the latter offering significantly higher resolution than the former.

Partial-Page Format Products

Partial-page format systems, with multiple arrays of 3.4 or 4.25-inch printheads, are used for monochrome, spot color, or highlight variable printing on documents. Flexible configurations of up to 16 printheads can be used to handle the widest variations of applications in-line on webs, both offset and flexo, folders, collators, and document tables.

The Scitex 6240tm 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 3500tm and Scitex 3600tm 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.

The Scitex Begintm software was created for the Scitex 3000 series high speed printing systems. It is made up of two modules: a web layout/page composition module designed to run on a PC under MS DOS®/Windows®; and a data merge module that runs on a Sun® SPARCstation® computer with the UNIX® operating system. The web layout/page composition module operates within QuarkXPresstm for Windows, and gives designers a large array of graphic design tools from which to choose. Proofing stations allow the designer to see exactly what the finished product will look like. Once data merge files have been created in the design process, they are transferred to the data merge module. The data merge process can handle input from multiple sources, data verification, and testing. As needs grow, the number of design stations linked to the data merge process can be expanded.

Wide Format Products

SDP’s ide format systems, with multiple 9-inch printheads, are used for full-page, variable printing up to 18 inches wide on one or two sides. These systems provide high quality at ultra-high production speeds for book printing, billings, statements, or any variable printing application.

The Scitex VersaMarktm high speed printing system, introduced in early 1999, combines high speed, exceptional print quality and the low cost per page in a turnkey solution that is neatly set into a modular, and entirely upgradable package. Coupled with spot color capability and numerous versatile configurations, it positions Scitex to expand its presence in the world market for on-demand publishing, billing and financial statement printing and to strengthen SDP's position in its traditional stronghold of personalized direct mail and catalogue printing.

Inks

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

Scitex Wide Format Printing

Scitex Wide Format Printing Ltd. designs, develops, manufactures and markets wide-format and super-wide format inkjet presses that are designed for cost-effective short and medium runs (up to about 150 copies) of display advertising. The applications include point-of-purchase and point-of-sales displays, banners, indoor and outdoor posters, billboards, fleet marking for trucks, cars and public transportation vehicles, window graphics, exhibition graphics, building covers, and others. Sold primarily to screen printers who are moving to a digital solution and to digital service bureaus worldwide, they print on a choice of various substrates, including paper, vinyl and other flexible materials.

The Scitex-162Adtm (formerly Idanit-162Adtm) wide-format, color inkjet printing system, was unveiled in 1995 and commenced commercial shipping at the beginning of 1997. It prints up to seventy 8 x 5 feet color sheets per hour (depending upon resolution and type of media). In October 1998, Scitex purchased the super-wide format product line from the Matan group of companies, including two Scitex GrandjetVtm presses, that print on formats up to 11 or 17 feet wide. These were added to the line of the products offered by Scitex Wide Format Printing Ltd. In June 1999, the high quality, high throughput Scitex Pressjettm system was introduced representing, for the first time, a true cost-effective solution for screen printing applications, in runs of up to 150 copies.

Print-On-Demand Systems Division

The Print-on-Demand Systems division develops, assembles and markets digital color servers for color on-demand and variable information printing systems. Scitex is cooperating with the Xerox Corporation worldwide to supply Scitex digital color servers for the Xerox® DocuColortm copier/printers. Xerox also offers a complete solution for variable printing, including advanced personalization and customization, with the Scitex Darwintm application and the Scitex VPStm architecture introduced in 1997. The Scitex Ignitetrm software package turns an Apple Macintosh® computer into an additional printer server for short-run, on-demand printing through Scitex digital color servers. The division’s products will also be used in driving high-speed, variable-information printing engines developed by SDP.

Karat Digital Press

Karat Digital Press, a Scitex joint venture with Koenig & Bauer A.G., the world's third largest press manufacturer, is developing and testing the four-color, four-page 74 Karattm digital offset press, designed for the short-to-medium-run color printing market. The 74 Karat press will offer commercial printers offset quality printing with ease-of-use and a high level of automation and speed. The press is currently undergoing testing at customer sites.

Discontinued Operations

Scitex Digital Video

In December 1998, Scitex sold the Scitex Digital Video business to Accom, Inc. for approximately $10 million and warrants convertible into approximately 10% of the stock of Accom (subject to dilution). Scitex had previously announced the intention to exit from the digital video business, which was no longer considered a core business. Accordingly, the digital video business has been presented throughout this report as discontinued operations.

Truevision, Inc.

Scitex’s investment in Truevision, Inc. (dating back to 1993) was a strategic investment linked to the digital video business. With our decision to exit from the digital video business, the Truvision investment was therefore considered part of the Company’s discontinued operations. In March 1999, Pinnacle Systems, Inc. acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. In April 1999, the Company sold its shares in Pinnacle for $3.1 million.

Marketing and Sales

The following Scitex entities are responsible for marketing, sales and customer support of our digital preprint and wide-format products in their stated geographical areas:

• Scitex America Corp. ("Scitex America") – North and South America. This is a wholly-owned subsidiary incorporated in 1972, with headquarters in Bedford, Massachusetts. 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. It has approximately 520 employees.
• Scitex Europe S.A. ("Scitex Europe") – Europe. This is a wholly-owned subsidiary, incorporated in Belgium in 1974, with headquarters in Waterloo (near Brussels), Belgium. It has a network of regional sales offices and other facilities, and uses both direct sales channels and selected dealers and distributors. Scitex Europe’s workforce, including employees of Scitex Europe’s regional subsidiaries and affiliates, is almost 500.
• Nihon Scitex Ltd. ("Nihon Scitex") – Japan. This is a joint venture based in Tokyo, Japan, formed in 1985, with headquarters in Tokyo. It is owned 50% by Scitex and 50% by the Japanese corporation, Toyo Ink Mfg. Co. Ltd. ("Toyo"). It operates several regional sales offices and customer support centers, and has approximately 160 employees (including a number of Toyo employees assigned to Nihon Scitex).
• Scitex Asia Pacific (H.K.) Ltd. – Asia and Pacific Rim (except for Japan). This is a wholly-owned subsidiary, incorporated in Hong Kong in 1992. It has a number of regional offices and branches, including a newly formed subsidiary in Shanghai, China. Its workforce, including employees of the Shanghai subsidiary, numbers over 80 employees.
• Scitex Middle East / Africa – Middle East (including Israel) and Africa. This is a division of Scitex Corporation Ltd. formed in 1995, and has approximately 30 employees.

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

** Revenues from Japan (other than for SDP products) 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.

As an integral part of Scitex’s marketing efforts into the digital preprint market, we employ a distribution strategy, which combines direct distribution outlets (primarily in North America, Western Europe and Japan), with other selective distribution strategies, such as dealers, distributors and value added resellers (VAR’s), including in regions where it had traditionally sold only directly. During 1998, 55% of Scitex America’s sales and 62% of Scitex Europe’s sales were being effected through these indirect channels (compared to 45% and 65%, respectively, in 1997 and 54% and 57%, respectively, in 1996). By the end ?f 1998, the Company’s indirect channels included over 100 dealers and distributors, and over 180 resellers, worldwide.

Developments in graphic arts and related markets have resulted in the emergence of two overlapping marketing trends. Scitex's smaller stand-alone "box" devices, such as the scanners, digital cameras, proofers and small-format imagesetters tend to be sold through the indirect distribution channels, whereas Scitex generally utilizes its direct distribution outlets for the larger integrated systems, such as the large-format imagesetters, the computer-to plate systems and the related workflow and data management solutions.

OEM sales are also an integral part of Scitex’s sales strategy. In 1998, such sales through Scitex’s eight major OEM partners together accounted for over 5.0% of the equipment sales (including all sales by the Print-on-Demand Systems division).

Scitex’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 our 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 we substantially expanded our 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 we can base our development efforts. In recent years, more than half of Scitex’s sales revenues have been derived from sales of additional products to our existing customer base. Customers can generally expand or upgrade their existing systems 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, with several Scitex subsidiaries in Europe and the Far East providing marketing and support. In certain areas, SDP also utilizes dealers, VAR’s and OEM agreements.

In early 1999, SDP announced an agreement with Domino Printing Sciences Plc, U.K., under which Domino will become the exclusive distributor in Europe of SDP’s narrow format products. Domino has a well-established sales and dealer network throughout Europe.

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 book publishing industry.

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. Scitex has agreements with third party financing companies for long-term financing of purchases of Scitex equipment by certain customers. The terms of these agreements in some cases grant the financing companies recourse against Scitex 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. In 1998, there were approximately $19 million of new transactions with recourse obligations. Approximately $70 million of trade receivables which had been financed under these programs were outstanding at December 31, 1998 (approximately $146 million outstanding at December 31, 1997). (See Note 9(b)(1) to the Consolidated Financial Statements listed in Item 19.)

In each of the years 1998 and 1997, no end-user customer nor distributor accounted for more than 10% of net revenues.

Competition

The primary competitive factors affecting sales of Scitex 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.

Scitex’s principal competitors in the digital preprint market are: Heidelberger Druckmaschinen ("Heidelberg") of Germany; Agfa, headquartered in Belgium; Fuji Photo Film Co. Ltd. (primarily through its wholly-owned subsidiary, Fuji Film Electronic Imaging Ltd.) of Japan; and Dainippon Screen also of Japan (operating in the United States under the name Screen). In addition, certain other companies, such as Creo Products, Inc. and Purup-Eskofot A/S, offer equipment that competes with specific products or product capabilities within the Scitex product line.

The principal competitors of SDP in the narrow and partial-page format digital printing market are U.S.-based Videojet Systems International, Inc. (owned by General Electric Plc of the U.K.), Imaje of France and Domino Printing Sciences Plc of the U.K., with whom SDP has entered in to a distribution agreement in Europe relating to SDP’s narrow format systems. 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, owned by Xerox) and Nipson Printing System, Inc. (now owned primarily by Xeikon N.V.) (magnetography), as well as Océ Printing Systems GmbH (formerly Siemens Nixdorf Printing Systems) and IBM Pennant Printing Systems (both electrophotography).

The principal competition for the printing systems manufactured by Scitex Wide Format Printing Ltd. comes from the Scotchprint 2000tm printer produced by Minnesota Mining & Manufacturing Co. (3M). In addition, these 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 of Israel.

Electronics for Imaging, Inc. (EFI) and Splash Technology Holdings, Inc. are our principal competitors in the Print-on-Demand Systems market. Karat Digital Press’s principal competitor is likely to be Heidelberg; and the principal competitor of Vio is Wam!Net, Inc. of the United States.

Customer Support

Technical support, training and customer service are important factors in system sales and the achievement of high levels of customer satisfaction. Scitex has established full-time support centers in our 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.

Scitex 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 have preferred to pay for service on a time and materials basis.

Our customer support operations, including those of Nihon Scitex, engage over 850 employees, comprising engineers, technical and application specialists as well as logistics and management personnel. They are based in several dozen locations, in North America, Europe, Japan and the Pacific, as well as at Scitex headquarters in Israel. In certain areas, services are provided through distributors and agents, who provide technical and applications support through locally trained engineers.

In 1998, 21.5% of the Company’s total revenues (nearly $138 million) was generated from service operations. In addition, during 1998, Scitex generated nearly $61 million of revenue from the supply of consumables, primarily ink and paper for the inkjet printing products produced by Iris, SDP and Scitex Wide Format Printing, representing 9.6% of our total revenues.

Research and Development

Scitex’s research and development efforts, engaging nearly 600 employees, are focused on the development of new products and technologies, as well as enhancing the quality and performance relative to price of our existing products, reducing manufacturing costs and upgrading and expanding our product line through the development of additional features and improved functionality, as well as the development of solutions in order to ensure that our products will be ready for year 2000.

Although Scitex carries out the greater part of its engineering, research and development activities in Israel (both at Scitex Israel and at Scitex Wide Format Printing’s facilities), a significant part of such activities is also conducted in the United States, principally by SDP and Iris Graphics.

Scitex 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:

⁽¹⁾ Excludes $44,264 thousand of in-process research and development related to the acquisition of Idanit. Total research and development incurred, including the in-process research and development, was $121,632 thousand (19.0% of total revenues), of which participations constituted 8.9%.
⁽²⁾ Percentage indicates the ratio of the relevant item to total revenues.
⁽³⁾ See Note 9a(1)(a) to the Consolidated Financial Statements listed in Item 19.
⁽⁴⁾ Percentage indicates the ratio of the participations to total research and development expenditure incurred (as shown).

We expect that Israel Government participations will, in future years, decline as a percentage of our total research and development expenditure, due to an increasing proportion of such expenditure being incurred in operations outside Israel (and therefore ineligible to receive such funding) and to continuing changes in Israel Government policy regarding such funding.

Under the terms of the Israel Government participations, Scitex pays a royalty on the proceeds of sales of products resulting from funded projects up to the amount 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 Scitex pursuant to the Israel Government and other programs amounted to approximately $4.7 million in 1998 (approximately $4.3 million in 1997 and $2.6 million in 1996). At December 31, 1998, the maximum contingent royalty payable was approximately $46 million.

There can 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 we will continue to meet the conditions to benefit from such program.

Manufacturing

Scitex has manufacturing facilities in Israel and the United States, and in both countries also uses subcontractors in connection with certain types of work and activities. Karat Digital Press has manufacturing facilities in both Israel and Germany.

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, components and commodities used by Scitex in the manufacture and assembly of Scitex products are available from several sources, although we currently purchase a substantial number of items from single suppliers. In some cases, there is only one source of supply for a component or commodity used by us. We generally purchase certain major components and commodities used in our products under annually renewable supply agreements with principal suppliers. To date, we have managed to overcome any difficulties experienced in obtaining timely deliveries. Although increased demand for these components and commodities or future unavailability could result in production delays which might adversely affect our business, we believe that, if required, alternative sources of supply could be developed for all parts, components and commodities.

Patents and Trademarks

Scitex owns, licenses or otherwise has rights in over 600 issued patents (primarily in the United States) and has over 470 patent applications pending in the United States and elsewhere. A large number of these issued patents were acquired with the purchase of SDP from Kodak in 1993. In addition, Scitex 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 used in prepress and color page editing and production. The complaint was later expanded to include claims that certain Scitex products infringe Dainippon Screen’s color correction and halftone dot generation patents. Scitex filed counterclaims against the plaintiffs for infringement of the trapping patents. Each side defended the claims made against it and in March 1999 all parties agreed to settlement without admission as to the validity, enforceability or claim coverage of the other side's patents. Under the parties' settlement, cross-licenses have been granted under the patent in the suit so that the parties and their sublicense suppliers, OEMs and end users are protected against claims of patent infringement under those patents.

On May 25, 1999, an action was commenced in the United States District Court of the Southern District of Ohio Western Division against Scitex Digital Printing, Inc. by Varis Corporation, alleging that SDP is infringing a patent issued to Varis and that SDP’s use of the VersaScript trademark infringes the VarisScript trademark used by Varis. SDP is assessing the merits of the lawsuit and intends vigorously to defend the action.

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

Employee and Labor Relations

Scitex currently has a total worldwide workforce of approximately 3,200. The workforce in Israel numbers approximately 1,075 (including approximately 125 positions filled by part-time and temporary employees). There are 1,375 employees in the United States (including approximately 100  temporary employees) and 650 employees in Europe and elsewhere. In addition, Scitex’s three principal joint ventures employ approximately 350 persons (almost all outside the United States). 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.

Political, Military and Economic Conditions in Israel

Scitex’s corporate headquarters and executive offices, together with a significant part of our research and development, engineering and manufacturing operations, are located in Israel, and therefore our operations are directly affected by economic, political and military conditions in Israel. In addition, we are heavily dependent upon components imported into Israel, primarily from the United States, and all but a small percentage of our sales are made outside Israel. Accordingly, our 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 has existed, varying from time to time in degree and intensity, between Israel and its various Arab neighbors and from time to time since 1987 Israel has experienced civil unrest from the local Arab population in territories which Israel had administered following a war in 1967 (the "Territories").

A large number of our Israeli male employees, including some of our officers, are obligated to perform annual reserve duty in the Israel Defense Forces. An emergency involving mobilization in Israel could require a substantial increase in the time such personnel are required to devote to active military service, which could result in disruption of our 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 several agreements with the Palestine Liberation Organization (the "PLO") relating to the Territories, under 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, Israel has not reached agreement with its other neighboring Arab countries, Syria and Lebanon, and there are still a number of major unresolved issues between Israel and the Palestinian Authority with negotiations having appeared to reach somewhat of an impasse, although there may be a change in negotiating positions following the change of government in Israel resulting from the general election held in May 1999. No predictions can be made as to whether or when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or the operations of Scitex.

Scitex has been favorably affected by certain Israel Government programs and tax legislation, principally related to research and development grants and capital investment incentives. Our operations could be adversely affected if these programs or tax benefits were reduced or eliminated and not replaced with equivalent programs or benefits, or if our 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 we 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 funds 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 funds 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 into the United States of Scitex products produced in Israel. 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.

ITEM 2. DESCRIPTION OF PROPERTY

The administrative offices of Scitex’s corporate management and the principal facilities of Scitex Israel are situated 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 Scitex and the others are leased. In addition, Scitex Wide Format Printing Ltd. leases both of its facilities, which are in industrial parks in Rishon Lezion, Israel, and Rosh Ha’ayin, Israel, both within approximately ten miles of Tel Aviv.

The properties leased and occupied by Scitex in Israel currently comprise, net, approximately 225,000 square feet of floor space, of which approximately 161,000 square feet of floor space in Herzlia is leased from Bayside Land Corporation Ltd. ("Bayside"), an affiliate of PEC Israel Economic Corporation and Discount Investment Corporation Ltd., two of Scitex’s major shareholders. The Bayside leases generally expire in 2003 and Scitex is considering a number of alternatives. (See "Item 4. Control of Registrant".)

Scitex, through its wholly-owned subsidiaries, leases various facilities outside Israel, the main locations of which are in Bedford, Massachusetts; Dayton, Ohio; Waterloo, Belgium; and Hong Kong. These facilities currently comprise approximately 770,000 square feet of floor space.

A new manufacturing facility in Radebeul, near Dresden, Germany, comprising approximately 10,000 square feet, was inaugurated by Karat Digital Press in May 1998, and Karat Digital Press leases from Scitex nearly 12,000 square feet of floor space in the building owned by Scitex in Herzlia, both facilities for the production of the 74 Karat digital press. In addition, Nihon Scitex leases nearly 60,000 square feet of floor space in Japan, and Vio Worldwide Limited leases approximately 6,300 square feet of office space in an business park in Watford, Hertfordshire, UK, approximately twenty miles northwest of London.

Scitex 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.

Scitex’s manufacturing operations in Israel are conducted at the facilities in Herzlia, Rishon Lezion and Rosh Ha’ayin. Outside Israel, Scitex’s principal manufacturing facilities are the new SDP facilities in Dayton, Ohio, specifically tailored to SDP’s printhead manufacturing workflow and the Iris Graphics facilities in Bedford, Massachusetts.

ITEM 3. LEGAL PROCEEDINGS

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 also "Item 1. Description of Business - Patents and Trademarks" for details of certain patent litigation; and "Year 2000 Readiness Disclosure – Risks" section of "Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations" for certain litigation relating to Year 2000 issues.

ITEM 4. CONTROL OF REGISTRANT

Unless otherwise stated, all data in this Item is as June 7, 1999.

Scitex Corporation Ltd. has authorized one class of equity securities, designated Ordinary Shares (NIS 0.12 nominal value) (in this Item "Shares").

On May 6, 1998, the Scitex board of directors approved a program for the repurchase by Scitex of up to two million Scitex Shares, to be held by the trustee for the benefit of employees within the framework of Scitex’s existing stock option plans (see "Item 12. Options to Purchase Securities of the Registrant or Subsidiaries"). Under the approved program Scitex may not purchase Shares from its principal shareholders. As at June 7, 1999, 559,500 Shares, at an average price per share of $9.37, had been repurchased by the trustee pursuant to the program, with funds provided by Scitex.

As of June 7, 1999, there were 42,491,948 Shares outstanding, excluding the 559,500 Shares purchased by the trustee pursuant to the repurchase program.

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

⁽¹⁾ Includes 246,664 Shares held through DIC Loans Ltd., a wholly owned subsidiary of DIC.
⁽²⁾ Includes 326,618 stock options exercisable within 60 days. Percentage based upon number of Shares outstanding plus the 326,618 Shares that the directors and executive officers as a group had the right to receive upon the exercise of such options.

CEI, an Israeli company that holds investments in Israeli companies operating in the electronics field, 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 outstanding Scitex Shares held by CEI.

PEC, a Maine corporation that holds equity interests in companies, predominately companies which are located in Israel or are Israel related is controlled by DIC, an Israeli corporation that holds investments in Israeli companies operating mainly in the fields of advanced technology, communications, industry and services. Based on the foregoing, DIC (which owns approximately 6.66% of the outstanding Scitex Shares) may be deemed to share with PEC (which owns approximately 6.68% of the outstanding Scitex Shares) the power to vote and dispose of the outstanding Scitex shares held by PEC.

Clal and DIC are both controlled by IDB Development Corporation Ltd. ("IDBD"). Companies controlled by Dina Recanati, Elaine Recanati, Leon Y. Recanati and Judith Yovel Recanati together beneficially own approximately 51.6% of the equity and voting power in IDB Holding Corporation Ltd. ("IDBH"), the parent of IDBD. Dina Recanati and Elaine Recanati are sisters-in law, and are aunts of Leon Y. Recanati and Judith Yovel Recanati, who are brother and sister. Leon Y. Recanati is Co-Chairman and Co-Chief Executive Officer of IDBH, Chairman of the boards of directors of Clal and Clal Industries, Co-Chairman of IDBD and a director of Scitex.

Based on the foregoing, IDBH and IDBD (by reason of their control of Clal and DIC) and Dina 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 outstanding Scitex Shares held by such companies, amounting, in the aggregate, to 26.48% of such Shares.

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 Scitex 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 39.82% of Scitex’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 Scitex, the parties are to vote their Shares for the election to the board of directors 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 Scitex’s board of directors will be adjusted to allow each party to designate such number of nominees to the board of directors as is compatible with each party’s voting power at such time. The Agreement also provides that, in the event of Scitex being required by law to appoint additional Directors, such directorships shall be filled by persons mutually agreed upon by the parties. (The Board of Directors of Scitex currently includes two Independent Directors – neither officers of Scitex 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, then Managing Director of DIC, was recommended to continue to serve as Chairman of Scitex’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 Scitex.

The Agreement further provides for the parties to confer before voting on any matter coming before any general meetings of Scitex, 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 Shares in Scitex owned by the parties to the Agreement.

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

ITEM 5. NATURE OF TRADING MARKET

Scitex’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 June 7, 1999, there were approximately 540 shareholders of record of Scitex, of whom approximately 500 were registered with addresses in the United States, representing approximately 83.3% of the outstanding Shares.

ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

On May 14, 1998, the Controller of Foreign Currency at the Bank of Israel granted 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.

ITEM 7. TAXATION - CAPITAL GAINS, INCOME AND ESTATE TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

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 Scitex 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 Scitex 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 Scitex 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 Scitex 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 Scitex 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.

ITEM 8. SELECTED FINANCIAL DATA

Statement of Operations Data

* Reclassified.

Balance Sheet Data

Dividends

The Company declared a cash dividend each quarter from the beginning of 1990 until the third quarter of 1996. During the last five years, the Company declared and paid a dividend of $0.13 in respect of each quarter of 1994, 1995 and the first three quarters of 1996. No dividend was declared in respect of the last quarter of 1996 nor in respect of 1997 or 1998. 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.

During the last five years, the rate of tax generally withheld at source at the time of payment by the Company of cash dividends ranged from 15.8% to 17.7%. 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%.

ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

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

Certain Factors That May Affect Future Results

Certain information contained in this Annual Report on Form 20-F, including, without limitation, information appearing under "Item 1. Description of Business" 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.

1. The Company’s markets are characterized by rapid technological change. There has also been consolidation in the industry with many of the Company’s competitors now being very large companies. The Company’s growth is dependent upon its ability continuously to develop, introduce and deliver commercially viable products and technologies on a timely basis that offer its customers enhanced performance at competitive prices. 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. 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.
2. 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 dealers and distributors versus 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.
3. 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. Other uncertainties that could affect the Company’s future operating results, include the Company’s ability to maintain or increase market share while expanding its product base and the ability to integrate acquired products and operations effectively. 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.
4. 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.
5. The Company has entered into several strategic alliances and joint ventures 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 in 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.
6. 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 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.
7. The Company’s operations could be adversely affected if Israel Government programs in which the Company participates, primarily related to research and development and tax incentives, were reduced, 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")
8. 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.

Impact of Inflation and Exchange Rates

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 pounds sterling or in currencies within the European Monetary Union and are now pegged to the Euro (principally Deutschmarks and French francs). Sales in Japan are made in Japanese yen.

A large portion of the Company’s costs relate to its operations in Israel. However, approximately 75% of these costs are in dollars or linked to the dollar. Costs not denominated in, or linked to, dollars are translated to dollars, when recorded, at prevailing exchange rates for the purposes of the Company’s financial statements, and may increase if the rate of inflation in Israel exceeds the rate of 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. Conversely, such costs may in dollar terms decrease if the rate of inflation is lower than the rate of devaluation of the shekel against the dollar.

In 1994, 1995 and 1996, the annual rates of inflation in Israel were 14.5%, 8.1% and 10.6%, respectively, and the annual rates of devaluation of the shekel against the dollar were 1.1%, 3.9% and 3.7%, respectively. This imbalance was reversed during 1997 and 1998, when the rates of inflation were 7.0% and 8.6%, respectively, and the annual rates of devaluation were 8.8% and 17.6%, respectively. As a result, the Israeli operations of the Company experienced increases in dollar costs in 1994 through 1996 and decreases in 1997 and 1998. The representative dollar exchange rate for converting the shekel to dollars, as reported by the Bank of Israel, was NIS 4.160 on December 31, 1998 (NIS 3.536 on December 31, 1997).

The Company has substantial operations outside the United States and Israel, and accordingly maintains substantial non-dollar balances of assets, including substantial accounts receivable balances related to sales made in non-dollar currencies, mostly European currencies and Japanese yen. The Company’s general policy is to hedge against the exchange rate exposure arising from the existence of such non-dollar business activities. This is done using a number of commercially available financial tools, including forward transactions and currency options. The net impact of currency exchange rate and remeasurement differences (after hedging) between the dollar and other currencies accounted for a net gain of $1.3 million in 1998, compared with net gains of $2.2 million in 1997 and $1.1 million in 1996.

In addition to the exchange rate 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 projected sales net of projected operating expenses for the corresponding periods. 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 1998, the dollar weakened compared to primary European currencies. At December 31, 1998, one dollar equaled 1.68 Deutschmarks compared to 1.79 Deutschmarks at December 31, 1997. In 1998, the Company’s hedging activity regarding future sales had a positive impact on revenues of $5.5 million. In 1997, such activity also had a positive impact on revenue, of 6.1 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 "Item 9A. Quantitative and Qualitative Disclosures about Market Risk" and Notes 1m, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.)

1998 Compared With 1997

The net loss in 1998 was $111 million, consisting of loss from continuing operations of $34 million and loss from discontinued operations of $77 million. The loss from continuing operations includes a $44 million charge for acquired in-process research and development. The loss from discontinued operations and the charge for in-process R&D are discussed in further detail below. Prior years amounts have been reclassified for the effect of the discontinued operations.

Total revenues in 1998 increased 4% to $640 million from $618 million in 1997. Sales of equipment were $441 million in 1998, up 3% from $427 million in 1997. The increase was primarily due to higher sales in the U.S. and Europe and the acquisition of Idanit, discussed further below.

Service revenue (mainly from maintenance contracts, time and material charges and advanced customer training) rose 3% in 1998 to $138 million from $134 million in 1997. The increase was mainly in North America. Sales of supplies for the Company’s inkjet printers rose 7% in 1998 to $61 million, the increase being mainly due to the acquisition of Idanit.

Revenues in Europe were $237 million, an increase of 6% from 1997. The increase was primarily due to higher sales of digital preprint products. Revenues in North and South America were $297 million, 8% above 1997. This was also largely a result of growth in digital preprint sales. Sales to Japan were $65 million, a decrease of 4% from the 1997 level of $67 million. The relatively small decrease in Japanese sales is principally due to major sales by SDP in Japan during 1998. Revenues in the rest of the world were $42 million compared to $52 million in 1997, reflecting the economic difficulties in the Far East.

Sales in Europe and Japan are generally denominated in local currencies and therefore the sales reported in U.S. dollars are affected by the exchange rate of the dollar against the European currencies and the yen. However, the Company operates a hedging program designed to protect operating profits from being eroded by exchange rate fluctuations (see "Item 9A. Quantitative and Qualitative Disclosures about Market Risk" and Notes 1m and 13 to the Consolidated Financial Statements).

Consolidated gross margin in 1998 was 42%, compared with 40% in 1997. Equipment gross margin was 48%, compared with 45% in 1997. The continued improvement in equipment gross margin in 1998 was due to product sales mix as well as lower cost of components, manufacturing efficiencies and lower inventory provisions, which resulted in a lower cost of sales. Service gross margin was 21% in 1998 compared with 17% in 1997. The improvement in service contribution in 1998 was primarily due to better reliability of products. Gross margin on sales of supplies, mainly paper and inks for the Company’s digital inkjet printers, was 46% in 1998, compared with 50% in 1997. The margin decline mainly reflects increasing competition in this market.

Research and development expenditures, before government grants and not including acquired in-process R&D, were $77 million in 1998 compared with $68 million in 1997. The increase in R&D spending was mainly due to acquisitions and increased efforts in the development of new digital printing products.

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 government R&D funding was $11 million in 1998 (14% of gross R&D expenditures) and $11 million in 1997 (15%). Royalty expense pursuant to the Government of Israel funding programs, included in selling expenses, was $4.7 million in 1998, compared with $4.3 million in 1997. The increase reflects product mix and an increase in the average royalty percentage.

In February 1998, the Company acquired Idanit for $63 million, of which $44 million represented the allocated value of in-process R&D with no alternative future use. Accordingly, this amount was charged to expense. The remaining purchase price was allocated to tangible assets, existing technology and goodwill. See note 2a to the Consolidated Financial Statements.

Selling and marketing expenses in 1998 increased 10% to $101 million (16% of revenues) from $91 million (15%) in 1997. The increase was due to higher sales-related costs at the U.S. and European distribution units, including increased sales force, as well as the effect of acquisitions. General and administrative expenses were $74 million in 1998, compared with $73 million in 1997.

Amortization of goodwill and other intangible assets was $9 million in 1998 and $6 million in 1997. The increase was primarily due to the acquisition of Idanit and the final $7 million contingent payment in respect of the acquisition of SDP based on the 1997 financial results of SDP.

Net financial income was $5 million in 1998 compared with $6 million in 1997, principally due to lower average cash balances.

The Company recorded a tax provision in 1998 of $2.2 million compared with a tax provision of $1.5 million in 1997. The 1998 provision is in large part to cover taxes which will be payable on 1998 taxable income in certain European countries. Following the sale of the digital video business (see below), the Company has tax loss carryforwards in the U.S. The Company also has significant carryforward tax losses in Israel. After valuation allowances, the Company has a net deferred tax asset of $28 million at December 31, 1998 which primarily relates to net operating loss and credit carryforwards, allowances for doubtful accounts, inventory reserves and accrued liabilities (see Note 12d to the Consolidated Financial Statements). 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 below 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 was $15 million in 1998, compared with an equity loss of $3 million in 1997. The losses were primarily from three joint ventures: Nihon Scitex (in Japan), which had a loss of $5.7 million compared with $2.2 million in 1997, and two new joint ventures - Karat Digital Press and Vio Worldwide Limited - which were established in 1998 and had equity losses totaling $8.2 million, primarily from start-up expenses.

In the third quarter of 1998, the Company recorded a provision of $63 million for the estimated loss on the exit from the digital video business. The provision was comprised of $50 million related to the estimated loss on sale of Scitex Digital Video (including estimated losses in the fourth quarter through the sale date) and $13 million to recognize permanent impairment of the value of its investment in Truevision, Inc. ("Truevision"). The discontinued operations section of the Consolidated Statement of Income includes the $63 million loss on disposal and the $14 million loss from digital video operations through the third quarter. No additional losses were recorded in the fourth quarter related to the exit from the digital video business. In the first quarter of 1999, the reserves associated with the exit from the digital video business were reduced by $5 million, which resulted in $5 million income from discontinued operations for such quarter.

In December 1998, the Company sold substantially all of the assets and liabilities of the Scitex Digital Video business for $10 million, of which $8 million of the proceeds was received in cash. The balance is being paid over a period of 18 months. In March 1999, Pinnacle Systems, Inc. ("Pinnacle") acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. In view of its intention to exit from the digital video business, the investment in Truevision had been reclassified in the balance sheet to short-term investments.

1997 Compared With 1996

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. The income in 1997 from continuing operations was $17 million and the loss from discontinued operations was $17 million (compared with losses of $162 million and $17 million, respectively, in 1996). Amounts have been reclassified for the effect of discontinued operations.

Total revenues in 1997 declined 1% to $618 million from $624 million in 1996.

Sales of equipment were $427 million in 1997, down 6% from $454 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). This decline was partly offset by a modest growth in sales of preprint products.

Income from service maintenance contracts, time and material charges and advanced customer training in 1997 rose 12% to $134 million from $119 million in 1996. Sales of supplies for the Company’s inkjet printer products produced by SDP and Iris Graphics rose 11% in 1997 to $57 million after increasing 42% in 1996. The slower growth rate was due in large part to increasing competition in this market.

Revenues in Europe were $223 million, slightly up on the $221 million in 1996. Higher sales in Europe were eroded by the unfavorable impact of the stronger dollar versus the major European currencies. Revenues in North and South America were $275 million, 13% above 1996. This was largely the result of a 17% growth in SDP’s sales and of higher sales to the graphic arts market. Sales to Japan were $67 million, a decrease of 39% from the 1996 level of $110 million. The decrease was 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 $52 million compared to $50 million in 1996.

Gross profit margin in 1997 was 40% compared with 33% in 1996. Equipment gross margin was 45% compared with 40% 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 manufacturing efficiencies, which resulted in lower inventory provisions and a lower cost of sales. Service gross margin was 17% in 1997 compared with1% 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% in 1997 compared with 54% in 1996. The margin decline in 1997 mainly reflects increasing competition in this market.

Research and development expenditures, before government grants, were $68 million in 1997 compared with $73 million in 1996. Resources allocated to preprint product maintenance and development were $33 million, unchanged from the 1996 level.

Total R&D funding by the Government of Israel was $11 million in 1997 (15% of gross R&D expenditures) and $12 million in 1996 (16%). 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 $91 million (15% of revenues) from $108 million (17%) in 1996. The decline was principally due to lower personnel-related costs at the United States and European 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 $73 million in 1997 compared with $142 million in 1996. The large decrease in G&A expenses was primarily due to lower bad debt expense.

In the third quarter of 1996, the Company announced a restructuring plan primarily for its preprint business, comprised of a series of planned actions aimed at downsizing the business consistent with the anticipated level of sales in order to restore its profitability, which included: reduction in staffing levels of 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 the third quarter of 1996 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.

Amortization of goodwill and other intangible assets was $6 million in 1997 and $8 million in 1996. The decrease was 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.

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 had a net deferred tax asset of $20 million at December 31, 1997 which primarily related 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 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.

Liquidity & Capital Resources

Cash, cash equivalents and short-term marketable investments at the end of 1998 were $83 million compared with $159 million at the end of 1997.

Net cash provided by operating activities totaled $33 million compared with $67 million in 1997. The larger amount in 1997 was primarily due to decreases in inventories and collection of trade receivables.

The major uses of cash for investing activities included the acquisition of Idanit ($62 million), the acquisition of the Matan product line ($12 million), investment in the new Karat and Vio joint ventures ($11 million) and capital expenditures ($32 million).

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. Management 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 1999.

The Company may use its remaining cash resources to acquire other technology-related businesses, to fund strategic opportunities and the acquisition of its own shares under an approved repurchase program.

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.

Year 2000 Readiness Disclosure

General

The Company is aware of the issues associated with the programming code and embedded technology in existing systems as the year 2000 approaches. The "Year 2000" issue arises from the potential for computers or equipment with embedded systems to fail or to operate incorrectly primarily because their programs incorrectly interpret the two digit date fields "00" as 1900 or some other year, rather than the year 2000. The Company has identified the following three areas for which the Year 2000 issue creates potential risk for the Company: The software and systems, including embedded systems, used in the Company's internal business processes. Third-party vendors, manufacturers and suppliers. The Company's products.

Failures of the Company’s or third parties’ computer systems or Year 2000 problems affecting the Company’s products could result in an interruption in, or a failure of, certain normal business activities or operations, and could have a material adverse effect on the Company's business, operating results and financial condition.

Internal Business Processes

The Company has updated substantially its entire computer system infrastructure over the last few years. Based upon representations made by the manufacturers (in particular Oracle and Microsoft), without independent verification or testing, management believes that all critical pieces of hardware and software will be ready for Year 2000 and that Year 2000 issues will not materially affect its internal management information systems (MIS). In some cases, readiness is expected to be met by releases of software updates from the manufacturers that are scheduled to be released in the latter half of 1999. ) However, there can be no assurance that any necessary updates will not be delayed or that the Company will have identified or procured all of the resources necessary to address all critical Year 2000 deficient hardware and software systems on a timely basis. In any of such events, the Company may need to spend additional amounts to identify, modify or repair internal systems, which could have a material adverse effect on the Company's business, operating results and financial condition.

The Company has also completed a review and assessment of its non-information technology systems with embedded technologies, such as security systems, building control systems, manufacturing equipment, switchboards, fire alarms, etc., to determine the potential impact of the Year 2000 issues and believes that, based upon representations made by the manufacturers of such systems, and without independent verification or testing, all critical elements are, or will be, fully ready for Year 2000.

Third-Party Vendors, Manufacturers and Suppliers

The Company has material relationships with third party suppliers and service providers who may utilize equipment or software that may not be ready for the Year 2000, such as manufacturers of parts and components, financial institutions, shipping companies and public utilities. The Company is continuing with the process of conducting Year 2000 readiness inquiries of such third parties. Based upon the results of such inquiries, the Company intends to take appropriate action.

All of the Company’s products include parts or components from third parties. Although Scitex has generally sought assurance from such third parties that such components are ready for Year 2000, Scitex has conducted only limited testing of such components and, accordingly, there can be no assurance that such third parties’ products are ready for Year 2000.

Products

The Company has established a program to assess whether its products are ready for Year 2000. The program consists of the following stages: Awareness and project planning; Assessment and impact analysis; Testing and solution development; Updates and validations; and Implementation and ongoing customer support.

Scitex has completed the first three stages and plans to complete initial updates and implementation activities by the end of this year. The Company is preparing for these activities by allocating the requisite resources, training relevant personnel and planning the field upgrade program.

Based on the Company’s assessment to date, the Company’s newly introduced products are ready for the Year 2000 or will have available upgrades to full Year 2000 readiness by the end of 1999.

With respect to products which are not currently being sold, the Company has evaluated their status and, in several cases, offers solutions and workarounds which will enable customers to continue to use their equipment beyond the end of 1999, with certain restrictions.

The Company is taking the following steps to assist its customers in the Year 2000 readiness planning:

1. identify customers which may be affected by Year 2000 issues;
2. raise customer awareness to product Year 2000 issues; and
3. encourage customers to use other solutions and workarounds which the Company offers.

The Company is offering a wide range of information resources and updates to help customers plan and implement Year 2000 solutions. Current information about the Company’s products and technical issues is available at the Scitex web site. Information on this web site is intended to help customers evaluate the impact of the Year 2000 on Scitex products used by them. This web site is updated on a regular basis with new solutions and relevant information. Information on the Scitex web site is provided to customers for the sole purpose of assisting in planning for the transition to the Year 2000. Such information is the most currently available concerning the Company's products and is provided ‘as is’, without warranty of any kind. There can be no assurance that the Company's current products do not contain undetected errors or defects associated with the Year 2000.

Scitex products may be used in conjunction with a third party’s products, over which Scitex has no control. Accordingly, the Company cannot assure its customers that such Scitex products will meet Year 2000 readiness criteria when used in conjunction with third parties’ products.

Risks

The most reasonably likely worst-case scenario has not yet been identified. Some commentators have stated that a significant amount of litigation will arise out of Year 2000 readiness issues. A purported class action complaint, filed in the United States District Court for the District Court of Massachusetts, alleging non-Year 2000 readiness of the Scitex PS/2 system and seeking damages in respect thereof, was served upon Scitex America Corp. in February 1999 and also names the Registrant as co-defendant. The Company believes that the claims asserted are without merit and intends vigorously to defend the lawsuit. However, because of the unprecedented nature of such litigation, there can be no assurance as to the extent the Company may be affected by the lawsuit filed or by any other such litigation, which could have a material adverse effect on the Company's business, operating results and financial condition.

Failure of the Company's current or prior products to operate properly with regard to the Year 2000 requirements could cause the Company to incur unanticipated expenses and could cause a reduction in sales, each of which could have a material adverse effect on the Company's business, operating results and financial condition.

Failure of any third-party's equipment or software to operate properly, or utilities or telecommunication failures, with regard to the Year 2000, could cause the Company to incur unanticipated expenses to remedy any problems and could cause a reduction in sales, each of which could have a material adverse effect on the Company's business, operating results and financial condition.

The Company's customers could also be adversely affected to the extent that they utilize equipment or software that is not Year 2000 compliant. Furthermore, the purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products and services such as those offered by the Company, which could have a material adverse effect on the Company's business, operating results and financial condition.

Costs

The aggregate cost to the Company over the last few years of replacing substantially its entire computer system infrastructure to a Year 2000 ready system was approximately $10 million (nearly all of which has already been expended). The Company believes that a significant portion of this cost relates to the replacement of systems that had already served their useful life and would have been replaced, or faced replacement in the near future, even without the approach of the Year 2000. Accordingly it is not possible accurately to estimate the portion of such costs attributable directly to the Year 2000 issue.

To date, the Company has primarily used existing personnel to evaluate the Company’s Year 2000 exposure, and the financial impact to the Company for Year 2000 compliance has not been material to its business, operating results and financial condition in any given year. The Company continues to assess the effects and costs associated with the Year 2000 program, and currently estimates that the aggregate cost (other than the costs expended in relation to the replacement of its computer system infrastructure or costs that may be incurred in related to litigation issues) will not exceed $5 million (of which approximately $1 million has already been expended), which will be funded from operating cash flows. If the Company encounters significant unforeseen Year 2000 problems in its internal business systems, its products, or in relation to third party vendors, manufacturers or suppliers, actual costs could materially exceed this estimate, which could have a material adverse effect on the Company's business, operating results and financial condition.

Further, it is possible that the Company may experience increased expenses in addressing migration issues for affected customers or customer dissatisfaction as a result of Year 2000 issues, which may have a material effect on the Company’s business, operating results and financial condition.

Accordingly, there can be no assurance that the future effects and costs associated with possible Year 2000 problems will not have a materially adverse effect on the Company business, operating results and financial condition.

Contingency Plans

Although the Company has not completed a formal contingency plan for potential Year 2000 related problems, management has taken steps and continues to assess the possible effects and potential solutions for Year 2000 issues. As part of its contingency planning efforts, the Company is identifying alternate sources or strategies where necessary, if significant exposures are identified. However, there can be no assurance that the Company will be able to develop contingency plans that will adequately address all Year 2000 issues that may arise.

ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company uses derivative financial instruments ("derivatives") in order to limit its exposure to risk deriving from changes in foreign currency exchange rates. The derivatives are used for hedging of non-dollar assets and liabilities as well as certain future operating exposure. The Company does not hold or issue derivatives for trading purposes.

The Company’s functional currency and that of most of its consolidated subsidiaries is the dollar. Accordingly, for the Company’s subsidiaries in which the functional currency is the dollar, the Company protects itself from balance sheet exposure deriving from the gap between assets and liabilities in each currency other than the dollar. The majority of this exposure is in European currencies, Japanese yen and Israel shekels. The exposure (after any "natural hedging" by offset of unrelated transactions in the same currency) is limited by the use of derivatives on a consolidated basis.

The table below details the balance sheet exposure, by currency and geography, as of December 31, 1998 (at fair value). All data in the table has been translated for convenience into the dollar equivalent (in millions). Explanatory notes are provided below the table.

1. In the data presented in the table, positive amounts represent assets and negative amounts represent liabilities.
2. The table does not include data with respect to balance sheet exposure for certain equity investments in which the functional currency is the local currency, since those balances do not create any such exposure.
3. In light of the correlation between currencies comprising the European Monetary Union, the Company does not differentiate between those currencies when measuring its exposure. All of those exposures have been combined in the column with the title "Euro".
4. The data presented in the table reflects the exposure after the use of natural hedging.

The table below details the hedging value acquired with forward transactions in order to limit the exposure to exchange rate fluctuations. The data is as of December 31, 1998 as recorded in the Company’s financial records and is presented in dollar equivalent terms (in millions).

Hedging acquired in derivatives
Currency	Hedging Value	Fair Value
Euro	23.8	24.1
Pound Sterling	9.7	9.9
Japanese Yen	14.0	13.1
Total	47.5	47.1

For anticipated sales, the Company generally hedges the projected net exposure resulting from projected sales less related projected operating expenses in non-dollar currencies. The Company uses options to hedge its future operating exposure by purchasing calls on the dollar, usually together with selling put options on the dollar at a lower exchange rate and selling a call option on the dollar at a higher exchange rate (risk reversal strategy).

The Company’s policy is to limit hedging transactions to four quarters forward. Accordingly, all of the transactions detailed in the foregoing table will expire not later than December 31, 1999.

The interest income on the Company's cash equivalents and short-term investments is sensitive to changes in the general level of market interest rates. The Company mitigates the impact of fluctuations in interest rates primarily through diversification and by limiting the average duration of its interest-bearing investment portfolio. The Company does not have any long-term interest-bearing debt. From time to time, the Company uses its short-term bank credit facilities for temporary needs.

(See "Impact of Inflation and Exchange Rates" section of "Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1m, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.)

ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT

The following table sets forth certain information with respect to the directors, executive officers and corporate secretary of Scitex as at June 7, 1999:

(1) Member of the Executive Committee of the board of directors.
(2) Member of the Remuneration Committee of the board of directors and the committees administering the Scitex key employee stock option and share incentive plans.
(3) Member of the Audit Committee of the board of directors.
(4) Member of the Financial Investments Committee of the board of directors.

* An "Independent Director" - not an officer nor an employee of Scitex, nor an affiliate of Scitex’s principal shareholders, nor a nominee designated by a principal shareholder pursuant to the 1992 Shareholders Agreement described under "Item 4. Control of Registrant."

Dov Tadmor, Chairman of the board of directors of Scitex since 1991 and of its Executive Committee since 1988, served as Managing Director of DIC from 1985 until March 31, 1999. He is also a director of IDBH, IDBD, Gilat Satellite Networks 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 Scitex 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 Scitex 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 Vice Chairman of the board of directors of Scitex in May 1999. He is President of Clal Industries, appointed in May 1997, and for the previous eleven years, Mr. Ben-Shaoul served as President of Clal Insurance Company Ltd. and a member of its board of directors. He is Chairman of the board of directors of CEI and serves as a director of a number of other companies within the Clal group, or in which it has an interest, including ECI Telecom Ltd. Mr. Ben-Shaoul holds a bachelors degree in economics and a masters degree in business administration, both from Tel Aviv University.

Mendy (Menachem) Erad was Managing Director of CEI from February 1995 until December 31, 1998 and Vice Chairman of the board of directors of Scitex from November 1996 until May 1999. He was previously General Manager of Koor Tourist Enterprises Ltd. from 1993 to 1995 and, prior thereto, General Manager, Group Systems Division at Tadiran Ltd. from 1990. Mr. Erad is a consultant to CEI and serves as a director of a number of companies. He holds a bachelors degree in electrical engineering from the Ben Gurion University of the Negev, Beersheba, Israel.

Jacob Eshel served until December 1997 as a director and until March 1998 as a 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 Ltd. 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 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 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 in 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 1977 to 1991, and Treasurer of PEC from 1980 to 1991. He is a director of PEC, as well as a number of companies associated with it, including Bayside Land Corporation Ltd. ("Bayside"), Elron, Level 18 Systems, Inc., Super-Sol Ltd., Tambour Ltd. and Tefron 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 1995, having previously held the position of Controller since 1990. He serves as a 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 directors of Clal with effect from March 1997, and has served as Co-Chief Executive Officer of IDBH since 1986 and as Co-Chairman of the boards of directors of IDBH and IDBD since June 1, 1999. 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 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 Scitex since June 1996, was appointed President of SDP at the time of its acquisition by Scitex in 1993, having previously served, since 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 then 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 Communications Services Corporation Ltd., which he co-founded in 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 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 1992 until 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 Scitex, 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 1994 and remained a Corporate Vice President of Scitex following his appointment as President of Scitex America in February 1997. From 1991 until joining Scitex, 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 Scitex in May 1987 and, in July of that year, was appointed Corporate Secretary. 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 Scitex, Mr. Shulman was an in-house attorney with Bank Leumi le-Israel B.M.

(See "Item 4. Control of Registrant" for details of agreement among principal shareholders relating to the election of directors.)

The Articles of Association of Scitex 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 of directors may from time to time prescribe. The board of directors has appointed an Executive Committee to which it has delegated full powers, Audit, Remuneration and Financial Investments Committees, as well as other committees from time to time, generally dealing with specific issues. The board of directors 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.

Pursuant to the terms of a court approved settlement of a purported class action, Scitex agreed in 1997 that the Scitex board of directors shall, for a period of five years, include two directors deemed to be independent of Scitex’s management and of its principal shareholders ("Independent Directors"). It was also agreed that, for such five year period, certain formal and informal offers to acquire a majority of Scitex’s shares or substantially all of Scitex’s assets shall be evaluated by a special committee of the board (consisting of not more than six directors) that shall include the two Independent Directors, which committee may make recommendations to the Scitex board concerning any such offers.

In addition, the Articles of Association of Scitex provide that any director may appoint, by written notice to Scitex, 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.

Scitex 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. Scitex 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.

In April 1999, the Israel legislature (the Knesset) approved the adoption of a new Company Law, which will generally become effective on February 1, 2000 and will replace the Companies Ordinance almost in its entirety.

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS

The following table sets forth with respect to all directors and executive officers of Scitex as a group, including all persons who were at any time during the period indicated directors or executive officers of Scitex, all cash and cash-equivalent forms of remuneration paid by Scitex during the fiscal year ended December 31, 1998:

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 Scitex’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 Scitex). Except as aforesaid, Scitex has not compensated directors who are not officers of Scitex.

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

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES

All data in this Item is as of June 7, 1999.

In September 1991, the shareholders of Scitex approved two plans, the Scitex Israel Key Employee Share Incentive Plan 1991 primarily designed for employees of Scitex and its subsidiaries located in Israel (the "Israel Plan") and the Scitex International Key Employee Stock Option Plan 1991 designed for employees of Scitex’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 Scitex (the "Shares") to officers, key or other employees, directors, consultants or contractors of Scitex and its subsidiaries. The International Plan permits the granting of such options to officers, management employees or other key employees, including employees who are also directors, of Scitex’s non-Israel subsidiaries. The aggregate number of Shares that have been authorized and reserved for issuance under the Plans is 2,650,000 Shares under the Israel Plan and 1,750,000 Shares under the International Plan.

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 2008. The following table sets forth certain information with respect to the Plans.

Directors and executive officers of Scitex hold under the Plans unexercised options aggregating 1,231,875 Shares, including options for the purchase of an aggregate of 40,000 Shares awarded to the two Independent Directors serving on Scitex’s Board of Directors (see "Item 10. Directors and Officers of the Registrant") at an exercise price of $11.375 per Share.

In 1998, the board of directors of Scitex approved a program for the repurchase by Scitex of up to two million of Scitex’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 Scitex 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.)

ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

Scitex 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 1998 was approximately $$2.0 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.)

Scitex purchased insurance policies in Israel 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, 1998, Scitex paid premiums on such insurance in the amount of $1.2 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 1998, Scitex 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 (see "Item 4. Control of Registrant"), all on terms which management believes were no less favorable to Scitex than would be obtained in transactions with unaffiliated third parties. (See Notes 8a and 16a to the Consolidated Financial Statements listed in Item 19.)

PART II

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

Not applicable.

PART III

ITEM 15. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS

None.

PART IV

ITEM 17. FINANCIAL STATEMENTS

Not applicable.

ITEM 18. FINANCIAL STATEMENTS

Incorporated by reference from the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 1998, attached hereto as Exhibit 2.1. See Item 19(a).

ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

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.

* Incorporated by reference from the Registrant’s 1998 Annual Report to Shareholders attached as Exhibit 2.1 hereto. Page reference is to the financial statement pages of the Registrant’s 1998 Annual Report to Shareholders. The 1998 Annual Report to Shareholders is not to be deemed to be filed as part of this Report on Form 20-F, except for those parts thereof specifically incorporated by reference herein.

(b) Exhibits:

2.1 Annual Report to Shareholders for the fiscal year ended December 31, 1998, certain portions of which have been incorporated herein by reference.

2.2 Consent of independent accountants.

SIGNATURES

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, 1999

The Report in Form-20F for the year ended December 31, 1998 appearing on this web site contains certain changes as to format from the Report filed by the Company with the Securities and Exchange Commission. You may download a Conformed Copy of the filed Report (pdf format).

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

Commission File Number 0-12332
SCITEX CORPORATION LTD.
(Exact name of Registrant as specified in its charter and translation of Registrant's name into English)

                       ISRAEL                    
(Jurisdiction of incorporation or organization)

Hamada Street, Industrial Park, 46103 Herzlia B, Israel
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
None Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.12 nominal (par) value per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Ordinary Shares, NIS 0.12 nominal (par) value per share
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as at the close of the period covered by the annual report: 43,038,852 Ordinary Shares, NIS 0.12 nominal (par) value per share, at December 31,1998.

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

x Yes o No

Indicate by check mark which financial statement item the Registrant has elected to follow.

o Item 17 x Item 18

TABLE Of CONTENTS

PART I

• ITEM 1. DESCRIPTION OF BUSINESS
  • General
  • Digital Preprint Business
  • Digital Printing Business
  • Discontinued Operations
  • Marketing and Sales
  • Competition
  • Customer Support
  • Research and Development
  • Manufacturing
  • Patents and Trademarks
  • Employee and Labor Relations
  • Political, Military and Economic Conditions in Israel
• ITEM 2. DESCRIPTION OF PROPERTY
• ITEM 3. LEGAL PROCEEDINGS
• ITEM 4. CONTROL OF REGISTRANT
• ITEM 5. NATURE OF TRADING MARKET
• ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
• ITEM 7. TAXATION - CAPITAL GAINS, INCOME AND ESTATE TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
• ITEM 8. SELECTED FINANCIAL DATA
  • Statement of Operations Data
  • Balance Sheet Data
  • Dividends
• ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  • General
  • Certain Factors That May Affect Future Result
  • Impact of Inflation and Exchange Rates
  • 1998 Compared With 1997
  • 1997 Compared With 1996
  • Liquidity & Capital Resources
  • Year 2000 Readiness Disclosure
• ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
• ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
• ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
• ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
• ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

PART II

• ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

PART III

• ITEM 15. DEFAULTS UPON SENIOR SECURITIES
• ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS

PART IV

• ITEM 17. FINANCIAL STATEMENTS
• ITEM 18. FINANCIAL STATEMENTS
• ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Scitex Corporation Ltd. (the "Registrant) and its subsidiaries design, develop, manufacture, market and support digital graphics communications products. Unless indicated otherwise by the context, all references in this report to "we", "us", "our", the "Company" or "Scitex" include Scitex Corporation Ltd. and its wholly-owned subsidiaries. The operations of Scitex principally comprise two related businesses, digital preprint and digital printing, operating within a single industry.

Preprint (also known as prepress) refers to all the processes and procedures required to prepare color separation films, printing plates or direct digital output before printing. It includes design and layout, image input, editing and digital asset management, proofing, and image output. Our digital preprint products are used for generating and producing 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 and 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. Both the digital preprint and digital printing 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. We also offer (including through a joint venture) communication products and services that allow customers and clients worldwide to collaborate over networks.

Our digital printing products are based primarily on inkjet technology and produce hardcopy output directly from digital data files generated entirely on a computer or originating from a computer, allowing the digital printing process to integrate into the digital workflow. These products include high-speed inkjet printing systems used for variable-data printing in monochrome and spot color for personalized promotional mailings, billings, statements, books, lottery tickets and other addressing/personalized applications. Such products range from stand-alone addressing systems to large printing systems used on-line with various finishing equipment. Digital printing products also include wide format, color inkjet printing systems used for point-of-purchase displays, banners, outdoor advertising posters and fleet markings, as well as digital color servers for driving and managing short-run variable-data color printers. Scitex is also engaged in a joint venture for developing, manufacturing and marketing a direct on-press imaging digital offset press for the short-to-medium run printing market.

Scitex Corporation Ltd. was incorporated in Israel in 1971, succeeding a predecessor corporation, Scientific Technology Ltd., which was founded in 1968.

Our corporate headquarters and executive offices are located in Herzlia, Israel, approximately eight miles north of Tel Aviv. Our telephone number in Israel is (972) 9 - 959 7222. Nearly all Scitex’s sales are outside of Israel.

In December 1998, Scitex sold its digital video business, consisting primarily of the operations of Scitex Digital Video, Inc. ("SDV"), having previously announced its proposed exit from the digital video business. Accordingly, unless otherwise indicated, all financial information and other data presented herein relate solely to the Company's continuing operations and digital video is presented as discontinued operations. Amounts for all prior years have been reclassified for the effect of the discontinued operations.

The following table sets forth amounts and relative percentages of total revenues from the Company’s equipment sales, service operations and supplies of consumables, for the years indicated:

The following are the principal development and manufacturing companies in the Scitex Group (see under the caption "Marketing and Sales" of this Item, for details of Scitex’s distribution and support subsidiaries):

• Scitex Corporation Ltd., the Registrant, located in Herzlia, Israel, comprises corporate functions and the operations of "Scitex Israel" - all of the Company’s operations in Israel, other than Scitex Wide Format Printing Ltd. It has a workforce of approximately 1,070 (including part-time and temporary employees), and includes research and development, engineering and manufacturing facilities. Scitex Israel includes a number of product line divisions (in 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 Scitex products in the Middle East, including Israel, and Africa
• Scitex Digital Printing, Inc. ("SDP"), a wholly-owned Scitex subsidiary based in Dayton, Ohio, with approximately 675 employees (including part-time and temporary employees). 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 provide general assistance for marketing and support 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.
• Iris Graphics, Inc. ("Iris Graphics"), part of the Company’s digital preprint business, 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, with a workforce of approximately 250, it was founded in 1985 and acquired by Scitex in 1990.
• Scitex Wide Format Printing Ltd., formerly Idanit Technologies Ltd. ("Idanit"), part of the our digital printing business, is a wholly-owned Scitex subsidiary, with approximately 100 employees. Idanit, founded in 1994, was acquired by Scitex in February 1998 for approximately $63 million. Its operations were expanded in October 1998 with the purchase of the super-wide format product line from the Matan group of companies, for approximately $12.2 million plus a performance based earn-out. Scitex Wide Format Printing Ltd. is a leading developer and manufacturer of wide-format, color inkjet printing systems used for point-of-purchase displays, banners and outdoor advertising posters. Its headquarters are in Rishon Lezion, Israel.
• Karat Digital Press ("Karat"), part of our digital printing business, is a joint venture for developing, manufacturing and marketing of a direct digital offset press for the short-run to medium-run printing market. Scitex and the German corporation, Koenig & Bauer A.G., each have a 50% interest in the joint venture. Research, development and production take place in both Radebeul, Germany and Herzlia, Israel. Karat carries out its operations through a German corporation, Karat Digital Press GmbH and an Israeli limited partnership, Karat Digital Press LP. It has a total workforce of approximately 140, divided almost equally between Israel and Germany.
• Vio Worldwide Limited ("Vio"), a 50/50 joint venture with British Telecommunications plc, incorporated in the UK, provides a global managed network service for the graphic arts industry. It commenced operations in late 1998, and has approximately twenty employees. Vio’s headquarters are in Watford, Herfordshire, UK, with a subsidiary in Pennsylvania.

The following table sets forth the Company’s total revenues for the years 1996 through 1998 and amounts and relative percentages attributable to the principal businesses: digital preprint and digital printing.

Digital Preprint Business

Introduction

Our digital preprint products encompass a broad range of digital imaging devices and systems that automate the preprint tasks required to prepare color images and pages for high resolution, high quality printing. They generally combine industry standard and custom-made hardware and software. These products operate on a stand-alone basis or are combined in systems and networks that meet customer requirements and production environments. Most of the preprint products can be easily upgraded, to communicate with a variety of products from other vendors, including desktop publishing ("DTP") systems and software applications, and to have networking and telecommunications capability. This open design allows end-users to select from many configurations to best address their needs.

Our preprint market consists of graphic arts enterprises, such as color trade shops, commercial printers, publishers, and digital trade services. Scitex develops products that address this broad segment of customers, emphasizing superior productivity and a high return on investment, as well as affordable price, easy operation and ability to communicate with DTP systems. We design versions of our products that permit input and output of PostScript® language and PDF (portable document format) files. PostScript language is the computerized page description software most widely used by desktop publishing systems in the graphic arts and related markets. PDF preserves the layout, type font and graphics as one unit, for electronic transfer and viewing.

Our digital preprint operations comprise the Input Systems and Output Systems divisions of Scitex Israel and the operations of Iris Graphics. Also included with the digital preprint business are our projects and products in telecommunication solutions and networking.

Input Systems Division

The Input Systems Division develops, manufactures and markets image capture solutions, such as scanners and digital cameras, as well as color management applications.

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 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.

Scitex scanners include the Smart® series of flatbed color scanners of continuous-tone images and line art in reflective and transparent forms and in sizes from 35mm to 26 x 36 inches. The scanners feature charge-coupled device ("CCD") sensors and automated scanner setup and operation. Their high speed and sophisticated capabilities provide high throughput of color and monochrome images to the digital workflow. The scanners include prescan and postscan viewing to boost productivity by virtually eliminating rescanning. In 1997, we introduced the EverSmarttm and EverSmart Protm large format, tabletop scanners that integrate well with PostScript and DTP systems, and added the top-of-the-line EverSmart Supremetm scanner in 1998. Their revolutionary XY Stitchtm technology allows the scanning head to scan along both the x and the y axes, which provides a uniformly high resolution over the entire scanner format, thereby breaking the traditional dependence of enlargement on original size. Scitex FinalTouchtm, a software application, enhances the quality of a scanned image by automatically removing imperfections that were in the original image. The EverSmart DOTtm film scanning application accurately scans preseparated films dot by dot and integrates them into the digital workflow. Scitex also markets the Monoscantm series of large format scanners, supplied under an OEM agreement with Purup-Eskofot A/S.

The Input Systems division products also include the Leaftm line of digital cameras, consisting of digital camera backs mounted on high-quality 2¼ x 2¼ inch cameras and connected to a Macintosh computer. The digital cameras capture images electronically, without using film or chemicals, and are efficient, high-quality replacements 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 Livetm captures stationary images in color and offers a real-time video view of the picture on the computer screen before the actual capture. In 1998, Scitex introduced the Leaf Volaretm, an especially high resolution camera back with live video preview and with Leaf Vhtwisttm technology for quick switching between landscape and portrait orientation. A similar product for images in motion will be introduced shortly, and is particularly suited to portraits and fashion photography.

Output Systems Division

The Output Systems Division develops, manufactures and markets imagesetters, platesetters, digital front ends and data management systems, either combined with other Scitex® products or as stand-alone devices, and provides communications solutions for integrating preprint products and systems in a digital workflow.

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

Imagesetters are used to output color separation films, at high resolutions and high-quality, for the preparation of printing plates. The current line of Dolev® imagesetters covers three formats based on the number of full-sized pages that can be imaged at one time: two pages up - about 14½ by 19½ inches (Dolev 2press Plustm), four pages up - 25¼ by 19½ inches (Dolev 4presstm and Dolev 4pressVtm), and eight pages up - 32 x 44 inches (Dolev 800Vtm). A specialized series of four-pages up imagesetters (Dolev 4news) is designed for newspapers. A compact, 2 pages up imagesetter (Dolev 2drytm, with a 4 pages-up model to follow) has a built-in dry film processor. By eliminating wet chemical processing and waste it is environmentally friendly and the image quality is high. The Scitex Class Screeningtm technology offers screening modules for high quality printing.

Computer-to-Plate ("CTP") technology is a major leap in the digital workflow. The Company offers complete color solutions that include platesetters, imposition workstations and proofers for direct plate production. In CTP, the platesetter outputs electronic data to plates ready for printing presses. Bypassing the film stage achieves significant savings in labor, materials and time, and improves the quality of the press output. CTP is also more environmentally responsible. The Scitex Lotem 800Vtm thermal platesetter, designed for high-quality CTP color production, has an imaging format of eight pages up. Additions to the Lotemtm line of platesetters are currently being planned with different capabilities. Integrating seamlessly into the Scitex digital workflow, these fully automated and comprehensive CTP solutions are driven by a Brisque Imposetm digital front end ("DFE") that also outputs the same files for proofing.

The family of Brisquetm digital front ends (DFE’s) for output devices such as imagesetters, platesetters and proofers, was launched in July 1996. A complete workflow automation solution, the Brisque DFE includes a unique job ticket mechanism, and provides higher predictability, reduces the chance of errors and produces faster and higher quality output. The front ends handle PostScript, TIFF/IT and PDF file formats, as well as Scitex CTtm and Scitex NLWtm formats. They also accept copydot files (color separation films that have been scanned and digitized) from Scitex EverSmart and Scitex Monoscan scanners.

The DFE’s can export the processed files in various formats, preserving all enhancements. The DFE’s link to a variety of digital printers in the pressroom and provide them with proofing files. The Scitex InkProtm application, an option in the Brisque and other Scitex DFE’s, is designed for commercial printers. It completely digitizes the labor-intensive process of setting the ink keys on offset presses, thereby reducing the make-ready time and increasing productivity, while minimizing waste of ink and paper.

The Brisque Impose DFE provides a full digital imposition for large-format imagesetters, platesetters and proofers. It stores each page independently, enabling fast and easy changes and corrections with minimum downtime. The Brisque Impose includes a RIP-Once workflow, drag-and-drop design and parallel processing. Recently, the Company introduced two new and powerful imposition front ends – the Brisque2 Imposetm DFE and the Brisque4 Imposetm DFE. They include two and four parallel RIPs, respectively, which provide symmetric multiple processing that allow them to handle several input devices in parallel, as well as very large files. The Brisque Imposetm DFE’s interface to third party proofers output imposition proofs to verify page layout, positioning and content, in monochrome or color, and can be used to assemble dummy books.

The Output Systems division’s products also include 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. Since 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.

We offer several data management system solutions to improve the productivity and profitability of Scitex customers. Acting as the hub of production systems and centralizing all data, these systems ensure a smooth, transparent flow and exchange of files among workstations, from input devices and to output devices, and on a wide variety of storage media. The Scitex Server line includes three models differing in performance and hardware configuration: entry level (3000 series), midrange (4000 series) and high end (5000 series). Each runs on an IBM® RS/6000tm* RISC computer, and enables file sharing between networked stations based on various platforms in a DTP or Scitex environment. All Scitex Servers can optionally include the Scitex Timnatm data management software solution with an advanced database for tracking all job elements and managing the data flow, particularly in operations with intensive archiving and last-minute changes. Emphasizing high speed and efficiency, these data management systems provide the infrastructure required for today’s demanding computer-to-film and computer-to-plate environments.

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

Iris Graphics – High Quality Inkjet Printers and Proofers

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 press-ready plates for the initiation of high volume printing. The Iris® direct digital color printers, produced by Iris Graphics, consist of high quality, continuous flow, color inkjet devices. In the inkjet process, special ink-delivery systems form and microscopically control uniform ink droplets with diameters measured in microns. The ink nozzles fire up to one million droplets per second on the printing medium.

In 1998, Iris Graphics replaced the Iris RealistFX 5015tm and the Iris RealistFX 5030 tm printers with the Iris2PRINT tm and Iris4PRINT tm digital contract proofers. These self-calibrating proofers offer improved resolution (up to 600 dpi) and removeable printing nozzles, called IrisPENs. For the Iris2PRINT and Iris4PRINT devices, Iris offers DCP (digital contract proofing) capabilities in addition to special application software. The DCP system is designed to output an authoritative proof of how the final printed piece will be printed. The Iris 3047 tm family of printers use the same technology; they include the Iris 3047G tm and IrisGPRINT tm, large format devices capable of printing a 34 x 46-inch sheet. Iris printers are also used for certain other applications, including fine arts, textile and industrial design, and the printing can be on paper, acetate and other media. All Iris products have versions that can be linked to DTP systems through PostScript language interpreters and a variety of front-end systems and software.

Telecommunications Solutions & Networking

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. These products can integrate systems, locally in nearby rooms or adjacent buildings and globally across continents.

Companies in the Scitex group offer communication products and services that allow customers and clients worldwide to benefit from close collaborative working, enhanced production efficiency and higher speed to market. These products offer rapid file transfer that improves turnaround time. Two of these products, both recently introduced, are the Vio® network and the Scitex RenderViewtm server.

In 1998, Vio Worldwide Limited (a Scitex joint venture with British Telecom) launched its secure, global, network for the preprint and printing industries. The Vio digital graphics network, a 24-hour, managed communications service, allows remote and secure file transfer in key stages from image capture to printing. One command can send the file to an unlimited number of pre-selected subscribers. The Vio network extends the ability of those in the graphic arts industry to offer their services beyond organizational and geographic boundaries. The service is currently operational in Europe and the US.

An alliance between Scitex and RTImage has resulted in the Internet-based Scitex RenderView server. The server is Internet-based, which allows real-time examination of jobs globally, before they are printed. It enables all clients in the preprint chain to view high-resolution files, including ready-to-print pages, at high speed and with great precision, and exchange comments on the screen.

Digital Printing Business

Our digital printing operations are comprised of: Scitex Digital Printing; Scitex Wide Format Printing; the Print-on-Demand Systems Division at Scitex Israel, as well as the Karat Digital Press joint venture.

We believe that Scitex is preeminent in inkjet printing and have recently added digital offset printing to our technology line. The inkjet product line includes high-speed, variable-data inkjet printing systems for high volume personalized and customized documents, used by specialized printers, in-house printers and data centers for printing business forms, bills and direct mail. The Scitex Wide Format Printing inkjet systems are used to print short and medium runs in color of point-of-purchase and point-of-sales displays, banners and outdoor advertising. Many screen printers are incorporating this printer in their operations.

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

Scitex Digital Printing (SDP) – High Speed Variable Information Printing

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. 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 promotional mailings, billings, statements, books, 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 digital printing of variable information, in narrow, partial page and wide formats.

Narrow Format Products

Narrow format systems, with 1-inch, 2.13 inch and 2.75 inch printheads, are used in applications such as direct addressing, bar coding, spot color or highlighting.

The Scitex Dijittm 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 compact and modular system can be used with a variety of third party equipment such as folders, web presses or mailing bases. The printing modules for the Scitex Dijit printing system are the Scitex 5120tm, Scitex 5240tm and Scitex 5300tm printers, the latter offering significantly higher resolution than the former.

Partial-Page Format Products

Partial-page format systems, with multiple arrays of 3.4 or 4.25-inch printheads, are used for monochrome, spot color, or highlight variable printing on documents. Flexible configurations of up to 16 printheads can be used to handle the widest variations of applications in-line on webs, both offset and flexo, folders, collators, and document tables.

The Scitex 6240tm 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 3500tm and Scitex 3600tm 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.

The Scitex Begintm software was created for the Scitex 3000 series high speed printing systems. It is made up of two modules: a web layout/page composition module designed to run on a PC under MS DOS®/Windows®; and a data merge module that runs on a Sun® SPARCstation® computer with the UNIX® operating system. The web layout/page composition module operates within QuarkXPresstm for Windows, and gives designers a large array of graphic design tools from which to choose. Proofing stations allow the designer to see exactly what the finished product will look like. Once data merge files have been created in the design process, they are transferred to the data merge module. The data merge process can handle input from multiple sources, data verification, and testing. As needs grow, the number of design stations linked to the data merge process can be expanded.

Wide Format Products

SDP’s ide format systems, with multiple 9-inch printheads, are used for full-page, variable printing up to 18 inches wide on one or two sides. These systems provide high quality at ultra-high production speeds for book printing, billings, statements, or any variable printing application.

The Scitex VersaMarktm high speed printing system, introduced in early 1999, combines high speed, exceptional print quality and the low cost per page in a turnkey solution that is neatly set into a modular, and entirely upgradable package. Coupled with spot color capability and numerous versatile configurations, it positions Scitex to expand its presence in the world market for on-demand publishing, billing and financial statement printing and to strengthen SDP's position in its traditional stronghold of personalized direct mail and catalogue printing.

Inks

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

Scitex Wide Format Printing

Scitex Wide Format Printing Ltd. designs, develops, manufactures and markets wide-format and super-wide format inkjet presses that are designed for cost-effective short and medium runs (up to about 150 copies) of display advertising. The applications include point-of-purchase and point-of-sales displays, banners, indoor and outdoor posters, billboards, fleet marking for trucks, cars and public transportation vehicles, window graphics, exhibition graphics, building covers, and others. Sold primarily to screen printers who are moving to a digital solution and to digital service bureaus worldwide, they print on a choice of various substrates, including paper, vinyl and other flexible materials.

The Scitex-162Adtm (formerly Idanit-162Adtm) wide-format, color inkjet printing system, was unveiled in 1995 and commenced commercial shipping at the beginning of 1997. It prints up to seventy 8 x 5 feet color sheets per hour (depending upon resolution and type of media). In October 1998, Scitex purchased the super-wide format product line from the Matan group of companies, including two Scitex GrandjetVtm presses, that print on formats up to 11 or 17 feet wide. These were added to the line of the products offered by Scitex Wide Format Printing Ltd. In June 1999, the high quality, high throughput Scitex Pressjettm system was introduced representing, for the first time, a true cost-effective solution for screen printing applications, in runs of up to 150 copies.

Print-On-Demand Systems Division

The Print-on-Demand Systems division develops, assembles and markets digital color servers for color on-demand and variable information printing systems. Scitex is cooperating with the Xerox Corporation worldwide to supply Scitex digital color servers for the Xerox® DocuColortm copier/printers. Xerox also offers a complete solution for variable printing, including advanced personalization and customization, with the Scitex Darwintm application and the Scitex VPStm architecture introduced in 1997. The Scitex Ignitetrm software package turns an Apple Macintosh® computer into an additional printer server for short-run, on-demand printing through Scitex digital color servers. The division’s products will also be used in driving high-speed, variable-information printing engines developed by SDP.

Karat Digital Press

Karat Digital Press, a Scitex joint venture with Koenig & Bauer A.G., the world's third largest press manufacturer, is developing and testing the four-color, four-page 74 Karattm digital offset press, designed for the short-to-medium-run color printing market. The 74 Karat press will offer commercial printers offset quality printing with ease-of-use and a high level of automation and speed. The press is currently undergoing testing at customer sites.

Discontinued Operations

Scitex Digital Video

In December 1998, Scitex sold the Scitex Digital Video business to Accom, Inc. for approximately $10 million and warrants convertible into approximately 10% of the stock of Accom (subject to dilution). Scitex had previously announced the intention to exit from the digital video business, which was no longer considered a core business. Accordingly, the digital video business has been presented throughout this report as discontinued operations.

Truevision, Inc.

Scitex’s investment in Truevision, Inc. (dating back to 1993) was a strategic investment linked to the digital video business. With our decision to exit from the digital video business, the Truvision investment was therefore considered part of the Company’s discontinued operations. In March 1999, Pinnacle Systems, Inc. acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. In April 1999, the Company sold its shares in Pinnacle for $3.1 million.

Marketing and Sales

The following Scitex entities are responsible for marketing, sales and customer support of our digital preprint and wide-format products in their stated geographical areas:

• Scitex America Corp. ("Scitex America") – North and South America. This is a wholly-owned subsidiary incorporated in 1972, with headquarters in Bedford, Massachusetts. 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. It has approximately 520 employees.
• Scitex Europe S.A. ("Scitex Europe") – Europe. This is a wholly-owned subsidiary, incorporated in Belgium in 1974, with headquarters in Waterloo (near Brussels), Belgium. It has a network of regional sales offices and other facilities, and uses both direct sales channels and selected dealers and distributors. Scitex Europe’s workforce, including employees of Scitex Europe’s regional subsidiaries and affiliates, is almost 500.
• Nihon Scitex Ltd. ("Nihon Scitex") – Japan. This is a joint venture based in Tokyo, Japan, formed in 1985, with headquarters in Tokyo. It is owned 50% by Scitex and 50% by the Japanese corporation, Toyo Ink Mfg. Co. Ltd. ("Toyo"). It operates several regional sales offices and customer support centers, and has approximately 160 employees (including a number of Toyo employees assigned to Nihon Scitex).
• Scitex Asia Pacific (H.K.) Ltd. – Asia and Pacific Rim (except for Japan). This is a wholly-owned subsidiary, incorporated in Hong Kong in 1992. It has a number of regional offices and branches, including a newly formed subsidiary in Shanghai, China. Its workforce, including employees of the Shanghai subsidiary, numbers over 80 employees.
• Scitex Middle East / Africa – Middle East (including Israel) and Africa. This is a division of Scitex Corporation Ltd. formed in 1995, and has approximately 30 employees.

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

** Revenues from Japan (other than for SDP products) 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.

As an integral part of Scitex’s marketing efforts into the digital preprint market, we employ a distribution strategy, which combines direct distribution outlets (primarily in North America, Western Europe and Japan), with other selective distribution strategies, such as dealers, distributors and value added resellers (VAR’s), including in regions where it had traditionally sold only directly. During 1998, 55% of Scitex America’s sales and 62% of Scitex Europe’s sales were being effected through these indirect channels (compared to 45% and 65%, respectively, in 1997 and 54% and 57%, respectively, in 1996). By the end ?f 1998, the Company’s indirect channels included over 100 dealers and distributors, and over 180 resellers, worldwide.

Developments in graphic arts and related markets have resulted in the emergence of two overlapping marketing trends. Scitex's smaller stand-alone "box" devices, such as the scanners, digital cameras, proofers and small-format imagesetters tend to be sold through the indirect distribution channels, whereas Scitex generally utilizes its direct distribution outlets for the larger integrated systems, such as the large-format imagesetters, the computer-to plate systems and the related workflow and data management solutions.

OEM sales are also an integral part of Scitex’s sales strategy. In 1998, such sales through Scitex’s eight major OEM partners together accounted for over 5.0% of the equipment sales (including all sales by the Print-on-Demand Systems division).

Scitex’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 our 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 we substantially expanded our 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 we can base our development efforts. In recent years, more than half of Scitex’s sales revenues have been derived from sales of additional products to our existing customer base. Customers can generally expand or upgrade their existing systems 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, with several Scitex subsidiaries in Europe and the Far East providing marketing and support. In certain areas, SDP also utilizes dealers, VAR’s and OEM agreements.

In early 1999, SDP announced an agreement with Domino Printing Sciences Plc, U.K., under which Domino will become the exclusive distributor in Europe of SDP’s narrow format products. Domino has a well-established sales and dealer network throughout Europe.

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 book publishing industry.

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. Scitex has agreements with third party financing companies for long-term financing of purchases of Scitex equipment by certain customers. The terms of these agreements in some cases grant the financing companies recourse against Scitex 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. In 1998, there were approximately $19 million of new transactions with recourse obligations. Approximately $70 million of trade receivables which had been financed under these programs were outstanding at December 31, 1998 (approximately $146 million outstanding at December 31, 1997). (See Note 9(b)(1) to the Consolidated Financial Statements listed in Item 19.)

In each of the years 1998 and 1997, no end-user customer nor distributor accounted for more than 10% of net revenues.

Competition

The primary competitive factors affecting sales of Scitex 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.

Scitex’s principal competitors in the digital preprint market are: Heidelberger Druckmaschinen ("Heidelberg") of Germany; Agfa, headquartered in Belgium; Fuji Photo Film Co. Ltd. (primarily through its wholly-owned subsidiary, Fuji Film Electronic Imaging Ltd.) of Japan; and Dainippon Screen also of Japan (operating in the United States under the name Screen). In addition, certain other companies, such as Creo Products, Inc. and Purup-Eskofot A/S, offer equipment that competes with specific products or product capabilities within the Scitex product line.

The principal competitors of SDP in the narrow and partial-page format digital printing market are U.S.-based Videojet Systems International, Inc. (owned by General Electric Plc of the U.K.), Imaje of France and Domino Printing Sciences Plc of the U.K., with whom SDP has entered in to a distribution agreement in Europe relating to SDP’s narrow format systems. 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, owned by Xerox) and Nipson Printing System, Inc. (now owned primarily by Xeikon N.V.) (magnetography), as well as Océ Printing Systems GmbH (formerly Siemens Nixdorf Printing Systems) and IBM Pennant Printing Systems (both electrophotography).

The principal competition for the printing systems manufactured by Scitex Wide Format Printing Ltd. comes from the Scotchprint 2000tm printer produced by Minnesota Mining & Manufacturing Co. (3M). In addition, these 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 of Israel.

Electronics for Imaging, Inc. (EFI) and Splash Technology Holdings, Inc. are our principal competitors in the Print-on-Demand Systems market. Karat Digital Press’s principal competitor is likely to be Heidelberg; and the principal competitor of Vio is Wam!Net, Inc. of the United States.

Customer Support

Technical support, training and customer service are important factors in system sales and the achievement of high levels of customer satisfaction. Scitex has established full-time support centers in our 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.

Scitex 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 have preferred to pay for service on a time and materials basis.

Our customer support operations, including those of Nihon Scitex, engage over 850 employees, comprising engineers, technical and application specialists as well as logistics and management personnel. They are based in several dozen locations, in North America, Europe, Japan and the Pacific, as well as at Scitex headquarters in Israel. In certain areas, services are provided through distributors and agents, who provide technical and applications support through locally trained engineers.

In 1998, 21.5% of the Company’s total revenues (nearly $138 million) was generated from service operations. In addition, during 1998, Scitex generated nearly $61 million of revenue from the supply of consumables, primarily ink and paper for the inkjet printing products produced by Iris, SDP and Scitex Wide Format Printing, representing 9.6% of our total revenues.

Research and Development

Scitex’s research and development efforts, engaging nearly 600 employees, are focused on the development of new products and technologies, as well as enhancing the quality and performance relative to price of our existing products, reducing manufacturing costs and upgrading and expanding our product line through the development of additional features and improved functionality, as well as the development of solutions in order to ensure that our products will be ready for year 2000.

Although Scitex carries out the greater part of its engineering, research and development activities in Israel (both at Scitex Israel and at Scitex Wide Format Printing’s facilities), a significant part of such activities is also conducted in the United States, principally by SDP and Iris Graphics.

Scitex 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:

⁽¹⁾ Excludes $44,264 thousand of in-process research and development related to the acquisition of Idanit. Total research and development incurred, including the in-process research and development, was $121,632 thousand (19.0% of total revenues), of which participations constituted 8.9%.
⁽²⁾ Percentage indicates the ratio of the relevant item to total revenues.
⁽³⁾ See Note 9a(1)(a) to the Consolidated Financial Statements listed in Item 19.
⁽⁴⁾ Percentage indicates the ratio of the participations to total research and development expenditure incurred (as shown).

We expect that Israel Government participations will, in future years, decline as a percentage of our total research and development expenditure, due to an increasing proportion of such expenditure being incurred in operations outside Israel (and therefore ineligible to receive such funding) and to continuing changes in Israel Government policy regarding such funding.

Under the terms of the Israel Government participations, Scitex pays a royalty on the proceeds of sales of products resulting from funded projects up to the amount 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 Scitex pursuant to the Israel Government and other programs amounted to approximately $4.7 million in 1998 (approximately $4.3 million in 1997 and $2.6 million in 1996). At December 31, 1998, the maximum contingent royalty payable was approximately $46 million.

There can 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 we will continue to meet the conditions to benefit from such program.

Manufacturing

Scitex has manufacturing facilities in Israel and the United States, and in both countries also uses subcontractors in connection with certain types of work and activities. Karat Digital Press has manufacturing facilities in both Israel and Germany.

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, components and commodities used by Scitex in the manufacture and assembly of Scitex products are available from several sources, although we currently purchase a substantial number of items from single suppliers. In some cases, there is only one source of supply for a component or commodity used by us. We generally purchase certain major components and commodities used in our products under annually renewable supply agreements with principal suppliers. To date, we have managed to overcome any difficulties experienced in obtaining timely deliveries. Although increased demand for these components and commodities or future unavailability could result in production delays which might adversely affect our business, we believe that, if required, alternative sources of supply could be developed for all parts, components and commodities.

Patents and Trademarks

Scitex owns, licenses or otherwise has rights in over 600 issued patents (primarily in the United States) and has over 470 patent applications pending in the United States and elsewhere. A large number of these issued patents were acquired with the purchase of SDP from Kodak in 1993. In addition, Scitex 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 used in prepress and color page editing and production. The complaint was later expanded to include claims that certain Scitex products infringe Dainippon Screen’s color correction and halftone dot generation patents. Scitex filed counterclaims against the plaintiffs for infringement of the trapping patents. Each side defended the claims made against it and in March 1999 all parties agreed to settlement without admission as to the validity, enforceability or claim coverage of the other side's patents. Under the parties' settlement, cross-licenses have been granted under the patent in the suit so that the parties and their sublicense suppliers, OEMs and end users are protected against claims of patent infringement under those patents.

On May 25, 1999, an action was commenced in the United States District Court of the Southern District of Ohio Western Division against Scitex Digital Printing, Inc. by Varis Corporation, alleging that SDP is infringing a patent issued to Varis and that SDP’s use of the VersaScript trademark infringes the VarisScript trademark used by Varis. SDP is assessing the merits of the lawsuit and intends vigorously to defend the action.

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

Employee and Labor Relations

Scitex currently has a total worldwide workforce of approximately 3,200. The workforce in Israel numbers approximately 1,075 (including approximately 125 positions filled by part-time and temporary employees). There are 1,375 employees in the United States (including approximately 100  temporary employees) and 650 employees in Europe and elsewhere. In addition, Scitex’s three principal joint ventures employ approximately 350 persons (almost all outside the United States). 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.

Political, Military and Economic Conditions in Israel

Scitex’s corporate headquarters and executive offices, together with a significant part of our research and development, engineering and manufacturing operations, are located in Israel, and therefore our operations are directly affected by economic, political and military conditions in Israel. In addition, we are heavily dependent upon components imported into Israel, primarily from the United States, and all but a small percentage of our sales are made outside Israel. Accordingly, our 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 has existed, varying from time to time in degree and intensity, between Israel and its various Arab neighbors and from time to time since 1987 Israel has experienced civil unrest from the local Arab population in territories which Israel had administered following a war in 1967 (the "Territories").

A large number of our Israeli male employees, including some of our officers, are obligated to perform annual reserve duty in the Israel Defense Forces. An emergency involving mobilization in Israel could require a substantial increase in the time such personnel are required to devote to active military service, which could result in disruption of our 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 several agreements with the Palestine Liberation Organization (the "PLO") relating to the Territories, under 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, Israel has not reached agreement with its other neighboring Arab countries, Syria and Lebanon, and there are still a number of major unresolved issues between Israel and the Palestinian Authority with negotiations having appeared to reach somewhat of an impasse, although there may be a change in negotiating positions following the change of government in Israel resulting from the general election held in May 1999. No predictions can be made as to whether or when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or the operations of Scitex.

Scitex has been favorably affected by certain Israel Government programs and tax legislation, principally related to research and development grants and capital investment incentives. Our operations could be adversely affected if these programs or tax benefits were reduced or eliminated and not replaced with equivalent programs or benefits, or if our 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 we 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 funds 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 funds 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 into the United States of Scitex products produced in Israel. 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.

ITEM 2. DESCRIPTION OF PROPERTY

The administrative offices of Scitex’s corporate management and the principal facilities of Scitex Israel are situated 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 Scitex and the others are leased. In addition, Scitex Wide Format Printing Ltd. leases both of its facilities, which are in industrial parks in Rishon Lezion, Israel, and Rosh Ha’ayin, Israel, both within approximately ten miles of Tel Aviv.

The properties leased and occupied by Scitex in Israel currently comprise, net, approximately 225,000 square feet of floor space, of which approximately 161,000 square feet of floor space in Herzlia is leased from Bayside Land Corporation Ltd. ("Bayside"), an affiliate of PEC Israel Economic Corporation and Discount Investment Corporation Ltd., two of Scitex’s major shareholders. The Bayside leases generally expire in 2003 and Scitex is considering a number of alternatives. (See "Item 4. Control of Registrant".)

Scitex, through its wholly-owned subsidiaries, leases various facilities outside Israel, the main locations of which are in Bedford, Massachusetts; Dayton, Ohio; Waterloo, Belgium; and Hong Kong. These facilities currently comprise approximately 770,000 square feet of floor space.

A new manufacturing facility in Radebeul, near Dresden, Germany, comprising approximately 10,000 square feet, was inaugurated by Karat Digital Press in May 1998, and Karat Digital Press leases from Scitex nearly 12,000 square feet of floor space in the building owned by Scitex in Herzlia, both facilities for the production of the 74 Karat digital press. In addition, Nihon Scitex leases nearly 60,000 square feet of floor space in Japan, and Vio Worldwide Limited leases approximately 6,300 square feet of office space in an business park in Watford, Hertfordshire, UK, approximately twenty miles northwest of London.

Scitex 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.

Scitex’s manufacturing operations in Israel are conducted at the facilities in Herzlia, Rishon Lezion and Rosh Ha’ayin. Outside Israel, Scitex’s principal manufacturing facilities are the new SDP facilities in Dayton, Ohio, specifically tailored to SDP’s printhead manufacturing workflow and the Iris Graphics facilities in Bedford, Massachusetts.

ITEM 3. LEGAL PROCEEDINGS

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 also "Item 1. Description of Business - Patents and Trademarks" for details of certain patent litigation; and "Year 2000 Readiness Disclosure – Risks" section of "Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations" for certain litigation relating to Year 2000 issues.

ITEM 4. CONTROL OF REGISTRANT

Unless otherwise stated, all data in this Item is as June 7, 1999.

Scitex Corporation Ltd. has authorized one class of equity securities, designated Ordinary Shares (NIS 0.12 nominal value) (in this Item "Shares").

On May 6, 1998, the Scitex board of directors approved a program for the repurchase by Scitex of up to two million Scitex Shares, to be held by the trustee for the benefit of employees within the framework of Scitex’s existing stock option plans (see "Item 12. Options to Purchase Securities of the Registrant or Subsidiaries"). Under the approved program Scitex may not purchase Shares from its principal shareholders. As at June 7, 1999, 559,500 Shares, at an average price per share of $9.37, had been repurchased by the trustee pursuant to the program, with funds provided by Scitex.

As of June 7, 1999, there were 42,491,948 Shares outstanding, excluding the 559,500 Shares purchased by the trustee pursuant to the repurchase program.

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

⁽¹⁾ Includes 246,664 Shares held through DIC Loans Ltd., a wholly owned subsidiary of DIC.
⁽²⁾ Includes 326,618 stock options exercisable within 60 days. Percentage based upon number of Shares outstanding plus the 326,618 Shares that the directors and executive officers as a group had the right to receive upon the exercise of such options.

CEI, an Israeli company that holds investments in Israeli companies operating in the electronics field, 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 outstanding Scitex Shares held by CEI.

PEC, a Maine corporation that holds equity interests in companies, predominately companies which are located in Israel or are Israel related is controlled by DIC, an Israeli corporation that holds investments in Israeli companies operating mainly in the fields of advanced technology, communications, industry and services. Based on the foregoing, DIC (which owns approximately 6.66% of the outstanding Scitex Shares) may be deemed to share with PEC (which owns approximately 6.68% of the outstanding Scitex Shares) the power to vote and dispose of the outstanding Scitex shares held by PEC.

Clal and DIC are both controlled by IDB Development Corporation Ltd. ("IDBD"). Companies controlled by Dina Recanati, Elaine Recanati, Leon Y. Recanati and Judith Yovel Recanati together beneficially own approximately 51.6% of the equity and voting power in IDB Holding Corporation Ltd. ("IDBH"), the parent of IDBD. Dina Recanati and Elaine Recanati are sisters-in law, and are aunts of Leon Y. Recanati and Judith Yovel Recanati, who are brother and sister. Leon Y. Recanati is Co-Chairman and Co-Chief Executive Officer of IDBH, Chairman of the boards of directors of Clal and Clal Industries, Co-Chairman of IDBD and a director of Scitex.

Based on the foregoing, IDBH and IDBD (by reason of their control of Clal and DIC) and Dina 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 outstanding Scitex Shares held by such companies, amounting, in the aggregate, to 26.48% of such Shares.

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 Scitex 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 39.82% of Scitex’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 Scitex, the parties are to vote their Shares for the election to the board of directors 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 Scitex’s board of directors will be adjusted to allow each party to designate such number of nominees to the board of directors as is compatible with each party’s voting power at such time. The Agreement also provides that, in the event of Scitex being required by law to appoint additional Directors, such directorships shall be filled by persons mutually agreed upon by the parties. (The Board of Directors of Scitex currently includes two Independent Directors – neither officers of Scitex 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, then Managing Director of DIC, was recommended to continue to serve as Chairman of Scitex’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 Scitex.

The Agreement further provides for the parties to confer before voting on any matter coming before any general meetings of Scitex, 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 Shares in Scitex owned by the parties to the Agreement.

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

ITEM 5. NATURE OF TRADING MARKET

Scitex’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 June 7, 1999, there were approximately 540 shareholders of record of Scitex, of whom approximately 500 were registered with addresses in the United States, representing approximately 83.3% of the outstanding Shares.

ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

On May 14, 1998, the Controller of Foreign Currency at the Bank of Israel granted 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.

ITEM 7. TAXATION - CAPITAL GAINS, INCOME AND ESTATE TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

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 Scitex 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 Scitex 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 Scitex 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 Scitex 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 Scitex 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.

ITEM 8. SELECTED FINANCIAL DATA

Statement of Operations Data

* Reclassified.

Balance Sheet Data

Dividends

The Company declared a cash dividend each quarter from the beginning of 1990 until the third quarter of 1996. During the last five years, the Company declared and paid a dividend of $0.13 in respect of each quarter of 1994, 1995 and the first three quarters of 1996. No dividend was declared in respect of the last quarter of 1996 nor in respect of 1997 or 1998. 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.

During the last five years, the rate of tax generally withheld at source at the time of payment by the Company of cash dividends ranged from 15.8% to 17.7%. 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%.

ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

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

Certain Factors That May Affect Future Results

Certain information contained in this Annual Report on Form 20-F, including, without limitation, information appearing under "Item 1. Description of Business" 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.

1. The Company’s markets are characterized by rapid technological change. There has also been consolidation in the industry with many of the Company’s competitors now being very large companies. The Company’s growth is dependent upon its ability continuously to develop, introduce and deliver commercially viable products and technologies on a timely basis that offer its customers enhanced performance at competitive prices. 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. 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.
2. 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 dealers and distributors versus 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.
3. 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. Other uncertainties that could affect the Company’s future operating results, include the Company’s ability to maintain or increase market share while expanding its product base and the ability to integrate acquired products and operations effectively. 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.
4. 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.
5. The Company has entered into several strategic alliances and joint ventures 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 in 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.
6. 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 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.
7. The Company’s operations could be adversely affected if Israel Government programs in which the Company participates, primarily related to research and development and tax incentives, were reduced, 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")
8. 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.

Impact of Inflation and Exchange Rates

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 pounds sterling or in currencies within the European Monetary Union and are now pegged to the Euro (principally Deutschmarks and French francs). Sales in Japan are made in Japanese yen.

A large portion of the Company’s costs relate to its operations in Israel. However, approximately 75% of these costs are in dollars or linked to the dollar. Costs not denominated in, or linked to, dollars are translated to dollars, when recorded, at prevailing exchange rates for the purposes of the Company’s financial statements, and may increase if the rate of inflation in Israel exceeds the rate of 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. Conversely, such costs may in dollar terms decrease if the rate of inflation is lower than the rate of devaluation of the shekel against the dollar.

In 1994, 1995 and 1996, the annual rates of inflation in Israel were 14.5%, 8.1% and 10.6%, respectively, and the annual rates of devaluation of the shekel against the dollar were 1.1%, 3.9% and 3.7%, respectively. This imbalance was reversed during 1997 and 1998, when the rates of inflation were 7.0% and 8.6%, respectively, and the annual rates of devaluation were 8.8% and 17.6%, respectively. As a result, the Israeli operations of the Company experienced increases in dollar costs in 1994 through 1996 and decreases in 1997 and 1998. The representative dollar exchange rate for converting the shekel to dollars, as reported by the Bank of Israel, was NIS 4.160 on December 31, 1998 (NIS 3.536 on December 31, 1997).

The Company has substantial operations outside the United States and Israel, and accordingly maintains substantial non-dollar balances of assets, including substantial accounts receivable balances related to sales made in non-dollar currencies, mostly European currencies and Japanese yen. The Company’s general policy is to hedge against the exchange rate exposure arising from the existence of such non-dollar business activities. This is done using a number of commercially available financial tools, including forward transactions and currency options. The net impact of currency exchange rate and remeasurement differences (after hedging) between the dollar and other currencies accounted for a net gain of $1.3 million in 1998, compared with net gains of $2.2 million in 1997 and $1.1 million in 1996.

In addition to the exchange rate 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 projected sales net of projected operating expenses for the corresponding periods. 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 1998, the dollar weakened compared to primary European currencies. At December 31, 1998, one dollar equaled 1.68 Deutschmarks compared to 1.79 Deutschmarks at December 31, 1997. In 1998, the Company’s hedging activity regarding future sales had a positive impact on revenues of $5.5 million. In 1997, such activity also had a positive impact on revenue, of 6.1 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 "Item 9A. Quantitative and Qualitative Disclosures about Market Risk" and Notes 1m, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.)

1998 Compared With 1997

The net loss in 1998 was $111 million, consisting of loss from continuing operations of $34 million and loss from discontinued operations of $77 million. The loss from continuing operations includes a $44 million charge for acquired in-process research and development. The loss from discontinued operations and the charge for in-process R&D are discussed in further detail below. Prior years amounts have been reclassified for the effect of the discontinued operations.

Total revenues in 1998 increased 4% to $640 million from $618 million in 1997. Sales of equipment were $441 million in 1998, up 3% from $427 million in 1997. The increase was primarily due to higher sales in the U.S. and Europe and the acquisition of Idanit, discussed further below.

Service revenue (mainly from maintenance contracts, time and material charges and advanced customer training) rose 3% in 1998 to $138 million from $134 million in 1997. The increase was mainly in North America. Sales of supplies for the Company’s inkjet printers rose 7% in 1998 to $61 million, the increase being mainly due to the acquisition of Idanit.

Revenues in Europe were $237 million, an increase of 6% from 1997. The increase was primarily due to higher sales of digital preprint products. Revenues in North and South America were $297 million, 8% above 1997. This was also largely a result of growth in digital preprint sales. Sales to Japan were $65 million, a decrease of 4% from the 1997 level of $67 million. The relatively small decrease in Japanese sales is principally due to major sales by SDP in Japan during 1998. Revenues in the rest of the world were $42 million compared to $52 million in 1997, reflecting the economic difficulties in the Far East.

Sales in Europe and Japan are generally denominated in local currencies and therefore the sales reported in U.S. dollars are affected by the exchange rate of the dollar against the European currencies and the yen. However, the Company operates a hedging program designed to protect operating profits from being eroded by exchange rate fluctuations (see "Item 9A. Quantitative and Qualitative Disclosures about Market Risk" and Notes 1m and 13 to the Consolidated Financial Statements).

Consolidated gross margin in 1998 was 42%, compared with 40% in 1997. Equipment gross margin was 48%, compared with 45% in 1997. The continued improvement in equipment gross margin in 1998 was due to product sales mix as well as lower cost of components, manufacturing efficiencies and lower inventory provisions, which resulted in a lower cost of sales. Service gross margin was 21% in 1998 compared with 17% in 1997. The improvement in service contribution in 1998 was primarily due to better reliability of products. Gross margin on sales of supplies, mainly paper and inks for the Company’s digital inkjet printers, was 46% in 1998, compared with 50% in 1997. The margin decline mainly reflects increasing competition in this market.

Research and development expenditures, before government grants and not including acquired in-process R&D, were $77 million in 1998 compared with $68 million in 1997. The increase in R&D spending was mainly due to acquisitions and increased efforts in the development of new digital printing products.

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 government R&D funding was $11 million in 1998 (14% of gross R&D expenditures) and $11 million in 1997 (15%). Royalty expense pursuant to the Government of Israel funding programs, included in selling expenses, was $4.7 million in 1998, compared with $4.3 million in 1997. The increase reflects product mix and an increase in the average royalty percentage.

In February 1998, the Company acquired Idanit for $63 million, of which $44 million represented the allocated value of in-process R&D with no alternative future use. Accordingly, this amount was charged to expense. The remaining purchase price was allocated to tangible assets, existing technology and goodwill. See note 2a to the Consolidated Financial Statements.

Selling and marketing expenses in 1998 increased 10% to $101 million (16% of revenues) from $91 million (15%) in 1997. The increase was due to higher sales-related costs at the U.S. and European distribution units, including increased sales force, as well as the effect of acquisitions. General and administrative expenses were $74 million in 1998, compared with $73 million in 1997.

Amortization of goodwill and other intangible assets was $9 million in 1998 and $6 million in 1997. The increase was primarily due to the acquisition of Idanit and the final $7 million contingent payment in respect of the acquisition of SDP based on the 1997 financial results of SDP.

Net financial income was $5 million in 1998 compared with $6 million in 1997, principally due to lower average cash balances.

The Company recorded a tax provision in 1998 of $2.2 million compared with a tax provision of $1.5 million in 1997. The 1998 provision is in large part to cover taxes which will be payable on 1998 taxable income in certain European countries. Following the sale of the digital video business (see below), the Company has tax loss carryforwards in the U.S. The Company also has significant carryforward tax losses in Israel. After valuation allowances, the Company has a net deferred tax asset of $28 million at December 31, 1998 which primarily relates to net operating loss and credit carryforwards, allowances for doubtful accounts, inventory reserves and accrued liabilities (see Note 12d to the Consolidated Financial Statements). 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 below 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 was $15 million in 1998, compared with an equity loss of $3 million in 1997. The losses were primarily from three joint ventures: Nihon Scitex (in Japan), which had a loss of $5.7 million compared with $2.2 million in 1997, and two new joint ventures - Karat Digital Press and Vio Worldwide Limited - which were established in 1998 and had equity losses totaling $8.2 million, primarily from start-up expenses.

In the third quarter of 1998, the Company recorded a provision of $63 million for the estimated loss on the exit from the digital video business. The provision was comprised of $50 million related to the estimated loss on sale of Scitex Digital Video (including estimated losses in the fourth quarter through the sale date) and $13 million to recognize permanent impairment of the value of its investment in Truevision, Inc. ("Truevision"). The discontinued operations section of the Consolidated Statement of Income includes the $63 million loss on disposal and the $14 million loss from digital video operations through the third quarter. No additional losses were recorded in the fourth quarter related to the exit from the digital video business. In the first quarter of 1999, the reserves associated with the exit from the digital video business were reduced by $5 million, which resulted in $5 million income from discontinued operations for such quarter.

In December 1998, the Company sold substantially all of the assets and liabilities of the Scitex Digital Video business for $10 million, of which $8 million of the proceeds was received in cash. The balance is being paid over a period of 18 months. In March 1999, Pinnacle Systems, Inc. ("Pinnacle") acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. In view of its intention to exit from the digital video business, the investment in Truevision had been reclassified in the balance sheet to short-term investments.

1997 Compared With 1996

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. The income in 1997 from continuing operations was $17 million and the loss from discontinued operations was $17 million (compared with losses of $162 million and $17 million, respectively, in 1996). Amounts have been reclassified for the effect of discontinued operations.

Total revenues in 1997 declined 1% to $618 million from $624 million in 1996.

Sales of equipment were $427 million in 1997, down 6% from $454 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). This decline was partly offset by a modest growth in sales of preprint products.

Income from service maintenance contracts, time and material charges and advanced customer training in 1997 rose 12% to $134 million from $119 million in 1996. Sales of supplies for the Company’s inkjet printer products produced by SDP and Iris Graphics rose 11% in 1997 to $57 million after increasing 42% in 1996. The slower growth rate was due in large part to increasing competition in this market.

Revenues in Europe were $223 million, slightly up on the $221 million in 1996. Higher sales in Europe were eroded by the unfavorable impact of the stronger dollar versus the major European currencies. Revenues in North and South America were $275 million, 13% above 1996. This was largely the result of a 17% growth in SDP’s sales and of higher sales to the graphic arts market. Sales to Japan were $67 million, a decrease of 39% from the 1996 level of $110 million. The decrease was 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 $52 million compared to $50 million in 1996.

Gross profit margin in 1997 was 40% compared with 33% in 1996. Equipment gross margin was 45% compared with 40% 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 manufacturing efficiencies, which resulted in lower inventory provisions and a lower cost of sales. Service gross margin was 17% in 1997 compared with1% 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% in 1997 compared with 54% in 1996. The margin decline in 1997 mainly reflects increasing competition in this market.

Research and development expenditures, before government grants, were $68 million in 1997 compared with $73 million in 1996. Resources allocated to preprint product maintenance and development were $33 million, unchanged from the 1996 level.

Total R&D funding by the Government of Israel was $11 million in 1997 (15% of gross R&D expenditures) and $12 million in 1996 (16%). 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 $91 million (15% of revenues) from $108 million (17%) in 1996. The decline was principally due to lower personnel-related costs at the United States and European 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 $73 million in 1997 compared with $142 million in 1996. The large decrease in G&A expenses was primarily due to lower bad debt expense.

In the third quarter of 1996, the Company announced a restructuring plan primarily for its preprint business, comprised of a series of planned actions aimed at downsizing the business consistent with the anticipated level of sales in order to restore its profitability, which included: reduction in staffing levels of 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 the third quarter of 1996 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.

Amortization of goodwill and other intangible assets was $6 million in 1997 and $8 million in 1996. The decrease was 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.

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 had a net deferred tax asset of $20 million at December 31, 1997 which primarily related 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 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.

Liquidity & Capital Resources

Cash, cash equivalents and short-term marketable investments at the end of 1998 were $83 million compared with $159 million at the end of 1997.

Net cash provided by operating activities totaled $33 million compared with $67 million in 1997. The larger amount in 1997 was primarily due to decreases in inventories and collection of trade receivables.

The major uses of cash for investing activities included the acquisition of Idanit ($62 million), the acquisition of the Matan product line ($12 million), investment in the new Karat and Vio joint ventures ($11 million) and capital expenditures ($32 million).

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. Management 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 1999.

The Company may use its remaining cash resources to acquire other technology-related businesses, to fund strategic opportunities and the acquisition of its own shares under an approved repurchase program.

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.

Year 2000 Readiness Disclosure

General

The Company is aware of the issues associated with the programming code and embedded technology in existing systems as the year 2000 approaches. The "Year 2000" issue arises from the potential for computers or equipment with embedded systems to fail or to operate incorrectly primarily because their programs incorrectly interpret the two digit date fields "00" as 1900 or some other year, rather than the year 2000. The Company has identified the following three areas for which the Year 2000 issue creates potential risk for the Company: The software and systems, including embedded systems, used in the Company's internal business processes. Third-party vendors, manufacturers and suppliers. The Company's products.

Failures of the Company’s or third parties’ computer systems or Year 2000 problems affecting the Company’s products could result in an interruption in, or a failure of, certain normal business activities or operations, and could have a material adverse effect on the Company's business, operating results and financial condition.

Internal Business Processes

The Company has updated substantially its entire computer system infrastructure over the last few years. Based upon representations made by the manufacturers (in particular Oracle and Microsoft), without independent verification or testing, management believes that all critical pieces of hardware and software will be ready for Year 2000 and that Year 2000 issues will not materially affect its internal management information systems (MIS). In some cases, readiness is expected to be met by releases of software updates from the manufacturers that are scheduled to be released in the latter half of 1999. ) However, there can be no assurance that any necessary updates will not be delayed or that the Company will have identified or procured all of the resources necessary to address all critical Year 2000 deficient hardware and software systems on a timely basis. In any of such events, the Company may need to spend additional amounts to identify, modify or repair internal systems, which could have a material adverse effect on the Company's business, operating results and financial condition.

The Company has also completed a review and assessment of its non-information technology systems with embedded technologies, such as security systems, building control systems, manufacturing equipment, switchboards, fire alarms, etc., to determine the potential impact of the Year 2000 issues and believes that, based upon representations made by the manufacturers of such systems, and without independent verification or testing, all critical elements are, or will be, fully ready for Year 2000.

Third-Party Vendors, Manufacturers and Suppliers

The Company has material relationships with third party suppliers and service providers who may utilize equipment or software that may not be ready for the Year 2000, such as manufacturers of parts and components, financial institutions, shipping companies and public utilities. The Company is continuing with the process of conducting Year 2000 readiness inquiries of such third parties. Based upon the results of such inquiries, the Company intends to take appropriate action.

All of the Company’s products include parts or components from third parties. Although Scitex has generally sought assurance from such third parties that such components are ready for Year 2000, Scitex has conducted only limited testing of such components and, accordingly, there can be no assurance that such third parties’ products are ready for Year 2000.

Products

The Company has established a program to assess whether its products are ready for Year 2000. The program consists of the following stages: Awareness and project planning; Assessment and impact analysis; Testing and solution development; Updates and validations; and Implementation and ongoing customer support.

Scitex has completed the first three stages and plans to complete initial updates and implementation activities by the end of this year. The Company is preparing for these activities by allocating the requisite resources, training relevant personnel and planning the field upgrade program.

Based on the Company’s assessment to date, the Company’s newly introduced products are ready for the Year 2000 or will have available upgrades to full Year 2000 readiness by the end of 1999.

With respect to products which are not currently being sold, the Company has evaluated their status and, in several cases, offers solutions and workarounds which will enable customers to continue to use their equipment beyond the end of 1999, with certain restrictions.

The Company is taking the following steps to assist its customers in the Year 2000 readiness planning:

1. identify customers which may be affected by Year 2000 issues;
2. raise customer awareness to product Year 2000 issues; and
3. encourage customers to use other solutions and workarounds which the Company offers.

The Company is offering a wide range of information resources and updates to help customers plan and implement Year 2000 solutions. Current information about the Company’s products and technical issues is available at the Scitex web site. Information on this web site is intended to help customers evaluate the impact of the Year 2000 on Scitex products used by them. This web site is updated on a regular basis with new solutions and relevant information. Information on the Scitex web site is provided to customers for the sole purpose of assisting in planning for the transition to the Year 2000. Such information is the most currently available concerning the Company's products and is provided ‘as is’, without warranty of any kind. There can be no assurance that the Company's current products do not contain undetected errors or defects associated with the Year 2000.

Scitex products may be used in conjunction with a third party’s products, over which Scitex has no control. Accordingly, the Company cannot assure its customers that such Scitex products will meet Year 2000 readiness criteria when used in conjunction with third parties’ products.

Risks

The most reasonably likely worst-case scenario has not yet been identified. Some commentators have stated that a significant amount of litigation will arise out of Year 2000 readiness issues. A purported class action complaint, filed in the United States District Court for the District Court of Massachusetts, alleging non-Year 2000 readiness of the Scitex PS/2 system and seeking damages in respect thereof, was served upon Scitex America Corp. in February 1999 and also names the Registrant as co-defendant. The Company believes that the claims asserted are without merit and intends vigorously to defend the lawsuit. However, because of the unprecedented nature of such litigation, there can be no assurance as to the extent the Company may be affected by the lawsuit filed or by any other such litigation, which could have a material adverse effect on the Company's business, operating results and financial condition.

Failure of the Company's current or prior products to operate properly with regard to the Year 2000 requirements could cause the Company to incur unanticipated expenses and could cause a reduction in sales, each of which could have a material adverse effect on the Company's business, operating results and financial condition.

Failure of any third-party's equipment or software to operate properly, or utilities or telecommunication failures, with regard to the Year 2000, could cause the Company to incur unanticipated expenses to remedy any problems and could cause a reduction in sales, each of which could have a material adverse effect on the Company's business, operating results and financial condition.

The Company's customers could also be adversely affected to the extent that they utilize equipment or software that is not Year 2000 compliant. Furthermore, the purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products and services such as those offered by the Company, which could have a material adverse effect on the Company's business, operating results and financial condition.

Costs

The aggregate cost to the Company over the last few years of replacing substantially its entire computer system infrastructure to a Year 2000 ready system was approximately $10 million (nearly all of which has already been expended). The Company believes that a significant portion of this cost relates to the replacement of systems that had already served their useful life and would have been replaced, or faced replacement in the near future, even without the approach of the Year 2000. Accordingly it is not possible accurately to estimate the portion of such costs attributable directly to the Year 2000 issue.

To date, the Company has primarily used existing personnel to evaluate the Company’s Year 2000 exposure, and the financial impact to the Company for Year 2000 compliance has not been material to its business, operating results and financial condition in any given year. The Company continues to assess the effects and costs associated with the Year 2000 program, and currently estimates that the aggregate cost (other than the costs expended in relation to the replacement of its computer system infrastructure or costs that may be incurred in related to litigation issues) will not exceed $5 million (of which approximately $1 million has already been expended), which will be funded from operating cash flows. If the Company encounters significant unforeseen Year 2000 problems in its internal business systems, its products, or in relation to third party vendors, manufacturers or suppliers, actual costs could materially exceed this estimate, which could have a material adverse effect on the Company's business, operating results and financial condition.

Further, it is possible that the Company may experience increased expenses in addressing migration issues for affected customers or customer dissatisfaction as a result of Year 2000 issues, which may have a material effect on the Company’s business, operating results and financial condition.

Accordingly, there can be no assurance that the future effects and costs associated with possible Year 2000 problems will not have a materially adverse effect on the Company business, operating results and financial condition.

Contingency Plans

Although the Company has not completed a formal contingency plan for potential Year 2000 related problems, management has taken steps and continues to assess the possible effects and potential solutions for Year 2000 issues. As part of its contingency planning efforts, the Company is identifying alternate sources or strategies where necessary, if significant exposures are identified. However, there can be no assurance that the Company will be able to develop contingency plans that will adequately address all Year 2000 issues that may arise.

ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company uses derivative financial instruments ("derivatives") in order to limit its exposure to risk deriving from changes in foreign currency exchange rates. The derivatives are used for hedging of non-dollar assets and liabilities as well as certain future operating exposure. The Company does not hold or issue derivatives for trading purposes.

The Company’s functional currency and that of most of its consolidated subsidiaries is the dollar. Accordingly, for the Company’s subsidiaries in which the functional currency is the dollar, the Company protects itself from balance sheet exposure deriving from the gap between assets and liabilities in each currency other than the dollar. The majority of this exposure is in European currencies, Japanese yen and Israel shekels. The exposure (after any "natural hedging" by offset of unrelated transactions in the same currency) is limited by the use of derivatives on a consolidated basis.

The table below details the balance sheet exposure, by currency and geography, as of December 31, 1998 (at fair value). All data in the table has been translated for convenience into the dollar equivalent (in millions). Explanatory notes are provided below the table.

1. In the data presented in the table, positive amounts represent assets and negative amounts represent liabilities.
2. The table does not include data with respect to balance sheet exposure for certain equity investments in which the functional currency is the local currency, since those balances do not create any such exposure.
3. In light of the correlation between currencies comprising the European Monetary Union, the Company does not differentiate between those currencies when measuring its exposure. All of those exposures have been combined in the column with the title "Euro".
4. The data presented in the table reflects the exposure after the use of natural hedging.

The table below details the hedging value acquired with forward transactions in order to limit the exposure to exchange rate fluctuations. The data is as of December 31, 1998 as recorded in the Company’s financial records and is presented in dollar equivalent terms (in millions).

Hedging acquired in derivatives
Currency	Hedging Value	Fair Value
Euro	23.8	24.1
Pound Sterling	9.7	9.9
Japanese Yen	14.0	13.1
Total	47.5	47.1

For anticipated sales, the Company generally hedges the projected net exposure resulting from projected sales less related projected operating expenses in non-dollar currencies. The Company uses options to hedge its future operating exposure by purchasing calls on the dollar, usually together with selling put options on the dollar at a lower exchange rate and selling a call option on the dollar at a higher exchange rate (risk reversal strategy).

The Company’s policy is to limit hedging transactions to four quarters forward. Accordingly, all of the transactions detailed in the foregoing table will expire not later than December 31, 1999.

The interest income on the Company's cash equivalents and short-term investments is sensitive to changes in the general level of market interest rates. The Company mitigates the impact of fluctuations in interest rates primarily through diversification and by limiting the average duration of its interest-bearing investment portfolio. The Company does not have any long-term interest-bearing debt. From time to time, the Company uses its short-term bank credit facilities for temporary needs.

(See "Impact of Inflation and Exchange Rates" section of "Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1m, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.)

ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT

The following table sets forth certain information with respect to the directors, executive officers and corporate secretary of Scitex as at June 7, 1999:

(1) Member of the Executive Committee of the board of directors.
(2) Member of the Remuneration Committee of the board of directors and the committees administering the Scitex key employee stock option and share incentive plans.
(3) Member of the Audit Committee of the board of directors.
(4) Member of the Financial Investments Committee of the board of directors.

* An "Independent Director" - not an officer nor an employee of Scitex, nor an affiliate of Scitex’s principal shareholders, nor a nominee designated by a principal shareholder pursuant to the 1992 Shareholders Agreement described under "Item 4. Control of Registrant."

Dov Tadmor, Chairman of the board of directors of Scitex since 1991 and of its Executive Committee since 1988, served as Managing Director of DIC from 1985 until March 31, 1999. He is also a director of IDBH, IDBD, Gilat Satellite Networks 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 Scitex 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 Scitex 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 Vice Chairman of the board of directors of Scitex in May 1999. He is President of Clal Industries, appointed in May 1997, and for the previous eleven years, Mr. Ben-Shaoul served as President of Clal Insurance Company Ltd. and a member of its board of directors. He is Chairman of the board of directors of CEI and serves as a director of a number of other companies within the Clal group, or in which it has an interest, including ECI Telecom Ltd. Mr. Ben-Shaoul holds a bachelors degree in economics and a masters degree in business administration, both from Tel Aviv University.

Mendy (Menachem) Erad was Managing Director of CEI from February 1995 until December 31, 1998 and Vice Chairman of the board of directors of Scitex from November 1996 until May 1999. He was previously General Manager of Koor Tourist Enterprises Ltd. from 1993 to 1995 and, prior thereto, General Manager, Group Systems Division at Tadiran Ltd. from 1990. Mr. Erad is a consultant to CEI and serves as a director of a number of companies. He holds a bachelors degree in electrical engineering from the Ben Gurion University of the Negev, Beersheba, Israel.

Jacob Eshel served until December 1997 as a director and until March 1998 as a 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 Ltd. 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 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 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 in 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 1977 to 1991, and Treasurer of PEC from 1980 to 1991. He is a director of PEC, as well as a number of companies associated with it, including Bayside Land Corporation Ltd. ("Bayside"), Elron, Level 18 Systems, Inc., Super-Sol Ltd., Tambour Ltd. and Tefron 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 1995, having previously held the position of Controller since 1990. He serves as a 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 directors of Clal with effect from March 1997, and has served as Co-Chief Executive Officer of IDBH since 1986 and as Co-Chairman of the boards of directors of IDBH and IDBD since June 1, 1999. 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 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 Scitex since June 1996, was appointed President of SDP at the time of its acquisition by Scitex in 1993, having previously served, since 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 then 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 Communications Services Corporation Ltd., which he co-founded in 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 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 1992 until 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 Scitex, 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 1994 and remained a Corporate Vice President of Scitex following his appointment as President of Scitex America in February 1997. From 1991 until joining Scitex, 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 Scitex in May 1987 and, in July of that year, was appointed Corporate Secretary. 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 Scitex, Mr. Shulman was an in-house attorney with Bank Leumi le-Israel B.M.

(See "Item 4. Control of Registrant" for details of agreement among principal shareholders relating to the election of directors.)

The Articles of Association of Scitex 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 of directors may from time to time prescribe. The board of directors has appointed an Executive Committee to which it has delegated full powers, Audit, Remuneration and Financial Investments Committees, as well as other committees from time to time, generally dealing with specific issues. The board of directors 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.

Pursuant to the terms of a court approved settlement of a purported class action, Scitex agreed in 1997 that the Scitex board of directors shall, for a period of five years, include two directors deemed to be independent of Scitex’s management and of its principal shareholders ("Independent Directors"). It was also agreed that, for such five year period, certain formal and informal offers to acquire a majority of Scitex’s shares or substantially all of Scitex’s assets shall be evaluated by a special committee of the board (consisting of not more than six directors) that shall include the two Independent Directors, which committee may make recommendations to the Scitex board concerning any such offers.

In addition, the Articles of Association of Scitex provide that any director may appoint, by written notice to Scitex, 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.

Scitex 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. Scitex 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.

In April 1999, the Israel legislature (the Knesset) approved the adoption of a new Company Law, which will generally become effective on February 1, 2000 and will replace the Companies Ordinance almost in its entirety.

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS

The following table sets forth with respect to all directors and executive officers of Scitex as a group, including all persons who were at any time during the period indicated directors or executive officers of Scitex, all cash and cash-equivalent forms of remuneration paid by Scitex during the fiscal year ended December 31, 1998:

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 Scitex’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 Scitex). Except as aforesaid, Scitex has not compensated directors who are not officers of Scitex.

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

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES

All data in this Item is as of June 7, 1999.

In September 1991, the shareholders of Scitex approved two plans, the Scitex Israel Key Employee Share Incentive Plan 1991 primarily designed for employees of Scitex and its subsidiaries located in Israel (the "Israel Plan") and the Scitex International Key Employee Stock Option Plan 1991 designed for employees of Scitex’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 Scitex (the "Shares") to officers, key or other employees, directors, consultants or contractors of Scitex and its subsidiaries. The International Plan permits the granting of such options to officers, management employees or other key employees, including employees who are also directors, of Scitex’s non-Israel subsidiaries. The aggregate number of Shares that have been authorized and reserved for issuance under the Plans is 2,650,000 Shares under the Israel Plan and 1,750,000 Shares under the International Plan.

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 2008. The following table sets forth certain information with respect to the Plans.

Directors and executive officers of Scitex hold under the Plans unexercised options aggregating 1,231,875 Shares, including options for the purchase of an aggregate of 40,000 Shares awarded to the two Independent Directors serving on Scitex’s Board of Directors (see "Item 10. Directors and Officers of the Registrant") at an exercise price of $11.375 per Share.

In 1998, the board of directors of Scitex approved a program for the repurchase by Scitex of up to two million of Scitex’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 Scitex 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.)

ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

Scitex 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 1998 was approximately $$2.0 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.)

Scitex purchased insurance policies in Israel 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, 1998, Scitex paid premiums on such insurance in the amount of $1.2 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 1998, Scitex 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 (see "Item 4. Control of Registrant"), all on terms which management believes were no less favorable to Scitex than would be obtained in transactions with unaffiliated third parties. (See Notes 8a and 16a to the Consolidated Financial Statements listed in Item 19.)

PART II

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

Not applicable.

PART III

ITEM 15. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS

None.

PART IV

ITEM 17. FINANCIAL STATEMENTS

Not applicable.

ITEM 18. FINANCIAL STATEMENTS

Incorporated by reference from the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 1998, attached hereto as Exhibit 2.1. See Item 19(a).

ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

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.

* Incorporated by reference from the Registrant’s 1998 Annual Report to Shareholders attached as Exhibit 2.1 hereto. Page reference is to the financial statement pages of the Registrant’s 1998 Annual Report to Shareholders. The 1998 Annual Report to Shareholders is not to be deemed to be filed as part of this Report on Form 20-F, except for those parts thereof specifically incorporated by reference herein.

(b) Exhibits:

2.1 Annual Report to Shareholders for the fiscal year ended December 31, 1998, certain portions of which have been incorporated herein by reference.

2.2 Consent of independent accountants.

SIGNATURES

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, 1999

The Report in Form-20F for the year ended December 31, 1998 appearing on this web site contains certain changes as to format from the Report filed by the Company with the Securities and Exchange Commission. You may download a Conformed Copy of the filed Report (pdf format).

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

Commission File Number 0-12332
SCITEX CORPORATION LTD.
(Exact name of Registrant as specified in its charter and translation of Registrant's name into English)

                       ISRAEL                    
(Jurisdiction of incorporation or organization)

Hamada Street, Industrial Park, 46103 Herzlia B, Israel
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
None Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.12 nominal (par) value per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Ordinary Shares, NIS 0.12 nominal (par) value per share
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as at the close of the period covered by the annual report: 43,038,852 Ordinary Shares, NIS 0.12 nominal (par) value per share, at December 31,1998.

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

x Yes o No

Indicate by check mark which financial statement item the Registrant has elected to follow.

o Item 17 x Item 18

TABLE Of CONTENTS

PART I

• ITEM 1. DESCRIPTION OF BUSINESS
  • General
  • Digital Preprint Business
  • Digital Printing Business
  • Discontinued Operations
  • Marketing and Sales
  • Competition
  • Customer Support
  • Research and Development
  • Manufacturing
  • Patents and Trademarks
  • Employee and Labor Relations
  • Political, Military and Economic Conditions in Israel
• ITEM 2. DESCRIPTION OF PROPERTY
• ITEM 3. LEGAL PROCEEDINGS
• ITEM 4. CONTROL OF REGISTRANT
• ITEM 5. NATURE OF TRADING MARKET
• ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
• ITEM 7. TAXATION - CAPITAL GAINS, INCOME AND ESTATE TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
• ITEM 8. SELECTED FINANCIAL DATA
  • Statement of Operations Data
  • Balance Sheet Data
  • Dividends
• ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  • General
  • Certain Factors That May Affect Future Result
  • Impact of Inflation and Exchange Rates
  • 1998 Compared With 1997
  • 1997 Compared With 1996
  • Liquidity & Capital Resources
  • Year 2000 Readiness Disclosure
• ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
• ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
• ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
• ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
• ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

PART II

• ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

PART III

• ITEM 15. DEFAULTS UPON SENIOR SECURITIES
• ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS

PART IV

• ITEM 17. FINANCIAL STATEMENTS
• ITEM 18. FINANCIAL STATEMENTS
• ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Scitex Corporation Ltd. (the "Registrant) and its subsidiaries design, develop, manufacture, market and support digital graphics communications products. Unless indicated otherwise by the context, all references in this report to "we", "us", "our", the "Company" or "Scitex" include Scitex Corporation Ltd. and its wholly-owned subsidiaries. The operations of Scitex principally comprise two related businesses, digital preprint and digital printing, operating within a single industry.

Preprint (also known as prepress) refers to all the processes and procedures required to prepare color separation films, printing plates or direct digital output before printing. It includes design and layout, image input, editing and digital asset management, proofing, and image output. Our digital preprint products are used for generating and producing 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 and 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. Both the digital preprint and digital printing 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. We also offer (including through a joint venture) communication products and services that allow customers and clients worldwide to collaborate over networks.

Our digital printing products are based primarily on inkjet technology and produce hardcopy output directly from digital data files generated entirely on a computer or originating from a computer, allowing the digital printing process to integrate into the digital workflow. These products include high-speed inkjet printing systems used for variable-data printing in monochrome and spot color for personalized promotional mailings, billings, statements, books, lottery tickets and other addressing/personalized applications. Such products range from stand-alone addressing systems to large printing systems used on-line with various finishing equipment. Digital printing products also include wide format, color inkjet printing systems used for point-of-purchase displays, banners, outdoor advertising posters and fleet markings, as well as digital color servers for driving and managing short-run variable-data color printers. Scitex is also engaged in a joint venture for developing, manufacturing and marketing a direct on-press imaging digital offset press for the short-to-medium run printing market.

Scitex Corporation Ltd. was incorporated in Israel in 1971, succeeding a predecessor corporation, Scientific Technology Ltd., which was founded in 1968.

Our corporate headquarters and executive offices are located in Herzlia, Israel, approximately eight miles north of Tel Aviv. Our telephone number in Israel is (972) 9 - 959 7222. Nearly all Scitex’s sales are outside of Israel.

In December 1998, Scitex sold its digital video business, consisting primarily of the operations of Scitex Digital Video, Inc. ("SDV"), having previously announced its proposed exit from the digital video business. Accordingly, unless otherwise indicated, all financial information and other data presented herein relate solely to the Company's continuing operations and digital video is presented as discontinued operations. Amounts for all prior years have been reclassified for the effect of the discontinued operations.

The following table sets forth amounts and relative percentages of total revenues from the Company’s equipment sales, service operations and supplies of consumables, for the years indicated:

The following are the principal development and manufacturing companies in the Scitex Group (see under the caption "Marketing and Sales" of this Item, for details of Scitex’s distribution and support subsidiaries):

• Scitex Corporation Ltd., the Registrant, located in Herzlia, Israel, comprises corporate functions and the operations of "Scitex Israel" - all of the Company’s operations in Israel, other than Scitex Wide Format Printing Ltd. It has a workforce of approximately 1,070 (including part-time and temporary employees), and includes research and development, engineering and manufacturing facilities. Scitex Israel includes a number of product line divisions (in 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 Scitex products in the Middle East, including Israel, and Africa
• Scitex Digital Printing, Inc. ("SDP"), a wholly-owned Scitex subsidiary based in Dayton, Ohio, with approximately 675 employees (including part-time and temporary employees). 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 provide general assistance for marketing and support 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.
• Iris Graphics, Inc. ("Iris Graphics"), part of the Company’s digital preprint business, 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, with a workforce of approximately 250, it was founded in 1985 and acquired by Scitex in 1990.
• Scitex Wide Format Printing Ltd., formerly Idanit Technologies Ltd. ("Idanit"), part of the our digital printing business, is a wholly-owned Scitex subsidiary, with approximately 100 employees. Idanit, founded in 1994, was acquired by Scitex in February 1998 for approximately $63 million. Its operations were expanded in October 1998 with the purchase of the super-wide format product line from the Matan group of companies, for approximately $12.2 million plus a performance based earn-out. Scitex Wide Format Printing Ltd. is a leading developer and manufacturer of wide-format, color inkjet printing systems used for point-of-purchase displays, banners and outdoor advertising posters. Its headquarters are in Rishon Lezion, Israel.
• Karat Digital Press ("Karat"), part of our digital printing business, is a joint venture for developing, manufacturing and marketing of a direct digital offset press for the short-run to medium-run printing market. Scitex and the German corporation, Koenig & Bauer A.G., each have a 50% interest in the joint venture. Research, development and production take place in both Radebeul, Germany and Herzlia, Israel. Karat carries out its operations through a German corporation, Karat Digital Press GmbH and an Israeli limited partnership, Karat Digital Press LP. It has a total workforce of approximately 140, divided almost equally between Israel and Germany.
• Vio Worldwide Limited ("Vio"), a 50/50 joint venture with British Telecommunications plc, incorporated in the UK, provides a global managed network service for the graphic arts industry. It commenced operations in late 1998, and has approximately twenty employees. Vio’s headquarters are in Watford, Herfordshire, UK, with a subsidiary in Pennsylvania.

The following table sets forth the Company’s total revenues for the years 1996 through 1998 and amounts and relative percentages attributable to the principal businesses: digital preprint and digital printing.

Digital Preprint Business

Introduction

Our digital preprint products encompass a broad range of digital imaging devices and systems that automate the preprint tasks required to prepare color images and pages for high resolution, high quality printing. They generally combine industry standard and custom-made hardware and software. These products operate on a stand-alone basis or are combined in systems and networks that meet customer requirements and production environments. Most of the preprint products can be easily upgraded, to communicate with a variety of products from other vendors, including desktop publishing ("DTP") systems and software applications, and to have networking and telecommunications capability. This open design allows end-users to select from many configurations to best address their needs.

Our preprint market consists of graphic arts enterprises, such as color trade shops, commercial printers, publishers, and digital trade services. Scitex develops products that address this broad segment of customers, emphasizing superior productivity and a high return on investment, as well as affordable price, easy operation and ability to communicate with DTP systems. We design versions of our products that permit input and output of PostScript® language and PDF (portable document format) files. PostScript language is the computerized page description software most widely used by desktop publishing systems in the graphic arts and related markets. PDF preserves the layout, type font and graphics as one unit, for electronic transfer and viewing.

Our digital preprint operations comprise the Input Systems and Output Systems divisions of Scitex Israel and the operations of Iris Graphics. Also included with the digital preprint business are our projects and products in telecommunication solutions and networking.

Input Systems Division

The Input Systems Division develops, manufactures and markets image capture solutions, such as scanners and digital cameras, as well as color management applications.

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 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.

Scitex scanners include the Smart® series of flatbed color scanners of continuous-tone images and line art in reflective and transparent forms and in sizes from 35mm to 26 x 36 inches. The scanners feature charge-coupled device ("CCD") sensors and automated scanner setup and operation. Their high speed and sophisticated capabilities provide high throughput of color and monochrome images to the digital workflow. The scanners include prescan and postscan viewing to boost productivity by virtually eliminating rescanning. In 1997, we introduced the EverSmarttm and EverSmart Protm large format, tabletop scanners that integrate well with PostScript and DTP systems, and added the top-of-the-line EverSmart Supremetm scanner in 1998. Their revolutionary XY Stitchtm technology allows the scanning head to scan along both the x and the y axes, which provides a uniformly high resolution over the entire scanner format, thereby breaking the traditional dependence of enlargement on original size. Scitex FinalTouchtm, a software application, enhances the quality of a scanned image by automatically removing imperfections that were in the original image. The EverSmart DOTtm film scanning application accurately scans preseparated films dot by dot and integrates them into the digital workflow. Scitex also markets the Monoscantm series of large format scanners, supplied under an OEM agreement with Purup-Eskofot A/S.

The Input Systems division products also include the Leaftm line of digital cameras, consisting of digital camera backs mounted on high-quality 2¼ x 2¼ inch cameras and connected to a Macintosh computer. The digital cameras capture images electronically, without using film or chemicals, and are efficient, high-quality replacements 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 Livetm captures stationary images in color and offers a real-time video view of the picture on the computer screen before the actual capture. In 1998, Scitex introduced the Leaf Volaretm, an especially high resolution camera back with live video preview and with Leaf Vhtwisttm technology for quick switching between landscape and portrait orientation. A similar product for images in motion will be introduced shortly, and is particularly suited to portraits and fashion photography.

Output Systems Division

The Output Systems Division develops, manufactures and markets imagesetters, platesetters, digital front ends and data management systems, either combined with other Scitex® products or as stand-alone devices, and provides communications solutions for integrating preprint products and systems in a digital workflow.

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

Imagesetters are used to output color separation films, at high resolutions and high-quality, for the preparation of printing plates. The current line of Dolev® imagesetters covers three formats based on the number of full-sized pages that can be imaged at one time: two pages up - about 14½ by 19½ inches (Dolev 2press Plustm), four pages up - 25¼ by 19½ inches (Dolev 4presstm and Dolev 4pressVtm), and eight pages up - 32 x 44 inches (Dolev 800Vtm). A specialized series of four-pages up imagesetters (Dolev 4news) is designed for newspapers. A compact, 2 pages up imagesetter (Dolev 2drytm, with a 4 pages-up model to follow) has a built-in dry film processor. By eliminating wet chemical processing and waste it is environmentally friendly and the image quality is high. The Scitex Class Screeningtm technology offers screening modules for high quality printing.

Computer-to-Plate ("CTP") technology is a major leap in the digital workflow. The Company offers complete color solutions that include platesetters, imposition workstations and proofers for direct plate production. In CTP, the platesetter outputs electronic data to plates ready for printing presses. Bypassing the film stage achieves significant savings in labor, materials and time, and improves the quality of the press output. CTP is also more environmentally responsible. The Scitex Lotem 800Vtm thermal platesetter, designed for high-quality CTP color production, has an imaging format of eight pages up. Additions to the Lotemtm line of platesetters are currently being planned with different capabilities. Integrating seamlessly into the Scitex digital workflow, these fully automated and comprehensive CTP solutions are driven by a Brisque Imposetm digital front end ("DFE") that also outputs the same files for proofing.

The family of Brisquetm digital front ends (DFE’s) for output devices such as imagesetters, platesetters and proofers, was launched in July 1996. A complete workflow automation solution, the Brisque DFE includes a unique job ticket mechanism, and provides higher predictability, reduces the chance of errors and produces faster and higher quality output. The front ends handle PostScript, TIFF/IT and PDF file formats, as well as Scitex CTtm and Scitex NLWtm formats. They also accept copydot files (color separation films that have been scanned and digitized) from Scitex EverSmart and Scitex Monoscan scanners.

The DFE’s can export the processed files in various formats, preserving all enhancements. The DFE’s link to a variety of digital printers in the pressroom and provide them with proofing files. The Scitex InkProtm application, an option in the Brisque and other Scitex DFE’s, is designed for commercial printers. It completely digitizes the labor-intensive process of setting the ink keys on offset presses, thereby reducing the make-ready time and increasing productivity, while minimizing waste of ink and paper.

The Brisque Impose DFE provides a full digital imposition for large-format imagesetters, platesetters and proofers. It stores each page independently, enabling fast and easy changes and corrections with minimum downtime. The Brisque Impose includes a RIP-Once workflow, drag-and-drop design and parallel processing. Recently, the Company introduced two new and powerful imposition front ends – the Brisque2 Imposetm DFE and the Brisque4 Imposetm DFE. They include two and four parallel RIPs, respectively, which provide symmetric multiple processing that allow them to handle several input devices in parallel, as well as very large files. The Brisque Imposetm DFE’s interface to third party proofers output imposition proofs to verify page layout, positioning and content, in monochrome or color, and can be used to assemble dummy books.

The Output Systems division’s products also include 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. Since 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.

We offer several data management system solutions to improve the productivity and profitability of Scitex customers. Acting as the hub of production systems and centralizing all data, these systems ensure a smooth, transparent flow and exchange of files among workstations, from input devices and to output devices, and on a wide variety of storage media. The Scitex Server line includes three models differing in performance and hardware configuration: entry level (3000 series), midrange (4000 series) and high end (5000 series). Each runs on an IBM® RS/6000tm* RISC computer, and enables file sharing between networked stations based on various platforms in a DTP or Scitex environment. All Scitex Servers can optionally include the Scitex Timnatm data management software solution with an advanced database for tracking all job elements and managing the data flow, particularly in operations with intensive archiving and last-minute changes. Emphasizing high speed and efficiency, these data management systems provide the infrastructure required for today’s demanding computer-to-film and computer-to-plate environments.

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

Iris Graphics – High Quality Inkjet Printers and Proofers

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 press-ready plates for the initiation of high volume printing. The Iris® direct digital color printers, produced by Iris Graphics, consist of high quality, continuous flow, color inkjet devices. In the inkjet process, special ink-delivery systems form and microscopically control uniform ink droplets with diameters measured in microns. The ink nozzles fire up to one million droplets per second on the printing medium.

In 1998, Iris Graphics replaced the Iris RealistFX 5015tm and the Iris RealistFX 5030 tm printers with the Iris2PRINT tm and Iris4PRINT tm digital contract proofers. These self-calibrating proofers offer improved resolution (up to 600 dpi) and removeable printing nozzles, called IrisPENs. For the Iris2PRINT and Iris4PRINT devices, Iris offers DCP (digital contract proofing) capabilities in addition to special application software. The DCP system is designed to output an authoritative proof of how the final printed piece will be printed. The Iris 3047 tm family of printers use the same technology; they include the Iris 3047G tm and IrisGPRINT tm, large format devices capable of printing a 34 x 46-inch sheet. Iris printers are also used for certain other applications, including fine arts, textile and industrial design, and the printing can be on paper, acetate and other media. All Iris products have versions that can be linked to DTP systems through PostScript language interpreters and a variety of front-end systems and software.

Telecommunications Solutions & Networking

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. These products can integrate systems, locally in nearby rooms or adjacent buildings and globally across continents.

Companies in the Scitex group offer communication products and services that allow customers and clients worldwide to benefit from close collaborative working, enhanced production efficiency and higher speed to market. These products offer rapid file transfer that improves turnaround time. Two of these products, both recently introduced, are the Vio® network and the Scitex RenderViewtm server.

In 1998, Vio Worldwide Limited (a Scitex joint venture with British Telecom) launched its secure, global, network for the preprint and printing industries. The Vio digital graphics network, a 24-hour, managed communications service, allows remote and secure file transfer in key stages from image capture to printing. One command can send the file to an unlimited number of pre-selected subscribers. The Vio network extends the ability of those in the graphic arts industry to offer their services beyond organizational and geographic boundaries. The service is currently operational in Europe and the US.

An alliance between Scitex and RTImage has resulted in the Internet-based Scitex RenderView server. The server is Internet-based, which allows real-time examination of jobs globally, before they are printed. It enables all clients in the preprint chain to view high-resolution files, including ready-to-print pages, at high speed and with great precision, and exchange comments on the screen.

Digital Printing Business

Our digital printing operations are comprised of: Scitex Digital Printing; Scitex Wide Format Printing; the Print-on-Demand Systems Division at Scitex Israel, as well as the Karat Digital Press joint venture.

We believe that Scitex is preeminent in inkjet printing and have recently added digital offset printing to our technology line. The inkjet product line includes high-speed, variable-data inkjet printing systems for high volume personalized and customized documents, used by specialized printers, in-house printers and data centers for printing business forms, bills and direct mail. The Scitex Wide Format Printing inkjet systems are used to print short and medium runs in color of point-of-purchase and point-of-sales displays, banners and outdoor advertising. Many screen printers are incorporating this printer in their operations.

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

Scitex Digital Printing (SDP) – High Speed Variable Information Printing

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. 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 promotional mailings, billings, statements, books, 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 digital printing of variable information, in narrow, partial page and wide formats.

Narrow Format Products

Narrow format systems, with 1-inch, 2.13 inch and 2.75 inch printheads, are used in applications such as direct addressing, bar coding, spot color or highlighting.

The Scitex Dijittm 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 compact and modular system can be used with a variety of third party equipment such as folders, web presses or mailing bases. The printing modules for the Scitex Dijit printing system are the Scitex 5120tm, Scitex 5240tm and Scitex 5300tm printers, the latter offering significantly higher resolution than the former.

Partial-Page Format Products

Partial-page format systems, with multiple arrays of 3.4 or 4.25-inch printheads, are used for monochrome, spot color, or highlight variable printing on documents. Flexible configurations of up to 16 printheads can be used to handle the widest variations of applications in-line on webs, both offset and flexo, folders, collators, and document tables.

The Scitex 6240tm 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 3500tm and Scitex 3600tm 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.

The Scitex Begintm software was created for the Scitex 3000 series high speed printing systems. It is made up of two modules: a web layout/page composition module designed to run on a PC under MS DOS®/Windows®; and a data merge module that runs on a Sun® SPARCstation® computer with the UNIX® operating system. The web layout/page composition module operates within QuarkXPresstm for Windows, and gives designers a large array of graphic design tools from which to choose. Proofing stations allow the designer to see exactly what the finished product will look like. Once data merge files have been created in the design process, they are transferred to the data merge module. The data merge process can handle input from multiple sources, data verification, and testing. As needs grow, the number of design stations linked to the data merge process can be expanded.

Wide Format Products

SDP’s ide format systems, with multiple 9-inch printheads, are used for full-page, variable printing up to 18 inches wide on one or two sides. These systems provide high quality at ultra-high production speeds for book printing, billings, statements, or any variable printing application.

The Scitex VersaMarktm high speed printing system, introduced in early 1999, combines high speed, exceptional print quality and the low cost per page in a turnkey solution that is neatly set into a modular, and entirely upgradable package. Coupled with spot color capability and numerous versatile configurations, it positions Scitex to expand its presence in the world market for on-demand publishing, billing and financial statement printing and to strengthen SDP's position in its traditional stronghold of personalized direct mail and catalogue printing.

Inks

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

Scitex Wide Format Printing

Scitex Wide Format Printing Ltd. designs, develops, manufactures and markets wide-format and super-wide format inkjet presses that are designed for cost-effective short and medium runs (up to about 150 copies) of display advertising. The applications include point-of-purchase and point-of-sales displays, banners, indoor and outdoor posters, billboards, fleet marking for trucks, cars and public transportation vehicles, window graphics, exhibition graphics, building covers, and others. Sold primarily to screen printers who are moving to a digital solution and to digital service bureaus worldwide, they print on a choice of various substrates, including paper, vinyl and other flexible materials.

The Scitex-162Adtm (formerly Idanit-162Adtm) wide-format, color inkjet printing system, was unveiled in 1995 and commenced commercial shipping at the beginning of 1997. It prints up to seventy 8 x 5 feet color sheets per hour (depending upon resolution and type of media). In October 1998, Scitex purchased the super-wide format product line from the Matan group of companies, including two Scitex GrandjetVtm presses, that print on formats up to 11 or 17 feet wide. These were added to the line of the products offered by Scitex Wide Format Printing Ltd. In June 1999, the high quality, high throughput Scitex Pressjettm system was introduced representing, for the first time, a true cost-effective solution for screen printing applications, in runs of up to 150 copies.

Print-On-Demand Systems Division

The Print-on-Demand Systems division develops, assembles and markets digital color servers for color on-demand and variable information printing systems. Scitex is cooperating with the Xerox Corporation worldwide to supply Scitex digital color servers for the Xerox® DocuColortm copier/printers. Xerox also offers a complete solution for variable printing, including advanced personalization and customization, with the Scitex Darwintm application and the Scitex VPStm architecture introduced in 1997. The Scitex Ignitetrm software package turns an Apple Macintosh® computer into an additional printer server for short-run, on-demand printing through Scitex digital color servers. The division’s products will also be used in driving high-speed, variable-information printing engines developed by SDP.

Karat Digital Press

Karat Digital Press, a Scitex joint venture with Koenig & Bauer A.G., the world's third largest press manufacturer, is developing and testing the four-color, four-page 74 Karattm digital offset press, designed for the short-to-medium-run color printing market. The 74 Karat press will offer commercial printers offset quality printing with ease-of-use and a high level of automation and speed. The press is currently undergoing testing at customer sites.

Discontinued Operations

Scitex Digital Video

In December 1998, Scitex sold the Scitex Digital Video business to Accom, Inc. for approximately $10 million and warrants convertible into approximately 10% of the stock of Accom (subject to dilution). Scitex had previously announced the intention to exit from the digital video business, which was no longer considered a core business. Accordingly, the digital video business has been presented throughout this report as discontinued operations.

Truevision, Inc.

Scitex’s investment in Truevision, Inc. (dating back to 1993) was a strategic investment linked to the digital video business. With our decision to exit from the digital video business, the Truvision investment was therefore considered part of the Company’s discontinued operations. In March 1999, Pinnacle Systems, Inc. acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. In April 1999, the Company sold its shares in Pinnacle for $3.1 million.

Marketing and Sales

The following Scitex entities are responsible for marketing, sales and customer support of our digital preprint and wide-format products in their stated geographical areas:

• Scitex America Corp. ("Scitex America") – North and South America. This is a wholly-owned subsidiary incorporated in 1972, with headquarters in Bedford, Massachusetts. 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. It has approximately 520 employees.
• Scitex Europe S.A. ("Scitex Europe") – Europe. This is a wholly-owned subsidiary, incorporated in Belgium in 1974, with headquarters in Waterloo (near Brussels), Belgium. It has a network of regional sales offices and other facilities, and uses both direct sales channels and selected dealers and distributors. Scitex Europe’s workforce, including employees of Scitex Europe’s regional subsidiaries and affiliates, is almost 500.
• Nihon Scitex Ltd. ("Nihon Scitex") – Japan. This is a joint venture based in Tokyo, Japan, formed in 1985, with headquarters in Tokyo. It is owned 50% by Scitex and 50% by the Japanese corporation, Toyo Ink Mfg. Co. Ltd. ("Toyo"). It operates several regional sales offices and customer support centers, and has approximately 160 employees (including a number of Toyo employees assigned to Nihon Scitex).
• Scitex Asia Pacific (H.K.) Ltd. – Asia and Pacific Rim (except for Japan). This is a wholly-owned subsidiary, incorporated in Hong Kong in 1992. It has a number of regional offices and branches, including a newly formed subsidiary in Shanghai, China. Its workforce, including employees of the Shanghai subsidiary, numbers over 80 employees.
• Scitex Middle East / Africa – Middle East (including Israel) and Africa. This is a division of Scitex Corporation Ltd. formed in 1995, and has approximately 30 employees.

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

** Revenues from Japan (other than for SDP products) 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.

As an integral part of Scitex’s marketing efforts into the digital preprint market, we employ a distribution strategy, which combines direct distribution outlets (primarily in North America, Western Europe and Japan), with other selective distribution strategies, such as dealers, distributors and value added resellers (VAR’s), including in regions where it had traditionally sold only directly. During 1998, 55% of Scitex America’s sales and 62% of Scitex Europe’s sales were being effected through these indirect channels (compared to 45% and 65%, respectively, in 1997 and 54% and 57%, respectively, in 1996). By the end ?f 1998, the Company’s indirect channels included over 100 dealers and distributors, and over 180 resellers, worldwide.

Developments in graphic arts and related markets have resulted in the emergence of two overlapping marketing trends. Scitex's smaller stand-alone "box" devices, such as the scanners, digital cameras, proofers and small-format imagesetters tend to be sold through the indirect distribution channels, whereas Scitex generally utilizes its direct distribution outlets for the larger integrated systems, such as the large-format imagesetters, the computer-to plate systems and the related workflow and data management solutions.

OEM sales are also an integral part of Scitex’s sales strategy. In 1998, such sales through Scitex’s eight major OEM partners together accounted for over 5.0% of the equipment sales (including all sales by the Print-on-Demand Systems division).

Scitex’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 our 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 we substantially expanded our 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 we can base our development efforts. In recent years, more than half of Scitex’s sales revenues have been derived from sales of additional products to our existing customer base. Customers can generally expand or upgrade their existing systems 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, with several Scitex subsidiaries in Europe and the Far East providing marketing and support. In certain areas, SDP also utilizes dealers, VAR’s and OEM agreements.

In early 1999, SDP announced an agreement with Domino Printing Sciences Plc, U.K., under which Domino will become the exclusive distributor in Europe of SDP’s narrow format products. Domino has a well-established sales and dealer network throughout Europe.

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 book publishing industry.

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. Scitex has agreements with third party financing companies for long-term financing of purchases of Scitex equipment by certain customers. The terms of these agreements in some cases grant the financing companies recourse against Scitex 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. In 1998, there were approximately $19 million of new transactions with recourse obligations. Approximately $70 million of trade receivables which had been financed under these programs were outstanding at December 31, 1998 (approximately $146 million outstanding at December 31, 1997). (See Note 9(b)(1) to the Consolidated Financial Statements listed in Item 19.)

In each of the years 1998 and 1997, no end-user customer nor distributor accounted for more than 10% of net revenues.

Competition

The primary competitive factors affecting sales of Scitex 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.

Scitex’s principal competitors in the digital preprint market are: Heidelberger Druckmaschinen ("Heidelberg") of Germany; Agfa, headquartered in Belgium; Fuji Photo Film Co. Ltd. (primarily through its wholly-owned subsidiary, Fuji Film Electronic Imaging Ltd.) of Japan; and Dainippon Screen also of Japan (operating in the United States under the name Screen). In addition, certain other companies, such as Creo Products, Inc. and Purup-Eskofot A/S, offer equipment that competes with specific products or product capabilities within the Scitex product line.

The principal competitors of SDP in the narrow and partial-page format digital printing market are U.S.-based Videojet Systems International, Inc. (owned by General Electric Plc of the U.K.), Imaje of France and Domino Printing Sciences Plc of the U.K., with whom SDP has entered in to a distribution agreement in Europe relating to SDP’s narrow format systems. 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, owned by Xerox) and Nipson Printing System, Inc. (now owned primarily by Xeikon N.V.) (magnetography), as well as Océ Printing Systems GmbH (formerly Siemens Nixdorf Printing Systems) and IBM Pennant Printing Systems (both electrophotography).

The principal competition for the printing systems manufactured by Scitex Wide Format Printing Ltd. comes from the Scotchprint 2000tm printer produced by Minnesota Mining & Manufacturing Co. (3M). In addition, these 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 of Israel.

Electronics for Imaging, Inc. (EFI) and Splash Technology Holdings, Inc. are our principal competitors in the Print-on-Demand Systems market. Karat Digital Press’s principal competitor is likely to be Heidelberg; and the principal competitor of Vio is Wam!Net, Inc. of the United States.

Customer Support

Technical support, training and customer service are important factors in system sales and the achievement of high levels of customer satisfaction. Scitex has established full-time support centers in our 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.

Scitex 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 have preferred to pay for service on a time and materials basis.

Our customer support operations, including those of Nihon Scitex, engage over 850 employees, comprising engineers, technical and application specialists as well as logistics and management personnel. They are based in several dozen locations, in North America, Europe, Japan and the Pacific, as well as at Scitex headquarters in Israel. In certain areas, services are provided through distributors and agents, who provide technical and applications support through locally trained engineers.

In 1998, 21.5% of the Company’s total revenues (nearly $138 million) was generated from service operations. In addition, during 1998, Scitex generated nearly $61 million of revenue from the supply of consumables, primarily ink and paper for the inkjet printing products produced by Iris, SDP and Scitex Wide Format Printing, representing 9.6% of our total revenues.

Research and Development

Scitex’s research and development efforts, engaging nearly 600 employees, are focused on the development of new products and technologies, as well as enhancing the quality and performance relative to price of our existing products, reducing manufacturing costs and upgrading and expanding our product line through the development of additional features and improved functionality, as well as the development of solutions in order to ensure that our products will be ready for year 2000.

Although Scitex carries out the greater part of its engineering, research and development activities in Israel (both at Scitex Israel and at Scitex Wide Format Printing’s facilities), a significant part of such activities is also conducted in the United States, principally by SDP and Iris Graphics.

Scitex 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:

⁽¹⁾ Excludes $44,264 thousand of in-process research and development related to the acquisition of Idanit. Total research and development incurred, including the in-process research and development, was $121,632 thousand (19.0% of total revenues), of which participations constituted 8.9%.
⁽²⁾ Percentage indicates the ratio of the relevant item to total revenues.
⁽³⁾ See Note 9a(1)(a) to the Consolidated Financial Statements listed in Item 19.
⁽⁴⁾ Percentage indicates the ratio of the participations to total research and development expenditure incurred (as shown).

We expect that Israel Government participations will, in future years, decline as a percentage of our total research and development expenditure, due to an increasing proportion of such expenditure being incurred in operations outside Israel (and therefore ineligible to receive such funding) and to continuing changes in Israel Government policy regarding such funding.

Under the terms of the Israel Government participations, Scitex pays a royalty on the proceeds of sales of products resulting from funded projects up to the amount 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 Scitex pursuant to the Israel Government and other programs amounted to approximately $4.7 million in 1998 (approximately $4.3 million in 1997 and $2.6 million in 1996). At December 31, 1998, the maximum contingent royalty payable was approximately $46 million.

There can 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 we will continue to meet the conditions to benefit from such program.

Manufacturing

Scitex has manufacturing facilities in Israel and the United States, and in both countries also uses subcontractors in connection with certain types of work and activities. Karat Digital Press has manufacturing facilities in both Israel and Germany.

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, components and commodities used by Scitex in the manufacture and assembly of Scitex products are available from several sources, although we currently purchase a substantial number of items from single suppliers. In some cases, there is only one source of supply for a component or commodity used by us. We generally purchase certain major components and commodities used in our products under annually renewable supply agreements with principal suppliers. To date, we have managed to overcome any difficulties experienced in obtaining timely deliveries. Although increased demand for these components and commodities or future unavailability could result in production delays which might adversely affect our business, we believe that, if required, alternative sources of supply could be developed for all parts, components and commodities.

Patents and Trademarks

Scitex owns, licenses or otherwise has rights in over 600 issued patents (primarily in the United States) and has over 470 patent applications pending in the United States and elsewhere. A large number of these issued patents were acquired with the purchase of SDP from Kodak in 1993. In addition, Scitex 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 used in prepress and color page editing and production. The complaint was later expanded to include claims that certain Scitex products infringe Dainippon Screen’s color correction and halftone dot generation patents. Scitex filed counterclaims against the plaintiffs for infringement of the trapping patents. Each side defended the claims made against it and in March 1999 all parties agreed to settlement without admission as to the validity, enforceability or claim coverage of the other side's patents. Under the parties' settlement, cross-licenses have been granted under the patent in the suit so that the parties and their sublicense suppliers, OEMs and end users are protected against claims of patent infringement under those patents.

On May 25, 1999, an action was commenced in the United States District Court of the Southern District of Ohio Western Division against Scitex Digital Printing, Inc. by Varis Corporation, alleging that SDP is infringing a patent issued to Varis and that SDP’s use of the VersaScript trademark infringes the VarisScript trademark used by Varis. SDP is assessing the merits of the lawsuit and intends vigorously to defend the action.

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

Employee and Labor Relations

Scitex currently has a total worldwide workforce of approximately 3,200. The workforce in Israel numbers approximately 1,075 (including approximately 125 positions filled by part-time and temporary employees). There are 1,375 employees in the United States (including approximately 100  temporary employees) and 650 employees in Europe and elsewhere. In addition, Scitex’s three principal joint ventures employ approximately 350 persons (almost all outside the United States). 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.

Political, Military and Economic Conditions in Israel

Scitex’s corporate headquarters and executive offices, together with a significant part of our research and development, engineering and manufacturing operations, are located in Israel, and therefore our operations are directly affected by economic, political and military conditions in Israel. In addition, we are heavily dependent upon components imported into Israel, primarily from the United States, and all but a small percentage of our sales are made outside Israel. Accordingly, our 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 has existed, varying from time to time in degree and intensity, between Israel and its various Arab neighbors and from time to time since 1987 Israel has experienced civil unrest from the local Arab population in territories which Israel had administered following a war in 1967 (the "Territories").

A large number of our Israeli male employees, including some of our officers, are obligated to perform annual reserve duty in the Israel Defense Forces. An emergency involving mobilization in Israel could require a substantial increase in the time such personnel are required to devote to active military service, which could result in disruption of our 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 several agreements with the Palestine Liberation Organization (the "PLO") relating to the Territories, under 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, Israel has not reached agreement with its other neighboring Arab countries, Syria and Lebanon, and there are still a number of major unresolved issues between Israel and the Palestinian Authority with negotiations having appeared to reach somewhat of an impasse, although there may be a change in negotiating positions following the change of government in Israel resulting from the general election held in May 1999. No predictions can be made as to whether or when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or the operations of Scitex.

Scitex has been favorably affected by certain Israel Government programs and tax legislation, principally related to research and development grants and capital investment incentives. Our operations could be adversely affected if these programs or tax benefits were reduced or eliminated and not replaced with equivalent programs or benefits, or if our 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 we 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 funds 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 funds 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 into the United States of Scitex products produced in Israel. 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.

ITEM 2. DESCRIPTION OF PROPERTY

The administrative offices of Scitex’s corporate management and the principal facilities of Scitex Israel are situated 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 Scitex and the others are leased. In addition, Scitex Wide Format Printing Ltd. leases both of its facilities, which are in industrial parks in Rishon Lezion, Israel, and Rosh Ha’ayin, Israel, both within approximately ten miles of Tel Aviv.

The properties leased and occupied by Scitex in Israel currently comprise, net, approximately 225,000 square feet of floor space, of which approximately 161,000 square feet of floor space in Herzlia is leased from Bayside Land Corporation Ltd. ("Bayside"), an affiliate of PEC Israel Economic Corporation and Discount Investment Corporation Ltd., two of Scitex’s major shareholders. The Bayside leases generally expire in 2003 and Scitex is considering a number of alternatives. (See "Item 4. Control of Registrant".)

Scitex, through its wholly-owned subsidiaries, leases various facilities outside Israel, the main locations of which are in Bedford, Massachusetts; Dayton, Ohio; Waterloo, Belgium; and Hong Kong. These facilities currently comprise approximately 770,000 square feet of floor space.

A new manufacturing facility in Radebeul, near Dresden, Germany, comprising approximately 10,000 square feet, was inaugurated by Karat Digital Press in May 1998, and Karat Digital Press leases from Scitex nearly 12,000 square feet of floor space in the building owned by Scitex in Herzlia, both facilities for the production of the 74 Karat digital press. In addition, Nihon Scitex leases nearly 60,000 square feet of floor space in Japan, and Vio Worldwide Limited leases approximately 6,300 square feet of office space in an business park in Watford, Hertfordshire, UK, approximately twenty miles northwest of London.

Scitex 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.

Scitex’s manufacturing operations in Israel are conducted at the facilities in Herzlia, Rishon Lezion and Rosh Ha’ayin. Outside Israel, Scitex’s principal manufacturing facilities are the new SDP facilities in Dayton, Ohio, specifically tailored to SDP’s printhead manufacturing workflow and the Iris Graphics facilities in Bedford, Massachusetts.

ITEM 3. LEGAL PROCEEDINGS

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 also "Item 1. Description of Business - Patents and Trademarks" for details of certain patent litigation; and "Year 2000 Readiness Disclosure – Risks" section of "Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations" for certain litigation relating to Year 2000 issues.

ITEM 4. CONTROL OF REGISTRANT

Unless otherwise stated, all data in this Item is as June 7, 1999.

Scitex Corporation Ltd. has authorized one class of equity securities, designated Ordinary Shares (NIS 0.12 nominal value) (in this Item "Shares").

On May 6, 1998, the Scitex board of directors approved a program for the repurchase by Scitex of up to two million Scitex Shares, to be held by the trustee for the benefit of employees within the framework of Scitex’s existing stock option plans (see "Item 12. Options to Purchase Securities of the Registrant or Subsidiaries"). Under the approved program Scitex may not purchase Shares from its principal shareholders. As at June 7, 1999, 559,500 Shares, at an average price per share of $9.37, had been repurchased by the trustee pursuant to the program, with funds provided by Scitex.

As of June 7, 1999, there were 42,491,948 Shares outstanding, excluding the 559,500 Shares purchased by the trustee pursuant to the repurchase program.

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

⁽¹⁾ Includes 246,664 Shares held through DIC Loans Ltd., a wholly owned subsidiary of DIC.
⁽²⁾ Includes 326,618 stock options exercisable within 60 days. Percentage based upon number of Shares outstanding plus the 326,618 Shares that the directors and executive officers as a group had the right to receive upon the exercise of such options.

CEI, an Israeli company that holds investments in Israeli companies operating in the electronics field, 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 outstanding Scitex Shares held by CEI.

PEC, a Maine corporation that holds equity interests in companies, predominately companies which are located in Israel or are Israel related is controlled by DIC, an Israeli corporation that holds investments in Israeli companies operating mainly in the fields of advanced technology, communications, industry and services. Based on the foregoing, DIC (which owns approximately 6.66% of the outstanding Scitex Shares) may be deemed to share with PEC (which owns approximately 6.68% of the outstanding Scitex Shares) the power to vote and dispose of the outstanding Scitex shares held by PEC.

Clal and DIC are both controlled by IDB Development Corporation Ltd. ("IDBD"). Companies controlled by Dina Recanati, Elaine Recanati, Leon Y. Recanati and Judith Yovel Recanati together beneficially own approximately 51.6% of the equity and voting power in IDB Holding Corporation Ltd. ("IDBH"), the parent of IDBD. Dina Recanati and Elaine Recanati are sisters-in law, and are aunts of Leon Y. Recanati and Judith Yovel Recanati, who are brother and sister. Leon Y. Recanati is Co-Chairman and Co-Chief Executive Officer of IDBH, Chairman of the boards of directors of Clal and Clal Industries, Co