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SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, DC 20549

FORM 20-F

|                                                        |                                                                                                   
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------
|(Mark
  One)                                           
|                                                       
|o                                                       | Registration
  statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of
  1934
|                                                        |                                                                                                   
|or                                                     
|                                                       
|x                                                       | Annual
  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934            
|                                                        |                                                                                                   
|For
  the fiscal year ended December 31, 2004          
|                                                        |                                                                                                   
|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 000-30664

Camtek Ltd.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

Ramat Gavriel Industrial
Zone, P.O. BOX 544, Migdal HaEmek, 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, par value NIS 0.01

Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
None

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:

27,078,647 Ordinary Shares, par value NIS
0.01

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 Company was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

YesxNoo

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

Item 17oItem 18x

1

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TABLE OF CONTENTS

|         |           |                                                                                 |     
|-------- | --------- | ------------------------------------------------------------------------------- | ----
|         |           |                                                                                 | PAGE
|         |           |                                                                                 |     
|PART I   |           | 4                                                                              
|         |           |                                                                                
|         | Item 1.   | Identity of Directors, Senior Management and Advisers.                          | 4   
|         |           |                                                                                 |     
|         | Item 2.   | Offer Statistics and Expected Timetable.                                        | 4   
|         |           |                                                                                 |     
|         | Item 3.   | Key Information.                                                                | 4   
|         |           |                                                                                 |     
|         | Item 4.   | Information on the Company.                                                     | 13  
|         |           |                                                                                 |     
|         | Item 5.   | Operating and Financial Review and Prospects.                                   | 20  
|         |           |                                                                                 |     
|         | Item 6.   | Directors, Senior Management and Employees.                                     | 30  
|         |           |                                                                                 |     
|         | Item 7.   | Major Shareholders and Related Party Transactions.                              | 40  
|         |           |                                                                                 |     
|         | Item 8.   | Financial Information.                                                          | 42  
|         |           |                                                                                 |     
|         | Item 9.   | The Offer and Listing.                                                          | 42  
|         |           |                                                                                 |     
|         | Item 10.  | Additional Information.                                                         | 43  
|         |           |                                                                                 |     
|         | Item 11.  | Quantitative and Qualitative Disclosures About Market Risk.                     | 56  
|         |           |                                                                                 |     
|         | Item 12.  | Description of Securities Other than Equity Securities.                         | 57  
|         |           |                                                                                 |     
|PART II  |           | 57                                                                             
|         |           |                                                                                
|         | Item 13.  | Defaults, Dividend Arrearages and Delinquencies.                                | 57  
|         |           |                                                                                 |     
|         | Item 14.  | Material Modifications to the Rights of Security Holders and Use
  of Proceeds. | 58  
|         |           |                                                                                 |     
|         | Item 15.  | Controls and Procedures.                                                        | 58  
|         |           |                                                                                 |     
|         | Item 16A. | Audit Committee Financial Expert.                                               | 58  
|         |           |                                                                                 |     
|         | Item 16B. | Code of Ethics.                                                                 | 58  
|         |           |                                                                                 |     
|         | Item 16C. | Principal Accounting Fees and Services.                                         | 58  
|         |           |                                                                                 |     
|PART III |           | 60                                                                             
|         |           |                                                                                
|         | Item 17.  | Financial Statements.                                                           | 60  
|         |           |                                                                                 |     
|         | Item 18.  | Financial Statements.                                                           | 60  
|         |           |                                                                                 |     
|         | Item 19.  | Exhibits.                                                                       | 61  

2

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Forward-Looking Statements

Statements
in this annual report about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those listed under Risk Factors or
described elsewhere in this annual report.

In
some cases, one can identify forward-looking statements by our use of words
such as may, will, should, could, expects, plans,
intends,
anticipates, believes, estimates, predicts, seeks, strategy,
potential or continue or the negative or other variations of these words,
or other comparable words or phrases.

Although
we believe that the expectations reflected in our forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements or other future events. We are under no duty to
update any of our forward-looking statements after the date of this annual
report, other than as required by law. One should not place undue reliance on
forward-looking statements.

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PART I

|        |                                                       
|------- | ------------------------------------------------------
|Item 1. | Identity of Directors, Senior Management and Advisers.
|        |                                                       
|        | Not
  applicable.                                     
|        |                                                       
|Item 2. | Offer Statistics and Expected Timetable.              
|        |                                                       
|        | Not
  Applicable.                                     
|        |                                                       
|Item 3. | Key Information.                                      

A.      Selected Consolidated Financial Data.

We
derived the statement of operations data for the years ended December 31,
2002, 2003 and 2004 and balance sheet data as of December 31, 2004 from
the audited consolidated financial statements contained in this annual report.
Those statements were jointly audited by Goldstein Sabo Tevet and Eisner LLP,
an independent member of Baker Tilly International, regarding the years ended
December 31, 2002 and 2003, and by Goldstein Sabo Tevet and Brightman
Almagor & Co., a member firm of Deloitte Touche Tohmatsu, regarding
the year ended December 31, 2004, all of whom are independent auditors,
and whose reports with respect to these financial statements are included elsewhere
in this annual report. We derived the statement of operations data for the
years ended December 31, 2000 and 2001 from audited financial statements
that are not included in this annual report.

For
all fiscal periods for which consolidated financial data are set forth below,
our audited consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States.

|                                                                   |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------ | ---- | - | ------ | - | ---- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                                   |  | Year Ended December 31,               |       
|                                                                   |  |                                       |       
|                                                                   |  | 2000                                  |        | 2001 |   | 2002   |   | 2003 |         | 2004 |  
|                                                                   |  |                                       |        |      |   |        |   |      |         |      |  
|                                                                   |  | (in thousands, except per share data) |       
|Selected Statement of Operations Data:                             |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Revenues:                                                          |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Sales of products                                                  |  | $                                     | 50,534 |      | $ | 41,180 |   | $    | 19,103  |      | $ | 26,567 |   | $ | 63,353 |  
|Service fees                                                       |  |                                       | 2,591  |      |   | 2,888  |   |      | 3,490   |      |   | 4,574  |   |   | 4,066  |  
|Total revenues                                                     |  |                                       | 53,125 |      |   | 44,068 |   |      | 22,593  |      |   | 31,141 |   |   | 67,419 |  
|Cost
  of revenues:                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Cost of products sold                                              |  |                                       | 21,670 |      |   | 18,930 |   |      | 10,421  |      |   | 13,214 |   |   | 28,193 |  
|Cost of services                                                   |  |                                       | 2,486  |      |   | 2,721  |   |      | 3,220   |      |   | 3,460  |   |   | 3,168  |  
|Royalties
  to the Government of Israel                            |  |                                       | 2,391  |      |   | 1,000  |   |      | 1,000   |      |   | 150    |   |   |       |  
|Write-off
  of inventory                                           |  |                                       |       |      |   |       |   |      | 1,805   |      |   |       |   |   |       |  
|Total cost of revenues                                             |  |                                       | 26,547 |      |   | 22,651 |   |      | 16,446  |      |   | 16,824 |   |   | 31,361 |  
|Gross
  profit                                                     |  |                                       | 26,578 |      |   | 21,417 |   |      | 6,147   |      |   | 14,317 |   |   | 36,058 |  
|Research
  and development costs:                                  |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Expenses                                                           |  |                                       | 7,037  |      |   | 9,017  |   |      | 7,194   |      |   | 5,855  |   |   | 7,328  |  
|Acquired in process research and
  development                     |  |                                       |       |      |   | 3,634  |   |      |        |      |   |       |   |   |       |  
|Less royalty-bearing participation from the
  Government of Israel |  |                                       | 2,086  |      |   |       |   |      |        |      |   |       |   |   |       |  
|Research and development costs, net                                |  |                                       | 4,951  |      |   | 12,651 |   |      | 7,194   |      |   | 5,855  |   |   | 7,328  |  
|Selling,
  general and administrative expenses                     |  |                                       | 9,919  |      |   | 13,178 |   |      | 10,057  |      |   | 10,041 |   |   | 15,953 |  
|Restructuring
  expenses                                           |  |                                       |       |      |   | 547    |   |      |        |      |   |       |   |   |       |  
|Aborted share issuance
  expenses                                  |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   | 1,122  |  
|Operating
  income (loss)                                          |  |                                       | 11,708 |      |   | (4,959 | ) |      | (11,104 | )    |   | (1,579 | ) |   | 11,655 |  
|Financial
  and other income (expenses), net                       |  |                                       | 31     |      |   | 1,400  |   |      | 331     |      |   | 235    |   |   | (359   | )
|Income
  (loss) before income taxes                                |  |                                       | 11,739 |      |   | (3,559 | ) |      | (10,773 | )    |   | (1,344 | ) |   | 11,296 |  
|Provision
  for income taxes                                       |  |                                       | 848    |      |   | 152    |   |      | 519     |      |   | 225    |   |   | 449    |  
|Net
  income (loss)                                                |  | $                                     | 10,891 |      | $ | (3,711 | ) | $    | (11,292 | )    | $ | (1,569 | ) | $ | 10,797 |  
|                                                                  
|Earnings (loss) per ordinary shares
  outstanding:                 |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Basic                                                              |  | $                                     | 0.58   |      | $ | (0.17  | ) | $    | (0.47   | )    | $ | (0.06  | ) |   | 0.40   |  
|Diluted                                                            |  | $                                     | 0.57   |      | $ | (0.17  | ) | $    | (0.47   | )    | $ | (0.06  | ) |   | 0.39   |  
|                                                                  
|Weighted average number of ordinary shares
  outstanding:          |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Basic                                                              |  |                                       | 18,692 |      |   | 22,043 |   |      | 24,166  |      |   | 27,053 |   |   | 27,114 |  
|Diluted                                                            |  |                                       | 19,202 |      |   | 22,043 |   |      | 24,166  |      |   | 27,053 |   |   | 27,800 |  

4

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|                            |  |                |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|--------------------------- |  | -------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                            |  | December 31,   |       
|                            |  |                |       
|                            |  | 2000           |        | 2001 |   | 2002   |  | 2003 |        | 2004 |  
|                            |  |                |        |      |   |        |  |      |        |      |  
|                            |  | (in thousands) |       
|Balance Sheet Data:         |  |                |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Cash
  and cash equivalents |  | $              | 9,793  |      | $ | 7,029  |  | $    | 2,898  |      | $ | 12,837 |  | $ | 9,141  | 
|Working
  capital           |  |                | 45,492 |      |   | 34,852 |  |      | 30,197 |      |   | 29,364 |  |   | 40,038 | 
|Total
  assets              |  |                | 65,727 |      |   | 61,254 |  |      | 48,948 |      |   | 54,186 |  |   | 68,643 | 
|Total
  debt                |  |                | 931    |      |   | 4,871  |  |      | 51     |      |   | 2,300  |  |   | 2,335  | 
|Shareholders
  equity      |  |                | 49,770 |      |   | 46,021 |  |      | 40,316 |      |   | 38,851 |  |   | 49,776 | 

B.      Capitalization and Indebtedness.

Not
applicable.

C.      Reasons for the Offer and Use of Proceeds.

Not
applicable.

D.
      Risk
Factors.

There
is a high degree of risk associated with our company and business. If any of
the following risks occur, our business, operating results and financial
condition could be materially adversely affected and the trading price of our
ordinary shares could decline.

Risk Factors
Related to Our Business and Our Markets

The main markets we target, the
printed circuit board, high density interconnect substrate and semiconductor
manufacturing and packaging industries, are highly cyclical and are currently
expanding after experiencing a prolonged and severe downturn; it is difficult
to predict the length and strength of this period of expansion or when the next
downturn will occur.

The
printed circuit board, high density interconnect substrate and semiconductor
manufacturing and packaging industries are highly cyclical and expanded during
2004 after experiencing a prolonged and severe downturn, during which the
overall rate of capital spending by printed circuit board and high density
interconnect substrate manufacturers had been sharply cut and sales of our
products had declined. As a result of this recovery, we saw during 2004 an
increase in capital spending in the printed circuit board and high density
interconnect substrate industries, and sales of our automated optical
inspection, or AOI, systems to these manufacturers have increased. However, we
cannot predict the length and strength of this recovery. In the first quarter of 2005, there was a
decrease in demand from our clients in the printed circuit board industry, as a
result of a capacity adjustment in that market. If this reduction in demand is
not temporary, we have only a limited ability to reduce expenses because of the
need for significant ongoing expenditures related to engineering, research and
development and worldwide customer service and support operations. Accordingly,
we may incur losses during future downturns or capacity adjustments affecting
the markets we serve.

5

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We are in the process of
penetrating a new market with our Falcon system, which targets the
semiconductor manufacturing and packaging industry. If this system and related
products are not accepted, or if this market fails to grow, our results of
operations will be adversely affected.

In
the second quarter of 2004 we sold our first Falcon system, designed for the
final inspection of silicon wafers to serve the semiconductor manufacturing and
packaging industry, a market which we have only recently entered.

Our
future success in the semiconductor manufacturing and packaging industry
depends on the acceptance rate of AOI technology in the applications for which
we offer our equipment and upon the acceptance of our AOI systems by
manufacturers. If the market for our AOI systems in the semiconductor
manufacturing and packaging industry does not develop at the rate we expect,
whether as a result of an economic downturn, competition, alternative
technologies, changes in technology, changes in product standards, inability to
gain customer acceptance or otherwise, our results will be adversely affected.

Longer sales cycles may increase
our costs and delay time to market of our products, which may increase our
inventory and negatively impact our results of operations.

We
are expanding our product lines and customer base. Compared to our sales cycles
for repeat orders from existing customers, we have longer sales cycles for new
customers who are likely to order multiple systems, for new products and for
new customers in new markets. The sales process in these cases generally
involves: demonstrations and testing against industry benchmarks in our sales
centers; sales and technical presentations and presentations regarding our
products competitive advantages; and installation of the systems at the
customers site for side-by-side competitive evaluations for a period of one to
four months. The longest evaluation period is for new customers who are likely
to order multiple systems. More evaluation time is devoted during the initial
penetration period for new products and for new customers in new markets, since
these circumstances usually require intensive engineering efforts to fix
errors, customize tasks and add new features. As a result of all of the above
factors, our finished goods inventory has increased, and our costs may increase
disproportionately to our revenues as our product lines and customer base
expand.

We operate an international sales
organization. Recently, a substantial majority of our sales has been to
manufacturers in the Asia Pacific region. The concentration of our sales and
other resources within a particular geographical region subjects us to
additional risks.

We
have sold our systems in over 30 countries around the world. In 2004, our total
sales increased on an absolute basis in almost all geographic markets. However,
the majority of our growth in sales was due to the increase in sales to our
customers in the Asia Pacific region. In 2004, our sales in the Asia Pacific
region accounted for approximately 73.4% of our total revenues, including
approximately 43.9% of our total revenues from sales in China and Hong Kong and
21.6 from sales in Taiwan. We also increased our presence in the region during
2004. Changes in local legislation, changes in governmental controls and
regulations, changes in tariffs and taxes, political instability, trade
restrictions, a downturn in economic or financial conditions, as well as any
extraordinary events having an adverse effect on the economy or business
environment in this region may cause a significant decline in our future
revenues and may have an adverse effect on our results of operations. These
general risks are heightened in China, where the nature of the economy and the
legal parameters are rapidly evolving and where foreign companies may face
cultural obstacles. Our results from operations may be adversely affected by
changes in the economic or legal environment in China.

If the current economic recovery
continues, we may encounter difficulties in purchasing key components and
subsystems to meet increased customer demand.

If
the current economic recovery continues, our operations may have to further
expand in order to meet increasing customer demand. In the current
highly-competitive business environment, our customers require us to fill
orders within a very short period of time. Our products are complex and require
essential components and subsystems that are produced by a number of suppliers
and subcontractors. These suppliers and subcontractors cannot always supply
such components and subsystems within the time frame demanded by our customers,
and we are therefore required to predict, with less reliable indications of
future demand, our future needs over a longer time horizon than in the past. If
we do not order adequate components and subsystems, or if our suppliers and
subcontractors are unable to timely meet our increased demand, we might not be
able to adequately meet our customers demands. Our inability to satisfy any
increase in customer orders could result in the loss of sales and could cause
customers to seek products from our competitors.

6

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We
may also overestimate our future needs, which could result in our carrying
excess inventory of certain components and subsystems.

Technology in the markets in which
we operate is rapidly evolving, and we may not be able to keep pace with these
changes or with emerging industry standards. This could result in a loss of
revenues.

The
markets for our products are characterized by changing technology, evolving
industry standards, changes in end-user requirements and new product
introductions. Potential new technologies and improvements to existing
production equipment and methods could improve production yields, thereby
reducing the need to use our AOI systems in these industries. In addition, new
technologies could emerge as alternatives to using our products.

Our
future success will depend on our ability to enhance our existing products and
to develop and introduce new technologies for AOI of printed circuit boards,
high density interconnect substrates and silicon wafers. These products must keep
pace with technological developments and address the increasingly sophisticated
needs of our customers. If we fail to keep pace with technological changes,
with products offered by our competitors or with emerging industry standards,
our ability to attract new business and generate revenues may be damaged.

The markets we serve are highly
competitive. There is a dominant market participant for AOI systems both for
the printed circuit board industry and for the final inspection of silicon
wafers in the semiconductor industry, and some of our competitors have greater
resources, all of which may make it difficult for us to maintain profitability.

Competition
in the markets we serve is intense. During 2001, 2002 and early 2003,
competition intensified due to the low demand for the type of products that we
manufacture, resulting from the general economic downturn during that time.
Demand increased since the latter part of 2003, but if the trend of
increasingly intense competition continues, it could mean lower prices for our
products and a corresponding reduction in our gross margin. If we have to lower
prices to remain competitive and are unable to reduce our costs to offset price
reductions or are unable to introduce new, higher performance products with
higher prices, our operating results may be adversely affected.

Competitors
currently sell systems that provide functionality similar to our products. In
the printed circuit board industry, our principal competitor and the dominant
market participant is Orbotech Ltd., with additional competitors including
Dainippon Screen and ManiaBarco. In addition, there is a market for used AOI
systems for printed circuit board manufacturers, which may reduce the demand
for our products and force us to lower our prices in certain cases. Our
competitors in the high density interconnect substrate industry include
Dainippon Screen, Orbotech and Utechzone. In the semiconductor manufacturing
and packaging industry, our principal competitor and the dominant market
participant is August Technology Corp., with additional competitors including
Robotic Vision Systems, Topcon and Toray Industries.

Some
of our competitors have greater financial, personnel and other resources and
offer a broader range of products and services. These competitors may be able
to respond more quickly to new or emerging technologies or changes in customer
requirements, develop additional or superior products, benefit from greater
purchasing economies, offer more aggressive pricing or devote greater resources
to the promotion of their products.

Our products may infringe on the
intellectual property rights of others, which could result in claims against
us.

Third
parties may assert claims that we have violated their patents or that we have
infringed upon their intellectual property rights. Intellectual property claims
have been asserted against us in the past and may be asserted against us in the
future. Any intellectual property claims against us, even if without merit, could
lead to protracted litigation, could cost us a significant amount of money to
defend and could divert managements attention from our business.

7

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On
May 10, 2004, a lawsuit was filed against us in the District Court in Nazareth,
Israel, by our competitor, Orbotech Ltd., alleging that the Dragon and Falcon
systems infringe upon a patent held by Orbotech Ltd. and requesting an
injunction against the manufacture and sale by the Company of those systems, as
well as pecuniary damages.

On
February 23, 2005, another lawsuit requesting temporary and permanent
injunctions, as well as pecuniary damages, was filed against us in the District
Court in Jerusalem by Orbotech Ltd., alleging patent infringement in
connection with a patent, regarding illumination blocks (an apparatus for illuminating and
controlling the illumination of scanned objects) used in our AOI systems, which already was the subject of
earlier allegations made by Orbotech in a letter sent to us in 1998. The District Court in Jerusalem has
granted Orbotech a temporary injunction under which we may not manufacture or
sell a
new illumination block which we were
developing for customized special applications. We believe that the
temporary injunction will not have a material effect on our business

We
believe that we have good defenses against Orbotechs claims. However, we
cannot assure you that we will be successful in our defense against Orbotechs
claims. If these claims are successful,
they could have a negative impact on our business by impairing our ability to
sell our systems, and they could result in pecuniary damages against us.
Pecuniary damages awarded at the discretion of the court, if any, would be
based either on the amount of any losses Orbotech incurred in sales of products
due to our sales of infringing products or on the amount of profits earned by
us from sales of infringing products. In the event we do not prevail against
these claims, we may also be liable for any court costs and attorneys fees incurred
by Orbotech in connection with these litigations.

If one or more of our third-party
suppliers or subcontractors does not provide us with key components or
subsystems, we may not be able to deliver our products to our customers in a
timely manner, and we may incur substantial costs to obtain these components
from alternate sources.

We
rely on single source and limited source suppliers and subcontractors for a
number of essential components and subsystems of our products. We do not have
agreements with all of these suppliers and subcontractors for the continued
supply of the components or subsystems they provide. An interruption in supply
from these sources or an unexpected termination of the manufacture of key
components or subsystems would disrupt production and adversely affect our
ability to deliver products to our customers. An unexpected termination of
supply would require an investment in capital and manpower resources in order
to shift to other suppliers and might cause a significant delay in introducing
replacement products.

We had a recent history of losses,
and we cannot assure you that we will not incur additional losses in the
future.

We
incurred net losses of $3.7 million, $11.3 million and
$1.6 million for the years ended December 31, 2001, 2002 and 2003,
respectively. We had net income of $10.8 million in 2004. However, we incurred a net loss of $2.4
million for the first quarter of 2005.
We may not be able to sustain or increase profitability on a quarterly
or annual basis. The failure to generate consistent profitability could have a
material adverse effect on the market price of our shares.

If we are unable to protect our
proprietary technologies, we may not be able to compete effectively.

We
differentiate our products and technologies from those of our competitors by
using our proprietary software, our image processing algorithms and the
integration of our advanced hardware components. We rely on a combination of
copyrights, trade secrets, patents, trademarks, confidentiality and
non-disclosure agreements to protect our proprietary know-how and intellectual
property, including hardware and software components of our products. These
measures may not be adequate to protect our proprietary technologies and it may
be possible for a third party, including a competitor, to copy or otherwise
obtain and use our products or technologies without authorization or to develop
similar technologies independently. Additionally, our products may be sold in
countries, particularly in the Asia Pacific region, that provide less
protection to intellectual property than that provided under U.S. or Israeli
laws.

8

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Fluctuations in currency exchange
rates may result in the prices of our products becoming less competitive or in
additional expenses.

Currency
exchange rate fluctuations may affect the prices of our products. Our prices in
most countries outside of Europe and Japan are denominated in dollars. In those
countries, if there is a significant devaluation in the local currency compared
to the dollar, the prices of our products will increase relative to that local
currency and may be less competitive. In addition, much of our service income
is denominated in local currencies. If a larger number of our sales were to be
denominated in currencies other than dollars, our reported revenue and earnings
would be subject to a greater degree to foreign exchange fluctuations.

We
generate most of our revenues in dollars but incur a significant portion of our
salary and operating expenses in NIS, and some of these expenses are linked to
Israels Consumer Price Index. In addition, we have an outstanding loan
denominated in NIS. As a result, we bear the risk that the rate of inflation in
Israel will exceed the rate of devaluation of the NIS in relation to the
dollar, which would increase our costs expressed in dollars.

We
incur a significant portion of our expenses in China in the Yuan, and these
expenses may rise with our increasing activities there. The Yuan is currently
linked to the dollar. While the value of the Yuan has generally been stable in
recent years and has been controlled by Chinas central government, it may
fluctuate according to substantial changes in the political and economic
conditions in China. The Chinese government is under continued international
pressure to permit the Yuan to enter a full or limited free float. The
appreciation of the Yuan against the dollar may adversely affect our results of
operations in dollar terms.

Our dependence on a single
manufacturing facility magnifies the risk of an interruption in our production
capabilities.

We
have only one manufacturing facility, which is located in Migdal HaEmek,
Israel. Any event affecting this site, including natural disaster, labor
stoppages or armed conflict, may disrupt or indefinitely discontinue our
manufacturing capabilities and could significantly impair our ability to
fulfill orders and generate revenues, thus negatively impacting our business.

We may experience fluctuations in
our future operating results, making it difficult to predict future results.

Our
revenues and net income, if any, in any particular period may be lower than
revenues and net income, if any, in a preceding or comparable period. This
complicates our planning processes and reduces the predictability of our
earnings. Period-to-period comparisons of our results of operations may not be
meaningful, and you should not rely on them as indications of our future
performance.

Our
quarterly results of operations may be subject to significant fluctuations due
to the following factors:

| |   |                                                       
| | - | ------------------------------------------------------
| |  | the
  size, timing and shipment of substantial orders;
| |   |                                                       
| |  | customer
  budget cycles and installation schedules;  
| |   |                                                       
| |  | product
  introductions;                              
| |   |                                                       
| |  | the
  pricing of our products;                        
| |   |                                                       
| |  | the
  timing of new product upgrades or enhancements; 

9

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| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | temporary
  shifts in industry capacity                                                              
| |   |                                                                                                      
| |  | the
  timing of installation or, in some cases, of acceptance of our products by
  our customers; and
| |   |                                                                                                      
| |  | interest
  and exchange rates.                                                                       

We depend on a limited number of
key personnel who would be difficult to replace.

Our
continued growth and success largely depends on the managerial and technical
skills of the members of our senior management and key employees. If we
continue expanding our operations, we believe that we will need to promote and
hire qualified engineering, administrative, operational, financial and
marketing personnel. In particular, we may find it difficult to hire key
personnel with the requisite knowledge of our business, products and
technologies. The process of locating, training and successfully integrating
qualified personnel into our operations can be lengthy and expensive. During
periods of economic growth, competition for qualified engineering and technical
personnel is intense.

If
our Chairman and Chief Executive Officer, Mr. Rafi Amit, other members of
our senior management or any of our key employees are unable or unwilling to
continue to be employed by us, our business would suffer. We do not have a key
man life insurance policy for Mr. Amit.

Our relationship with Priortech
may give rise to conflicts of interest.

From
time to time, we purchase products of, or sell products to, other companies
owned or controlled by Priortech, our principal shareholder, and act jointly
with respect to governmental and administrative matters and the purchase from
third parties of various products and services, which may create conflicts of
interest. Although Israeli law imposes procedural requirements, including
obtaining special shareholder approvals for interested party transactions, we
cannot be certain that those procedures will eliminate the possible detrimental
effects of any of these transactions and activities. In addition Mr. Amit acts as the Chief Executive Officer
of the Company, on a full time basis as well as acting as Priortechs Chairman
of the Board Of Directors. Mr. Yotam Stern, our Executive Vice President,
Business & Strategy, spends up to 40% of his time serving as the Chief Executive Officer of Priortech and
other positions in the Priortech group.

We may be classified as a passive
foreign investment company, and, as a result, our U.S. shareholders may suffer
adverse tax consequences.

Generally,
if for any taxable year 75% or more of our gross income is passive income, or
at least 50% of our assets are held for the production of, or produce, passive
income, we may be characterized as a passive foreign investment company, or
PFIC, for U.S. federal income tax purposes. Our passive income would not
include income derived from the sale of our products but would include amounts
derived by reason of the temporary investment of any cash amounts. This
characterization could result in adverse U.S. tax consequences to our
shareholders, including gain realized on the sale of our ordinary shares being
treated as ordinary income rather than capital gain income and could result in
punitive interest charges being applied to such sales proceeds. U.S.
shareholders should consult with their own U.S. tax advisors with respect to
the U.S. tax consequences of investing in our ordinary shares.

Based
on an analysis of our assets and income, we believe that in 2004 we were not a
PFIC. We currently expect that we will not be a PFIC in 2005. However, PFIC
status is determined as of the end of the taxable year and is dependent on a
number of factors, including the relative value of our passive assets and our
non-passive assets, our market capitalization and the amount and type of our
gross income. Therefore, there can be no assurance that we will not become a
PFIC for the year ending December 31, 2005 or in a future year. For a
discussion of how we might be characterized as a PFIC and related tax
consequences, please see U.S. Federal Income Tax Considerations-Tax
Consequences if we are a Passive Foreign Investment Company.

10

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Our share price has been volatile in the past and may
continue to fluctuate in the future.

Our
ordinary shares have experienced significant market price and volume
fluctuations in the past. During the period from January 1, 2004 through
May 31, 2005, the price of our ordinary shares ranged from $2.79 to $7.8.
Our ordinary shares may experience significant market price and volume
fluctuations in response to factors, some of which are beyond our control, such
as the following:

| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly variations in
  our operating results;                                                                                                          
| |   |                                                                                                                                                           
| |  | market conditions
  relating to our customers industries;                                                                                                
| |   |                                                                                                                                                           
| |  | operating results that
  vary from the expectations of securities analysts and investors;                                                                 
| |   |                                                                                                                                                           
| |  | changes in expectations
  as to our future financial performance, including financial estimates or
  recommendations by securities analysts and investors;
| |   |                                                                                                                                                           
| |  | large block transactions
  in our ordinary shares;                                                                                                        
| |   |                                                                                                                                                           
| |  | announcements of
  technological innovations or new products by us or our competitors;                                                                    
| |   |                                                                                                                                                           
| |  | announcements by us or
  our competitors of significant contracts, acquisitions, strategic
  partnerships, joint ventures or capital commitments;         
| |   |                                                                                                                                                           
| |  | changes in the status of
  our intellectual property rights;                                                                                              
| |   |                                                                                                                                                           
| |  | announcements by third
  parties of significant claims or proceedings against us;                                                                         
| |   |                                                                                                                                                           
| |  | additions or departures
  of our key personnel;                                                                                                           
| |   |                                                                                                                                                           
| |  | future sales of our
  ordinary shares; and                                                                                                                
| |   |                                                                                                                                                           
| |  | general stock market
  price and volume fluctuations.                                                                                                     

Stock
markets often experience extreme price and volume fluctuations. Market
fluctuations, as well as general economic conditions, such as a recession,
interest rate or currency rate fluctuations or political events or hostilities
in Israel or the surrounding region could adversely affect the market price of
our ordinary shares.

In
the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. In the future, we could be the target of similar litigation.
Securities litigation could be protracted, result in substantial costs and
divert managements attention and resources.

Our principal shareholder, Priortech, holds a controlling
interest in us and will be able to exercise its control in ways that may be
adverse to your interests.

Priortech
beneficially holds 77.8% of our issued and outstanding ordinary shares. As a
result, Priortech has the power to control the outcome of matters submitted to
a vote of our shareholders, including the election of members of our board and
the approval of significant corporate transactions. This concentration of
ownership may also have the effect of making it more difficult to obtain
approval for a change in control of us. Messrs. Rafi Amit, Yotam Stern and
Itzhak Krell control Priortech and may be deemed to control us.

11

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Risks Relating to Our Operations in Israel

Conducting business in Israel entails special risks.

Our
principal offices and sole research and development and manufacturing
facilities are located in the State of Israel. We depend on components imported
from outside of Israel and almost all of our sales occur outside of Israel.
Accordingly, we are directly influenced by the political, economic and military
conditions affecting Israel. Specifically, we could be adversely affected by:

| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | any major hostilities
  involving Israel;                                                      
| |   |                                                                                                
| |  | a full or partial
  mobilization of the reserve forces of the Israeli army;                    
| |   |                                                                                                
| |  | the interruption or
  curtailment of trade between Israel and its present trading partners; and
| |   |                                                                                                
| |  | a significant downturn in
  the economic or financial condition of Israel.                     

Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has
been a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or any future armed conflict, political instability or
violence in the region may have a negative effect on our business condition,
harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries, primarily in the Middle East, as
well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies of those countries directed towards Israel or
Israeli businesses may have an adverse impact on our operations, our financial
results or the expansion of our business.

Our operations could be disrupted as a result of the
obligation of our key personnel in Israel to perform military service.

Many
of our officers and employees in Israel, including certain key employees, are
obligated to perform annual reserve duty in the Israeli army and are subject to
being called up for reserve duty at any time. The absence of one or more of our
officers and key employees for significant periods of time due to military
service could be disruptive to our operations.

The Israeli government programs and tax benefits in which we
have participated in the past and in which we currently participate or from
which we receive benefits require us to meet several conditions. These programs
or benefits may be terminated or reduced in the future, which could increase
our costs.

We
benefit from certain Israeli government programs and tax benefits, particularly
from tax exemptions and reductions resulting from the Approved Enterprise
status of our manufacturing facilities in Israel. To be eligible for these
programs and tax benefits, we must continue to meet conditions, including
making specified investments in fixed assets and equipment and financing a
percentage of those investments with our share capital. If we fail to meet such
conditions in the future, these tax benefits could be cancelled, and we could
be required to refund those tax benefits already received. These programs and
tax benefits may not be continued in the future at their current levels or at
all, and our requests for future participation in these programs for any future
expansion of our manufacturing facilities may not be approved. In recent years,
the Israeli government has reduced the benefits available under certain of its
programs in which we do not participate. The termination or reduction of these
programs and tax benefits could increase our tax rates, thereby reducing our
net profits or increasing our net losses.

12

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The government grants we received in the past for research
and development expenditures restrict our ability to manufacture products or to
transfer technologies outside of Israel.

From
our inception through 2000, we received government grants from the Office of
the Chief Scientist of the Ministry of Industry and Trade, or OCS, for the
financing of a significant portion of our product development expenditures. In
March 2001, we commenced repayment of many of these grants pursuant to an
understanding reached with the OCS. As of June 1, 2005, we have fully
repaid the grants received by us from the OCS. Except for special circumstances
and if we obtain governmental consents and pay to the OCS amounts which may be
substantial, the terms of these grants prohibit us from selling or transferring
rights in the technology developed with the grants to parties outside of Israel
and allow sale or transfer of rights within Israel only with special
governmental approvals, even after full repayment of the grants. Elements of
our technologies, including in the areas of electronic hardware, image
processing, electro-optics, physics and mechanics, were developed with OCS
grants. In addition, except for special circumstances and with governmental
consents, we may only manufacture products developed with these grants outside
of Israel pursuant to the approval of a special governmental committee, and any
approval of this nature may also require us to pay significantly higher
royalties than the terms of the grants required. The restrictions regarding the
sale or transfer of technology or manufacturing rights out of Israel could have
a material adverse effect on our ability to enter into strategic alliances or
enter into merger or acquisition transactions in the future that provide for
the sale or transfer of our technology or manufacturing rights.

It may be difficult to enforce a U.S. judgment against us,
our officers and directors and some of the experts named in this annual report
or to assert U.S. securities law claims in Israel.

We
are incorporated in Israel. Substantially all of our executive officers and
directors and our Israeli accountants and attorneys are nonresidents of the
United States, and a substantial portion of our assets and the assets of these
persons are located outside the United States. Therefore, it may be difficult
to enforce a judgment obtained in the United States against us or any of these
persons, including one based on the civil liability provisions of the U.S.
federal securities laws. Additionally, it may be difficult for you to assert
U.S. federal securities laws claims or to enforce civil liabilities under U.S.
federal securities laws in actions originally instituted in Israel.

Some provisions of Israeli law could inhibit the acquisition
of us by others.

Some
provisions of Israeli corporate law may have the effect of delaying, preventing
or making more difficult a merger with, or acquisition of, us. The Israeli
Companies Law generally provides that a merger be approved by the board of
directors and by a majority of the shares present and voting on the proposed
merger at a shareholders meeting called upon at least 21 days notice. A
merger may not be completed until at least 50 days have passed since the
filing of the merger proposal with the Israeli Registrar of Companies. The
Israeli Companies Law also provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of the acquisition, the
purchaser would become a 25% or greater shareholder of the company, unless
there is already another 25% or greater shareholder of the company. Similarly,
an acquisition of shares must be made by way of a tender offer if, as a result
of the acquisition, the purchaser would become a 45% or greater shareholder of
the company, unless there is already a majority shareholder of the company. In
any event, if, as a result of an acquisition of shares, the acquirer will hold
more than 90% of a companys shares, the acquisition must be made by means of a
tender offer for all of the shares. Finally, Israeli tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and
a foreign company, less favorably than U.S. tax laws. For example, Israeli tax
law may, under certain circumstances, subject a shareholder who exchanges his
ordinary shares for shares in another corporation to taxation prior to the sale
of the shares received in such stock-for-stock swap. For more information on
the provisions of Israeli law in these contexts, please see sections  Share Capital and Israeli
Taxation.

|        |                              
|------- | -----------------------------
|Item 4. | Information
  on the Company.

A.      History and Development of the Company

We were incorporated in 1987. In our first years of operation, we provided manual
optical inspection equipment to address the needs of the printed circuit board,
or PCB, manufacturing industry. In 1994, we introduced our first automated
optical inspection, or AOI, system for the inspection of PCBs. In late 1998, we
introduced our Orion system, which gained wide acceptance in the high-end PCB
market and represented a breakthrough for us. Applying our core technologies,
we developed our Pegasus system, which was introduced in the third quarter of
2002, for the inspection of high density interconnect substrates, or HDI-S. In
September 2001, we acquired a developer and producer of AOI systems for
the semiconductor manufacturing and packaging industry. This acquisition
allowed us to enter the semiconductor inspection market. After a period of
intense internal research and development, we shipped our first new Falcon
system for the semiconductor manufacturing and packaging industry in the fourth
quarter of 2003.

13

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In
July 2000, we sold 5,835,000 ordinary shares in an initial public offering, in
which we  received net proceeds of  approximately $35 million.  In August 2002, we sold 5,926,730 ordinary
shares in a rights offering of ordinary shares to our then existing
shareholders (of which 5,922,228 were sold to Priortech Ltd.), in which we
received net proceeds of $6.1 million.

We
have been a public company since July 2000. Our headquarters are located
in Israel, and we have operations in the Asia Pacific region, Japan, the United
States and Europe.

Our
principal executive offices are located at our new facilities in Ramat Gavriel
Industrial Zone, P.O. Box 544, Migdal HaEmek 23150, Israel, and our telephone
number is 011-972-4-604-8111.  Our agent
for service of process in the United States is Camtek USA, Inc., located at 301
RT. 66, Building B, 2nd Fl., Neptune, NJ 07753, telephone number
(732) 695-1333.  Our website is
located at www.camtek.co.il.  The
information on our website is not incorporated by reference into this annual
report.

B.Business
Overview.

For
discussion of capital expenditures and divestitures, see Item 5  Operating and
Financial Review and Prospects- Liquidity and Capital Resources.

Our Business

We
design, develop, manufacture and market automated optical inspection, or AOI,
systems and related products. AOI systems are computerized systems which
optically inspect various types of electronic product components for defects
caused during the manufacturing process. Our AOI systems are used to enhance
both production processes and yields for manufacturers in three industries: the
printed circuit board, or PCB, industry; the high density interconnect, or
HDI-S, industry; and the semiconductor manufacturing and packaging industry.
Our systems provide our customers with a high level of defect detection, are
highly reliable and offer high throughput. We have sold more than 1,300 of our
AOI systems in over 30 countries around the world, predominantly to the PCB
industry, of which we believe over 950 systems are still in use. Our customer
base includes a majority of the largest 100 PCB manufacturers worldwide. Our
global, direct customer support network provides responsive, localized support
for our installed base.

Our products incorporate proprietary advanced image processing software and
algorithms, as well as advanced electro-optics and precision mechanics. They
are designed for easy operation and maintenance. In addition, our AOI systems
use technology that enables our customers to handle a wide range of inspection
and verification needs.

Our Markets

We
target three industries: the PCB industry; the HDI-S industry; and the
semiconductor manufacturing and packaging industry.

The Printed Circuit Board Market

A
PCB is generally used as the basic platform to interconnect and mount a broad
range of electronic components. PCBs consist of traces, or lines, of conductive
material, such as copper, laminated on either a rigid or a flexible insulated
base. These conductive lines provide electrical interconnections for electronic
components and are essential to the functioning of electronic products.
Imperfections in the various stages of the PCB manufacturing process may result
in defects or flaws, like open conductive lines, electrical short circuits,
nicks and inappropriate line widths.

14

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The
trend toward compact, high-performance and highly reliable electronic products,
such as mobile phones, notebook computers, digital cameras and personal digital
assistants, drives the demand for increased complexity and miniaturization of
PCBs. In response to this demand, PCB manufacturers are increasingly producing
multi-layer PCBs with narrower and denser lines, as well as boards with higher
layer counts. Multi-layer boards consist of several layers of circuitry
laminated together to form a single board with both horizontal and
vertical electrical interconnections. In addition, multi-layer boards are continuing
to evolve with new technologies. Currently, high-end PCBs (excluding
substrates) use conductive lines and spaces 2 to 5 mil wide. One mil is the
equivalent of one-thousandth of an inch. The scan time required to inspect a
given PCB surface increases substantially in relation to the reduction in line
width.

The
manufacturing process for multi-layer boards is comprised of three stages: the
manufacture of production tools, including artwork and masks; the production of
inner layers and their lamination into a single board; and the production of
external layers. The majority of AOI systems in the PCB industry is used for
inspection of inner layers. Today, the number of inner layers in a typical
multi-layer PCBs typically ranges from four to 18, though certain high
layer-count boards may consist of as many as 52 layers.. Inspection by AOI
systems during the manufacturing process for the detection of defects in the
inner layers prior to the lamination process is crucial, so that any defective
individual layers may be repaired or replaced while still accessible. Once the
multi-layer board is laminated, any undetected defect in any specific layer
will result in discarding the entire board.

The High Density Interconnect Substrate Market

A
consistent trend in the semiconductor manufacturing industry is to increase the
number of transistors on each integrated circuit, or IC, also commonly known as
a chip. At the same time the pursuit for miniaturization and lower costs drives
the packaging industry towards smaller devices requiring more input/output
connections across smaller areas. This trend has created the need for an
advanced intermediate carrier between the IC and the PCB. In response to this
challenge, the PCB industry has developed HDI-S, in which the substrates
conductive lines and spaces are 12 to 50 μm (microns). Although HDI-S are
produced using technologies derived from those used for the production of
traditional PCBs, the complexity and high density of these substrates require
separate, specialized manufacturing facilities.

The
HDI-S is connected to the PCB via an array of conductive solder balls, known as
a ball grid array, or BGA. The IC is connected to the upper side of the HDI-S,
either by wire bonding by means of small metal wires, or by flipping the IC
and directly connecting its face to the HDI-S through an array of conductive
bumps plated or stenciled on the upper side of the HDI-S and on the face of the
IC, in what is known as flip chip BGA, or FCBGA, assembly.

The
complexity of HDI-S requires high density inspection capabilities and creates
challenges in achieving high production yields. Therefore, using AOI throughout
the production line becomes even more essential than in the traditional PCB
industry. AOI of the HDI-S is required during the manufacturing process as an
in-process inspection. AOI is also required at the end of the production
process to ensure that the HDI-S meets the requirements for the assembly of the
semiconductor package.

FCBGA
packaging technology is primarily used in high-performance, high-speed ICs,
such as microprocessors, graphics processors and wireless ICs, as it allows a
higher number of input-output contact pads and also improves the performance of
the IC. In FCBGA packaging, the HDI-S must be inspected by AOI with 3-D
measurement capabilities because any deformation of the substrate or deviation
in the size, shape or placement of the bumps on the HDI-S may cause damage to
either the substrate or to the IC during the packaging process or result in an
unreliable contact with the mating pad on the IC, in either case leading to
device failure.

15

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The Semiconductor Manufacturing and Packaging Market

The
semiconductor manufacturing industry produces silicon wafers, each of which
consists of numerous ICs. At the end of the wafer manufacturing process, our
AOI systems inspect the wafer for various defects. At this stage, AOI systems
verify that no damage has been caused by the electronic probes used for functional
testing of the finished wafer and generate data to improve the probe testing
process. AOI is important to correct any wafer manufacturing process problems,
as well as for quality assurance purposes, mainly to ensure that the conductive
pads on the IC meet the requirements for wire-bonding to either a substrate or
lead frame. A lead frame is the traditional manner of packaging the IC, where
the IC is wire bonded to a thin sheet of copper or copper alloy stamped to form
an array of leads. The protruding leads connect the finished device to the PCB.

In
the semiconductor packaging process, the finished wafers are diced, or
separated, into individual ICs, which are then mounted onto substrates,
interconnected and encapsulated to produce semiconductor packages. AOI
equipment, together with electrical probe testing, determines which ICs and
substrates are non-defective. AOI equipment is also used to inspect for any
defects that may have been caused to the ICs during the dicing of the wafer.

In
FCBGA packaging technology, the face of the IC is attached to the top of a
substrate via an array of bumps, rather than being wire bonded. Similar to
HDI-S inspection, wafers designed for FCBGA assembly interconnect go through a
process in which bumps are plated or stenciled on pads on the face of the IC.
AOI with 3-D measurement capabilities is used to detect any missing, misplaced
or deformed bumps and to determine their conformity to shape and height
specifications. Size, shape and placement deviations may cause damage to the IC
or the substrate during the packaging process, leading to device failure.

Products

Our
AOI systems consist of:

| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a precise, movable table;                                                                                                                                                           
| |   |                                                                                                                                                                                     
| |  | an optical assembly unit,
  either movable or fixed, which captures the image of the inspected product;
  and                                                                       
| |   |                                                                                                                                                                                     
| |  | an electronic hardware
  unit, which operates the entire system and includes embedded components that
  process the captured image in real time by using our proprietary algorithms.

The
inspected product is placed on the movable table and is scanned under the
optical assembly unit. The optical assembly unit then captures the image of the
product, while the electronic hardware unit processes the algorithms and
detects any defects. The image of the defect is immediately available for
verification by the system operator.

We
offer a broad range of systems for AOI of ICs, HDI-S and for PCBs. These
systems are used to enhance production yields and assist in controlling
manufacturing processes at wafer fabs, test and assembly houses, and PCB plants
worldwide. We invest significant resources in research and development to
provide our customers with advantageous performance, low cost of ownership,
high reliability and ease of operation. We believe that a significant part of
our competitive advantage and of our ability to adapt our technologies to
evolving market needs come from our design philosophy and applicable know-how
in basing its products on software-intensive architectures.

Automated Optical Inspection Systems for the PCB and
High-Density Interconnect Substrate Industries

Our
products for these industries consist of the Dragon and Orion lines for the
inspection of inner and outer layers of PCB panels; the Pegasus line for
inspection of HDI-S; and special models dedicated for inspection of artwork and
photo masks.

16

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Dragon

Dragon
systems are high-throughput, automation-ready systems for inspection of all PCB
types in a mass production environment. Dragon models are optimized for
specific PCB technology ranges  from mainstream circuits of typically 100 μm
(microns) conductor line width, up to high density substrates having 12 μm
(microns) wide conductive lines. All Dragon models are designed to interface
with automated material handling mechanisms provided by us or other automation
suppliers. We believe that the combination of detection ability, scanning speed
and automated material handling deliver outstanding value to customers. The
Dragon was first introduced in March 2003.

Orion

Orion
systems are stand-alone AOI systems for high volume inspection of all PCB
types. The Orion family has evolved gradually since its introduction in 2000.
All Orion models retain an ergonomic user interface that supports high productivity
and flexibility, allowing successive on-line inspection and verification, or
solely inspection followed by off-line verification on a separate station. Like
the Dragon family, Orion models are dedicated for various PCB technology
ranges.

Pegasus

The
Pegasus line includes systems for automated inspection of finished organic
substrates that are subsequently used in packaging of BGA and Chip Scale
Package (CSP) devices. The Pegasus inspects the both sides of the substrate,
searching for process and mechanical defects in particular in the gold-plated
areas where the substrate will interconnect with the silicon die or the PCB.
Pegasus models handle substrates in strip format in magazines or singular
substrates in trays.

Automated Optical Inspection Systems for the Semiconductor
Industry

Falcon

The
Falcon products integrate two-dimensional and three-dimensional inspection,
metrology and analysis capabilities onto a single platform. These capabilities
enable the Falcon to detect defects in the semiconductor die, which, if left
undetected, may cause premature failure. In addition, inspection data can be
used by customers to monitor and characterize several wafer finishing
processes, troubleshoot electrical testing issues or control the integrity of
the interconnect bump arrays made on dice intended for packaging in flip chip
technology. The Falcon family currently includes models for inspection of
wafers up to 200 mm and up to 300mm in diameter at the end of their production
process in the wafer fab, before they undergo functional electrical testing and
sorting (pre-sort stage).  The same
models can be used to inspect wafers at fabs, test and assembly houses after
test and sort procedures, where it adds the value of monitoring the marks left
by the testing probe. Another model handles wafers up to 300 mm in diameter
after they have been diced. At that stage the Falcon adds the value of
detecting dicing-related damage.

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Customers

Our
customer base includes a majority of the largest 100 PCB manufacturers
worldwide. Our customers, many of whom have multiple facilities, are located in
over 30 countries throughout Asia, Europe and North America. No individual
customer accounted for more than 10% of our total revenues during 2002, 2003 or
2004. In the HDI-S industry, our customers are typically dedicated HDI-S
manufacturers, but also include large PCB manufacturers who have separate HDI-S
manufacturing facilities. Our HDI-S customers are predominantly located in
Taiwan, Japan and the Asia Pacific region. In the semiconductor manufacturing
and packaging industry, we target wafer manufacturers and companies involved in
the testing, assembly and packaging of semiconductors.

The
following table shows our revenues classified by geographical region for each
of the last three years:

|                    |  |                         |        |      |   |        |  |   |        | 
|------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                    |  | Year Ended December 31, |       
|                    |  |                         |       
|                    |  | 2002                    |        | 2003 |   | 2004   | 
|                    |  |                         |        |      |   |        | 
|                    |  | (in thousands)          |       
|China and Hong Kong |  | $                       | 9,722  |      | $ | 10,520 |  | $ | 29,576 | 
|Taiwan              |  |                         | 5,956  |      |   | 10,717 |  |   | 14,574 | 
|Japan               |  |                         | 1,332  |      |   | 2,563  |  |   | 3,533  | 
|Other Asia          |  |                         | 1,170  |      |   | 1,139  |  |   | 5,341  | 
|United States       |  |                         | 2,020  |      |   | 2,465  |  |   | 8,116  | 
|Western Europe      |  |                         | 2,162  |      |   | 2,737  |  |   | 4,780  | 
|Rest of the World   |  |                         | 231    |      |   | 1,000  |  |   | 1,499  | 
|                    |  |                         |        |      |   |        |  |   |        | 
|Total               |  | $                       | 22,593 |      | $ | 31,141 |  | $ | 67,419 | 
|                    |  |                         |        |      |   |        |  |   |        | 

Sales, Marketing and Customer Support

We
have established a global distribution and support network throughout the
territories in which we sell our products, including the Asia Pacific region,
Japan, North America and Europe. We believe that this is an essential factor in
our customers decision to purchase our products. We primarily utilize our own
employees to provide these customer support services. We may expand our network
into additional territories as market conditions warrant.

As
of December 31, 2004, 154 of our employees were engaged in our worldwide
sales, marketing and support efforts, including support and sales
administration staff. Due to the shift in our sales from North America and
Europe to the Asia Pacific region, we adjusted our sales organization
accordingly during the past two years, and significantly expanded our sales,
marketing and support teams in the Asia Pacific region.

Our
marketing efforts include participation in various trade shows and conventions,
publications and trade press, product demonstrations performed at our
facilities and regular contact with customers by sales personnel. We generally
provide a 12-month warranty to our customers. In addition, for a fee, we offer
service and maintenance contracts commencing after the expiration of the
warranty period, which is typically one year. Under our service and maintenance
contracts, we provide prompt on-site customer support.

Manufacturing

Our
manufacturing activities consist primarily of the assembly and integration of
parts, components and subassemblies, which are acquired from third-party
vendors and subcontractors. The manufacturing process for our products
generally lasts four to six weeks. We utilize subcontractors in Israel for the
production of subsystems.

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We
rely on single source and limited source suppliers and subcontractors for a
number of essential components and subsystems of our products. We generally
maintain several months of inventory of critical components used in the
manufacture and assembly of our products. To date, we have been able to obtain
sufficient units of these components to meet our needs.

Competition

The
markets in which we operate are highly competitive. In the PCB industry, our
principal competitor is Orbotech, with additional competitors including
Dainippon Screen, Lloyd Doyle and ManiaBarco. Our competitors in the HDI-S
industry include Dainippon Screen, Orbotech and Utechzone. In the semiconductor
manufacturing and packaging industry, our primary competitor is August
Technology, with additional competitors including Robotic Vision Systems,
Topcon and Toray Industries.

We
believe that the principal elements of competition in the AOI market are:

| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | product capabilities
  (defect detection, throughput, uptime, performance);
| |   |                                                                            
| |  | product versatility and
  flexibility;                                     
| |   |                                                                            
| |  | product ease of use;                                                       
| |   |                                                                            
| |  | timely delivery of
  product;                                              
| |   |                                                                            
| |  | local customer service
  and technical support; and                        
| |   |                                                                            
| |  | product price.                                                             

We
believe that we compete effectively on all of these factors.

Capital Expenditures

The
following table shows our principal capital expenditures in fixed assets for
the last three years:

| |                                  |  |                |     |      |   |      |  |   |     | 
| | -------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | --- | 
| |                                  |  | December 31,   |    
| |                                  |  |                |    
| |                                  |  | 2002           |     | 2003 |   | 2004 | 
| |                                  |  |                |     |      |   |      | 
| |                                  |  | (in thousands) |    
| | Real
  Estate                    |  | $              |    |      | $ |     |  | $ | 191 | 
| | Building                         |  |                | (13 | )    |   |     |  |   | 30  | 
| | Machinery
  and equipment        |  |                | 111 |      |   | 66   |  |   | 315 | 
| | Office
  furniture and equipment |  |                | 142 |      |   | 154  |  |   | 293 | 
| | Automobiles                      |  |                |    |      |   |     |  |   |     | 
| | Total                            |  | $              | 240 |      | $ | 220  |  | $ | 829 | 

We
currently do not have any material capital expenditures in progress.

Legal Proceedings

On
May 10, 2004, a lawsuit was filed against us in the District Court in Nazareth,
Israel, by our competitor, Orbotech Ltd., alleging that the Dragon and Falcon
systems infringe upon a patent held by Orbotech Ltd. and requesting an
injunction against the manufacture and sale by the Company of those systems, as
well as pecuniary damages.

On
February 23, 2005, another lawsuit requesting temporary and permanent
injunctions, as well as pecuniary damages, was filed against us in the District
Court in Jerusalem by Orbotech Ltd., alleging patent infringement in connection
with a patent, regarding illumination blocks (an apparatus for illuminating and
controlling the illumination of scanned objects) used in our AOI systems, which already was the subject of earlier
allegations made by Orbotech in a letter sent to us in 1998, regarding an
illumination block. The
District Court in Jerusalem has granted Orbotech a temporary injunction under
which we may not manufacture or sell a new illumination block which we were
developing for customized special application. We do not believe that the
temporary injunction will have a material effect on our business.

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We
believe that we have good defenses against Orbotechs claims. However, we
cannot assure you that we will be successful in our defense against Orbotechs
claims.

We
are not a party to any other material legal proceedings.

C.      Organizational Structure

Priortech Ltd.,
our principal shareholder, through its affiliated companies, engages in various
aspects of electronic packaging, including the production and assembly of PCBs
and the development and sale of HDI-S. Based on sales, PCB Technologies, a
subsidiary of Priortech, is one of the largest PCB manufacturers in Israel.
Priortech currently holds 77.8% of our outstanding ordinary shares. We did not
sell any AOI systems to Priortech in 2002 and 2003, but did sell to a
subsidiary of Priortech an AOI system for $230,000 in 2004 and  a photo plotter for $190,000 in 2003. In
addition to these sales of products, we act jointly with Priortech with regard
to various governmental, administrative and commercial matters, which we
believe is to the mutual advantage of both parties.

D.Property,
Plants and Equipment

Our
main office, manufacturing and research and development facilities are located
in the Ramat Gavriel Industrial Zone of Migdal HaEmek in northern Israel. In
September 1998, we entered into a lease for these facilities to be built
by the lessor and also acquired an option to purchase the building and
underlying land from the lessor, which was exercised by us. These facilities
occupy 74,000 square feet, of which 28,000 square feet are devoted to the
manufacture of our products. We believe that our production capacity is
sufficient for our current and expected levels of sales.

Our
sales offices and demonstration centers, which we lease in various locations
around the world, occupy, in the aggregate, approximately 28,000 square
feet.

|        |                                                
|------- | -----------------------------------------------
|Item 5. | Operating
  and Financial Review and Prospects.

A.      Operating
Results

The
following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
the notes to those statements included herein, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or United States GAAP.

Overview

We
design, develop, manufacture and market automatic optical inspection, or AOI,
systems and related products. Our AOI systems are used to enhance both
production processes and yields for manufacturers in the printed circuit board,
or PCB, industry, the high density interconnect substrate, or HDI-S, industry
and the semiconductor manufacturing and packaging industry.

We
sell our AOI systems internationally. The majority of sales of our AOI systems
in 2004 was to PCB manufacturers in the Asia Pacific region, particularly in
China and Taiwan. This trend is due, among other factors, to the migration of
PCB manufacturers into this region due to significant labor cost advantages
available there. In 2004, our sales to customers in the Asia Pacific region
accounted for approximately 73.4% of our total revenues, including
approximately 43.9% of our total revenues from sales in China and Hong Kong and
21.6% from sales in Taiwan. We expect that this trend of increased production
of PCBs and other electronic components in the Asia Pacific region will
continue for the foreseeable future, but at a reduced rate than took place in
2004.

In
addition to revenues derived from the sale of AOI systems and related products,
we generate revenues from providing maintenance and support services for our
products. We expect our service revenues to increase as our installed base
increases. We generally provide a one year warranty with our systems. Accordingly,
service revenues are not earned during the warranty period. Our service
revenues, and gross profit derived from these revenues, decreased in 2004 since
fewer systems were sold during the industry downturn (during 2001-2003),
therefore fewer warranties expired. We expect service revenues to grow in 2005
due to the higher rate of sales of systems during 2003 and 2004.

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Our
customers are increasingly requiring that we deliver our products with short
lead times. In order to meet our customers needs in the timeframe they
require, we need to pre-order components and subsystems based on our forecasts
of future orders, rather than on actual orders. This need to pre-stock our
component and subsystem inventory is compounded by the fact that, in times of
increasing demand in our industry, our suppliers and subcontractors tend to
extend their delivery schedules or fail to meet their delivery deadlines. In
order to compensate for these unexpected delays, we have had to predict our
needs further into the future, which increases the risk that our predictions
may not correspond to our actual future needs. The uncertainties involved in
these longer term estimates during times of business expansion tend to increase
the level of component and subsystem inventories.

Compared
to our sales cycles for repeat orders from existing customers, we have longer
sales cycles for new customers who are likely to order multiple systems, for
new products and for new customers in new markets. The sales process generally
involves: demonstrations and testing against industry benchmarks in our sales
centers; sales and technical presentations and presentations regarding our
products competitive advantages; and installation of the systems at a
customers site for side-by-side competitive evaluations for a period of one to
four months. During the initial penetration period for new products and for new
customers in new markets, the evaluation period is typically extended, since
there are usually more intensive engineering efforts to fix errors, customize
tasks and add new features. As a result of all of the above factors, our
finished goods inventory has increased. A significant portion of our finished
goods inventory consists of systems under evaluation and demonstration systems.
We expect that this inventory will continue to increase as our business,
product lines and customer base expand.

During
the industry downturn in 2001, 2002 and early 2003, we implemented several cost
cutting and adjustment programs and measures. These measures included
reductions in salaries, bonuses and professional service fees, selective
layoffs on a worldwide basis and restructuring of production, research and
development and sales and marketing resources. Our cost reduction programs and measures
resulted in a reduction in the level of our expenses during 2002 and 2003.
Since our business expanded in 2004, we increased salaries and restore bonus
arrangements, which were cut during the reduction programs.

Critical Accounting Policies

The
Securities and Exchange Commission defines critical accounting policies as
those that are, in managements view, most important to the portrayal of a
companys financial condition and results of operations and most demanding on
their calls on judgment, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain and may change in
subsequent periods. We believe our most critical accounting policies relate to:

Revenue Recognition of Product Sales. We
recognize revenues from the sales of our products when the products are
installed at the customers premises and are operating in accordance with the
products specifications, signed documentation of the arrangement, such as a
signed contract or purchase order, has been received and the price is fixed or
determinable and collectability is reasonably assured.

Our
products are only installed by our qualified technicians. Thus, before we
recognize the revenue from the sale of a product and consider the sales cycle
completed, our technicians must install our product at the customers premises,
activate the product according to its specifications and then certify
completion of such installation and activation.

Our
revenue recognition policy requires that we make a judgment as to whether
collectability is reasonably assured. Our judgment is made for each customer on
a case-by-case basis, and, among other factors, we take into consideration the
individual customers payment history and its financial strength, as
demonstrated by its financial reports or through a third-party credit check. In
some cases, we secure payments by a letter of credit or other instrument.

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Valuation of Accounts Receivable.We review accounts receivable to determine which are doubtful of collection. In making this
determination of the appropriate allowance for doubtful accounts, we consider
our history of write-offs, relationships with our customers and the overall
credit worthiness of our customers. Changes in the credit worthiness of our
customers, the general economic environment and other factors may impact the
level of our future write-offs. The following table is a summary of the
allowance for doubtful accounts related to accounts receivable for the years
ended December 31, 2002, 2003 and 2004:

|                               |  |                      |        |      |   |        |   |   |        |  
|------------------------------ |  | -------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                               |  | As of
  December 31, |       
|                               |  |                      |       
|                               |  | 2002                 |        | 2003 |   | 2004   |  
|                               |  |                      |        |      |   |        |  
|                               |  | (in thousands)       |       
|Balance at beginning of period |  | $                    | (1,135 | )    | $ | (2,387 | ) | $ | (2,090 | )
|Provisions                     |  |                      | (1,568 | )    |   | (628   | ) |   | (1,229 | )
|Deductions                     |  |                      | 316    |      |   | 925    |   |   | 1,083  |  
|Balance at end of period       |  | $                    | (2,387 | )    | $ | (2,090 | ) |   | (2,236 | )

In
establishing these allowances for doubtful accounts, we took into account the
industry downturn and global economic recession in 2001, 2002 and the beginning
of 2003.

Valuation of Inventory.
We review inventory for obsolescence and excess quantities to determine that
items deemed obsolete or excess inventory are appropriately reserved. In making
the determination, we consider future sales of related products and the
quantity of inventory at the balance sheet date, assessed against each
inventory items past usage rates and future expected usage rates. Changes in
factors such as technology, customer demand, competing products and other
matters could affect the level of our obsolete and excess inventory in the
future. For example, in the third quarter of 2002, we took a one-time inventory
write-off charge of $1.8 million to account for obsolete inventory. Most
of this write-off was a result of major engineering enhancements to components
of our Orion product line that improved its performance while significantly
reducing the costs of goods sold. We wrote off the inventory items that would
not be used in future sales due to these enhancements.

Recent Accounting Pronouncements

In November
2004, the FASB issued FASB Statement No. 151, Inventory Costs, an amendment to
ARB 43, Chapter 4 (SFAS 151). The amendment made by SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period charges, and also
requires the allocation of fixed production overhead inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The provisions of SFAS 151 should be
applied prospectively. The Company does not expect the adoption of SFAS 151 to
have material effect on the Companys results of operations.

In
December 2004, the FASB issued SFAS No. 123 (revised 2004) Share Based
Payments (SFAS 123(R)). This Statement is a revision of FASB Statement No.
123, Accounting for Stock-Based Compensation, which supersedes APB Opinion
No. 25, and its authoritative interpretations. SFAS 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services; focuses primarily on accounting for transactions
in which an entity obtains employee and director services in share-based
payment transactions; and does not change the accounting guidance for
share-based payment transactions with parties other than employees. SFAS 123(R)
eliminates the alternative to use APB 25s intrinsic value method of accounting
that was provided in SFAS 123 as originally issued and requires measuring the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The
fair-value-based method in this Statement is similar to the fair-value-based
method in SFAS 123 in most respects. The costs associated with the awards will
be recognized over the period during which an employee is required to provide
service in exchange for the award  the requisite service period (usually the
vesting period).

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The
grant-date fair value of employee share options and similar instruments will be
estimated using option-pricing models adjusted for the unique characteristics
of those instruments (unless observable market prices for the same or similar
instruments are available). If an equity award is modified after the grant
date, incremental compensation cost will be recognized in an amount equal to
the excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. The provisions of SFAS 123(R) apply beginning with the
Companys 2006 fiscal year. When initially applying the provisions of SFAS
123(R), in the first quarter of 2006, the Company will be required to
elect between using either the modified prospective method or the modified
retrospective method. Under the modified prospective method, the
Company is required to recognize compensation cost for all awards granted after
the adoption of SFAS 123(R) and for the unvested portion of previously granted
awards that are outstanding on that date. Under the modified retrospective
method, the Company is required to restate its previously issued financial statements
to recognize the amounts previously calculated and reported on a pro forma
basis, as if the original provisions of SFAS 123 had been adopted. Under both
methods, it is permitted to use either a straight line or an accelerated method
to amortize the cost as an expense for awards with graded vesting. Management
has recently commenced identifying the potential future impact of applying the
provisions of SFAS 123(R), including each of its proposed transition methods,
yet is currently unable to fully quantify the effect of this Standard on the
Companys future financial position and results of operations. Nonetheless, it
is expected that the adoption of SFAS 123(R) will increase the
stock-based-award expenses the Company is to record in the future in comparison
to the expenses recorded under the guidance currently applied by the Company.

In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
an amendment of APB No. 29. This Statement amends APB 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date this Statement is issued.
Retroactive application is not permitted.

Results of Operations

Year Ended December 31, 2004 Compared to
Year Ended December 31, 2003

Revenues. Revenues
increased 116% to $67.4 million in the year ended December 31, 2004
from $31.1 million in the year ended December 31, 2003, primarily as
a result of the upturn in the global electronics industry, which resulted in
our customers increasing capital equipment spending. Sales of products
increased 138% to $63.4 million in the year ended December 31, 2004
from $26.6 million in the year ended December 31, 2003. The mixture
of products sold and their configuration varieties make it very difficult to
estimate average selling prices and pricing trends. However, we estimate that
the average selling prices of our AOI systems increased by approximately 6%
during 2004 compared to 2003. The introduction of new products and the
increased quantity of AOI systems sold during 2004 were the main factors
contributing to our revenue increase.

In
2004, our total sales increased on an absolute basis in all geographic markets;
in addition, the relative significance of certain geographic markets as a
percentage of our total sales has continued to shift from Europe and the United
States to the Asia Pacific region. Sales also increased due to the successful
penetration of our Dragon system, continuing penetration of our Pegasus system
and the introduction of our Orion Fine Line system to the packaging market. We
have also started to recognize sales to the semiconductor manufacturing sector
by introducing our Falcon system.

Service
fees decreased by 11.1% to $4.1 million in the year ended
December 31, 2004 from $4.6 million for the year ended
December 31, 2003. This decrease reflected the decrease in sales of system
in 2002 which resulted in lower service fees in 2004.

23

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Gross Profit. Gross
profit consists of revenues less cost of revenues, which includes the cost of
components, production materials, labor, depreciation, factory and service
center overhead, provisions for warranties and royalty payments to the
Government of Israel. These expenditures are only partially affected by sales
volume. In 2004, we experienced an increase in gross profit and gross margins,
primarily due to increased sales which provided the economies of scale
benefits. Our gross profit on product sales increased by $22 million to
$35.2 million in 2004, compared to $13.2 million in 2003. Our gross
profit on service revenue decreased by $216,000 in 2004, compared to $1.1
million in 2003. Our total gross profit increased by $21.8 million to
$36.1 million in 2004 from $14.3 million in 2003, representing an
increase of 152.3%. Our gross margin improved to 53.5% in 2004, compared to a
gross margin of 46% in 2003.

Research and Development Costs.
Research and development expenses consist primarily of salaries, materials
consumption and costs associated with subcontracting certain development
efforts . Total research and development expenses for 2004 were
$7.3 million, compared to $5.9 million in 2003. Research and
development expenses increased in 2004, due in part to increased research and
development projects (an increase of $646,000) and an increase of $447,000
resulting from an increase in headcount and raised salaries and bonuses that
had been reduced in the past two years.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of expenses
associated with salaries, commissions, promotion and travel, doubtful debt,
professional services and rent costs. Our selling, general and administrative
expenses, increased 56.5% to $16.0 million in 2004 from $10.0 million
in 2003. Selling, general and administrative expenses as a percentage of
revenues decreased in 2004 to 23.7% from 32.2% in 2003 mainly due to economies
of scale. In 2004 we continued the restructuring and strengthening our sales
infrastructure especially in the Asian territory. We increased our sales and
service employee headcount raising expenses by $2.0 million, expenses related
to revenue volume such as agent commissions were increased by $1.0 million,
traveling expenses increased by $333,000 and shipping expenses increased by $1.3
million.

Financial and Other (Expenses) Income, Net. We had net financial expense of $359,000 in 2004, as compared to net financial
income of $235,000 in 2003. These changes related primarily to exchange rate
influence and interest paid. Changes in currency rates resulted in income of
$80,000 in 2004 and $396,000 in 2003. In 2003, this income was offset by
interest expenses of $450,000, while in 2004, we had interest expense of $
169,000.

Provision for Income Taxes. We had a provision for income tax of $499,000 in 2004 due to a settlement we
reached with the Israeli Income Tax Authorities regarding certain tax
assessments. This compares to a provision of $225,000 in 2003. The 2003
provision reflected our estimate of the probable cost of settlement of these
tax assessments.

Net Income. Our net
income increased to $10.8 million in 2004 compared to a net loss of
$1.6 million in 2003. This increase in net income was primarily due to an
increase in our revenues.

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002

Revenues. Revenues
increased 37.8% to $31.1 million in the year ended December 31, 2003
from $22.6 million in the year ended December 31, 2002, primarily as
a result of the upturn in the second half of 2003 in the global electronics industry,
which resulted in our customers increasing capital equipment spending. Sales
of products increased 39.1% to $26.6 million in the year ended
December 31, 2003 from $19.1 million in the year ended
December 31, 2002. Our mix of products sold and their configuration
varieties make it very difficult to estimate average selling prices and pricing
trends. However, we estimate that the average selling prices of our AOI systems
increased by approximately 6% during 2003 compared to 2002. The introduction of
new products and the increased quantity of AOI systems sold during 2003 were
the main factors contributing to our revenue increase.

In
2003, our total sales increased on an absolute basis in almost all geographic
markets; in addition, the relative significance of certain geographic markets
as a percentage of our total sales has continued to shift from Europe and the
United States to the Asia Pacific region. Sales also increased due to the
launch of our Dragon system, continuing penetration of our Pegasus system and
the introduction of our Orion Fine Line system. Sales in the semiconductor
manufacturing and packaging market were insignificant. We expect to begin to
recognize revenues from the sale of our Falcon product line targeting this
market in the end of the second quarter of 2004 or in the third quarter of 2004.

24

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Service
fees increased 31.1% to $4.6 million in the year ended December 31,
2003 from $3.5 million for the year ended December 31, 2002. This
increase reflected the expiration of warranties on systems installed mostly in
2001.

Gross Profit. In
2003, we experienced an increase in gross profit and gross margins, primarily
due to increased sales, lower costs of goods sold due to the resulting
economies of scale and our continued efforts at cost cutting in all areas. Our
revenues increased in 2003 by $8.5 million, while our cost of revenues
remained at almost the same aggregate level as in 2002, some non-recurring
charges and fixed expenses were reduced and our variable costs were increased.
The main fixed costs and non-recurring factors that were decreased in
2003 compared to 2002 were a decrease in royalties to the Government of Israel
by $850,000, an inventory write-off in 2002 of $1.8 million, which did not
recur in 2003, and a decrease in factory overhead expenses of $384,000. Our
gross profit on product sales increased by $7.3 million to
$13.2 million in 2003, compared to $5.9 million in 2002. Our gross
profit on service revenue increased by $844,000 to $1.1 million in 2003,
compared to $270,000 in 2002. Our total gross profit increased by
$8.2 million to $14.3 million in 2003 from $6.1 million in 2002,
representing an increase of 132.9%. Our gross margin improved to 46.0% in 2003,
compared to a gross margin of 27.2% in 2002.

Research and Development Costs. Total research and development expenses for 2003 were $5.9 million,
compared to $7.2 million in 2002. In 2003, we reduced our total research
and development costs through an internal consolidation of our research and
development personnel and a shift of research efforts from subcontractors to
internal employees. Thus, we managed to decrease our expenses related to
subcontractors and materials consumption by $1.1 million in 2003.

Selling, General and Administrative Expenses.
Our selling, general and administrative expenses were $10.0 million in
2003 and $10.1 million in 2002. Selling, general and administrative
expenses as a percentage of revenues decreased in 2003 to 32.2% from 44.5% in
2002 due to economies of scale. We restructured our selling, general and
administrative organization by shifting a significant portion of our sales
efforts from the United States to the Asia Pacific region, where employee costs
are lower, by focusing more on direct sales and less on sales that require
payments of commissions to external sales representatives, by implementing
general cost cutting measures in professional services and by reducing the
number of our executive management positions.

Financial and Other (Expenses) Income, Net. We had net financial income of $235,000 in 2003, as compared to net financial
income of $331,000 in 2002. These changes related primarily to decreasing
interest rates and deposit balances. Changes in currency rates resulted in
income of $396,000 in 2003 and $112,000 in 2002. In 2003, this income was
offset by interest expenses in 2003 of $169,000, while in 2002, we had interest
income of $189,000.

Provision for Income Taxes. We had a provision for income tax of $225,000 in 2003 in connection with
certain tax assessments we received from the Israeli Income Tax Authorities,
compared to a provision of $519,000 in 2002. The 2003 provision reflected our
estimate of the probable cost of settlement of these tax assessments. The
assessment from the Israeli Income Tax Authorities has now been settled, and an
additional provision of $460,000 regarding the settlement was made in the first
quarter of 2004. The principal reason for the provision in 2002 was a write-off
of $539,000 of deferred tax assets, due to the unlikelihood of recovery in
light of our continuing losses at the time.

Net Loss. Our net
loss decreased to $1.6 million in 2003 from $11.3 million in 2002.
This decrease in net loss was primarily due to an increase in our revenues,
coupled with a smaller increase in expenses.

25

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B.       Liquidity and Capital Resources.

Our
cash and cash equivalent balances totaled approximately $9.1 million at
December 31, 2004 and $12.8 million at December 31, 2003. We had
no investments in marketable securities as of December 31, 2004 or
December 31, 2003. Our cash and marketable securities consisted mainly of
money raised through equity offerings in 2000 and 2002. We raised approximately
$36.0 million from our initial public offering in 2000 and approximately
$6.1 million in a rights offering of ordinary shares to our then existing
shareholders in 2002. Our working capital was approximately $40.0 million
at December 31, 2004 and $29.4 million at December 31, 2003. Our
decrease in cash and cash equivalents during 2004 was mainly due to the sharp
increase in inventory levels as a result of our wide product variety and to a
sharp increase in our accounts receivable due to our increased level of sales.
In addition, we drew on our existing credit line with our primary lender, Bank
Leumi, in the amount of $2.3 million.

Cash
flow from operating activities

For
the year ended December 31, 2004, we had negative cash flow from
operations of $1.8 million, primarily due to an increase in our
inventories of $11.2 million, and due to an increase in our accounts
receivable of $8.8 million. For the year ended December 31, 2003, we had
negative cash flow from operations of $3.0 million, primarily due to an
increase in our accounts receivable of $2.7 million, in amounts due from
Priortech and its affiliates of $2.1 million and in inventories of
$1.7 million, partially offset by an increase in accounts payable of
$4.0 million. The increase in our receivables, payables and inventory was
a reflection of our increased level of activity during 2003. The amounts due
from Priortech primarily related to Israeli value added tax refunds belonging
to us, which were received by Priortech due to the fact that we are part of a
consolidated group with Priortech for purposes of Israeli value added tax
matters. All amounts due, as of December 31, 2003, to us from Priortech
have since been paid.

Cash
flow from investing activities

Cash
flow used by investing activities in 2004 was $0.8 million, mainly due to
investment in fixed assets. Cash flow provided by investing activities in 2003
was $10.7 million, mainly due to the redemption of marketable securities.
Cash flow provided by investing activities in 2002 was $2.7 million, also
mainly due to the redemption of marketable securities.

Capital
expenditures for 2004 were $829,000, compared to $220,000 in 2003, and $240,000
in 2002. Most of the capital expenditures in 2004 were for the purpose of
replacing obsolete equipment and machinery and renewing office furnishings. Our
capital expenditure budget for 2005 is approximately $800,000.

The
short-term bank credit will continue to be available to us after
repayment, even if we repay any amounts outstanding, subject to the terms of
the credit agreement with Bank Leumi. Under the terms of this credit facility,
we may draw down up to NIS 26 million, the equivalent of approximately
$5.8 million. The terms of this credit facility require that our
shareholders equity, net of intangible assets, treasury stock, deferred
expenses and accounts payable from related entities, remain at or above 45% of
the total value represented by our consolidated balance sheet, and further
require us to maintain a cash balance of at least $2.0 million in the form
of either bank deposits or non-encumbered bonds rated no lower than AA.
We have also undertaken not to effect a merger or change of control without the
consent of Bank Leumi, and to furnish the bank with our financial statements.
Borrowings under the Bank Leumi loan are collateralized by all of our assets.
There is no guarantee that we can maintain compliance with all the conditions
imposed by Bank Leumi in connection with the credit line, and, therefore, the
credit line may not be available to us in the future.

On
September 17, 2001, we announced that our Board of Directors had
authorized a share repurchase program to acquire up to $3.0 million of our
ordinary shares from time to time in open market transactions. During September 2001,
we purchased 250,000 ordinary shares at an aggregate cost of $592,000, and
during 2002, we purchased 761,619 ordinary shares at an aggregate total cost of
$401,000 in connection with such program. The purpose of our repurchase program
was to demonstrate to our shareholders our confidence in our company and the
AOI industry and to show our confidence in the long-run performance of both of
them. We believed when we implemented this program that it was in the best
interests of our shareholders. We do no currently have any specific plans for
the use of the repurchased shares.

26

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On
March 31, 2004, we reached a settlement with the Israeli Income Tax
Authorities over disputed assessments for the 1999, 2000 and 2001 tax years.
The dispute concerned assessments received from the Israeli Income Tax
Authorities, according to which we owed tax on our annual revenues in a total
amount of $6.7 million for those three tax years. The assessment included
four elements: (a) the tax benefits to which we are entitled in relation
to our Approved Enterprise status under Israeli tax law, (b) the
recognition of certain research and development costs, (c) the recognition
of our costs relating to our initial public offering in 2000 and (d) the
inflationary adjustment of debentures which we acquired from the proceeds of
our initial public offering in 2000. Under the settlement reached, we will pay
the Israeli Income Tax Authorities a total of approximately $685,000 to settle
the $6.7 million originally demanded of us. In addition, under the settlement,
we may continue to calculate our applicable tax benefits for the subsequent
years (2002 through 2007) of the Approved Enterprise program in which we
currently participate and with respect to which the tax assessment pertained at
the rates previously applied by us. The settlement amount resulted in a one-time
provision for income tax of approximately $460,000 in the first quarter of
2004, in addition to the $225,000 that was reserved for this purpose in the
fourth quarter of 2003.

We
believe that our existing sources of liquidity and anticipated cash flow from
operations will be sufficient to meet our anticipated cash requirements for at
least the next twelve months.

Effective Corporate Tax Rate

Our
production facilities are the subject of several investment programs, and
have been granted Approved Enterprise status under the Law for Encouragement of
Capital Investments, 1959. We are entitled to a tax holiday for a period of ten
years from the year in which we, as an Approved Enterprise, first earn taxable
income. The periods of benefits relating to our investment programs which
received Approved Enterprise status expire at different times. The tax benefits
with regard to our first investment program which received Approved Enterprise
status expired on December 31, 1999, and the tax benefits with regard to
our second approved investment program will expire at the end of 2007. Income
related to our first investment program is now subject to a 34% corporate tax
rate. The percentage of our income which will be subject to the 34% tax rate is
dependent on the increase in our revenues in comparison to the revenues in the
year in which each additional investment program was approved and other
factors. In 2005, approximately 10% of our taxable income will be subject to
the 34% corporate tax rate.

As
of December 31, 2004, we had net operating loss, or NOL, carryovers for
Israeli tax purposes of approximately $5.1 million, which may be used to
offset taxable income, subject to annual limitations. This NOL carryover has no
expiration date. In addition, foreign subsidiaries have NOL carryovers totaling
approximately $9.7 million, of which approximately $4.1 million
expire between 2005 to 2009, approximately $2.5 million expire between
2021 to 2023 and approximately $3.1 million have no expiration date. `

In
the event that we operate under more than one approval or that our capital
investments are only partly approved, our effective tax rate will be a weighted
combination of the various applicable tax rates.

Disclosure About Market Risk

The
currency of the primary economic environment in which our operations are
conducted is the dollar. Most of our revenues are derived in dollars, and the
prices of most of our materials and components are purchased in dollars or are
linked to changes in the dollar/NIS exchange rate effective on the date of
delivery of the goods to our factory. Most of our marketing expenses are also
denominated in dollars or are dollar linked. Our product prices in most
countries outside of Europe and Japan are denominated in dollars. However, most
of our service income is denominated in local currency. In Europe or Japan, if
there is a significant devaluation in the local currency as compared to the
dollar, the prices of our products will increase relative to that local
currency and may be less competitive. The opposite effect occurs when the
dollar decreases in value in comparison to these currencies, which was the case
in 2004. As the majority of our revenues are denominated in dollars, we believe
that inflation and fluctuations in the NIS/dollar exchange rate have no
material effect on our revenues. However, a portion of the costs of our Israeli
operations, mainly personnel and facility-related, are incurred in NIS.
As a result, we bear the risk that the rate of inflation in Israel will exceed
the rate of devaluation of the NIS in relation to the dollar, which will
increase our costs expressed in dollars and have an effect on our net income.
Our NIS costs, as expressed in dollars, increase to the extent by which any
increase in the rate of inflation in Israel is not offset, or is offset on a
lagging basis, by a devaluation of the NIS in relation to the dollar or to the
extent that the NIS appreciates in relation to the dollar.

27

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An
increasing portion of our expenses is incurred in the Peoples Republic of
China. The Chinese currency is currently linked to the dollar. The Chinese
government has been under increasing international pressure to permit the Yuan
to enter a full or limited free float. Should this linkage be discontinued by
the Chinese government, and if the Chinese currency rises in value in relation
to the dollar, our results of operations, in dollar terms, would be adversely affected.

In
our consolidated financial statements, transactions and balances originally
denominated in dollars are presented at their original amounts. Gains and
losses arising from non-dollar transactions and balances are included in the
determination of net income as part of financial expenses, net.

Currently,
we do not engage in hedging or other transactions intended to manage risks
relating to foreign currency exchange rate or interest rate fluctuations.

C.       Research and Development, Patents and
Licenses.

We believe that intensive research
and
development are essential to our business. We devote substantial research and
development resources to developing new products and to improving our existing
products to meet our customers evolving needs. We have dedicated teams with
expertise in image processing software and algorithms, electronic hardware,
electro-optics, physics, mechanics and systems design.

Our
product development efforts over the past two years have resulted in the
introduction of several new AOI systems, including the new models in the Dragon
series, and Orion series as well as automated material handling systems for the
Dragon series for the PCB market. the Pegasus the Lam, new models in the Orion
series for the HDI-S market and the Falcon for the semiconductor manufacturing
and packaging market.

Our
research and development efforts are primarily focused on:

| |   |                                                   
| | - | --------------------------------------------------
| |  | increasing
  the throughput of our AOI systems;   
| |   |                                                   
| |  | improving
  our defect detection capabilities; and
| |   |                                                   
| |  | reducing
  the number of false alarms.            

In
addition, we are focusing our efforts on leveraging our core technologies,
expertise and experience into improving our Falcon and Dragon family of
products. We believe our internal multi-disciplinary expertise will
enable us to maintain and enhance our technological edge.

As
of December 31, 2004, we had 76 employees engaged in research and
development, all of whom are based in our headquarters in Israel. We also use
subcontractors for the development of some of the hardware components of our
systems. Our research and development expenses were $7.2 million,
$5.9 million and $7.3 million for the years ended December 31, 2002,
2003 and 2004, respectively, representing 31.8%, 18.8% and 10.7% of total
revenues for the years then ended.

We
will continue to devote our research and development resources to maintaining
and extending our technology leadership position. In 2005 and 2006, we expect
to introduce new products and capabilities for all of our target markets.

28

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In
 general, we rely on a combination of our copyrights, trade secrets, patents,
 trademarks and non-disclosure agreements to protect our proprietary know-how
 and intellectual property. We also enter into confidentiality agreements with
 key employees and with all of the subcontractors who develop and manufacture
 components for use in our products. We cannot be certain that actions we take
 to protect our proprietary rights will be adequate nor can we be certain that
 we will be able to deter reverse engineering or that there will not be
 independent third-party development of our technology

We
 have eight patents pending with the Patent Cooperation Treaty organization, six
 patents pending in Israel, and one patent registered in the United States,
 Japan and Israel. Several of these patents relate to our AOI technology
 developed for the semiconductor industry. We consider aspects of many elements
 of our AOI systems to be proprietary to us.

D.       Trend Information.

During
 2001, 2002 and early 2003, competition in the industries we serve intensified
 due to the low demand for AOI systems, resulting from the general economic
 downturn during that time. Demand for AOI systems increased from the latter
 part of 2003 through the third quarter of 2004, though there was a capacity
 correction in the first quarter of 2005. There are two general trends that we
 believe are driving this increased demand. First, as electronic equipment
 becomes more complex, AOI equipment becomes more critical to the manufacturing
 process. Second, the recovery of the global electronics industry drove
 manufacturers in these industries to increase their investment in capital
 equipment. This increase led to an increase in demand for our systems both for
 expansion and for the replacement of existing systems.

In
 2004, the majority of sales of our AOI systems were to PCB manufacturers in
 the Asia Pacific region, particularly in China and Taiwan. This trend is due,
 among other factors, to the migration of PCB manufacturers into this region
 due to significant labor cost advantages available there. We expect that this
 trend toward the manufacturing of PCBs and other electronic components in the Asia
 Pacific region will continue for the foreseeable future, though at a lower
 rate.

E.       Off-Balance Sheet Arrangements.

We do not have any arrangements or
 relationships with entities that are not consolidated into our financial
 statements and are reasonably likely to materially affect our liquidity or the
 availability of our capital resources.

F.       Contractual Obligations and Other Commercial
 Commitments.

As of December 31, 2004, we had
 contractual obligations and commercial commitments of:

|                                   |  |                   |       |                        |   |              |  |              |       |                      |   |     |  |   |     | 
|---------------------------------- |  | ----------------- | ----- | ---------------------- | - | ------------ |  | ------------ | ----- | -------------------- | - | --- |  | - | --- | 
|                                   |  | Payment
   Due in |      
|                                   |  |                   |      
|Contractual Obligations            |  | Total             |       | Less than
   1
   Year |   | 1-3
   years |  | 3-5
   years |       | More than
   5 years |  
|                                   |  |                   |       |                        |   |              |  |              |       |                      |  
|                                   |  | (in
   thousands) |      
|                                   |  |                   |       |                        |   |              |  |              |       |                      |   |     |  |   |     | 
|Long-term debt obligations         |  | $                 |      |                        | $ |             |  | $            |      |                      | $ |    |  | $ |    | 
|Capital lease obligations          |  |                   |      |                        |   |             |  |              |      |                      |   |    |  |   |    | 
|Operating lease obligations (1)    |  |                   | 1,163 |                        |   | 446          |  |              | 694   |                      |   | 23  |  |   |    | 
|Purchase obligations               |  |                   |      |                        |   |             |  |              |      |                      |   |    |  |   |    | 
|Other long-term
   obligations (2) |  |                   | 1,185 |                        |   | 411          |  |              | 443   |                      |   | 194 |  |   | 137 | 
|                                   |  |                   |       |                        |   |              |  |              |       |                      |  
|Total                              |  | $                 | 2348  |                        | $ | 857          |  | $            | 1,137 |                      | $ | 217 |  | $ | 137 | 

|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In May
   2004, we entered into an operating lease for vehicles for a period of 36
   months. As of December 31, 2004, the minimum future rental payments
   were approximately $ 1,163.                      
|   
|(2) | Our
   subsidiaries have entered into various operating lease agreements,
   principally for office space. As of December 31, 2004, minimum future
   rental payments under these leases amounted to $1,185. .

29

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|        |                                                   
|------- | --------------------------------------------------
|Item 6. | Directors, Senior Management and Key
   Employees.

A.       Directors
and Senior Management.

The
 following table sets forth information with respect to our directors,
 executive officers and key employee as of the date of this annual report. The
 address of our directors, executive officers and key employee is c/o Camtek
 Ltd., Ramat Gavriel Industrial Zone, P.O. Box 544, Migdal HaEmek 23150
 Israel.

|                    |     |                                                                  
|------------------- | --- | -----------------------------------------------------------------
|Name                | Age | Title                                                            
|                    |     |                                                                  
|Rafi
   Amit        | 56  | Chairman
   of the Board of Directors and Chief Executive Officer
|Yotam
   Stern      | 52  | Executive
   Vice President, Business & Strategy and
   Director 
|Meir
   Ben-Shoshan | 74  | Director                                                         
|Haim
   Horowitz    | 56  | Director                                                         
|Eran
   Bendoly     | 41  | Director                                                         
|Moshe
   Amit       | 60  | Executive
   Vice President and Chief Financial Officer          
|Yuval
   Attias     | 37  | Controller                                                       
|Amir
   Gilead      | 54  | Vice
   President, Semiconductor andPackaging
   Division        
|Adi
   Corem        | 52  | Vice
   President, Operations                                    
|Jacob
   Yavor      | 46  | Vice
   President, Printed Circuit Board andHDI-S
   Division    
|Roni
   Flieswasser | 44  | Chief
   Technology Officer and President ofCamtek
   Europe     
|Roy
   Porat        | 38  | President
   of Camtek Hong Kong                                 

Rafi
 Amit  has
 served as our Chief Executive Officer since January 1998 and has served
 as Chairman of the Board of Directors since 1987. Since 1981, Mr. Amit
 has also served as the President and director of Priortech and has been the
 Chairman of the Board of Directors of Priortech since 1988. From 1981 until
 2004, Mr. Amit served as Priortechs Chief Executive Officer. Mr. Amit
 has a B.Sc. in Industrial Engineering and Management from Technion  Israel
 Institute of Technology. Mr. Rafi Amit is the brother of Mr. Moshe
 Amit.

Yotam
 Stern has served as an executive of ours since January 1998 and since
 February 2001 has served as our Executive Vice President,
 Business & Strategy. He has also served as a member of our Board of
 Directors since 1987. From January 1998 until February 2001, Mr. Stern
 served as our Chief Financial Officer. Mr. Stern has also served as the
 Chief Financial Officer of Priortech since 1981 and as Priortechs Chief
 Executive Officer since 2004 as well as serving as a director of Priortech
 since 1985. Mr. Stern has a B.A. in Economics from Hebrew University of
 Jerusalem.

Meir
 Ben-Shoshan
 has served on our Board of Directors since November 1998. From
 May 1995 until March 1999, Mr. Ben-Shoshan was a director of AG
 Associates (Israel) Ltd., a manufacturer of integrated processing
 equipment for the semiconductor industry, and was Chairman of its board from
 April 1996 to March 1999. From 1986 to 1998, Mr. Ben-Shoshan
 was a vice president of Clal Electronics Industries Ltd., a large
 electronics company. From March 2000 to March 2001,
 Mr. Ben-Shoshan was a director of Tower Semiconductor Ltd., a
 manufacturer of semiconductors. He has also been a director of IFN Ltd.,
 a company dealing in e-knowledge and e-content management since
 January 2000 and has been the Chairman of the Board of Jordan Valley
 Applied Radiation Ltd. since August 1999. Mr. Ben-Shoshan has
 been a member of the Association of Production Engineers in England since 1965
 and received an M.B.A. from Tel-Aviv University.

30

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Haim
 Horowitz
 has served on our Board of Directors since November 1998.
 Mr. Horowitz has also been the manager of the operating and financial
 control department of DSP Group, a fabless semiconductor company. Between 1999
 and 2003, Mr. Horowitz served as Vice President and Chief Financial Officer
 of Menen Medical Ltd., a medical equipment manufacturer. Between 1994 and
 1999, he served as Treasurer of Menen Medical Ltd., and from 1993 to
 1994, he served as the Chief Financial Officer of Menen Medical Corp., a
 subsidiary of Menen Medical Ltd. From 1991 to 1993, Mr. Horowitz
 served as Treasurer of Elscint, Inc., a medical imaging equipment
 company. Mr. Horowitz holds a B.Sc. in Industry and Management from
 Technion  Israel Institute of Technology.

Eran
 Bendoly  has served on our Board of Directors since November 2000. Currently,
 Mr. Bendoly serves as the Chief Executive Officer of Xenia
 Management Ltd., which is the managing partner of Xenia Ventures LP, a
 limited partnership that operates the technological incubator in Kiryat Gat,
 Israel. From 2000 to 2002, Mr. Bendoly served as Director of Finance for
 Europe, Middle East & Africa of Mindspeed Technologies, Inc., a U.S.-based
 fabless semiconductor manufacturer. From 1998 to 2000, Mr. Bendoly served
 as Chief Financial Officer of Novanet Semiconductor Ltd., and, from 1996
 to 1998, he served as Vice President, Finance and Operations of Novacom
 Technologies Ltd. Mr. Bendoly holds a B.A. from Hebrew University of
 Jerusalem and an M.B.A. from KU Leuven University of Belgium.

Moshe
 Amit  has
 served as one of our executive officers since October 1994 and since
 February 2001 has served as our Executive Vice President and Chief
 Financial Officer. From 1987 until 1994, Mr. Amit served as the President
 of PCE, Inc., a New Jersey-based company affiliated with us, which,
 until 2001, sold and serviced PCBs and AOI systems. Mr. Amit has a B.Sc.
 in Industrial Engineering and Management from Technion  Israel Institute of
 Technology. Mr. Moshe Amit is the brother of Mr. Rafi Amit.

Yuval
 Attias
 has served as our Controller since February 1999, prior to which
 Mr. Attias was an accountant with Somekh Chaikin, the Israeli affiliate
 of KPMG Peat Marwick. Mr. Attias has a B.A. in Economics and Accounting
 from Haifa University and is a registered CPA in Israel.

Amir
 Gilead
 has been employed by us since March 2000, and since November 2001,
 has served as our Vice President, Semiconductor and Packaging Division. From
 1999 until March 2000, Mr. Gilead served as President and Chief
 Executive Officer of Advanced Automation International Inc., a startup in
 the semiconductor equipment manufacturing industry. From 1990 until 1999,
 Mr. Gilead held various executive positions with Kulicke &
 Soffa, a semiconductor equipment manufacturer. Mr. Gilead has a B.Sc. and
 an M.Sc. in electrical engineering from Technion  Israel Institute of
 Technology.

Adi
 Corem  has
 been employed by us since November 1998 and has served as our Vice
 President, Operations since January 2001. From 1988 to
 November 1998, Mr. Corem served as the Operations Manager of Volta
 Carmiel Ltd., a manufacturer of plastic products. From 1984 to 1988,
 Mr. Corem worked as a Projects Manager in Elbit Systems Ltd., a
 military technology developer and producer. Mr. Corem has a B.Sc. in
 Industrial Engineering from Technion  Israel Institute of Technology.

Jacob
 Yavor  has
 been employed by us since 1987 and has served as our Vice President, Printed
 Circuit Board and HDI-S Division since May 2002. Mr. Yavor has a
 B.Sc. in Computer Engineering from Technion  Israel Institute of Technology.

Roni
 Flieswasser  established the then European branch of Camtek in September 1995, prior
 to the establishment of Camtek Europe NV. Prior to joining Camtek,
 Mr. Flieswasser worked with AOI systems at Orbotech, and was a partner
 for four years in a software company specializing in business applications.

Roy
 Porat  has
 served as President of Camtek Hong Kong since September 2003. From 2001
 until September 2003, Mr. Porat served as President of our U.S.
 subsidiary, Camtek USA, Inc. From 1999 to 2000, Mr. Porat served as
 the Chief Executive Officer of Aeronautics Ltd. From 1994 to 1999,
 Mr. Porat served in various executive positions at our affiliate, PCB
 Technologies. Mr. Porat has a B.Sc. in Industrial Engineering from
 Technion  Israel Institute of Technology.

31

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B.       Compensation.

Compensation of Executive Officers and
 Directors

The
 aggregate remuneration paid by us in the year ended December 31, 2004 to
 all the persons listed in the table under Directors, Executive Officers and
 Key Employees, except for Mr. Yuval Attias, was approximately $2,158,000, which
 includes amounts paid to provide pension, retirement or similar benefits, as
 well as amounts expended by us for automobiles made available to all our
 executive officers, and other fringe benefits commonly reimbursed or paid by
 companies in Israel. Regulations promulgated under the Israeli Companies Law
 regulate the annual remuneration and remuneration for participation in meetings
 of outside directors and the reimbursement of their expenses.
 Messrs. Rafi Amit and Yotam Stern did not receive any additional
 compensation for their service as our directors.

Employment Agreements

We
 maintain written employment agreements with our employees, including all of
 our executive officers, that contain customary provisions, including
 non-compete and confidentiality agreements. In recent years, Israeli courts
 have required employers seeking to enforce non-compete undertakings of a
 former employee to demonstrate that the competitive activities of the former
 employee will harm one of a limited number of material interests of the
 employer. If we cannot demonstrate that we will be harmed by the competitive
 activities of a former employee, we may be unable to prevent our competitors
 from benefiting from the expertise of our former employees.

Effective
 January 1, 1998, we entered into an employment agreement with
 Mr. Rafi Amit, our Chief Executive Officer. The agreement has a two-year
 term, which is automatically renewed at the end of every two years thereafter.
 The agreement contains confidentiality and non-compete provisions for the term
 of Mr. Amits employment and for a two-year period after the termination
 of his employment. Furthermore, the agreement provides that all intellectual
 property developed by Mr. Amit, or in which he took part, in connection
 with his employment, is our sole property. Pursuant to his employment
 agreement, Mr. Amit may dedicate up to 20% of his time to work for
 Priortech or any of the Priortech entities. Mr. Amit is currently engaged full
 time in his employment with the Company. The employment agreement may be
 terminated by either party at any time, or not renewed at the end of any
 successive two-year extension of its term, by written notice of termination or
 non-renewal delivered to the other party six months in advance. We may,
 however, immediately terminate the employment of Mr. Amit in various
 circumstances, including a breach of fiduciary duty.

Effective
 January 1, 1998, we entered into an employment agreement with
 Mr. Yotam Stern, our Executive Vice President, Business &
 Strategy. The agreement has a two year term which is automatically renewed at
 the end of every two years thereafter. The agreement contains confidentiality
 and non-compete provisions for the term of Mr. Sterns employment and for
 a two-year period after the termination of his employment. Pursuant to his
 employment agreement, Mr. Stern may dedicate up to 25% of his time to
 work for Priortech or any of the Priortech entities. In May 2005, our
 shareholders approved an amendment to this agreement under which
 Mr. Stern may dedicate up to 40% of his time to work for Priortech or any
 of the Priortech entities. The employment agreement may be terminated by
 either party at any time, or not renewed at the end of any successive two-year
 extension of its term, by written notice of termination or non-renewal
 delivered to the other party six months in advance. We may, however, terminate
 Mr. Sterns employment immediately upon the occurrence of various
 circumstances, including a breach of fiduciary duty.

C.       Board Practices.

Composition of the Board of
 Directors

Our
 Articles provide that our Board of Directors shall consist of not less than
 five nor more than ten directors, including the outside directors. Currently,
 our board consists of five directors.

Directors,
 other than outside directors, are elected by a resolution of the shareholders
 at the annual general meeting and serve until the conclusion of the next
 annual general meeting of the shareholders. Directors may be removed at any
 time by a resolution of the shareholders. Since directors may be elected and
 removed by a majority vote, Priortech Ltd., which holds a majority of our
 voting shares, has the power to elect all of our directors, subject to the
 restrictions placed on the election of outside directors as described below.
 The Chief Executive Officer is appointed by our Board of Directors. Each of the
 other officers is appointed by the Chief Executive Officer.

32

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The
 Chairman of our Board of Directors and Chief Executive Officer is
 Mr. Rafi Amit, who also serves as our general manager. Under the Israeli
 Companies Law, the general manager of a public company may not hold the
 position of Chairman of the Board unless that designation is approved at the
 general meeting of shareholders, by a vote of at least two-thirds of the
 non-controlling shareholders attending the meeting and voting on the resolution.
 This approval requirement need not be met if the total number of shares not
 held by controlling shareholders of the company which are voted against the
 resolution represents 1% or less of all of the voting rights. The designation
 may be approved for a term of up to three years and may be re-approved by the
 same majority for an additional three-year term each time. At our annual
 general shareholders meeting held in July 2003, our shareholders
 authorized Mr. Rafi Amit to continue to hold the position of general
 manager for an additional period of up to three years.

Our
 Articles provide that any director may appoint as an alternate director, by
 written notice to us or to the Chairman of the Board, any individual who is
 qualified to serve as director and who is not then serving as a director or
 alternate director for any other director. An alternate director has all of
 the rights and obligations of a director, excluding the right to appoint an
 alternate for himself. Currently no alternate directors serve on our board.

Messrs. Rafi
 Amit, Yotam Stern and Eran Bendoly are each serving a one year term which
 expires at our 2006 annual general meeting of shareholders. Each of our
 outside directors, Messrs. Haim Horowitz and Meir Ben-Shoshan, is serving
 a three year term in accordance with the Israeli Companies Law, which will
 expire at our annual general meeting of shareholders to be held in 2006.

None
 of the members of our Board of Directors, except Messrs. Rafi Amit and
 Yotam Stern, is a party to a service contract with us which would provide them
 benefits upon termination of employment.

Outside Directors; Independent
 Directors

Under
 the Israeli Companies Law, public Israeli companies are required to appoint at
 least two directors who qualify as outside directors under Israeli law.

The
 outside directors must not have any relationship with us. For this purpose,
 relationship means any employment, business or professional relations,
 either in the present or in the preceding two years. An individual whose
 relatives, business partners, employers or controlled companies have a
 relationship with us may not serve as an outside director. In addition, an
 individual whose other business affairs may cause a conflict of interest with
 the performance of his duties as an outside director or interfere with his
 ability to serve as such, may not serve as an outside director. Also, at least
 one of the outside directors must have financial and accounting expertise and
 the other must have professional qualifications, as defined in regulations
 promulgated under the Israeli Companies Law.

Outside
 directors are elected by a majority of the shares present and voting at the
 shareholders meeting. In addition, the shares voted in favor of their election
 must include at least one third of the shareholdings present and voting at the
 meeting, not counting abstentions, which are not held by controlling
 shareholders of the company. This minority approval requirement need not be
 met if the total number of shares not held by controlling shareholders of the
 company which are voted against the election of an outside director represents
 1% or less of all of the voting rights.

Each
 of our outside directors serves a three-year term, and may be re-elected to
 serve in this capacity for one additional term of up to three years. An
 outside director can be removed from office only by either the same percentage
 of shareholders that may elect him, or by a court order. In either case, an
 outside director may be removed only if the outside director ceases to meet
 the statutory qualifications for serving as an outside director or breaches
 his fiduciary duty. The court may also remove an outside director from office
 if he or she is unable to perform his or her duties on a regular basis. If at
 the time an outside director is appointed by the shareholders, all other
 directors are of the same gender, the outside director to be appointed shall
 be of the other gender.

33

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Neither
we nor our subsidiaries may, prior to the lapse of two years after the
termination of membership on our board of any of our outside directors, employ
such former outside director, engage him or her to serve as an executive
officer or director for us or retain his or her professional services.

Messrs.
Haim Horowitz and Meir Ben-Shoshan currently serve as our outside directors.

The
Sarbanes-Oxley Act of 2002, as well as related new rules subsequently
implemented by the Securities and Exchange Commission, require foreign private
issuers, such as us, to comply with various corporate governance practices. In
addition, the Nasdaq Stock Market, or Nasdaq, has adopted amendments to its
requirements for companies that are listed on Nasdaq. We believe that we are
currently in compliance with, and we intend to take all actions necessary for
us to maintain compliance with, the applicable corporate governance
requirements of the Sarbanes-Oxley Act, the rules adopted by the Securities and
Exchange Commission and the listing standards of Nasdaq.

Under the Nasdaq listing
requirements, we are required to have a majority of independent directors on
our Board of Directors. Messrs. Haim Horowitz, Meir Ben-Shoshan and Eran
Bendoly all qualify as our independent directors under Nasdaq rules.

Internal Auditor

The
board of directors of an Israeli public company must appoint an internal
auditor proposed by the audit committee. The role of the internal auditor is to
examine, among other things, the compliance of the companys conduct with
applicable law and orderly business procedures. An internal auditor may not
hold any other position in the company, have any business affairs outside of
the company which may create a conflict of interest with his or her duties as
internal auditor or be an interested party. For this purpose, an interested
party is a person who holds 5% or more of the companys shares, serves as or
has the power to appoint a director to or the chief executive officer of the
company, is otherwise personally employed by the company or serves on its board
or is a relative of any of these parties. The only exception to the rule
against an internal auditor being employed by the company is that the internal
auditor may serve as an ombudsman, provided that this does not interfere with
the performance of the duties of the internal auditor. In addition, the
internal auditor may not be a member of the companys independent accounting
firm. We currently have an internal auditor who meets the independence
requirements of Israeli law.

Committees of the Board of Directors

The
Israeli Companies Law provides that a public company must appoint an audit
committee and may also appoint other committees to the board of directors, unless
otherwise specified in the Companys Articles. The board of directors may
delegate its powers to such committees of the board of directors as it deems
appropriate, subject to the provisions of the Israeli Companies Law. Powers
that may not be delegated include, among others, the power to distribute
dividends, the determination of general company policy, the issuance of
securities, the issuance of shares (unless such issuance is under an employee
share option plan) and the approval of financial reports. However, those
matters can be delegated to committees for the purpose of making
recommendations to the full board of directors. According to the Companies Law,
a committee to which powers have been delegated shall be composed only of
directors. However, a committee whose purpose is only to make a recommendation
can be composed of non-directors unless otherwise specified in the Companys
Articles. According to the Companies Law, at least one outside director must be
appointed to serve on each committee of the board, excluding the audit
committee, which must be comprised of at least three directors, including all
of the outside directors of the Company. However, the Sarbanes-Oxley Act and
the Nasdaq listing requirements require that all members of the audit committee
be independent. The audit committee may not include the chairman of the board,
any director who is employed by the company or regularly provides service to
it, a controlling shareholder, or a relative of any such individual. Our Board
of Directors has an audit committee and a compensation committee.

34

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Audit Committee. The Audit Committee oversees and approves the retention, performance
and compensation of our independent auditors and establishes and oversees the
implementation of procedures concerning our systems of internal accounting and
auditing control. The Audit Committee is also responsible for identifying
deficiencies in the management of our business and proposing solutions for any
such deficiencies, and, in accordance with the Israeli Companies Law and the
Sarbanes-Oxley Act, approving certain acts and transactions that involve
conflicts of interest or that involve interested parties. The members of our
Audit Committee are Messrs. Meir Ben-Shoshan, Eran Bendoly and Haim Horowitz,
all of whom are independent directors in accordance with Nasdaq listing
requirements. Messrs. Bendoly and Horovitz qualify as financial experts for
purposes of the Sarbanes-Oxley Act and the Nasdaq listing requirements, and
Messrs. Ben-Shoshan and Horowitz qualify as outside directors under Israeli
Companies Law.

Compensation Committee. The Compensation Committee reviews and
makes recommendations to our board concerning the terms of the compensation
packages provided to our employees, including our executive officers, and the
terms of any bonus, share options or other awards to be provided to our
employees, including our executive officers. Under Israeli law, all
compensation arrangements with a general manager who is not a director require
the approval of the board of directors. Arrangements regarding the compensation
of directors require approval of the audit committee, the board of directors
and the shareholders, in that order, and if the director holds a controlling
interest in the company, special shareholder approvals are required. See
Duties of Office Holders and Approval of Transactions under Israeli Law. The
members of our Compensation Committee are Messrs. Horowitz, Ben-Shoshan and
Bendoly.

Duties of Office Holders and Controlling Shareholders and Approval
of Transactions under Israeli Law

Office Holders

The
Israeli Companies Law codifies the duty of care and the fiduciary duties that
office holders have towards the company. An office holders duty of care
includes the duty to act as a reasonable office holder would have acted in
the same position and under the same circumstances. An office holders
fiduciary duty requires the office holder to act in good faith and for the good
of the company, which includes:

| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | avoiding conflicts of interest
  between the office holders position with the company and his personal
  affairs;                                   
| |   |                                                                                                                                                      
| |  | avoiding any competition
  with the company;                                                                                                         
| |   |                                                                                                                                                      
| |  | avoiding the exploitation
  of the companys business opportunities for personal gain; and                                                           
| |   |                                                                                                                                                      
| |  | revealing to the company
  any information or documents relating to the companys affairs which the
  office holder has received due to his position.

An office holder, under
the Israeli Companies Law, is anyone serving, regardless of formal title, as a
director, general manager, chief executive officer, executive vice president,
vice president, or any other executive reporting directly to the general
manager. Each person listed in the table under Directors, Executive Officers
and Key Employees is one of our office holders, with the exception of our
controller. All arrangements as to compensation of office holders who are
neither directors nor controlling shareholders are approved by our compensation
committee. The compensation of office holders who are directors or controlling
shareholders, and any other employee who is a controlling shareholder, and as
of March 17, 2005, also a close relative of such controlling shareholder as
defined in the Companies Law), must be approved also by our Audit Committee,
our Board of Directors and our shareholders, in that order. Special shareholder
voting procedures are required for the approval of compensation of office
holders or employees who are also controlling shareholders or any relative
thereof.

Disclosure of Personal Interest

The
Israeli Companies Law requires an office holder or controlling shareholder of a
company to disclose any personal interest in an existing or proposed
transaction with the company, no later than at the first board meeting in which
the transaction is discussed. A personal interest also includes an interest in
any company in which the person, his or her close relative or any entity in
which such person or close relative has a personal interest, is a direct or
indirect 5% or greater shareholder, is a director or the general manager or has
the right to appoint at least one director or the general manager. Board
approval is required to approve the transaction, and no transaction that is
adverse to the companys interest may be approved. Approval by the companys
audit committee and board of directors is required for an extraordinary
transaction, meaning any transaction that is not in the ordinary course of
business, is not on market terms or is likely to have a substantial effect on
the companys profitability, assets or liabilities. A director who has a
personal interest in a matter may not be present at a board of directors or
audit committee meeting during discussions or vote on the matter. However, a
director with a personal interest may be present if the transaction to be
discussed is not an extraordinary transaction, or if a majority of the audit
committee members or the directors, as the case may be, has a personal interest
in the matter. If a majority of the board of directors or the audit committee
has a personal interest in the transaction, shareholder approval is also
required.

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Transactions with Controlling Shareholders

A
controlling shareholder is a shareholder who has the ability to direct the
activities of a company, including a shareholder who holds 25% or more of the
voting rights if no other shareholder holds more than 50% of the voting rights.
Under Israeli law, the disclosure requirements regarding personal interests
that apply to directors and office holders also apply to a controlling
shareholder of a public company.

Required Approval. Extraordinary transactions with a controlling shareholder (and as of
March 17, 2005, also a controlling shareholders close relative) or in which a
controlling shareholder (or its relative) has a personal interest, and the
terms of compensation of a controlling shareholder or a relative of a
controlling shareholder who is a director, executive officer or employee,
require the approval of the audit committee, the board of directors and the
shareholders of the company. This shareholder approval must include the
majority of shares voted at the meeting. In addition, either:

| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the majority must include
  at least one-third of the shares of disinterested shareholders voted at the
  meeting; or                                                
| |   |                                                                                                                                                                      
| |  | the total number of
  shares of disinterested shareholders voted against the transaction must not
  exceed one percent of the aggregate voting rights in the company.

A shareholder who
participates in this vote must provide notice to the company prior to voting,
stating whether such shareholder has a personal interest in the transaction. In
the absence of this notice, the shareholder may not vote on the matter, and his
or her vote shall not be counted.

Approval of Certain Specific Extraordinary Transactions. According to regulations promulgated under
the Israeli Companies Law, the following specific kinds of extraordinary
transactions with a controlling shareholder do not require shareholder
approval, provided that the audit committee and the board of directors have
approved the transaction and determined that it is one of the following:

| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the extension of an
  existing transaction which was previously approved in accordance with the
  Israeli Companies Law, provided no material change has been made to the terms
  of the extended transaction;                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a transaction that
  benefits only the company;                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a transaction made in
  accordance with the terms of a framework transaction previously approved in
  accordance with the requirements of the Israeli Companies Law;                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a transaction
  constituting part of a transaction with a third party or a joint offer to
  contract with a third party, provided that the benefit to the company does
  not materially differ than that to the controlling shareholder, taking into
  account the proportional interest of each of the parties; or
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | a transaction between
  companies controlled by a common controlling shareholder or between a public
  company and its controlling shareholder, provided that the transaction is on
  market terms, is in the ordinary course of business and does not adversely
  affect the interests of the company.            

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Insurance, Indemnification and Exemption

Our
Articles provide that, subject to the provisions of the Israeli Companies Law,
we may:

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Obtain insurance for our
  office holders covering their liability for any act performed in their
  respective capacities as an office holder with respect to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | a violation of the duty
  of care to us or to another person;                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | a breach of fiduciary
  duty, provided that the office holder acted in good faith and had reasonable
  grounds to assume that the act would not cause us harm; and
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | a monetary liability
  imposed on an office holder for the benefit of another person.                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                   
|(2) | Undertake to indemnify
  our office holders or to indemnify an office holder retroactively for a
  liability imposed or approved by a court, and for reasonable legal fees
  incurred by the office holder in his or her capacity as an office holder, in
  proceedings instituted against the office holder by the company, on its
  behalf or by a third party, in connection with criminal proceedings in which
  the office holder was acquitted, or in connection with criminal proceedings
  or other proceedings in which the office holder was investigated or but not
  indicted, or as a result of a conviction for a crime that does not require
  proof of criminal intent or as result of proceeding in which a monetary
  liability was imposed regarding a crime that does not require proof of
  criminal intent. An advance undertaking to indemnify an office holder must be
  limited to categories of events that can be reasonably foreseen in light of the
  Companys activities, and to an amount which is reasonable under the
  circumstances, as determined by the board of directors.

We may exempt, in advance,
an office holder from all or part of his or her responsibility for damages
occurring as a result of a breach of his or her duty of care. However, we may
not exempt, in advance, an office holder for breach of his or her duty of care
in respect distribution of dividends. We may also approve an action taken by
the office holder, even if performed in breach of his or her fiduciary duty, if
the office holder was acting in good faith, the action does not adversely
affect us and the office holder has revealed to the board his or her personal
interest in the action.

Notwithstanding
the foregoing, we may not insure, indemnify or exempt an office holder for any
breach of his or her fiduciary duty, or for a violation of his or her duty of
care (1) if the act was committed recklessly or with intent, (2) if the act was
committed with the intent to realize improper personal gain, or (3) for any
fine imposed on the office holder, except as provided above.

As
required under Israeli law, our Audit Committee, Board of Directors and
shareholders have approved the indemnification and insurance of our office
holders, as well as the resolutions necessary both to exempt our office holders
in advance from any liability for damages arising from a breach of their duty
of care to us, and to provide them with the indemnification undertakings and
insurance coverage they have received from us in accordance with our Articles.

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D.      Employees.

Employees

The
following table sets forth for the last three years, the number of our
employees engaged in the specified activities:

| |                            |  |                    |     |      |  |      |  |  |     | 
| | -------------------------- |  | ------------------ | --- | ---- |  | ---- |  |  | --- | 
| |                            |  | As of December 31, |    
| |                            |  |                    |    
| |                            |  | 2002               |     | 2003 |  | 2004 | 
| |                            |  |                    |     |      |  |      | 
| |                            |  |                    |     |      |  |      |  |  |     | 
| | Executive
  management     |  |                    | 8   |      |  | 7    |  |  | 8   | 
| | Research
  and development |  |                    | 80  |      |  | 72   |  |  | 74  | 
| | Sales
  support            |  |                    | 63  |      |  | 58   |  |  | 94  | 
| | Sales
  and marketing      |  |                    | 32  |      |  | 50   |  |  | 59  | 
| | Administration             |  |                    | 25  |      |  | 32   |  |  | 36  | 
| | Operations                 |  |                    | 41  |      |  | 46   |  |  | 67  | 
| | Total                      |  |                    | 249 |      |  | 265  |  |  | 338 | 

The
following table sets forth for the last three years, the number of our
employees located in the following geographic regions:

| |                               |  |                    |     |      |  |      |  |  |     | 
| | ----------------------------- |  | ------------------ | --- | ---- |  | ---- |  |  | --- | 
| |                               |  | As of December 31, |    
| |                               |  |                    |    
| |                               |  | 2002               |     | 2003 |  | 2004 | 
| |                               |  |                    |     |      |  |      | 
| | China
  (including Hong Kong) |  |                    | 36  |      |  | 51   |  |  | 78  | 
| | Taiwan                        |  |                    | 21  |      |  | 28   |  |  | 32  | 
| | Japan                         |  |                    | 5   |      |  | 5    |  |  | 6   | 
| | Other
  Asia                  |  |                    | 6   |      |  | 7    |  |  | 17  | 
| | Europe                        |  |                    | 11  |      |  | 8    |  |  | 10  | 
| | North
  America               |  |                    | 19  |      |  | 17   |  |  | 18  | 
| | Israel                        |  |                    | 151 |      |  | 149  |  |  | 177 | 
| | Total                         |  |                    | 249 |      |  | 265  |  |  | 338 | 

With
respect to our Israeli employees, we have no collective bargaining agreements
with our employees. However, by administrative order, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordination Bureau of Economic Organizations,
relating primarily to the length of the work day, minimum wages, pension
contributions, insurance for work-related accidents, procedures for dismissing
employees, determination of severance pay and other conditions of employment,
are applicable to our employees. In accordance with these provisions, the
salaries of our Israeli employees are partially indexed to the Consumer Price
Index in Israel, depending on the rate of increase of the Consumer Price Index.

We
consider our relationship with our employees to be good, and we have never
experienced a labor dispute, strike or work stoppage.

E.      Share Ownership.

The
following table sets forth certain information with respect to the beneficial
ownership of our outstanding ordinary shares by our directors and executive
officers.

Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally means sole or shared power to vote or direct
the voting or to dispose or direct the disposition of any ordinary shares.
Except as indicated by footnote, the persons named in the table below have sole
voting and investment power with respect to all ordinary shares shown as beneficially
owned by them. The percentage of beneficial ownership is based upon 27,078,647
ordinary shares outstanding as
of June 15, 2005.

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| |                                                               |  |                                |            |            |  |      |  
| | ------------------------------------------------------------- |  | ------------------------------ | ---------- | ---------- |  | ---- | -
| |                                                               |  | Beneficial Ownership           |           
| |                                                               |  | Number of Ordinary
  Shares(1) |            | Percentage | 
| |                                                               |  |                                |            |            | 
| |                                                               |  |                                |            |            |  |      |  
| | Rafi
  Amit(2)                                                |  |                                | 21,045,230 |            |  | 77.8 | %
| | Yotam
  Stern(3)                                              |  |                                | 21,108,230 |            |  | 78.0 | %
| |                                                               |  |                                |            |            |  |      |  
| | Directors and executive officers as a group
  (11 persons)(4) |  |                                | 21,507,360 |            |  | 79.4 | %
| |                                                               |  |                                |            |            |  |      |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(1) | Ordinary shares relating
  to options currently exercisable or exercisable within 60 days of the date of
  this annual report are deemed outstanding for computing the percentage of the
  person holding such securities but are not deemed outstanding for computing
  the percentage of any other person. As of the date of this annual report, no
  options held by the persons included in the above table are currently
  exercisable or exercisable within 60 days of the date hereof.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | As a result of a voting
  agreement relating to a majority of Priortechs voting equity, Mr. Amit may
  be deemed to control Priortech. Includes Mr. Amits interest in ordinary
  shares beneficially owned by Priortech. Mr. Amit does not directly own any of
  our ordinary shares.                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | As a result of a voting
  agreement relating to a majority of Priortech voting equity, Mr. Stern may be
  deemed to control Priortech. Includes Mr. Sterns interest in ordinary shares
  beneficially owned by Priortech. Mr. Stern directly owns 63,000 of our
  ordinary shares.                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Includes Messrs. Amits
  and Sterns interest in ordinary shares beneficially owned by Priortech. Our
  directors and executive officers as a group directly own 336,688 of our
  ordinary shares. Our controller is not one of our executive officers.                                                                                                                                                                                                                                     

Share Option Plans

General. We currently maintain five share option plans. The purpose of our
option plans is to afford an incentive to our officers, directors, employees
and consultants and those of our subsidiaries, to acquire a proprietary
interest in us, to increase their efforts on our behalf and to promote the
success of our business.

As
of December 31, 2004, there were 1,250,000 outstanding options to acquire our
ordinary shares pursuant to our share option plans at a weighted average
exercise price of $1.98, exercisable at various dates through July 2013.)

Future
options to be granted by us to our employees, officers, directors and
consultants or those of our affiliates will only be made pursuant to the 2003
Share Option Plan.

Administration of Our Share Option Plans. Our option plans are administered by our
Board of Directors. Under these option plans, options to purchase our ordinary
shares may also be granted to our officers, directors, employees or consultants
and those of our subsidiaries. The exercise price of options is determined,
under our option plans, by our Board of Directors, and is generally set as the
fair market value (although some options are exercisable for no additional
consideration and are the equivalent of restricted stock grants). The vesting
schedule of the options is also determined by the Board of Directors; generally
the options vest over a four-year period. Each option granted under the option
plans is exercisable between four to ten years from the date of the grant of
the option, according to the plan under which they were granted and subject to
certain early expiration provisions, such as in the event of termination.

The Share Option Plans. In September 1997, we adopted a share
option plan (the 1997 Share Option Plan) under which options to purchase our
ordinary shares were granted to employees, as determined by the board from time
to time. This plan was amended in 2000 and in 2003, each time in order to
comply with new Israeli tax legislation.

39

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In
November 2000, we adopted three share option plans: the Executive Share Option
Plan, the US Incentive Stock Option Plan and the European Employee Share Option
Plan. Under these plans, options were granted to employees, directors,
executive officers and consultants of our company and our affiliates around the
world.

In
October 2003, we adopted our 2003 Share Option Plan and its corresponding
Sub-Plan for Grantees Subject to United States Taxation and Sub-Plan for
Grantees Subject to Israeli Taxation. The total number of options that may be
granted under the 2003 Share Option Plan is 998,800 options.

Options Granted During 2004. No options were granted by us during the
year ended December 31, 2004.

We
have filed registration statements on Form S-8 under the Securities Act of
1933, as amended, to register the ordinary shares issuable under all of our
option plans. Ordinary shares issued pursuant to these share option plans are
eligible for resale in the public market.

As
of December 31, 2004, there were outstanding options exercisable for 375,300
ordinary shares at an average weighted exercise price of $1.98 per share, and
unvested options exercisable for 874,700 ordinary shares at an average weighted
exercise price of $ 1.98.

|        |                                                   
|------- | --------------------------------------------------
|Item 7. | Major Shareholders and Related Party Transactions.

A.       Major Shareholders.

The
following table provides information regarding the beneficial ownership of our
ordinary shares as of June 15, 2005, as to each person or entity who
beneficially owns more than 5.0% of our outstanding ordinary shares. None of
these shareholders has different voting rights than any of the Companys other
shareholders.

Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally means sole or shared power to vote or direct
the voting or to dispose or direct the disposition of any ordinary shares.
Except as indicated by footnote, the person named in the table below have sole
voting and investment power with respect to all ordinary shares shown as
beneficially owned by them. The percentage of beneficial ownership is based
upon 27,078,647 ordinary
shares outstanding as of June 15, 2005.

| |                  |  |                           |            |            |  |      |  
| | ---------------- |  | ------------------------- | ---------- | ---------- |  | ---- | -
| |                  |  | Beneficial Ownership      |           
| |                  |  |                           |           
|
| |                  |  | Number of OrdinaryShares* |            | Percentage | 
| |                  |  |                           |            |            | 
| | Priortech
  Ltd. |  |                           | 21,045,230 |            |  | 77.8 | %

* A majority
of the voting equity in
Priortech Ltd. is subject to a voting agreement. As a result of this agreement,
Messrs. Rafi Amit, Yotam Stern and Itzhak Krell may be deemed to control
Priortech Ltd. Priortechs principal
executive offices are located at Industrial Zone, Migdal HaEmek 23150, Israel.

B.      Related Party Transactions.

Rights Offering

In
August 2002, we sold 5,926,730 ordinary shares in a rights offering of ordinary
shares to our then existing shareholders, in which we received proceeds of
approximately $6.1 million. Of the ordinary shares sold in the rights offering,
5,922,228 ordinary shares were sold to Priortech, which exercised all its
rights under the rights offering.

40

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Ordinary Course Transactions and Activities with Priortech
and its Affiliates

From
time to time we have entered into transactions in the ordinary course of
business with Priortech and its affiliates. Our purchases of materials, such as
PCBs and assembled PCBs from Priortech and its affiliates, totaled $532,000,
$733,000 and $1,122,000 in 2002, 2003 and 2004 respectively. In addition, we
purchase bare PCBs and assembled PCBs from a Priortech subsidiary for the
development and manufacture of our systems so long as the price charged and
other payment terms is comparable to the best offer we could obtain from a
third party. We did not sell any of our systems to Priortech in 2002 or 2003,
we sold a photo plotter for $190,000 to a subsidiary of Priortech in 2003 and
our total revenues from sales to affiliates of Priortech in 2004 were $230,000.
We act jointly with Priortech with regard to various governmental,
administrative and commercial matters, which we believe is to the mutual
advantage of both parties. Unpaid balances between Priortech and us bear
interest at LIBOR plus 1%. As of December 31, 2004, the remaining balance owed
to us by Priortech and its affiliates under transactions made in the ordinary
course of business with them was $479,000 and as of March 31, 2005 this balance
stood at $327,000.We believe that these transactions and activities were
conducted on terms and conditions as favorable to us as those which we could
have entered into with unaffiliated third parties.

Registration Rights Agreement with Priortech

On
March 1, 2004, we entered into a registration rights agreement providing for us
to register with the SEC certain of our ordinary shares held by Priortech. This
registration rights agreement may be used in connection with future offerings
of our ordinary shares, includes, among others, the following terms: (a)
Priortech is entitled to make up to three demands that we register our ordinary
shares held by Priortech, subject to delay due to market conditions; (b)
Priortech will be entitled to participate and sell our ordinary shares in any
future registration statements initiated by us, subject to delay due to market
conditions; (c) we will indemnify Priortech in connection with any liabilities
incurred in connection with such registration statements due to any
misstatements or omissions other than information provided by Priortech, and
Priortech will indemnify us in connection with any liabilities incurred in
connection with such registration statements due to any misstatements or omissions
in written statements by Priortech made for the purpose of their inclusion in
such registration statements; and (d) we will pay all expenses related to
registrations which we have initiated, except for certain underwriting
discounts or commissions or legal fees, and Priortech will pay all expenses
related to a registration initiated at its demand in which we are not
participating.

On
December 30, 2004, the Registration Rights Agreement with Priortech was
amended. The amendment concerns
primarily the grant of unlimited shelf registration rights thereunder to
Priortech with respect to its holdings in us, and the assignability of those
shelf registration rights to its transferees.

Employment Agreements with Messrs. Rafi Amit and Yotam Stern

Effective
January 1, 1998, we entered into an employment agreement with Mr. Rafi Amit,
our Chief Executive Officer. Pursuant to his employment agreement, Mr. Amit may
dedicate up to 20% of his time to work for Priortech or any of the Priortech
entities (for further details see Employment Agreements).

Also
effective January 1, 1998, we entered into an employment agreement with Mr.
Yotam Stern, our Executive Vice President, Business & Strategy. Pursuant to
his employment agreement, Mr. Stern may dedicate up to 40% of his time to work
for Priortech or any of the Priortech entities (for further details see
Employment Agreements).

Mr.
Rafi Amit works on a full time basis for us and therefore receives a full time
salary, while Mr. Yotam Stern receives 60% of a full time salary, from us. Mr.
Stern is compensated directly by each of the Priortech entities for which he
works. Mr. Rafi Amit also serves as the Chairman of Priortech, and Mr. Yotam
Stern also serves as the Chief Executive Officer and as a director of
Priortech.

Messrs.
Amit and Stern do not receive any additional compensation for their service as
our directors.

41

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C.      Interests of Experts and Counsel.

Not
Applicable.

|        |                       
|------- | ----------------------
|Item 8. | Financial Information.

A.      Consolidated Statements and Other Financial
Information.

Please
see the consolidated financial statements listed in Item 18 for audited
consolidated financial statements prepared in accordance with this Item.

B.      Significant Changes.

There
have been no significant changes since the date of the financial statements
included in this annual report.

|        |                       
|------- | ----------------------
|Item 9. | The Offer and Listing.

A.      Offer and Listing Details.

Price History of Ordinary Shares.

Since
April 22, 2004, the primary trading market for our ordinary shares has been the
Nasdaq National Market, where our ordinary shares are listed and traded under
the symbol CAMT. From February 5, 2003 through April 21, 2004, our ordinary
shares were listed and traded on the Nasdaq SmallCap Market, and from July 28,
2000 through February 4, 2003, our ordinary shares were listed and traded on
the Nasdaq National Market. The following table sets forth, for the periods
indicated, the high and low reported sales prices of the ordinary shares:

|                                                       |  |      |       |     |  
|------------------------------------------------------ |  | ---- | ----- | --- | -
|                                                       |  | High |       | Low |  
|                                                       |  |      |       |     |  
|Annual
  and Quarterly Market Prices                   |  |      |       |     |  
|Fiscal
  Year Ended December 31, 2000 (from July 28):: |  | $    | 11.06 |     | $
|Fiscal
  Year Ended December 31, 2001:                 |  |      | 8.75  |     |  
|Fiscal
  Year Ended December 31, 2002:                 |  |      | 3.90  |     |  
|2003:                                                  |  |      |       |     |  
|First Quarter                                          |  |      | 0.42  |     |  
|Second Quarter                                         |  |      | 1.27  |     |  
|Third Quarter                                          |  |      | 2.16  |     |  
|Fourth Quarter                                         |  |      | 3.64  |     |  
|Fiscal
  Year Ended December 31, 2003:                 |  |      | 3.64  |     |  
|2004:                                                  |  |      |       |     |  
|First Quarter                                          |  |      | 7.80  |     |  
|Second Quarter                                         |  |      | 6.03  |     |  
|Third Quarter                                          |  |      | 5.63  |     |  
|Fourth Quarter                                         |  |      | 4.86  |     |  
|Fiscal
  Year Ended December 31, 2004:                 |  |      | 7.80  |     |  
|First Quarter 2005                                     |  |      | 4.29  |     |  
|Monthly
  Market Prices for the Most Recent Six Months |  |      |       |     |  
|December 2004                                          |  |      | 4.86  |     |  
|January 2005                                           |  |      | 3.59  |     |  
|February 2005                                          |  |      | 4.29  |     |  
|March 2005                                             |  |      | 3.60  |     |  
|April 2005                                             |  |      | 3.41  |     |  
|May 2005                                               |  |      | 3.31  |     |  
|June 2005 until June 23, 2005                          |  |      | 3.17  |     |  

For
the period between November 26, 2001 and October 21, 2003, our ordinary shares
were also listed on the Tel Aviv Stock Exchange, or TASE. During such period,
the trading activity on the TASE in our ordinary shares was insignificant. At
our request, our ordinary shares were de-listed from the TASE.

42

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B.      Plan of distribution.

Not
applicable.

C.      Markets.

As
noted above, the Companys ordinary shares are traded on the Nasdaq National
Market under the symbol CAMT.

D.      Selling Shareholders.

Not
applicable.

E.      Dilution.

Not
applicable.

F.      Expenses of the Issue.

Not
applicable.

|         |                        
|-------- | -----------------------
|Item 10. | Additional Information.

A and B.        Share Capital; Memorandum and
Articles

Following
is a summary of material information concerning our share capital and a brief
description of the material provisions contained in our Memorandum of
Association and our Articles.

General

Our
authorized share capital consists of one class of shares, which are our
ordinary shares. Out of our authorized share capital of 100,000,000 ordinary
shares, par value NIS 0.01 per ordinary share, 27,078,647 ordinary shares are outstanding and
fully-paid.

The
ordinary shares do not have preemptive rights. The ownership and voting of our
ordinary shares of Israel are not restricted in any way by our Articles, or by
the laws of the State of Israel, except for shareholders who are citizens of
countries in a state of war with Israel. Under the Israeli Companies Law,
Israeli companies may purchase and hold their own shares, subject to the same
conditions that apply to distribution of dividends (see Dividend and
Liquidation Rights). These shares do not confer any rights whatsoever for as
long as they are held by us. Additionally, a subsidiary may purchase or hold
shares of its parent company to the same extent that the parent company is
entitled to purchase its own shares, and these shares do not confer any voting
rights for as long as they are held by the subsidiary.

Transfer of Shares and Notices

Ordinary
shares are issued in registered form. Ordinary shares registered on the books
of the transfer agent in the United States may be freely transferred on the
transfer agents books. Each shareholder of record is entitled to receive at
least 21 days prior notice for a general meeting of the shareholders.

Dividend and Liquidation Rights

Our
Board of Directors may, without seeking shareholder approval, declare a
dividend to be paid to the holders of ordinary shares out of our retained earnings
or our earnings derived over the two most recent years, whichever is higher, as
reflected in the last audited or reviewed financial report prepared less than
six months prior to distribution, provided that there is no reasonable concern
that a payment of a dividend will prevent us from satisfying our existing and
foreseeable obligations as they become due. Dividends are distributed to
shareholders in proportion to the nominal value of their respective holdings.
In the event of our liquidation, after satisfaction of liabilities to
creditors, our assets will be distributed to the holders of ordinary shares in
proportion to the nominal value of their respective holdings. This right may be
affected by the grant of preferential dividend or distribution rights to the
holders of any class of shares with preferential rights that may be authorized
in the future. Our shareholders would need to approve any class of shares with
preferential rights.

43

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Modification of Class Rights

The
Israeli Companies Law provides that the articles of a company may not be
modified in such a manner that would have a detrimental effect on the rights of
a particular class of shares without the vote of a majority of the affected
class.

Voting, Shareholders Meetings and Resolutions

Holders
of ordinary shares have one vote for each ordinary share held on all matters
submitted to a vote of the shareholders. These voting rights may be affected by
the grant of special voting rights to the holders of any class of shares with
preferential rights that may be authorized in the future; however, currently no
holders of our securities have any special voting rights.

An
annual meeting of the shareholders must be held every year, and not later than
15 months following the last annual meeting. A special meeting of the
shareholders may be convened by the board of directors at its decision to do so
or upon the demand of any of: (1) two of the directors or 25% of the then
serving directors, whichever is fewer; (2) shareholders owning at least 5% of
the issued share capital and at least 1% of the voting rights in the company;
or (3) shareholders owning at least 5% of the voting rights in the company. If
the board does not convene a meeting upon a valid demand of any of the above,
then whoever made the demand, and in the case of shareholders, those
shareholders holding more than half of the voting rights of the persons making
the demand, may convene a meeting of the shareholders to be held within three
months of the demand. Alternatively, upon petition by the individuals making
the demand, a court may order that a meeting be convened.

The
quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy within one half hour of the time
scheduled for the beginning of the meeting, who hold or represent together at
least 33 1/3% of the voting power in our company. A meeting adjourned due to
lack of a quorum is generally adjourned to the same day in the following week at
the same time and place or any time and place as the directors designate in a
notice to the shareholders. If a quorum is not present at the reconvened
meeting, the meeting may be held with any number of participants. However, if
the meeting was convened following a demand by the shareholders, the quorum
will be that minimum number of shareholders authorized to make the demand.

In
any shareholders meeting, a shareholder can vote either in person or by proxy.
General meetings of shareholders will be held in Israel, unless decided
otherwise by our board.

Most
resolutions at a shareholders meeting may be passed by a majority of the
voting power of the company represented at the shareholders meeting and voting
on the matter. Resolutions requiring special voting procedures include the
appointment and removal of outside directors, approval of transactions with
controlling shareholders and the approval for the chairman of the board to also
serve as chief executive officer. See Management -Duties of Office Holders and
Approval of Transactions under the Israeli Law.

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith and in
a customary manner in exercising his rights and duties towards the company and
other shareholders, to refrain from prejudicing the rights of other
shareholders and to refrain from abusing his power in the company. The rights
and duties apply, among other things, to voting at the general meeting of the
shareholders on any of the following matters: (1) amendments to the articles;
(2) an increase in the companys authorized share capital; (3) a merger; or (4)
an approval of those related party transactions that require shareholder
approval.

In
addition, any shareholder who: (1) is a controlling shareholder; (2) knows that
its vote will determine the outcome of a shareholder vote; or (3) under the
provisions of the articles, has the power to appoint or to prevent the
appointment of an office holder in the company, is under a duty to act in
fairness towards the company. Israeli law does not define the substance of this
duty of fairness, however the laws of contracts, regarding breach of contract,
shall apply to violations of the duty to act in fairness.

44

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Anti-Takeover Effects of Israeli Laws; Mergers and
Acquisitions Under Israeli Law

The
Israeli Companies Law allows a merger to be effected without the need for court
approval if the merger receives the approval of the boards of directors of each
of the merging companies and a majority of the shareholders present and voting
at the general shareholders meeting of each of the merging companies. However,
such approval by the general shareholders meeting is not required if the
merging company is the full owner of the other party to the merger, or if the
merger does not require the change of the merging companys articles of
association and the merging company is not issuing more than 25% of its share
capital as part of the merger and a person will not become a controlling
shareholder as result of the merger. Israeli law also provides that in addition
to the approval of the merger by the requisite majority at the shareholders
general meeting, if either party to the merger or its interested parties hold
over 25% of the shares of the other party to the merger, then the majority must
also include a majority of the shares held by those shareholders present and
voting (excluding abstainees) who do not have an interest in the other party.

Israeli
law does not require court approval of a merger other than in specified
situations. However, upon petition by objecting shareholders or a creditor of a
merging company, the court may delay or prevent the consummation of the merger,
if it deems there to be a reasonable concern that as a result of the merger,
the surviving company will not be able to meet the obligation to creditors of
either of the merging companies.

A
merger may not be completed until 50 days have passed from the time that
the merger proposal was filed with the Israeli Registrar of Companies and until
all required approvals have been obtained and submitted to the Registrar of
Companies.

In
addition, the Israeli Companies Law contains provisions dealing with
arrangements between a company and its shareholders. These arrangements may be
used to effect squeeze-out transactions in which the target company becomes a
wholly-owned subsidiary of the acquirer. These provisions generally require
that the merger be approved by at least 75% of the shares of participating
shareholders and a majority of the shareholders voting at a shareholders
meeting. In addition to shareholder approval, court approval of the transaction
is required, which entails further delay.

The
Israeli Companies Law also provides that an acquisition of shares in a public
company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would become a holder of 25% or more of the
companys voting power. This rule does not apply if there is already another
holder of 25% or more of the voting power of the company. Similarly, the
Israeli Companies Law provides that an acquisition of shares of a public
company must be made by means of a tender offer if, as a result of the acquisition,
the purchaser would become a holder of more than 45% of the voting power of the
company. This rule does not apply if someone else already holds 45% of the
voting power of the company or if such acquisition of shares is made in a
private offering, following the consent of the Companys general meeting of
shareholders or if the acquisition of shares is from a controlling shareholder
following which the purchaser will become a controlling shareholder.

An
acquisition of shares following which the purchaser would become a holder of
more than 90% of a public companys shares must be made by a tender offer for
the purchase of all the remaining shares; if a tender offer is not accepted by
holders of less than 5% of the companys issued shares, then the holders of the
remaining shares must sell their shares to the acquirer on the terms of the
tender offer, although they may petition the court to raise the offered price
on the basis that it is an unfair price. However, the acquirer will not be permitted
to acquire tendered shares, to the extent that the acquisition of those shares
would bring the acquirers holdings to 95% or less and more than 90% of the
target companys shares, in which case the acquirer may only purchase the
balance which will bring the acquirers holdings to 90%. In addition, a
shareholder who holds more than 90% of the shares of a public company may not
purchase additional shares as long as the shareholder holds more than 90%.
Shares acquired in violation of these provisions become dormant and cease to
confer any rights upon their holder; and all rights are suspended as long as
the shares are held by the acquirer.

45

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In
addition, our technology developed pursuant to the terms of the Law for the
Encouragement of Industrial Research and Development, 1984, may not be sold or
transferred to third parties without the prior approval of a governmental
committee. Approval for the sale or transfer of technology may be granted only
if the recipient undertakes to abide by all of the provisions of the Law for
the Encouragement of Industrial and Research Development and its associated
regulations, including the restrictions on the transfer of know-how, the
obligation to manufacture in Israel and the obligation to pay royalties in an
amount that might be increased. These requirements could inhibit the
acquisition of us by others. However, a recent amendment to the Law for the
Encouragement of Industrial Research and Development enables the transfer of
know-how outside of Israel, and the manufacture outside of Israel, under very
limited and specific conditions, including additional payment of certain
amounts.

Finally,
Israeli tax law treatment of certain acquisitions, such as stock-for-stock swap
between an Israeli company and a foreign company, may be less favorable than
the treatment that may be applicable under U.S. tax law. For example, Israeli
tax law may subject a shareholder who exchanges his ordinary shares for shares
in a foreign corporation to immediate taxation. However, a stock-for-stock swap
of listed securities will not be subject to taxation until the earlier of:
(1) the time at which the shares will be sold; or (2) for 50% of the
stock, the lapse of two years from the date of the transaction, and for the
remaining 50%, the lapse of four years from the date of the transaction.

Transfer Agent

The
transfer agent and registrar for the ordinary shares is the American Stock
Transfer & Trust Company, New York, New York.

C.      Material Contracts.

None

D.      Exchange Controls

Nonresidents
of Israel who purchase our shares may exchange any NIS received as dividends,
if any, thereon, and any amounts payable upon the dissolution, liquidation or
winding up of our affairs, as well as the proceeds of any sale in Israel of the
ordinary shares to an Israeli resident, into freely repatriable dollars, at the
rate of exchange prevailing at the time of exchange, pursuant to regulations
issued under the Currency Control Law, 1978, provided that Israeli income tax
has been withheld with respect to amounts that are being repatriated to the
extent applicable or an exemption has been obtained. Israeli residents are eligible, subject to reporting
requirements, to purchase securities in foreign currencies.

E.      Taxation

U.S. Federal Income Tax Considerations

Subject
to the limitations described herein, this discussion summarizes the material
U.S. federal income tax consequences of the purchase, ownership and disposition
of our ordinary shares to a U.S. holder. A U.S. holder is a holder of our
ordinary shares who is:

| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an individual citizen or
  resident of the United States for U.S. federal income tax purposes;                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | a corporation or
  partnership (or another entity taxable as a corporation or partnership for
  U.S. federal income tax purposes) created or organized under the laws of the
  United States or any political subdivision thereof;                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | an estate, the income of
  which may be included in gross income for U.S. federal income tax purposes
  regardless of its source; or                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | a trust (i) if, in
  general, a U.S. court is able to exercise primary supervision over its
  administration and one or more U.S. persons have the authority to control all
  of its substantial decisions or (ii) that has in effect a valid election
  under applicable U.S. Treasury regulations to be treated as a U.S. person.

46

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Unless
otherwise specifically indicated, this discussion does not consider the U.S.
tax consequences to a person that is not a U.S. holder and considers only U.S.
holders that will own the ordinary shares as capital assets.

This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the Code), current and proposed Treasury regulations promulgated
under the Code and administrative and judicial interpretations of the Code, all
as currently in effect and all of which are subject to change, possibly with a
retroactive effect. This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to any particular U.S. holder
based on the U.S. holders particular circumstances. In particular, this
discussion does not address the U.S. federal income tax consequences to U.S.
holders who are broker-dealers or who own, directly, indirectly or
constructively, 10% or more of our outstanding voting shares, U.S. holders
holding the ordinary shares as part of a hedging, straddle or conversion
transaction, U.S. holders whose functional currency is not the U.S. dollar,
insurance companies, tax-exempt organizations, financial institutions and
persons subject to the alternative minimum tax, who may be subject to special
rules not discussed below. Additionally, the tax treatment of holders of
ordinary shares that are partnerships or other pass-through entities or persons
who hold the ordinary shares through a partnership or other pass-through entity
is not considered, nor is the possible application of U.S. federal estate or
gift taxes or any aspect of state, local or non-U.S. tax laws.

You
are advised to consult your tax advisor with respect to the specific U.S.
federal, state, local and foreign income tax consequences to you of purchasing,
holding or disposing of our ordinary shares.

Taxation of Distributions on the Ordinary Shares

Subject
to the discussion below under Tax Consequences if we are a Passive Foreign
Investment Company, the amount of a distribution with respect to the ordinary
shares will equal the amount of cash and the fair market value of any property
distributed and will also include the amount of any Israeli taxes withheld as
described below under Israeli Taxation -Taxation of Non-Residents on Receipt
of Dividends. A distribution paid by us with respect to the ordinary shares to
a U.S. holder will be treated as dividend income to the extent that the
distribution does not exceed our current and accumulated earnings and profits,
as determined for U.S. federal income tax purposes. Dividends that are received
by U.S. holders that are individuals, estates or trusts will be taxed at the
rate applicable to long-term capital gains (a maximum rate of 15%), provided
that such dividends meet the requirements of qualified dividend income.
Dividends that fail to meet such requirements, and dividends received by
corporate U.S. holders are taxed at ordinary income rates. No dividend received
by a U.S. holder will be a qualified dividend (1) if the U.S. holder held
the ordinary share with respect to which the dividend was paid for less than
61 days during the 121-day period beginning on the date that is
60 days before the ex-dividend date with respect to such dividend,
excluding for this purpose, under the rules of Code section 246(c), any
period during which the U.S. holder has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor of
a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such
ordinary share (or substantially identical securities); or (2) to the
extent that the U.S. holder is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in property
substantially similar or related to the ordinary share with respect to which
the dividend is paid. If we were to be a passive foreign investment company(as
such term is defined in the Code) for any year, dividends paid on our ordinary
shares in such year or in the following year would not be qualified dividends.
In addition, a non-corporate U.S. holder will be able to take a qualified
dividend into account in determining its deductible investment interest (which
is generally limited to its net investment income) only if it elects to do so;
in such case the dividend will be taxed at ordinary income rates.

The
amount of any distribution which exceeds the amount treated as a dividend will
be treated first as a non-taxable return of capital, reducing the U.S. holders
tax basis in its ordinary shares to the extent thereof, and then as capital
gain from the deemed disposition of the ordinary shares. Corporate holders will
not be allowed a deduction for dividends received in respect of the ordinary
shares.

47

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Dividends
paid by us in NIS will be included in the income of U.S. holders at the dollar
amount of the dividend (including any Israeli taxes withheld therefrom), based
upon the spot rate of exchange in effect on the date the distribution is
included in income. U.S. holders will have a tax basis in the NIS for U.S.
federal income tax purposes equal to that dollar value. Any subsequent gain or
loss in respect of the NIS arising from exchange rate fluctuations will
generally be taxable as U.S. source ordinary income or loss.

Subject
to the limitations set forth in the Code and the Treasury regulations
thereunder, U.S. holders may elect to claim as a foreign tax credit against
their U.S. federal income tax liability the Israeli income tax withheld from
dividends received in respect of the ordinary shares. The limitations on
claiming a foreign tax credit include, among others, computation rules under
which foreign tax credits allowable with respect to specific classes of income
cannot exceed the U.S. federal income taxes otherwise payable with respect to
each such class of income. In this regard, dividends paid by us will be foreign
source passive income for U.S. foreign tax credit purposes or, in the case of
a financial services entity, financial services income (and, for tax years
beginning after December 31, 2006, as general category income). U.S. holders
that do not elect to claim a foreign tax credit may instead claim a deduction
for the Israeli income tax withheld. The rules relating to foreign tax credits
are complex, and you should consult your tax advisor to determine whether and
to what extent you would be entitled to this credit. A U.S. holder will be
denied a foreign tax credit for Israeli income tax withheld from a dividend
received on the ordinary shares (i) if the U.S. holder has not held the
ordinary shares for at least 16 days of the 30-day period beginning on the
date which is 15 days before the ex-dividend date with respect to such
dividend or (ii) to the extent the U.S. holder is under an obligation to
make related payments with respect to positions in substantially similar or
related property. Any days during which a U.S. holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the required 16-day holding period. The discussion above is subject to
Tax Consequences if we are a Passive Foreign Investment Company,

Taxation of the Disposition of Ordinary Shares

Subject
to the discussion below under Tax Consequences if We are a Passive Foreign
Investment Company, upon the sale, exchange or other disposition of our
ordinary shares, a U.S. holder will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the disposition and the
U.S. holders tax basis in the ordinary shares. The gain or loss recognized on
the disposition of the ordinary shares will be long-term capital gain or loss
if the U.S. holder held the ordinary shares for more than one year at the time
of the disposition. Gain or loss recognized by a U.S. holder on a sale,
exchange or other disposition of ordinary shares will be treated as U.S. source
income or loss for U.S. foreign tax credit purposes.

A
U.S. holder that uses the cash method of accounting calculates the dollar value
of the proceeds received on the sale as of the date that the sale settles.
However, a U.S. holder that uses the accrual method of accounting is required
to calculate the value of the proceeds of the sale as of the trade date and may
therefore realize foreign currency gain or loss. A U.S. holder may avoid
realizing foreign currency gain or loss by electing to use the settlement date
to determine the proceeds of sale for purposes of calculating the foreign
currency gain or loss. In addition, a U.S. holder that receives foreign
currency upon disposition of ordinary shares and converts the foreign currency
into dollars after the settlement date or trade date (whichever date the U.S.
holder is required to use to calculate the value of the proceeds of sale) will
have foreign exchange gain or loss based on any appreciation or depreciation in
the value of the foreign currency against the dollar, which will generally be
U.S. source ordinary income or loss.

Tax Consequences if we are a Passive Foreign Investment
Company

We
will be a passive foreign investment company, or PFIC, if either (1) 75%
or more of our gross income in a taxable year is passive income; or
(2) 50% or more of the value, determined on the basis of a quarterly
average, of our assets in a taxable year produce or are held for the production
of passive income. If we own (directly or indirectly) at least 25% by value of
the stock of another corporation, we will be treated for purposes of the
foregoing tests as owning our proportionate share of the other corporations
assets and as directly earning our proportionate share of the other
corporations income. If we are a PFIC, a U.S. holder must determine under
which of three alternative taxing regimes it wishes to be taxed:

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The QEF regime applies
  if the U.S. holder elects to treat us as a qualified electing fund (QEF)
  for the first taxable year in which the U.S. holder owns our ordinary shares
  or in which we are a PFIC, whichever is later, and if we comply with certain
  reporting requirements. If the QEF regime applies, then each year that we are
  a PFIC such U.S. holder will include in its gross income a proportionate
  share of our ordinary earnings (which is taxed as ordinary income) and net
  capital gain (which is taxed as long-term capital gain), subject to a
  separate election to defer payment of taxes, which deferral is subject to an
  interest charge. These amounts would be included in income by an electing
  U.S. holder for its taxable year in which our taxable year ends, whether or
  not such amounts are actually distributed to the U.S. holder. A U.S. holders
  basis in our ordinary shares for which a QEF election has been made would be
  increased to reflect the amount of any taxed but undistributed income.
  Generally, a QEF election allows an electing U.S. holder to treat any gain
  realized on the disposition of his ordinary shares as capital gain.

Once made, the QEF election
applies to all subsequent taxable years of the U.S. holder in which it holds
our ordinary shares and for which we are a PFIC and can be revoked only with
the consent of the Internal Revenue Service. A shareholder makes a QEF election
by attaching a completed Internal Revenue Service Form 8621, including the
information provided in the PFIC annual information statement, to a timely
filed United States federal income tax return. Even if a QEF election is not
made, a U.S. person who is a shareholder in a PFIC must file a completed
Internal Revenue Service Form 8621 every year.

If a QEF election is made
after the first taxable year in which a U.S. holder holds our ordinary shares
and we are a PFIC, then special rules would apply.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A second regime, the
  mark-to-market regime, may be elected so long as our ordinary shares are
  publicly traded. Pursuant to this regime, an electing U.S. holders ordinary
  shares are marked-to-market each year and the U.S. holder recognizes as
  ordinary income or loss an amount equal to the difference as of the close of
  the taxable year between the fair market value of our ordinary shares and the
  U.S. holders adjusted tax basis in our ordinary shares. Losses are allowed
  only to the extent of net mark-to-market gain previously included by the U.S.
  holder under the election for prior taxable years. An electing U.S. holders
  adjusted basis in our ordinary shares is increased by income recognized under
  the mark-to-market election and decreased by the deductions allowed under the
  election.

Under the mark-to-market
election, gain on the sale of our ordinary shares is treated as ordinary
income, and loss on the sale of our ordinary shares, to the extent the amount
of loss does not exceed the net mark-to-market gain previously included, is
treated as ordinary loss. The mark-to-market election applies to the tax year
for which the election is made and all later tax years, unless the ordinary
shares cease to be marketable or the Internal Revenue Service consents to the
revocation of the election.

If the mark-to-market
election is made after the first taxable year in which a U.S. holder holds our
ordinary shares and we are a PFIC, then special rules would apply.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A U.S. holder making
  neither the QEF election nor the mark-to-market election is subject to the
  excess distribution regime. Under this regime, excess distributions are
  subject to special tax rules. An excess distribution is either (1) a
  distribution with respect to our ordinary shares that is greater than 125% of
  the average distributions received by the U.S. holder from us over the
  shorter of either the preceding three years or such U.S. holders holding
  period for our ordinary shares, or (2) 100% of the gain from the
  disposition of our ordinary shares.

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Excess distributions must
be allocated ratably to each day that a U.S. holder has held our ordinary
shares. A U.S. holder must include amounts allocated to the current taxable
year in its gross income as ordinary income for that year. All amounts
allocated to prior years of the U.S. holder would be taxed at the highest tax
rate for each such prior year applicable to ordinary income. The U.S. holder
also would be liable for interest on the deferred tax liability for each such
prior year calculated as if such liability had been due with respect to each
such prior year. A U.S. holder that is an individual is not allowed a deduction
for interest on the deferred tax liability. The portions of gains and
distributions that are not characterized as excess distributions are subject
to tax in the current year under the normal tax rules of the Code.

A U.S. person who inherits
shares in a foreign corporation that was a PFIC in the hands of the decedent
(who did not make either of the elections described above), is denied the
otherwise available step-up in the tax basis of such shares to fair market
value at the date of death. The U.S. person steps into the shoes of the
decedent and will be subject to the rules described above.

Based
on an analysis of our assets and income, we believe that we were not a PFIC for
our tax year ended December 31, 2004. We currently expect that we will not
be a PFIC in 2005. However, PFIC status is determined as of the end of the
taxable year and is dependent on a number of factors, including the relative
value of our passive assets and our
non-passive assets, our market capitalization and the amount and type of our
gross income. There can be no assurance that we will not become a PFIC for the
current year ending December 31, 2005 or in a future year. We will notify
U.S. holders in the event we conclude that we will be treated as a PFIC for any
taxable year to enable U.S. holders to consider whether or not to elect to
treat us as a QEF for U.S. federal income tax purposes or to mark to market
the ordinary shares or to become subject to the excess distribution regime,
and we expect that in such event we will provide U.S. holders with the
information needed to make a QEF election.

Although
a U.S. holder normally is not permitted to make a retroactive QEF election, a
retroactive election may be made for a taxable year of the U.S. holder (the
retroactive election year) if the U.S. holder (i) reasonably believed
that, as of the date the QEF election was due, the foreign corporation was not
a PFIC for its taxable year that ended during the retroactive election year and
(ii) filed a protective statement with respect to the foreign corporation,
applicable to the retroactive election year, in which the U.S. holder described
the basis for its reasonable belief and extended the period of limitation on
the assessment of taxes determined under Sections 1291 through 1298 of the Code
with respect to the foreign corporation (PFIC-related taxes) for all taxable
years of the shareholder to which the protective statement applies. U.S.
holders should consult their tax advisors regarding the advisability of filing
a protective statement.

U.S.
holders are urged to consult their tax advisors regarding the application of
the PFIC rules, including eligibility for and the manner and advisability of
making, the QEF election or the mark-to-market election.

Information Reporting and Backup Withholding

A
U.S. holder generally is subject to information reporting and may be subject to
backup withholding at rate of up to 28% with respect to dividends paid in the
United States on, and the receipt of the proceeds from the disposition of, the
ordinary shares. Backup withholding will not apply with respect to payments
made to exempt recipients, including corporations and tax-exempt organizations,
or if a U.S. holder provides a correct taxpayer identification number (or
certifies that he has applied for a taxpayer identification number), certifies
that such holder is not subject to backup withholding or otherwise establishes
an exemption. Backup withholding is not an additional tax and may be claimed as
a credit against the U.S. federal income tax liability of a U.S. holder, or
alternatively, the U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue Service.

Non-U.S. Holders of Ordinary Shares

Except
as described below, a non-U.S. holder of ordinary shares (except certain former
U.S. citizens and long-term residents of the United States) will not be subject
to U.S. federal income or withholding tax on the receipt of dividends on, and
the proceeds from the disposition of, an ordinary share, unless that item is
effectively connected with the conduct by the non-U.S. holder of a trade or
business in the United States and, in the case of a resident of a country which
has an income tax treaty with the United States, that item is attributable to a
permanent establishment in the United States or, in the case of an individual,
a fixed place of business in the United States. In addition, gain recognized by
an individual non-U.S. holder will be subject to tax in the United States if
the non-U.S. holder is present in the United States for 183 days or more
in the taxable year of the sale and other conditions are met.

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Non-U.S.
holders will not be subject to information reporting or backup withholding with
respect to the payment of dividends on ordinary shares unless the payment is
made through a paying agent, or an office of a paying agent, in the United
States. Non-U.S. holders will be subject to information reporting and backup
withholding at a rate of up to 28% with respect to the payment within the
United States of dividends on the ordinary shares unless the holder provides
its taxpayer identification number, certifies to its foreign status or
otherwise establishes an exemption.

Non-U.S.
holders will be subject to information reporting and backup withholding at a
rate of up to 28% on the receipt of the proceeds from the disposition of the
ordinary shares to, or through, the United States office of a broker, whether
domestic or foreign, unless the holder provides a taxpayer identification
number, certifies to its foreign status or otherwise establishes an exemption.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the receipt of proceeds from the disposition of the
ordinary shares by a foreign office of a broker; provided, however, that if the
broker is a U.S. person or a U.S. related person, information reporting (but
not backup withholding) will apply unless the broker has documentary evidence
in its records of the non-U.S. holders foreign status or the non-U.S. holder
certifies to its foreign status under penalties of perjury or otherwise
establishes an exemption. For this purpose, a U.S. related person is a broker
or other intermediary that maintains one or more enumerated U.S. relationships.
Backup withholding is not an additional tax and may be claimed as a credit
against the U.S. federal income tax liability of a non-U.S. holder, or
alternatively, the non-U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue Service.

ISRAELI TAXATION

The
following summary describes the current tax structure applicable to companies
in Israel, with special reference to its effect on us. It also discusses
Israeli tax consequences material to persons purchasing our ordinary shares. We
recommend that you consult your tax advisor as to the particular tax
consequences of an investment in our ordinary shares.

General Corporate Tax Structure

Most
Israeli companies are subject to corporate tax at the rate of 34% of their taxable
income.However, pursuant to an amendment to the law passed on June 29, 2004
the corporate tax rate is to be reduced to 32% for the 2006 tax year and 30%
for the 2007 tax year and thereafter. Furthermore the Israeli Minster of Finance has recently proposed a new
tax five-year tax program, under which the Corporate tax rate will be reduced
to 25% by the year 2009 and the capital gains tax will be increased to 20% by January 2006, this proposal has
yet to be approved by the Israeli Government and by the Knesset (Israeli
parliament).In our case, the
rate is currently effectively reduced, as set forth below.

Taxation Under Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary
Adjustments Law, is intended to neutralize the erosion of capital investments
and to prevent tax benefits resulting from deduction of inflationary expenses.
This law applies a supplementary set of inflationary adjustments to the normal
taxable profits and losses computed under the regular cost principles. We are
subject to tax under this law.

Under
the Inflationary Adjustments Law, income and loss for tax purposes are adjusted
for inflation on the basis of changes in the Israeli consumer price index. In
addition, subject to limitations regarding depreciation of fixed assets and
losses carried forward are adjusted for inflation on the basis of changes in
the Israeli consumer price index. Under a recent amendment to the Inflationary
Adjustment Law, the Minister of Finance is authorized, with the approval of the
Finance Committee of the Israeli parliament, to suspend the application of the
Inflationary Adjustment Law for any particular year if the rate of inflation
for that year was not higher than 3%. The Inflationary Adjustment Law was not
suspended in 2002, 2003 or in 2004.

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Law for the Encouragement of Capital Investments, 1959

General.

The
Law for Encouragement of Capital Investments, 1959, or the Investment Law, sets
a number of alternative courses for receiving benefits which encourage
investments in companies that meet the criterions set forth in the Investment
Law. An Approved Enterprise may be entitled to benefits, including Israeli
Government cash grants, which are made available if it is located in a
government designated development area, and tax benefits. As discussed below,
our production facilities have been granted Approved Enterprise status.

A company could forgo
entitlement to grants otherwise available under the Investment Law, and in lieu
thereof participate in the Alternative Benefits course, under which the
undistributed income from the Approved Enterprise is fully exempt from
corporate tax for a certain period, depending on the geographical region of
Israel in which the Approved Enterprise is located. We chose and
received approvals within the Alternative Benefit course. The Investment Law
was amended in April 1st, 2005, and the Alternative Benefit program
was cancelled. Nonetheless, Alternative Benefit programs, which were approved
by the end of 2004 shall continue to be in full force and effect.

Each
certificate of approval for an Approved Enterprise relates to a specific
investment program, delineated both by the financial scope of the investment
and by the physical characteristics of the facility or the asset. The tax
benefits from any such certificate of approval relate only to taxable profits
attributable to the specific Approved Enterprise.

Tax Benefits.

Taxable income derived from
an Approved Enterprise is subject to a reduced corporate tax rate of up to 25%,
until the earlier of

| |   |                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the end of the seven year
  period or ten in case of a Foreign Investment Company as defined below or 10
  year period in the case of an enterprise located in geographical Zone A, commencing
  in the year in which the Approved Enterprise first generates taxable income;
| |   |                                                                                                                                                                                                                                                                                
| |  | the end of the 12-year
  period from commencement of production; or                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                
| |  | the end of the 14-year
  period from the date of approval of the Approved Enterprise status.                                                                                                                                                                                   

That
income is eligible for further reductions in tax rates if the company qualifies
as a Foreign Investors Company, depending on the percentage of the foreign
ownership of its equity. A Foreign Investors Company is a company more than
25% of whose share capital (in terms of shares, rights to profits, voting and
appointment of directors) and loan capital is owned by non-Israeli residents.

The
tax rate is reduced to 20% if the foreign ownership of the foreign investment
company is 49% or more but less than 74%; 15% if the foreign ownership of the
Foreign Investors Company is 74% or more but less than 90%; and 10% if the
foreign ownership of the Foreign Investors Company is 90% or more. The
determination of foreign ownership is made on the basis of the lowest level of
foreign ownership during the tax year.

In
the event that a company is operating under more than one approval, or that not
all of its capital investments are approved, its effective corporate tax rate
is the result of a weighted combination of the various applicable rates.

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As
we participate in the Alternative Benefits course, and, as our facilities are
located in geographical Zone A, the most preferred region in Israel for
Approved Enterprise purposes, we are exempt from corporate tax for a period of
ten years from the date the first taxable income has been derived from each
Approved Enterprise but not later than the earlier
of the 12 year period from commencement of production or 14 year period from
the date of approval of the Approved Enterprise status. We have received five
Approved Enterprise approvals for the establishment and expansions of our
facilities, the first of which expired in 1999 and the others will expire
between the end of 2007 and the end of year 2014.

The
benefits available to an Approved Enterprise are conditioned upon terms
stipulated in the Investment Law and the regulations thereunder and the
criteria set forth in the applicable certificate of approval. These conditions
include the filing of periodic reports and a requirement that minimum
proportions of our paid-up capital be 30% of our fixed assets. In the event
that we do not fulfill these conditions in whole or in part, the benefits can
be canceled and we may be required to refund the amount of the benefits, with
the addition of the Israeli consumer price index linkage differences and
interest. We believe that our Approved Enterprises currently operate in
compliance with all applicable conditions and criteria, but there can be no
assurance that they will continue to do so. These programs and tax benefits may
not be continued in the future at their current levels or at any level or our
requests for future participation in these programs may not be approved.

Tax Rates
imposed on dividends

Dividends
paid by a company that owns an Approved Enterprise and that are attributable to
income derived from that Approved Enterprise during the applicable benefits
period, are taxed at a reduced rate of 15%, if the dividends are paid during
the benefit period or no more than twelve years thereafter; or, if the company
qualifies as a Foreign Investors Company without any time limitations. This
tax must be withheld at source by the company paying the dividend. A dividend paid
from income derived from an enterprise owned by a company that has elected the
Alternative Benefits Program during the period in which it is exempt from tax
is also subject to tax at a 15% rate but causes the company to be liable for
additional corporate tax on the amount distributed, at the rate that would have
been applicable had the company not elected the Alternative Benefits Program
(which is up to 25%).

The
amendment to the Investment Law

On
April 1, 2005, an amendment to the Investments Law came into force. In order to
be recognized as owning a Approved Enterprise, a company is required to meet a
number of conditions set forth in the amendment, including making a minimal
investment in manufacturing assets for the Approved Enterprise and receiving a
minimal rate of 25% of the gross revenues from certain market which has a
population of at least 12 million people. Pursuant to the amendment, a company
with a Approved Enterprise is entitled, in to accelerated depreciation for the
manufacturing assets used by the Approved Enterprise and to certain tax
benefits. As we are located in geographical Zone A, if we will invest the
minimal investment abovementioned and we shall still meet the other criteria
set forth in the Investment Law, we will be exempt from income tax for a period
of up to 10 years.

Another
special tax course enabling companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the
Approved Enterprise. The benefits period is ten years. Upon payment of
dividends, the company is required to withhold tax at source at a rate of 15%
for Israeli residents and at a rate of 4% for foreign residents. The amendment
changes the definition of foreign investment in the Investments Law so that
instead of an investment of foreign currency in the company, the definition now
requires a minimal investment of NIS 5 million by foreign investors.
Furthermore, such definition now also includes the purchase of shares of a company
from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million.

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Law for the Encouragement of Industry (Taxes), 1969

We
believe that we currently qualify as an Industrial Company within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry
Encouragement Law. According to the Industry Encouragement Law, an Industrial
Company is a company resident in Israel, 90% or more of the income of which in
any tax year, other than of income from defense loans, capital gains, interest
and dividends, is derived from an Industrial Enterprise owned by it. An
Industrial Enterprise is defined as an enterprise whose major activity in a
given tax year is industrial production.

The
following corporate tax benefits are available to Industrial Companies:

| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amortization of the cost
  of purchased know-how and patents over an eight-year period for tax purposes;                                        
| |   |                                                                                                                                                 
| |  | amortization of expenses
  incurred in some cases in connection with a public issuance of publicly
  traded securities over a three-year period;
| |   |                                                                                                                                                 
| |  | accelerated depreciation
  rates on equipment and buildings.                                                                                    

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. No assurance can be given
that we qualify or will continue to qualify as an Industrial Company or that
the benefits described above will be available in the future.

Law for
the Encouragement of Industrial Research and Development, 1984

Under
the Law for the Encouragement of Industrial Research and Development, 1984,
research and development programs approved by a governmental committee of the
Office of the Chief Scientist are eligible for grants, in exchange for payment
of royalties from revenues generated by the products developed in accordance
with the program. Once a project is approved, the Office of the Chief Scientist
will award grants between 20-50% of the projects approved budget, in exchange
for royalties at a rate of 2% to 6%, depending on the date of approval of the
project, of the proceeds from the sales of the products that are developed from
projects funded by the Office of the Chief Scientist. These royalties must be
paid beginning with the commencement of sales of those products and ending when
100% of the dollar value of the grant was repaid or, for projects approved
after January 1, 1999, the dollar amount of the grant plus interest at the
rate LIBOR for dollar deposits in a twelve-month period.

The
terms of this Israeli governmental participation also require that the products
developed with government grants be manufactured in Israel, unless a special
governmental committee, in its discretion consents to manufacturing abroad. In
addition, in the event that any of the manufacturing rights are sold or
transferred to parties or performed outside of Israel, if approved by the
special governmental committee, a company may be required to pay royalties at a
higher rate and be liable to an increased aggregate pay back amount depending
on the portion of manufacturing performed outside of Israel, up to a maximum of
300% of the dollar amount of the grant. Prior to the recent amendment of the
law, the technology developed pursuant to the terms of these grants could not
have been sold or transferred outside of Israel under any circumstances, and
could not have been sold or transferred to third parties within Israel without
the prior approval of the governmental committee. However, pursuant to an
amendment of the law, which entered into force on March 30th, 2005,
the special governmental committee may, in special cases, approve the transfer
or sale of the technology outside of Israel. Such sale or transfer, even if approved,
may impose on a company a substantial payment, which generally may be as high
as the amount of the grants received by a company, increased in proportion to
the increase of the value of the technology or the company less any royalty
payments already paid to the government. This approval is not required for the
export of any products resulting from that research development. Approval of
the sale or transfer of technology within Israel may be granted only if the
recipient abides by all of the provisions of this law and the regulations
promulgated thereunder, including the restrictions on the sale or transfer of
know-how and the obligation to pay royalties in an amount that may be
increased. There can be no assurance that this consent, if requested, will be
granted.

Each
application to the Office of the Chief Scientist is reviewed separately, and
grants are based on the program approved by the research committee of the
Office of the Chief Scientist. Expenditures supported under other incentive programs
of the State of Israel are not eligible for Office of the Chief Scientist
grants.

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In
March 2001, we reached an arrangement with the Chief Scientist whereby
were to repay the outstanding balance of the grants we received, not including
grants received by Inspectech prior to its merger into us, at a quarterly rate
equal to 4.5% of the revenues derived in connection with products we develop as
a result of research and development funded by Chief Scientist participations,
up to a maximum amount of $250,000 per quarter. We have not received any
additional grants from the Office of the Chief Scientist since 2000, and As of
June 1, 2005 we had no additional payment obligations in connection with
these grants.

Net Operating Loss Carryover

As
of December 31, 2004, we had net operating loss, or NOL, carryovers for
Israeli tax purposes of approximately $5.1 million which may be used to
offset taxable income, subject to annual limitations. This NOL carryover has no
expiration date.

Taxation of Shareholders Capital Gains

Israeli
law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between the Real Gain and the Inflationary Surplus. The Real
Gain is the difference between the total capital gain and the Inflationary
Surplus. The Inflationary Surplus is computed on the basis of the difference
between the Israeli consumer price index in the month of sale and the month of
purchase. The Inflationary Surplus accumulated after January 1, 1994 is exempt
from capital gains tax. A foreign resident may reduce the tax rate used for the
Inflationary Surplus to zero if calculated according to the exchange rate of
the foreign currency lawfully invested in shares of the Israeli resident
company, instead of the Israeli consumer price index. Real Gains accrued after
January 1, 2003 are subject to capital gains tax of 25%, whereas assets
acquired before January 1, 2003 are subject to a blended tax rate based on
the relative periods of time that the assets were held before and after
January 1, 2003. Real Gains derived on or after January 1, 2003 from
the sale of ordinary shares traded on the Tel Aviv Stock Exchange or on a
foreign stock exchange recognized by the Israeli Ministry of Finance are subject
to capital gains tax of 15%. However, the Israeli Minster of Finance has
recently proposed a new five-year tax program, under which capital gains tax will be increased to 20% by January
2006.This proposal has yet to be approved by the Israeli Government and by the
Knesset (Israeli parliament). Non-residents are generally exempt from tax on
gains from the sale of such shares, provided that the Real Gains are not
derived by a non-residents permanent establishment in Israel. We note that
Nasdaq was recognized by the Israeli Ministry of Finance as a foreign stock
exchange.

Application of the U.S.-Israel Tax Treaty to Capital Gains
Tax

Subject
to the U.S.-Israel Tax Treaty, the sale, exchange or disposition of the
ordinary shares by a person who qualifies as a resident of the United States
and who is entitled to claim the benefits afforded to that resident, which is
called a Treaty U.S. Resident, will not be subject to Israeli capital gains tax
unless that Treaty U.S. Resident held, directly or indirectly, shares
representing 10% or more of our voting power during any part of the 12-month
period preceding the sale, exchange or disposition. A sale, exchange or
disposition of the ordinary shares by a Treaty U.S. Resident who held, directly
or indirectly, shares representing 10% or more of our voting power at any time
during the 12-month period preceding the sale, exchange or disposition will be
subject to Israeli capital gains tax, to the extent applicable. However, under
the U.S.-Israel Tax Treaty, this Treaty U.S. Resident would be permitted to
claim credit for these taxes against U.S. income tax imposed with respect to
such sale, exchange or disposition, subject to the limitations set in U.S. laws
applicable to foreign tax credits.

Taxation of Non-Residents on Receipt of Dividends

Nonresidents
of Israel are subject to Israeli income tax on the receipt of dividends paid on
the ordinary shares at the rate of 25%, which tax will be withheld at source,
unless the dividends are paid from income derived from an Approved Enterprise
during the applicable benefit period, or a different rate is provided in a
treaty between Israel and the shareholders country of residence. Under the
U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of the
ordinary shares who is a Treaty U.S. Resident will be 25%. However, when
dividends are paid from income derived during any period for which the Israeli
company is not entitled to the reduced tax rate applicable to an Approved
Enterprise under Israels Law for the Encouragement of Capital
Investments-1959, the maximum tax will be 12.5% if the holder is a company
holding shares representing 10% or more of the voting power during the part of
the taxable year preceding the date of payment of dividends and during the whole
of its prior taxable year, if any, and, if the company has not derived more
then 25% of its revenues from passive income. When dividends are paid from
income derived during any period for which the Israeli company is entitled to
the reduced tax rate applicable to an Approved Enterprise, then the tax will be
15%.

55

---

---



F.       Dividends and Paying Agents.

Not
applicable.

G.      Statement by Experts.

Not
applicable.

H.      Documents on Display.

We
file annual and special reports and other information with the Securities and
Exchange Commission, or SEC. You may inspect and copy such material at the
public reference facilities maintained by the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of such material from the
SEC at prescribed rates by writing to the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room.

The
SEC maintains an Internet Web site at http://www.sec.gov that contains reports
and other material that are filed through the SECs Electronic Data Gathering,
Analysis and Retrieval, or EDGAR, system.

Our
ordinary shares are quoted on the NASDAQ National Market. You may inspect
reports and other information concerning us at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Information about us is also available on our Web site at http://www.camtek.co.il.
Such information on our Web site is not part of this annual report.

As
a foreign private issuer, we are exempt from the rules under the Securities
Exchange Act of 1934, as amended, or Exchange Act, prescribing the furnishing
and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange
Act to file periodic reports and financial statements with the SEC as
frequently or as promptly as United States companies whose securities are
registered under the Exchange Act. A copy of each report submitted in
accordance with applicable United States law is available for public review at
our principal executive offices.

I.Subsidiary
Information.

Not
applicable.

|         |                                                             
|-------- | ------------------------------------------------------------
|Item 11. | Quantitative
  and Qualitative Disclosures About Market Risk

Interest
Rate Risk

We
currently do not hold or invest in derivative financial instruments for trading
or other purposes and, as of December 31, 2004, we had no outstanding
derivative financial instruments of any kind. We have no material market risk
exposure of the type contemplated by Item 11, and, therefore, no quantitative
tabular disclosures are required.

56

---

---



Our
non-NIS denominated loans bear interest based on the LIBOR, and our NIS
denominated loans are based on the Israeli prime interest rate. From time to
time, we use short-term loans. As of December 31, 2004, our short-term loans
were US Dollar denominated.

Most
of our investments are compromised of short-term bank deposits which bear fixed
interest rates.

Foreign
Currency Rate Fluctuations

The
currency of the primary economic environment in which our operations are
conducted is the dollar. Most of our revenues are derived in dollars, and the
prices of most of our materials and components are purchased in dollars or are
linked to changes in the dollar/NIS exchange rate effective on the date of
delivery of the goods to our factory. Most of our marketing expenses are also
denominated in dollars or are dollar linked. Our product prices in most
countries outside of Europe and Japan are denominated in dollars. However, most
of our service income is denominated in local currency. In Europe or Japan, if
there is a significant devaluation in the local currency as compared to the
dollar, the prices of our products will increase relative to that local
currency and may be less competitive. The opposite effect occurs when the dollar
decreases in value in comparison to these currencies, which was the case in
2003. As the majority of our revenues are denominated in dollars, we believe
that inflation and fluctuations in the NIS/dollar exchange rate have no
material effect on our revenues. However, a portion of the costs of our Israeli
operations, mainly personnel and facility-related, are incurred in NIS. As a
result, we bear the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the dollar, which will increase
our costs expressed in dollars and have an effect on our net income. Our NIS
costs, as expressed in dollars, increase to the extent by which any increase in
the rate of inflation in Israel is not offset, or is offset on a lagging basis,
by a devaluation of the NIS in relation to the dollar or to the extent that the
NIS appreciates in relation to the dollar.

An
increasing portion of our expenses is incurred in the Peoples Republic of
China. The Chinese currency is currently linked to the dollar. The Chinese
government has been under increasing international pressure to permit the Yuan
to enter a full or limited free float. Should this linkage be discontinued by
the Chinese government, and if the Chinese currency rises in value in relation
to the dollar, our results of operations, in dollar terms, would be adversely
affected.

In
our consolidated financial statements, transactions and balances originally
denominated in dollars are presented at their original amounts. Gains and
losses arising from non-dollar transactions and balances are included in the
determination of net income as part of financial expenses, net.

Currently,
we do not engage in hedging or other transactions intended to manage risks relating
to foreign currency exchange rate or interest rate fluctuations.

Our
balance sheet exposure to fluctuations in the exchange rate between the U.S.
dollar and other currencies are primarily from NIS denominated balances. As of
December 31, 2004, we had net liabilities of approximately $9.8 million,
denominated in NIS. Any fluctuation in the exchange rate between the NIS and
the U.S. dollar of 1% will cause us expenses of $98,000 or income for the same
amount in case of evaluation or devaluation, respectively.

|                  |                                                          
|----------------- | ---------------------------------------------------------
|Item 12.          | Description
  of Securities Other than Equity Securities.
|                  |                                                          
|Not
  applicable.

PART II

|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Defaults,
  Dividend Arrearages and Delinquencies.
|         |                                                   
|None.   

57

---

---



|                  |                                                                                
|----------------- | -------------------------------------------------------------------------------
|Item 14.          | Material
  Modifications to the Rights of Security Holders and Use of Proceeds.
|                  |                                                                                
|Not
  Applicable.
|                  |                                                                                
|Item 15.          | Controls
  and Procedures                                                      

We
have established disclosure controls and procedures to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to the officers who certify our financial reports and to other members of
senior management and the Board of Directors.

Our
chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended) as of
December 31, 2004, have concluded that, as of such date, our disclosure
controls and procedures were effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported within the
periods specified by the SECs rules and forms.

There
have been no changes in our internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of 1934,
as amended) during the period covered by this report that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

|          |                                   
|--------- | ----------------------------------
|Item 16A. | Audit
  Committee Financial Expert

Our
board of directors has determined that each of Messrs. Eran Bendoly and Haim
Horovitz is qualified as an audit committee financial expert as defined in
Item 401(h) of Regulation S-K.

|          |                 
|--------- | ----------------
|Item 16B. | Code of
  Ethics

On
May 3, 2004, we adopted a Code of Ethics
which is applicable to all of our directors, officers and employees, including
our principal executive, financial and accounting officers and persons
performing similar functions. A
copy of the Code of Conduct is available on our website, www.camtek.co.il. We
will also provide a copy of the Code of Ethics to any person, without charge,
upon written request addressed to our Chief Financial Officer at our corporate
headquarters in Israel.

|          |                                         
|--------- | ----------------------------------------
|Item 16C. | Principal
  Accounting Fees and Services

Our
Audit Committee maintains a policy of approving and recommending only those
services to be performed by our external auditors which are permitted under the
Sarbanes-Oxley Act of 2002 and the applicable rules of the Securities and
Exchange Commission relating to auditors independence, and which are otherwise
consistent with and will encourage, and are remunerated at levels that accord
with, the basic principles of auditor independence.

The
following table presents the aggregate amount of fees paid by the Company to
each of Goldstein Sabo Tevet and Brightman Almagor & Co., a member firm of
Deloitte Touche Tohmatsu, for their services to the Company for the year ended
December 31, 2004:

58

---

---



| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | ------------------ |  | -------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------- |  | - | ------ |  | 
| | Fee
  Category     |  | Fees Paid
  to Goldstein Sabo Tevet for
  the Year Ended December 31, 2004 |        | Fees Paid
  to Brightman Almagor &
  Co. for the Year Ended December 31, 2004 | 
| |                    |  |                                                                            |        |                                                                               | 
| |                    |  |                                                                            |        |                                                                               | 
| | Audit Fees         |  | $                                                                          | 35,000 |                                                                               |  | $ | 45,000 |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | Audit-Related Fees |  | $                                                                          | 25,000 |                                                                               |  | $ | 52,000 |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        | 
| | Tax Fees           |  | $                                                                          | 10,000 |                                                                               |  |   |       |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        | 
| | All Other Fees     |  | $                                                                          | 8,000  |                                                                               |  |   |       |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        | 
| |                    |  |                                                                            |        |                                                                               |  |   |        | 
| | Total Fees         |  | $                                                                          | 78,000 |                                                                               |  | $ | 97,000 |  | 

The
following table presents the aggregate amount of fees paid by the Company to
each of Goldstein Sabo Tevet CPA and Brightman Almagor & Co., a member firm
of Deloitte Touche Tohmatsu, for their services to the Company for the year
ended December 31, 2003:

| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | ------------------ |  | -------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------- |  | - | ------ |  | 
| | Fee
  Category     |  | Fees Paid
  to Goldstein Sabo Tevet for
  the Year Ended December 31, 2003 |        | Fees Paid
  to Brightman Almagor &
  Co. for the Year Ended December 31, 2003 | 
| |                    |  |                                                                            |        |                                                                               | 
| |                    |  |                                                                            |        |                                                                               |  |   |       
| | Audit Fees         |  | $                                                                          | 35,000 |                                                                               |  | $ | 40,000 |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | Audit-Related Fees |  | $                                                                          | 10,000 |                                                                               |  |   |       |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | Tax Fees           |  | $                                                                          | 10,000 |                                                                               |  |   |       |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | All Other Fees     |  | $                                                                          | 10,000 |                                                                               |  |   |       |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| |                    |  |                                                                            |        |                                                                               |  |   |        |  | 
| | Total Fees         |  | $                                                                          | 65,500 |                                                                               |  | $ | 40,000 |  | 

Audit Fees: Consists of the aggregate fees billed for professional services
rendered for the audit of the our annual financial statements and services that
are normally provide by independent auditors in connection with statutory and
regulatory filings or engagements.

Audit RelatedFees: Consists of the aggregate fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements and are not reported under Audit Fees. These
services include the review of interim financial statements.

Tax Fees: Consists of the aggregate fees billed for professional services
rendered for tax compliance, tax advice and tax planning. These services
include assistance regarding income tax and international tax compliance.

All Other Fees: Consists of the aggregate fees billed for products and services other
than the services reported above. These services include consultations
concerning financial accounting and reporting standards in view of the
accounting policies required by the various governmental agencies.

|          |                                                              
|--------- | -------------------------------------------------------------
|Item 16D. | Exemptions
  from the Listing Standards for Audit Committees.

Not
yet applicable to registrant.

|         |                                                                          
|-------- | -------------------------------------------------------------------------
|Item 16E | Purchases
  of Equity Securities by the Issuer and Affiliated Purchasers.

Not
yet applicable to registrant.

59

---

---



PART III

|         |                                     
|-------- | ------------------------------------
|Item 17. | Consolidated
  Financial Statements.

The
Company has elected to furnish financial statements and related information
specified in Item 18.

|         |                                     
|-------- | ------------------------------------
|Item 18. | Consolidated
  Financial Statements.

The
financial statements required by this item are found at the end of this annual
report, beginning on page F-1.

60

---

---



|            |           |         |                                                                                                                                                                                                                                                                                                                                       | 
|----------- | --------- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Item 19.    | Exhibits.
|            |          
|Exhibit No. |           | Exhibit
|            |           |         |                                                                                                                                                                                                                                                                                                                                      
|            |           |        
|1.1         |           |         | Memorandum
  of Association of Registrant (incorporated herein by reference to Exhibit 3.1
  to Amendment No. 1 to the Registrants Registration Statement on Form
  F-1, File No. 333-12292, filed with the Securities and Exchange
  Commission on July 21, 2000).                                                                
|1.2         |           |         | Articles of
  Registrant (incorporated herein by reference to Exhibit 3.2 to Amendment No.
  1 to the Registrants Registration Statement on Form F-1, File No.
  333-113208, filed with the Securities and Exchange Commission on April 5,
  2004).                                                                                 
|4.1         |           |         | Amended and
  Restated Employee Share Option Plan (incorporated herein by reference to
  Exhibit 10.1 to the Registrants Registration Statement on Form S-8, File No.
  333-84476, filed with the Securities and Exchange Commission on March 18,
  2002).                                                                          
|4.2         |           |         | Amended and
  Restated Subsidiary Employee Option Plan (incorporated herein by reference to
  Exhibit 10.2 to the Registrants Registration Statement on Form S-8, File No.
  333-84476, filed with the Securities and Exchange Commission on March 18,
  2002).                                                                     
|4.3         |           |         | Employee
  Share Option Plan  Europe (incorporated herein by reference to Exhibit 10.3
  to the Registrants Registration Statement on Form S-8, File No. 333-49982,
  filed with the Securities and Exchange Commission on November 15, 2000).                                                                                     
|4.4         |           |         | Executive
  Share Option Plan (incorporated herein by reference to Exhibit 10.4 to the
  Registrants Registration Statement on Form S-8, File No. 333-60704, filed
  with the Securities and Exchange Commission on May 11, 2001).                                                                                                  
|4.5         |           |         | 2003 Share
  Option Plan (incorporated herein by reference to Exhibit 10.1 to the
  Registrants Registration Statement on Form S-8, File No. 333-113139, filed
  with the Securities and Exchange Commission on February 27, 2004).                                                                                                 
|4.6         |           |         | Sub-Plan for
  Grantees Subject to United States Taxation (incorporated herein by reference
  to Exhibit 10.2 to the Registrants Registration Statement on Form S-8, File
  No. 333-113139, filed with the Securities and Exchange Commission on February
  27, 2004).                                                              
|4.7         |           |         | Sub-Plan for
  Grantees Subject to Israeli Taxation (incorporated herein by reference to
  Exhibit 10.3 to the Registrants Registration Statement on Form S-8, File
  No. 333-113139, filed with the Securities and Exchange Commission on February
  27, 2004).                                                                    
|4.8         |           |         | Form of
  Indemnification Agreement (incorporated herein by reference to Exhibit 10.10
  to Amendment No. 1 to the Registrants Registration Statement on Form F-1,
  File No. 333-12292, filed with the Securities and Exchange Commission on July
  21, 2000).                                                                     
|4.9         |           |         | Registration
  Rights Agreement, by and between the Registrant and Priortech Ltd., dated
  March 1, 2004 (incorporated herein by reference to Exhibit 10.9 to
  Amendment No. 1 to the Registrants Registration Statement on Form F-1, File
  No. 333-113208, filed with the Securities and Exchange Commission on April 5,
  2004).
|4.10        |           |         | Registration
  Rights Amended and Restated Agreement by and between the Registrant and
  Priortech Ltd., dated December 30, 2004.                                                                                                                                                                                                    
|8.1         |           |         | Subsidiaries
  of the Registrant (incorporated herein by reference to Exhibit 21.1 to
  Amendment No. 1 to the Registrants Registration Statement on Form F-1, File
  No. 333-12292, filed with the Securities and Exchange Commission on July 21,
  2000).                                                                         
|12.1        |           |         | Certification
  of Chief Executive Officer required by Rules 13a-14(a) and Rule 15d-14(a)
  under the Securities Exchange Act of 1934, as amended.*                                                                                                                                                                                  
|12.1        |           |         | Certification
  of Chief Financial Officer required by Rules 13a-14(a) and Rule 15d-14(a)
  under the Securities Exchange Act of 1934, as amended.*                                                                                                                                                                                  
|13.1        |           |         | Certification
  of the Chief Executive Officer and Chief Financial Officer pursuant to 18
  U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
  Act of 2002.*                                                                                                                                             
|14.1        |           |         | Consent of
  Eisner LLP, an independent member of Baker Tilly International, and Goldstein
  Sabo Tevet.*                                                                                                                                                                                                                            
|14.2        |           |         | Consent of
  Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu, and
  Goldstein Sabo Tevet.*                                                                                                                                                                                                                        

---

          English
translations from Hebrew original.

*          Filed
herewith.

61

---

---



SIGNATURES

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

|                    |                                  | 
|------------------- | -------------------------------- | 
|                    | CAMTEK
  LTD.                   
|                    |                                 
|                    | By: /s/ Rafi Amit               
|                    |                                  | 
|                    | Name: Rafi Amit                 
|                    | Title: Chief Executive
  Officer
|                    |                                 
|Date: June 30, 2005 |                                 

62

---

---



INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                                             |            
|-------------------------------------------------------------------------------------------- | -----------
|                                                                                             | Page       
|                                                                                             |            
|                                                                                             |            
|Independent
  auditors report for the years 2003 and 2004                                   | F2        
|                                                                                             |            
|Independent
  auditors report for the year 2002                                             | F3        
|                                                                                             |            
|Consolidated Balance Sheets                                                                  | F4        
|                                                                                             |            
|Consolidated Statements of Operations                                                        | F5        
|                                                                                             |            
|Consolidated Statements of Changes in Shareholders Equity And
  comprehensive Income (Loss) | F6        
|                                                                                             |            
|Consolidated Statements of Cash Flows                                                        | F7        
|                                                                                             |            
|Notes to consolidated financial statements as of December 31, 2004                           | F8 to F26

F1

---

---



INDEPENDENT
AUDITORS REPORT

To
the Shareholders and Board of Directors
Camtek Ltd.

We
have audited the accompanying consolidated balance sheets of Camtek Ltd.
(the Company) and its subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, shareholders equity and
comprehensive income (loss) and cash flows for each of the two years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of December 31,
2004 and 2003 and the consolidated results of their operations, and their
consolidated cash flows for each of the two years in the period ended December
31, 2004, in conformity with U.S. generally accepted accounting principles.

|                                            |                               
|------------------------------------------- | ------------------------------
|Brightman
  Almagor & Co.                   | Goldstein
  Sabo Tevet        
|Certified
  Public Accountants              | Certified
  Public Accountants
|A member
  firm of Deloitte Touche Tohmatsu |                               
|                                            |                               
|Tel Aviv,
  Israel                          |                               
|February 22,
  2005                         |                               

F2

---

---



INDEPENDENT
AUDITORS REPORT

To
the Shareholders and Board of Directors
Camtek Ltd.
Migdal HaEmek, Israel

We have audited the accompanying consolidated balance sheet of
Camtek Ltd. (the Company) and its subsidiaries as of December 31,
2002, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for the year ended December 31, 2002.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company and its subsidiaries as of December 31, 2002 and the
consolidated results of their operations, and their cash flows for the year
ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.

| |                      |                                      
| | -------------------- | -------------------------------------
| | Eisner LLP           | Goldstein
  Sabo Tevet               
| |                      | Certified
  Public Accountants (Isr.)
| | New York,
  New York | Tel-Aviv,
  Israel                   
| | March 11,
  2003     |                                      

F3

---

---



CAMTEK LTD.

Consolidated
Balance Sheets(in thousands, except share data)

|                                                                                                                                                                               |  |                |        |      |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ---- |  | ------ | -
|                                                                                                                                                                               |  | December
  31, |       
|                                                                                                                                                                               |  |                |       
|                                                                                                                                                                               |  | 2003           |        | 2004 | 
|                                                                                                                                                                               |  |                |        |      | 
|                                                                                                                                                                               |  | US dollars     |       
|                                                                                                                                                                               |  |                |       
|                                                                                                                                                                               |  |                |        |      |  |        |  
|ASSETS                                                                                                                                                                         |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Current
  assets:                                                                                                                                                              |  |                |        |      |  |        |  
|Cash and cash equivalents                                                                                                                                                      |  |                | 12,837 |      |  | 9,141  |  
|Accounts receivable  trade, net of
  allowance of $2,090 and $2,236                                                                                                           |  |                | 13,317 |      |  | 22,078 |  
|Inventories (Note 3)                                                                                                                                                           |  |                | 13,687 |      |  | 24,892 |  
|Due from affiliates                                                                                                                                                            |  |                | 2,652  |      |  | 479    |  
|Other current assets (Note
4)                                                                                                                                                  |  |                | 1,794  |      |  | 2,093  |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Total current assets                                                                                                                                                           |  |                | 44,287 |      |  | 58,683 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Fixed assets
  (Note 5)                                                                                                                                                        |  |                |        |      |  |        |  
|Cost                                                                                                                                                                           |  |                | 13,066 |      |  | 13,874 |  
|Less  Accumulated
depreciation                                                                                                                                                |  |                | 3,167  |      |  | 3,914  |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Fixed assets, net                                                                                                                                                              |  |                | 9,899  |      |  | 9,960  |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Total assets                                                                                                                                                                   |  |                | 54,186 |      |  | 68,643 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|LIABILITIES                                                                                                                                                                    |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Current
  liabilities:                                                                                                                                                         |  |                |        |      |  |        |  
|Short-term bank credit (Note
6)                                                                                                                                                |  |                | 2,300  |      |  | 2,335  |  
|Accounts payable  trade                                                                                                                                                       |  |                | 6,985  |      |  | 8,215  |  
|Other current liabilities (Note
7)                                                                                                                                             |  |                | 5,638  |      |  | 8,095  |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Total current liabilities                                                                                                                                                      |  |                | 14,923 |      |  | 18,645 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Accrued
  severance pay, net of amounts funded (Note 8)                                                                                                                        |  |                | 412    |      |  | 222    |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Total liabilities                                                                                                                                                              |  |                | 15,335 |      |  | 18,867 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Commitments
  and contingent liabilities (Note 9)                                                                                                                              |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|SHAREHOLDERS EQUITY (Note 11)                                                                                                                                                 |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Ordinary shares NIS 0.01 par value,
  authorized 100,000,000 shares, issued 28,065,038 in 2003 and 28,085,766 in
  2004, outstanding 27,053,419 in 2003 and 27,074,147 in 2004 |  |                | 125    |      |  | 125    |  
|Additional
  paid-in capital                                                                                                                                                   |  |                | 43,801 |      |  | 43,732 |  
|Unearned compensation                                                                                                                                                          |  |                | (560   | )    |  | (363   | )
|Retained
  earnings (Accumulated deficit)                                                                                                                                      |  |                | (3,522 | )    |  | 7,275  |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                | 39,844 |      |  | 50,769 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Treasury stock, at cost (1,011,619 shares in 2003 and 2004)                                                                                                                    |  |                | (993   | )    |  | (993   | )
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                | 38,851 |      |  | 49,776 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|                                                                                                                                                                               |  |                |        |      |  |        |  
|Total liabilities and
shareholders equity                                                                                                                                     |  |                | 54,186 |      |  | 68,643 |  
|                                                                                                                                                                               |  |                |        |      |  |        |  

See notes to consolidated financial
statements

F4

---

---



CAMTEK LTD.

Consolidated
Statements of Operations(in thousands, except per share data)

|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | ------ | - |  | ------ | -
|                                                                                            |  | Year Ended
  December 31, |        
|                                                                                            |  |                           |        
|                                                                                            |  | 2002                      |         | 2003 |  | 2004   |  
|                                                                                            |  |                           |         |      |  |        |  
|                                                                                            |  | US dollars                |        
|                                                                                            |  |                           |        
|Revenues:                                                                                   |  |                           |         |      |  |        |   |  |        |  
|Sales of
  products                                                                         |  |                           | 19,103  |      |  | 26,567 |   |  | 63,353 |  
|Service fees                                                                                |  |                           | 3,490   |      |  | 4,574  |   |  | 4,066  |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           | 22,593  |      |  | 31,141 |   |  | 67,419 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Cost of
  revenues:                                                                         |  |                           |         |      |  |        |   |  |        |  
|Cost of products sold (including
provision
  for  inventory write-down in 2002 of
  $1,805) |  |                           | 12,226  |      |  | 13,214 |   |  | 28,193 |  
|Cost of
  services                                                                          |  |                           | 3,220   |      |  | 3,460  |   |  | 3,168  |  
|Royalties to
  the Government of Israel                                                     |  |                           | 1,000   |      |  | 150    |   |  |       |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Total cost
  of revenues                                                                    |  |                           | 16,446  |      |  | 16,824 |   |  | 31,361 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Gross profit                                                                                |  |                           | 6,147   |      |  | 14,317 |   |  | 36,058 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Research and
  development costs                                                            |  |                           | 7,194   |      |  | 5,855  |   |  | 7,328  |  
|Selling,
  general and administrative expenses (Note 13a)                                   |  |                           | 10,057  |      |  | 10,041 |   |  | 15,953 |  
|Aborted
  share issuance expenses (Note 13c)                                                |  |                           |        |      |  |       |   |  | 1,122  |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Total
  operating expenses                                                                  |  |                           | 17,251  |      |  | 15,896 |   |  | 24,403 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Operating
  (loss) income                                                                   |  |                           | (11,104 | )    |  | (1,579 | ) |  | 11,655 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Financial
  and other income (loss), net (Note 13b)                                         |  |                           | 331     |      |  | 235    |   |  | (359   | )
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Income
  (loss) before income taxes                                                         |  |                           | (10,773 | )    |  | (1,344 | ) |  | 11,296 |  
|Provision
  for Income taxes (Note 14)                                                      |  |                           | 519     |      |  | 225    |   |  | 499    |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Net income
  (loss)                                                                         |  |                           | (11,292 | )    |  | (1,569 | ) |  | 10,797 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Net income
  (loss) per ordinary share:                                                     |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Basic                                                                                       |  |                           | (0.47   | )    |  | (0.06  | ) |  | 0.40   |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Diluted                                                                                     |  |                           | (0.47   | )    |  | (0.06  | ) |  | 0.39   |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Weighted
  average number of ordinary shares outstanding:                                   |  |                           |         |      |  |        |   |  |        |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Basic                                                                                       |  |                           | 24,166  |      |  | 27,053 |   |  | 27,114 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  
|Diluted                                                                                     |  |                           | 24,166  |      |  | 27,053 |   |  | 27,800 |  
|                                                                                            |  |                           |         |      |  |        |   |  |        |  

See notes to consolidated financial statements

F5

---

---



CAMTEK LTD.

Consolidated
Statements of Changes in Shareholders Equity And comprehensive Income (Loss)(in thousands)

|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|--------------------------------------------------- |  | ------------------------------- | ------ | ----------------------------- |  | ------------------------------ |  | ----------------------- | ------ | --------------------------------------------------- |  | --------------------------------------------- | - | ---------------- | ---- | ----- |  | -------------------------- | - |  | ------- | - |  | ---- | - |  | ------- | - |  | ------- | -
|                                                    |  | Ordinary A
  NIS 0.01 par value |        | Number of
  treasury
  shares |  | Additional
  paid-in
  capital |  | Unearned
  compensation |        | Accumulated
  other
  comprehensive
  income (loss) |  | Retained
  earnings
  (accumulated
  deficit) |   | Treasury
  stock |      | Total |  | Comprehensiveincome (loss) |  
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |  
|                                                    |  | Shares                          |        | US dollars                    | 
|                                                    |  |                                 |        |                               | 
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Balance  January 1, 2002                           |  |                                 | 22,131 |                               |  | 112                            |  |                         | (250   | )                                                   |  | 37,196                                        |   |                  | (162 | )     |  | 128                        |   |  | 9,339   |   |  | (592 | ) |  | 46,021  |   |  |         |  
|Exercise of share options                           |  |                                 | 7      |                               |  |                               |  |                         |        |                                                     |  | 10                                            |   |                  |     |       |  |                           |   |  |        |   |  |     |   |  | 10      |   |  |         |  
|Amortization of share options                       |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                              |   |                  | 41   |       |  |                           |   |  |        |   |  |     |   |  | 41      |   |  |         |  
|Issuance of common shares, net                      |  |                                 | 5,927  |                               |  | 13                             |  |                         |        |                                                     |  | 6,060                                         |   |                  |     |       |  |                           |   |  |        |   |  |     |   |  | 6,073   |   |  |         |  
|Unrealized holding loss on  marketable
securities   |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                              |   |                  |     |       |  | (136                       | ) |  |        |   |  |     |   |  | (136    | ) |  | (136    | )
|Net loss                                            |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                              |   |                  |     |       |  |                           |   |  | (11,292 | ) |  |     |   |  | (11,292 | ) |  | (11,292 | )
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Comprehensive loss                                  |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                              |   |                  |     |       |  |                           |   |  |        |   |  |     |   |  |        |   |  | (11,428 | )
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Purchase of  treasury shares                        |  |                                 |       |                               |  |                               |  |                         | (762   | )                                                   |  |                                              |   |                  |     |       |  |                           |   |  |        |   |  | (401 | ) |  | (401    | ) |  |         |  
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Balance  December 31, 2002                         |  |                                 | 28,065 |                               |  | 125                            |  |                         | (1,012 | )                                                   |  | 43,266                                        |   |                  | (121 | )     |  | (8                         | ) |  | (1,953  | ) |  | (993 | ) |  | 40,316  |   |  |         |  
|Cancellation of share options                       |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  | (96                                           | ) |                  | 96   |       |  |                            |   |  |         |   |  |      |   |  |        |   |  |         |  
|Compensation related to share options               |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  | 631                                           |   |                  | (631 | )     |  |                            |   |  |         |   |  |      |   |  |        |   |  |         |  
|Amortization of share options                       |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                               |   |                  | 96   |       |  |                            |   |  |         |   |  |      |   |  | 96      |   |  |         |  
|Unrealized holding gain  on
  marketable securities |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  | 8                          |   |  |         |   |  |      |   |  | 8       |   |  | 8       |  
|Net loss                                            |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  | (1,569  | ) |  |      |   |  | (1,569  | ) |  | (1,569  | )
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Comprehensive loss                                  |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |        |   |  | (1,561  | )
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Balance  December 31, 2003                         |  |                                 | 28,065 |                               |  | 125                            |  |                         | (1,012 | )                                                   |  | 43,801                                        |   |                  | (560 | )     |  |                           |   |  | (3,522  | ) |  | (993 | ) |  | 38,851  |   |  |         |  
|Exercise of share options                           |  |                                 | 21     |                               |  |                               |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Cancellation of share options                       |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  | (69                                           | ) |                  | 69   |       |  |                            |   |  |         |   |  |      |   |  |        |   |  |         |  
|Amortization of share options                       |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                               |   |                  | 128  |       |  |                            |   |  |         |   |  |      |   |  | 128     |   |  |         |  
|Net income                                          |  |                                 |       |                               |  |                               |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  | 10,797  |   |  |      |   |  | 10,797  |   |  | 10,797  |  
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Comprehensive income                                |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  | 10,797  |  
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  
|Balance  December 31, 2004                         |  |                                 | 28,086 |                               |  | 125                            |  |                         | (1,012 | )                                                   |  | 43,732                                        |   |                  | (363 | )     |  |                           |   |  | 7,275   |   |  | (993 | ) |  | 49,776  |   |  |         |  
|                                                    |  |                                 |        |                               |  |                                |  |                         |        |                                                     |  |                                               |   |                  |      |       |  |                            |   |  |         |   |  |      |   |  |         |   |  |         |  

See notes to consolidated financial
statements

F6

---

---



CAMTEK LTD.

Consolidated
Statements of Cash Flows(in thousands)

|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | ------ | - |  | ------- | -
|                                                                                       |  | Year Ended
  December 31, |        
|                                                                                       |  |                           |        
|                                                                                       |  | 2002                      |         | 2003 |  | 2004   |  
|                                                                                       |  |                           |         |      |  |        |  
|                                                                                       |  | US dollars                |        
|                                                                                       |  |                           |        
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Cash flows from operating activities:                                                  |  |                           |         |      |  |        |   |  |         |  
|Net income (loss)                                                                      |  |                           | (11,292 | )    |  | (1,569 | ) |  | 10,797  |  
|Adjustments to reconcile net income
(loss)
  to net cash used in operating activities: |  |                           |         |      |  |        |   |  |         |  
|Depreciation and
amortization                                                          |  |                           | 890     |      |  | 788    |   |  | 747     |  
|(Gain) loss on disposal of fixed
assets                                                |  |                           | 22      |      |  | 3      |   |  | (4      | )
|Amortization of unearned
compensation                                                  |  |                           | 41      |      |  | 96     |   |  | 128     |  
|Deferred taxes                                                                         |  |                           | 550     |      |  |       |   |  |        |  
|Accrued severance pay                                                                  |  |                           | 71      |      |  | 34     |   |  | (190    | )
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Changes in operating assets and
  liabilities:                                         |  |                           |         |      |  |        |   |  |         |  
|Accounts receivable                                                                    |  |                           | 3,233   |      |  | (2,732 | ) |  | (8,761  | )
|Inventories                                                                            |  |                           | 11      |      |  | (1,659 | ) |  | (11,205 | )
|Due from affiliates                                                                    |  |                           | (1,259  | )    |  | (2,133 | ) |  | 2,173   |  
|Other current assets                                                                   |  |                           | 814     |      |  | (297   | ) |  | 823     |  
|Accounts payable                                                                       |  |                           | 150     |      |  | 3,978  |   |  | 1,230   |  
|Other current liabilities                                                              |  |                           | (888    | )    |  | 442    |   |  | 2,457   |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Net cash used in operating
activities                                                  |  |                           | (7,657  | )    |  | (3,049 | ) |  | (1,805  | )
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Cash flows from investing activities:                                                  |  |                           |         |      |  |        |   |  |         |  
|Purchase of marketable
securities                                                      |  |                           | (17,445 | )    |  |       |   |  |        |  
|Redemption of marketable
securities                                                    |  |                           | 20,305  |      |  | 10,920 |   |  |        |  
|Construction of building and
purchase of
  other fixed assets                          |  |                           | (240    | )    |  | (220   | ) |  | (829    | )
|Proceeds from disposal of fixed
assets                                                 |  |                           | 44      |      |  | 39     |   |  | 25      |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Net cash (used) provided by investing
  activities                                     |  |                           | 2,664   |      |  | 10,739 |   |  | (804    | )
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Cash flows from financing activities:                                                  |  |                           |         |      |  |        |   |  |         |  
|Proceeds from issuance of common
shares,
  net                                         |  |                           | 6,073   |      |  |       |   |  |        |  
|Increase (decrease) in short-term
bank
  credit                                        |  |                           | (4,777  | )    |  | 2,261  |   |  | 35      |  
|Exercise of share options                                                              |  |                           | 10      |      |  |       |   |  |        |  
|Payment of long-term loans                                                             |  |                           | (43     | )    |  | (12    | ) |  |        |  
|Purchase of treasury
shares                                                            |  |                           | (401    | )    |  |       |   |  |        |  
|Aborted share issuance
expenses                                                        |  |                           |        |      |  |       |   |  | (1,122  | )
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Net cash (used) provided by financing
  activities                                     |  |                           | 862     |      |  | 2,249  |   |  | (1,087  | )
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                           | (4,131  | )    |  | 9,939  |   |  | (3,696  | )
|Cash and cash equivalents at
beginning
  of  the year                                  |  |                           | 7,029   |      |  | 2,898  |   |  | 12,837  |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Cash and cash equivalents at end of period the year                                    |  |                           | 2,898   |      |  | 12,837 |   |  | 9,141   |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|                                                                                       |  |                           |         |      |  |        |   |  |         |  
|Supplemental disclosure of cash flow information:                                      |  |                           |         |      |  |        |   |  |         |  
|Cash paid during the year
for:                                                         |  |                           |         |      |  |        |   |  |         |  
|Interest                                                                               |  |                           | 340     |      |  | 169    |   |  | 450     |  
|Income taxes                                                                           |  |                           |        |      |  |       |   |  | 479     |  

See notes to consolidated financial statements

F7

---

---



CAMTEK
LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1      | BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | Camtek Ltd.
  (Camtek), an Israeli company, is a majority owned (78%) subsidiary of
  Priortech Ltd., an Israeli company. Priortech Ltd. is listed on the Tel-Aviv
  Stock Exchange. Camtek designs, develops, manufactures and markets automatic
  optical inspection, or AOI, systems and related products. Camteks AOI
  systems are used to enhance both production processes and yields for
  manufacturers of: the printed circuit board, or PCB, industry; the high
  density interconnect substrate, or HDI-S, industry; and the semiconductor
  manufacturing and packaging industry. Camteks activities are conducted in one reportable business segment.

|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------ | ------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | a.                              | Basis of preparation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                 | The
  consolidated financial statements, which include the accounts of Camtek and
  its subsidiaries (collectively the Company), are prepared in accordance
  with U.S. generally accepted accounting principles. All material intercompany balances and transactions have been
  eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | b.                              | Estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                 | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the financial statements and
  the reported amounts of revenues and expenses during the reporting
  period. Actual results may differ
  from those estimates.                                                                                                                                                                                                                                                                         
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | c.                              | Foreign currency transactions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                 | The
  functional currency of the Company is the U.S. dollar. Most of the revenues generated by the
  Company are from outside of Israel and a majority thereof are received in
  U.S. dollars. In addition, most
  salaries, materials and components purchased and marketing expenses incurred
  are either paid for in U.S. dollars or in New Israeli Shekels (NIS) linked
  to changes in the dollar/NIS exchange rate. A significant portion of the
  Companys expenses are incurred in Israel and paid for in NIS. Foreign
  currency income included in financial and other income, net, resulting from
  transactions not denominated in U.S. dollars amounted to $112, $396 and $89
  in 2002, 2003 and 2004, respectively.
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | d.                              | Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                 | All highly
  liquid investments purchased with maturity of three months or less are
  considered to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | e.                              | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                 | Inventories
  consist of completed AOI systems, AOI systems partially completed and
  components, and are recorded at the lower of cost, determined by the moving  average basis or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F8

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                             |                                                                                                                                                   
|------------ | ------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (continued)
|             |                                             |                                                                                                                                                   
|             | f.                                          | Fixed assets:                                                                                                                                     
|             |                                             |                                                                                                                                                   
|             |                                             | Fixed assets
  are stated at cost less accumulated depreciation, and are depreciated over
  their estimated useful lives on a straight-line basis.
|             |                                             |                                                                                                                                                   
|             |                                             | Annual rates
  of depreciation are as follows:                                                                                                    

| |                                  |  |  |           | 
| | -------------------------------- |  |  | --------- | 
| | Building                         |  |  | 2%        | 
| | Machinery
  and equipment        |  |  | 10%  33% | 
| | Office
  furniture and equipment |  |  | 6%  20%  | 
| | Automobiles                      |  |  | 15%       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The Company
  periodically assesses the recoverability of the carrying amount of fixed assets
  based on expected undiscounted cash flows. If an assets carrying amount is
  determined to be not recoverable, the Company recognizes an impairment loss
  based upon the difference between the carrying amount and the fair value of
  such assets, in accordance with SFAS No. 144 Accounting for the Impairment
  or Disposal of Long-Lived Assets (SFAS No. 144).                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | g. | Fair values of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The carrying
  amounts for cash and cash equivalents, accounts receivable, accounts payable
  and accrued expenses and amounts due from affiliates approximate fair value
  because of the short-term duration of those items. Marketable securities are carried at quoted market prices,
  which represent fair value. The
  carrying amounts of short-term bank credit and amounts due to or from
  Priortech Ltd. approximate fair value because the interest rates on such debt
  approximate the market rate.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | h. | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company
  recognizes revenue from sales of its products when the products are installed
  at the customers premises and are operating in accordance with its
  specifications, signed documentation of the arrangement, such as a signed
  contract or purchase order, has been received, the price is fixed or
  determinable, and collectibility is reasonably assured.                                                                                                                                    
|
| |    | Service
  revenues consist mainly of revenues from maintenance contracts and are
  recognized ratably over the contract period.                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | i. | Warranty:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company
  records a liability for product warranty obligations at the time of sale based
  upon historical warranty experience. The term of the warranty is generally
  twelve months.                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Changes in
  the product warranty obligations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                     |  |            |        |      |  |        |  
| | ------------------- |  | ---------- | ------ | ---- |  | ------ | -
| |                     |  | 2003       |        | 2004 | 
| |                     |  |            |        |      | 
| |                     |  | US dollars |       
| |                     |  |            |       
| |                     |  |            |        |      |  |        |  
| | Beginning of
  year |  |            | 627    |      |  | 757    |  
| | New
  warranties    |  |            | 1,282  |      |  | 2,899  |  
| | Reductions          |  |            | (1,152 | )    |  | (1,953 | )
| |                     |  |            |        |      |  |        |  
| | End of year         |  |            | 757    |      |  | 1,703  |  
| |                     |  |            |        |      |  |        |  

F9

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------ | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (continued)
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             | j.                                          | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                             | The Company
  accounts for income taxes in accordance with SFAS No. 109, Accounting for
  Income Taxes (SFAS No. 109). This Statement prescribes the use of the
  liability method whereby deferred tax asset and liability account balances
  are determined based on differences between financial reporting and tax bases
  of assets and liabilities and are measured using the enacted tax rates and
  laws that will be in effect when the differences are expected to reverse. The
  Company provides a valuation allowance, if necessary, to reduce deferred tax
  assets to their estimated realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             | k.                                          | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                             | Research and
  development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             | l.                                          | Earning (loss) per ordinary share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                             | Basic
  earning (loss) per ordinary share is calculated utilizing only weighted
  average ordinary shares outstanding. Diluted earning (loss) per share, if
  relevant, gives effect to dilutive potential ordinary shares outstanding
  during the year. Such dilutive shares
  consist of incremental shares, utilizing the treasury stock method, from the
  assumed exercise of share options. The effect of the exercise of outstanding
  share options and warrants was anti-dilutive for the years ended
  December 31, 2002 and 2003, and has not been included in computing
  dilutive loss per ordinary share. Potentially dilutive options and warrants
  to purchase an aggregate of 1,285,160 and 1,353,056 ordinary shares were
  outstanding at December 31, 2002 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                             | In the year
  ended December 31, 2004, the effect of the exercise of outstanding share
  options and warrants is dilutive, and was included in computing diluted
  earning per ordinary share. Total of 1,250,000 options are outstanding at
  December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             | m.                                          | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                             | At
  December 31, 2004, the Company had five stock-based employee
  compensation plans, which are described more fully in Note 11(c). The Company
  accounts for these plans under the recognition and measurement principles of
  Accounting Principles Board Opinion No. 25 (APB 25) and related
  interpretations and, accordingly, recognizes compensation expense for the
  difference between the quoted market price of the underlying ordinary shares
  and the exercise price of the option at the date of grant. Statement of
  Financial Accounting Standards No. 123, Accounting for Stock-Based
  Compensation (SFAS 123), issued in October 1995, requires the use of the
  fair value based method of accounting for share options. Under this method, compensation cost is
  measured at the grant date based on the fair value of the options granted and
  is recognized over the vesting period. SFAS 123, as amended by SFAS 148, allows the Company to continue to
  measure the compensation cost of employee options in accordance with APB 25,
  but requires the Company to disclose pro forma information regarding net
  income (loss) and per share data determined as if the Company had accounted
  for its employee share options under the fair value method of that statement.

F10

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                             |                                                                                                                                             
|------------ | ------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (continued)
|             |                                             |                                                                                                                                             
|             | m.                                          | Stock-based compensation: (continued)                                                                                                       
|             |                                             |                                                                                                                                             
|             |                                             | The
  following table illustrates the effect on net loss and loss per share if the
  fair value based method had been applied to all awards.

| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | -------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | ---- |  | ------ | - |  | ------ | -
| |                                                                                                                |  | Year Ended
  December 31,          |        
| |                                                                                                                |  |                                    |        
| |                                                                                                                |  | 2002                               |         | 2003 |  | 2004   |  
| |                                                                                                                |  |                                    |         |      |  |        |  
| |                                                                                                                |  | US dollars
  except per share data |        
| |                                                                                                                |  |                                    |        
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | Net income (loss), as reported                                                                                 |  |                                    | (11,292 | )    |  | (1,569 | ) |  | 10,797 |  
| | Stock-based employee compensation expense included in
reported net
  income (loss), net of related tax effects |  |                                    | 41      |      |  | 96     |   |  | 128    |  
| | Stock-based employee compensation determined under the
fair value
  based method, net of related tax effects   |  |                                    | (1,229  | )    |  | (689   | ) |  | (688   | )
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | Pro forma net income (loss)                                                                                    |  |                                    | (12,480 | )    |  | (2,162 | ) |  | 10,237 |  
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | Income (loss) per share:                                                                                       |  |                                    |         |      |  |        |   |  |        |  
| | Basic  as reported                                                                                            |  |                                    | (0.47   | )    |  | (0.06  | ) |  | 0.40   |  
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | Basic  pro forma                                                                                              |  |                                    | (0.52   | )    |  | (0.08  | ) |  | 0.38   |  
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | Diluted  as reported                                                                                          |  |                                    | (0.47   | )    |  | (0.06  | ) |  | 0.39   |  
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  
| | Diluted  pro forma                                                                                            |  |                                    | (0.52   | )    |  | (0.08  | ) |  | 0.37   |  
| |                                                                                                                |  |                                    |         |      |  |        |   |  |        |  

| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted
  average fair value of the options granted during 2002 and 2003 in applying
  the fair value method was estimated at $2.32 and $2.15, respectively, using the Black-Scholes pricing model with the
  following assumptions:

| |                           |  |            |       |            |  |               | 
| | ------------------------- |  | ---------- | ----- | ---------- |  | ------------- | 
| |                           |  | 2002 Grant |       | 2003 Grant | 
| |                           |  |            |       |            | 
| |                           |  |            |       |            |  |               | 
| | Dividend
  yield          |  |            | 0     |            |  | 0             | 
| | Volatility                |  |            | 91%   |            |  | 97%           | 
| | Risk-free
  interest rate |  |            | 4.74% |            |  | 3.04%  4.17% | 
| | Expected
  life           |  |            | 4     |            |  | 4  10        | 

| |    |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | --------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | n. | Recent accounting pronouncements:
| |    |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | 1.                                | FASB Statement No. 151, Inventory Costs,an amendment to ARB 43,
  Chapter 4 (SFAS 151)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                   | In November 2004, the FASB
  issued FASB Statement No. 151, Inventory
  Costs,an amendment to ARB 43, Chapter 4 (SFAS 151). The amendment
  made by SFAS 151 clarifies that abnormal amounts of idle facility expense,
  freight, handling costs, and wasted material (spoilage) should be recognized
  as current-period charges, and also require the allocation of fixed
  production overhead inventory based on the normal capacity of the production
  facilities. The guidance is effective for inventory costs incurred during
  fiscal years beginning after June 15, 2005. Earlier application is permitted
  for inventory costs incurred during fiscal years beginning after November 23,
  2004. The provision of SFAS 151 should be applied prospectively. The Company
  does not expect the adoption of SFAS 151 to have material effect on the
  Companys results of operations.

F11

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ------------------------------------------- | --------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (continued)
|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | n.                                          | Recent accounting pronouncements: (continued)
|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                             | 2.                                            | SFAS No. 123 (revised
  2004) Share Based Payments(SFAS
  123(R))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                             |                                               | In December 2004, the FASB issued SFAS No.
  123 (revised 2004) Share Based Payments (SFAS 123(R)). This Statement is
  a revision of FASB Statement No. 123, Accounting for Stock-Based
  Compensation, which supersedes APB Opinion No. 25, and its authoritative
  interpretations. (see note 2(m) above).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                             |                                               | SFAS 123(R) establishes standards for the
  accounting for transactions in which an entity exchanges its equity
  instruments for goods or services; focuses primarily on accounting for
  transactions in which an entity obtains employee and directors services in
  share-based payment transactions; and does not change the accounting guidance
  for share-based payment transactions with parties other than employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                             |                                               | SFAS 123(R) eliminates the alternative to
  use APB 25s intrinsic value method of accounting that was provided in SFAS
  123 as originally issued and requires measuring the cost of employee services
  received in exchange for an award of equity instruments based on the
  grant-date fair value of the award. The fair-value-based method in this
  Statement is similar to the fair-value-based method in SFAS 123 in most
  respects. The costs associated with the awards will be recognized over the
  period during which an employee is required to provide service in exchange
  for the award  the requisite service period (usually the vesting period).                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                             |                                               | The grant-date fair value of employee share
  options and similar instruments will be estimated using option-pricing models
  adjusted for the unique characteristics of those instruments (unless
  observable market prices for the same or similar instruments are available).
  If an equity award is modified after the grant date, incremental compensation
  cost will be recognized in an amount equal to the excess of the fair value of
  the modified award over the fair value of the original award immediately
  before the modification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                             |                                               | The provisions of SFAS 123(R) apply to all
  awards to be granted by the Company after June 30, 2005 and to awards
  modified, repurchased, or cancelled after that date. When initially applying
  the provisions of SFAS 123(R), in the third quarter of 2005, the Company will
  be required to elect between using either the modified prospective method
  or the modified retrospective method. Under the modified prospective
  method, the Company is required to recognize compensation cost for all awards
  granted after the adoption of SFAS 123(R) and for the unvested portion of
  previously granted awards that are outstanding on that date. Under the
  modified retrospective method, the Company is required to restate its
  previously issued financial statements to recognize the amounts previously
  calculated and reported on a pro forma basis, as if the original provisions
  of SFAS 123 had been adopted. Under both methods, it is permitted to use
  either a straight line or an accelerated method to amortize the cost as an
  expense for awards with graded vesting.

F12

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------ | ------------------------------------------- | --------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (continued)
|             |                                            
|             | n.                                          | Recent accounting pronouncements: (continued)
|             |                                             |                                              
|             |                                             | 2.                                            | SFAS No. 123 (revised
  2004) Share Based Payments (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                             |                                               | Management
  has recently commenced identifying the potential future impact of applying
  the provisions of SFAS 123(R), including each of its proposed transition
  methods, yet is currently unable to fully quantify the effect of this
  Standard on the Companys future financial position and results of
  operations. Nonetheless, it is expected that the adoption of SFAS 123(R) will
  increase the stock-based-award expenses the Company is to record in the
  future in comparison to the expenses recorded under the guidance currently
  applied by the Company.
|             |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                             | 3.                                            | SFAS 153,
  Exchange of Non-Monetary Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                             |                                               | In
  December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
  an amendment of APB No. 29. This Statement amends APB 29 to eliminate the
  exception for nonmonetary exchanges of similar productive assets and replaces
  it with a general exception for exchanges of nonmonetary assets that do not
  have commercial substance. The Statement specifies that a nonmonetary
  exchange has commercial substance if the future cash flows of the entity are
  expected to change significantly as a result of the exchange.                            
|            
|             |                                             |                                               | This
  Statement is effective for nonmonetary asset exchanges occurring in fiscal
  periods beginning after June 15, 2005. Earlier application is permitted for
  nonmonetary asset exchanges occurring in fiscal periods beginning after the
  date this Statement is issued. Retroactive application is not permitted.                                                                                                                                                                                                                                                        
|             |                                             |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|NOTE 3      | INVENTORIES                                

| |                                                                                |  |                |        |      |  |        | 
| | ------------------------------------------------------------------------------ |  | -------------- | ------ | ---- |  | ------ | 
| |                                                                                |  | December
  31, |       
| |                                                                                |  |                |       
| |                                                                                |  | 2003           |        | 2004 | 
| |                                                                                |  |                |        |      | 
| |                                                                                |  | US dollars     |       
| |                                                                                |  |                |       
| |                                                                                |  |                |        |      |  |        | 
| | Components                                                                     |  |                | 4,548  |      |  | 9,437  | 
| | Systems partially completed                                                    |  |                | 2,118  |      |  | 3,755  | 
| | Completed systems, including systems not
  yet purchased at customer locations |  |                | 7,021  |      |  | 11,700 | 
| |                                                                                |  |                |        |      |  |        | 
| |                                                                                |  |                | 13,687 |      |  | 24,892 | 
| |                                                                                |  |                |        |      |  |        | 

F13

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                     
|------------ | --------------------
|NOTE 4      | OTHER CURRENT ASSETS

| |                                          |  |                |       |      |  |       | 
| | ---------------------------------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                                          |  | December
  31, |      
| |                                          |  |                |      
| |                                          |  | 2003           |       | 2004 | 
| |                                          |  |                |       |      | 
| |                                          |  | US dollars     |      
| |                                          |  |                |      
| |                                          |  |                |       |      |  |       | 
| | Due from
  Government of Israel agencies |  |                | 410   |      |  | 454   | 
| | Due from
  employees                     |  |                | 133   |      |  | 201   | 
| | Prepaid
  expenses                       |  |                | 294   |      |  | 487   | 
| | Advances to
  suppliers                  |  |                | 419   |      |  | 285   | 
| | Deposits to
  leaseholders               |  |                | 514   |      |  | 563   | 
| | Other                                    |  |                | 24    |      |  | 103   | 
| |                                          |  |                |       |      |  |       | 
| |                                          |  |                | 1,794 |      |  | 2,093 | 
| |                                          |  |                |       |      |  |       | 

|             |             
|------------ | ------------
|NOTE 5      | FIXED ASSETS

| |                                  |  |                |        |      |  |        | 
| | -------------------------------- |  | -------------- | ------ | ---- |  | ------ | 
| |                                  |  | December
  31, |       
| |                                  |  |                |       
| |                                  |  | 2003           |        | 2004 | 
| |                                  |  |                |        |      | 
| |                                  |  | US dollars     |       
| |                                  |  |                |       
| |                                  |  |                |        |      |  |        | 
| | Land                             |  |                | 624    |      |  | 815    | 
| | Building                         |  |                | 7,543  |      |  | 7,612  | 
| | Machinery
  and equipment        |  |                | 2,734  |      |  | 2,953  | 
| | Office
  furniture and equipment |  |                | 1,896  |      |  | 2,243  | 
| | Automobiles                      |  |                | 269    |      |  | 251    | 
| |                                  |  |                |        |      |  |        | 
| |                                  |  |                | 13,066 |      |  | 13,874 | 
| | Less
  accumulated depreciation  |  |                | 3,167  |      |  | 3,914  | 
| |                                  |  |                |        |      |  |        | 
| |                                  |  |                | 9,899  |      |  | 9,960  | 
| |                                  |  |                |        |      |  |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In September
  1998, the Company entered into a lease for a building in Israel to be built
  by the lessor and also acquired an option to purchase the building and
  underlying land from the lessor. The lease payments were based on and the option
  price was equal to the cost of constructing the building, plus financing
  costs and $595, less payments made under the lease contract. The Company
  exercised this option to purchase the building during 2004. These assets are
  collateralized due to a loan described in note 6.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Depreciation
  and amortization expense related to fixed assets totaled $890, $788 and $763
  for the years ended December 31, 2002, 2003 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                              

F14

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                       
|------------ | ----------------------
|NOTE 6      | SHORT-TERM BANK CREDIT

| |                                                 |  |                |       |      |  |       | 
| | ----------------------------------------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                                                 |  | December
  31, |      
| |                                                 |  |                |      
| |                                                 |  | 2003           |       | 2004 | 
| |                                                 |  |                |       |      | 
| |                                                 |  | US dollars     |      
| |                                                 |  |                |      
| |                                                 |  |                |       |      |  |       | 
| | Loan in US
  dollars, bearing interest of 4.75% |  |                | 2,300 |      |  | 2,335 | 
| |                                                 |  |                |       |      |  |       | 

|             |                                                                                                                                  
|------------ | ---------------------------------------------------------------------------------------------------------------------------------
|             | Borrowings
  under the bank loans are collateralized by all of the assets of the Company
  (including the land and the building).
|             |                                                                                                                                  
|NOTE 7      | OTHER CURRENT LIABILITIES                                                                                                        

| |                                                 |  |                |       |      |  |       | 
| | ----------------------------------------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                                                 |  | December
  31, |      
| |                                                 |  |                |      
| |                                                 |  | 2003           |       | 2004 | 
| |                                                 |  |                |       |      | 
| |                                                 |  | US dollars     |      
| |                                                 |  |                |      
| |                                                 |  |                |       |      |  |       | 
| | Accrued
  compensation and related benefits     |  |                | 1,895 |      |  | 3,669 | 
| | Government
  institutions                       |  |                | 1,385 |      |  | 196   | 
| | Accrued
  warranty costs                        |  |                | 757   |      |  | 1,703 | 
| | Commissions                                     |  |                | 506   |      |  | 888   | 
| | Advances
  from customers and deferred revenues |  |                | 585   |      |  | 1,214 | 
| | Other                                           |  |                | 510   |      |  | 425   | 
| |                                                 |  |                |       |      |  |       | 
| |                                                 |  |                | 5,638 |      |  | 8,095 | 
| |                                                 |  |                |       |      |  |       | 

|NOTE 8      | SEVERANCE PAY                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | The majority of the Companys liability for severance pay is
  calculated in accordance with the Israeli law based on the most recent salary
  paid to employees and the length of employment with the Company. The
  Companys liability for severance pay is fully provided for. Part of the
  liability is funded through individual insurance policies and pension funds
  purchased from outside insurance companies, which are not under the Companys
  control
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | The amounts
  accrued and the portions funded with severance pay funds and by purchase of
  insurance policies are composed as follows:                                                                                                                                                                                                                                                                                                                               

| |                         |  |                |       |      |  |     | 
| | ----------------------- |  | -------------- | ----- | ---- |  | --- | 
| |                         |  | December
  31, |      
| |                         |  |                |      
| |                         |  | 2003           |       | 2004 | 
| |                         |  |                |       |      | 
| |                         |  | US dollars     |      
| |                         |  |                |      
| |                         |  |                |       |      |  |     | 
| | Accrued
  severance pay |  |                | 1,125 |      |  | 464 | 
| | Less amounts
  funded   |  |                | 713   |      |  | 242 | 
| |                         |  |                |       |      |  |     | 
| |                         |  |                |       |      |  |     | 
| | Unfunded
  balance      |  |                | 412   |      |  | 222 | 
| |                         |  |                |       |      |  |     | 

| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  severance pay liabilities covered by the pension funds are not reflected in
  the above amounts, as the severance pay liabilities have been irrevocably
  transferred to the pension funds.
| |                                                                                                                                                                                                  
| | Severance
  pay expenses were $578, $484 and $529 in 2002, 2003 and 2004, respectively.                                                                                                          

F15

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------ | ---------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9      | COMMITMENTS AND CONTINGENT
  LIABILITIES
|             |                                         
|             | a.                                       | Operating leases:                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                          | The
  Companys subsidiaries have entered into various operating lease agreements,
  principally for office space. As of December 31, 2004, minimum future
  rental payments under these leases amounted to $1,185. In May 2004, the
  Company entered into an operating lease for vehicles for a period of 36
  months. As of December 31, 2004, the minimum future rental payments were
  approximately $1,163.
|             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                          | At
  December 31, 2004, minimum future rental payments under such
  noncancelable operating leases are as follows:                                                                                                                                                                                                                                                                                               

| |                            |  |            |       | 
| | -------------------------- |  | ---------- | ----- | 
| |                            |  |            |       | 
| | Year Ending
  December 31, |  | US dollars |      
| |                            |  |            |       | 
| |                            |  |            |       | 
| | 2005                       |  |            | 857   | 
| | 2006                       |  |            | 707   | 
| | 2007                       |  |            | 430   | 
| | 2008                       |  |            | 120   | 
| | Thereafter                 |  |            | 234   | 
| |                            |  |            |       | 
| |                            |  |            | 2,348 | 
| |                            |  |            |       | 

| |    |                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------
| |    | Aggregate
  rent expense amounted to $ 414, $484 and $529 in 2002, 2003 and 2004,
  respectively.                                    
| |    |                                                                                                                                      
| | b. | Valuation and qualifying accounts:                                                                                                   
| |    |                                                                                                                                      
| |    | The
  following is a summary of the allowance for doubtful accounts related to
  accounts receivable for the years ended December 31:

| |      |  |                                    |       |                         |  |                              |       |   |  | 
| | ---- |  | ---------------------------------- | ----- | ----------------------- |  | ---------------------------- | ----- | - |  | 
| |      |  | Balance at
  beginning
  of period |       | Provision
  (recovery), |  | Balance at
  end of
  period |      
| |      |  |                                    |       |                         |  |                              |      
| |      |  | US dollars                         |      
| |      |  |                                    |      
| |      |  |                                    |       |                         |  |                              |       |   |  | 
| | 2002 |  |                                    | 1,135 |                         |  |                              | 1,252 |   |  | 
| | 2003 |  |                                    | 2,387 |                         |  |                              | (297  | ) |  | 
| | 2004 |  |                                    | 2,090 |                         |  |                              | 146   |   |  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Litigations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | On May 10, 2004, a lawsuit
  was filed against the Company in the District Court in Nazareth, Israel, by
  the Companys competitor, Orbotech Ltd., alleging that the Company products:
  Dragon and Falcon systems infringe upon a patent held by Orbotech Ltd. and
  requesting an injunction against the manufacture and sale by the Company of
  those systems, as well as pecuniary damages. The Company believes that the
  Company has good defenses against Orbotechs claims.

F16

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------ | ----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9      | COMMITMENTS AND CONTINGENT LIABILITIES (continued)                                                                                 
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             | c.                                                                                                                                  | Litigations: (CONTINUED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                     | On February 23, 2005, a
  lawsuit was filed against the Company in the District Court in Jerusalem by
  the Companys competitor, Orbotech Ltd., alleging that the Company is
  infringing a patent held by Orbotech Ltd. regarding an illumination block.
  The Company believes that the Company has good defenses against Orbotechs
  claims.                                                                                                                                                                                                                                           
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                     | On December 7, 2004, a
  former employee of the Company field a lawsuit with the magistrate court of
  Haifa, Israel, against the Company and two of his former managers. In his
  lawsuit, the employee asserts claims mainly regarding his employment
  termination process with the Company. The total compensation requested in
  this claim is about $235. The Company has filed a statement of defense.                                                                                                                                                                               
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE 10     | CONCENTRATION OF RISK                                                                                                              
|             |                                                                                                                                    
|             | During the
  years ended December 31, 2002, 2003 and 2004, no customer accounted for
  10% or more of the Companys revenue.       
|             |                                                                                                                                    
|             | At December
  31, 2002, 2003 and 2004 accounts receivable from one customer approximated
  $2,217, $1,080 and $1,474, respectively.
|             |                                                                                                                                    
|NOTE 11     | SHAREHOLDERS EQUITY                                                                                                               
|             |                                                                                                                                    
|             | a.                                                                                                                                  | Initial public offering:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                     | In July
  2000, the Company completed an initial public offering (IPO) in the United
  States and issued 5,835,000 ordinary shares for net proceeds of $34,957, net
  of offering costs of $5,857. Following the IPO, the Company shares are traded
  on the Over-the-Counter Market and are listed on the NASDAQ National Market.                                                                                                                                                                                                                                                        
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             | b.                                                                                                                                  | Issuance of rights:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                     | On August 8,
  2002, the Company offered to existing shareholders rights to purchase a total
  of 8,571,429 ordinary shares. Each shareholder was able to subscribe for
  rights to purchase one ordinary share for each 2.5536 ordinary shares held of
  record by that holder. The exercise price of the right was $1.05 per share. Upon exercise of the rights, the Company
  issued 5,926,730 new shares for $6,073, net of $150 of offering costs. Such
  shares were principally purchased by Priortech Ltd., which increased its
  ownership interest in the Company from 68% to 78%.

F17

---

---



CAMTEK LTD. 
Notes to consolidated financial statements 
as of December 31, 2004 
(US Dollars in thousands)

|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------ | -------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11     | SHAREHOLDERS EQUITY (continued)
|             |                                 
|             | c.                               | Share options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  | As of
  December 31, 2004, the Company has five share option plans for employees and
  directors. Future options will be
  granted only pursuant to the 2003 Share Option Plan described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  | Options
  granted in July 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  | In July
  2003, the Company granted options to purchase an aggregate of 501,200
  ordinary shares to directors, executive officers and employees. All of these
  options were granted at an exercise price of zero. The options vest over 4
  years from the date of the grant, with 30% to vest at the end of each of the
  first three years and the remaining 10% to vest at the end of the fourth year
  following the grant date. The Company recorded deferred stock-based
  compensation of $631 for the year ended December 31, 2003 in regard to this
  grant. As of December 31, 2004, options to purchase 421,000 shares were
  outstanding with an exercise price of $0.00 per share.
|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  | 2003 Share
  Option Plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  | In October
  2003, the Company adopted the 2003 Share Option Plan. The total number of
  options, which may be granted to directors, officers, employees and
  consultants under this plan, is limited to 998,800 options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                  | In December
  2003, the Company granted options to purchase an aggregate of 859,500 ordinary
  shares to directors, officers and employees. All of these options were
  granted at an exercise price at or above the estimated fair value per
  ordinary share at the date of grant. The options vest over 4 years from the
  date of the grant, with 30% to vest at the end of each of the first three
  years and the remaining 10% to vest at the end of the fourth year following
  the grant date. As of December 31, 2004, options to purchase 829,000 shares
  were outstanding with an exercise price of $2.98 per share.                                                                

F18

---

---



CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004
(US Dollars in thousands)

|             |                                  |                                                                   
|------------ | -------------------------------- | ------------------------------------------------------------------
|NOTE 11     | SHAREHOLDERS EQUITY (continued)
|             |                                  |                                                                   
|             | c.                               | Share options: (continued)                                        
|             |                                  |                                                                   
|             |                                  | Share
  option activity during the past three years is as follows:

| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      |  |  |  |           |   |  |  |      |  | 
| | ------------------------ |  | ------------------------- | --------- | ----------------------------------------- |  | -------------------- | ---- | ----------------------------------------- |  | -------------------- | ---------- | ----------------------------------------- |  |  | ---- |  |  |  | --------- | - |  |  | ---- |  | 
| |                          |  | Year Ended
  December 31, |          
| |                          |  |                           |          
| |                          |  | 2002                      |           | 2003                                      |  | 2004                 |     
| |                          |  |                           |           |                                           |  |                      |     
| |                          |  | Number
  of
  shares      |           | Weighted
  average
  exercise
  price US$ |  | Number
  of
  shares |      | Weighted
  average
  exercise
  price US$ |  | Number
  of
  shares |            | Weighted
  average
  exercise
  price US$ | 
| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      | 
| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      |  |  |  |          
| | Outstanding at January 1 |  |                           | 1,719,204 |                                           |  |                      | 4.19 |                                           |  |                      | 1,285,160  |                                           |  |  | 4.62 |  |  |  | 1,353,056 |   |  |  | 1.90 |  | 
| | Granted                  |  |                           | 72,918    |                                           |  |                      | 2.97 |                                           |  |                      | 1,360,700  |                                           |  |  | 1.88 |  |  |  |          |   |  |  |     |  | 
| | Forfeited                |  |                           | (499,452  | )                                         |  |                      | 2.96 |                                           |  |                      | (1,292,804 | )                                         |  |  | 4.59 |  |  |  | (82,328   | ) |  |  | 1.16 |  | 
| | Exercised                |  |                           | (7,510    | )                                         |  |                      | 1.33 |                                           |  |                      |           |                                           |  |  |      |  |  |  | (20,728   | ) |  |  | 0.00 |  | 
| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      |  |  |  |           |   |  |  |      |  | 
| | Outstanding at year end  |  |                           | 1,285,160 |                                           |  |                      | 4.62 |                                           |  |                      | 1,353,056  |                                           |  |  | 1.90 |  |  |  | 1,250,000 |   |  |  | 1.98 |  | 
| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      |  |  |  |           |   |  |  |      |  | 
| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      |  |  |  |           |   |  |  |      |  | 
| | Exercisable at year end  |  |                           | 697,346   |                                           |  |                      | 4.81 |                                           |  |                      |           |                                           |  |  |     |  |  |  | 375,300   |   |  |  | 1.98 |  | 
| |                          |  |                           |           |                                           |  |                      |      |                                           |  |                      |            |                                           |  |  |      |  |  |  |           |   |  |  |      |  | 

| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | The
  following table summarizes information about share options at
  December 31, 2004:

| |                                |  |                      |           |                                                                     |  |                                             |      |                       |  |                                              |  |      |  |  |  |         |  |  |  |      |  | 
| | ------------------------------ |  | -------------------- | --------- | ------------------------------------------------------------------- |  | ------------------------------------------- | ---- | --------------------- |  | -------------------------------------------- |  | ---- |  |  |  | ------- |  |  |  | ---- |  | 
| | Range of 
  exercise price US$ |  | Number
  outstanding |           | Weighted 
  average 
  remaining 
  contractual 
  life 
  in years |  | Weighted 
  average 
  exercise
  price US$ |      | Number 
  exercisable |  | Weighted 
  average 
  exercise 
  price US$ | 
| |                                |  |                      |           |                                                                     |  |                                             |      |                       |  |                                              | 
| |                                |  |                      |           |                                                                     |  |                                             |      |                       |  |                                              |  |      |  |  |  |        
| | 0.00                           |  |                      | 421,000   |                                                                     |  |                                             | 2.87 |                       |  |                                              |  | 0.00 |  |  |  | 126,300 |  |  |  | 0.00 |  | 
| | 2.983.29                      |  |                      | 829,000   |                                                                     |  |                                             | 8.99 |                       |  |                                              |  | 2.98 |  |  |  | 249,000 |  |  |  | 2.98 |  | 
| |                                |  |                      |           |                                                                     |  |                                             |      |                       |  |                                              |  |      |  |  |  |         |  |  |  |      |  | 
| |                                |  |                      | 1,250,000 |                                                                     |  |                                             | 6.93 |                       |  |                                              |  | 1.98 |  |  |  | 375,300 |  |  |  | 1.98 |  | 
| |                                |  |                      |           |                                                                     |  |                                             |      |                       |  |                                              |  |      |  |  |  |         |  |  |  |      |  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Treasury stock:                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                       
| |    | On
  September 17, 2001, the Board of Directors authorized a share repurchase
  program to acquire up to $3,000 of the Companys ordinary shares. During
  September 2001, the Company purchased 250,000 ordinary shares at a cost of
  $592 and during 2002, the Company purchased 761,619 ordinary shares at a
  total cost of $401 in connection with such program.

F19

---

---



CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004
(US Dollars in thousands)

|             |                                                                                                                                                                                                                                                                  
|------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12     | GEOGRAPHIC INFORMATION                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                  
|             | Substantially
  all fixed assets are located in Israel and substantially all revenues are
  derived from shipments to other countries. Revenues are attributable to
  geographic areas/countries based upon the destination of shipment of products
  as follows:

| |                       |  |                           |        |      |  |        |  |  |        | 
| | --------------------- |  | ------------------------- | ------ | ---- |  | ------ |  |  | ------ | 
| |                       |  | Year Ended
  December 31, |       
| |                       |  |                           |       
| |                       |  | 2002                      |        | 2003 |  | 2004   | 
| |                       |  |                           |        |      |  |        | 
| |                       |  | US dollars                |       
| |                       |  |                           |       
| |                       |  |                           |        |      |  |        |  |  |        | 
| | China
  and Hong Kong |  |                           | 9,722  |      |  | 10,520 |  |  | 29,576 | 
| | Taiwan                |  |                           | 5,956  |      |  | 10,717 |  |  | 14,574 | 
| | Japan                 |  |                           | 1,332  |      |  | 2,563  |  |  | 3,533  | 
| | Other
  Asia          |  |                           | 1,170  |      |  | 1,139  |  |  | 5,341  | 
| | United
  States       |  |                           | 2,020  |      |  | 2,465  |  |  | 8,116  | 
| | Western
  Europe      |  |                           | 2,162  |      |  | 2,737  |  |  | 4,780  | 
| | Rest
  of the world   |  |                           | 231    |      |  | 1,000  |  |  | 1,499  | 
| |                       |  |                           |        |      |  |        |  |  |        | 
| |                       |  |                           | 22,593 |      |  | 31,141 |  |  | 67,419 | 
| |                       |  |                           |        |      |  |        |  |  |        | 

|             |                                |                                              
|------------ | ------------------------------ | ---------------------------------------------
|NOTE 13     | SELECTED INCOME STATEMENT DATA
|             |                                |                                              
|             | a.                             | Selling, general and administrative expenses:

| |                                           |  |                           |        |      |  |        |  |  |        | 
| | ----------------------------------------- |  | ------------------------- | ------ | ---- |  | ------ |  |  | ------ | 
| |                                           |  | Year Ended
  December 31, |       
| |                                           |  |                           |       
| |                                           |  | 2002                      |        | 2003 |  | 2004   | 
| |                                           |  |                           |        |      |  |        | 
| |                                           |  | US dollars                |       
| |                                           |  |                           |       
| |                                           |  |                           |        |      |  |        |  |  |        | 
| | Selling*                                  |  |                           | 7,497  |      |  | 7,383  |  |  | 12,819 | 
| | General
  and administrative              |  |                           | 2,560  |      |  | 2,658  |  |  | 3,134  | 
| |                                           |  |                           |        |      |  |        |  |  |        | 
| |                                           |  |                           | 10,057 |      |  | 10,041 |  |  | 15,953 | 
| |                                           |  |                           |        |      |  |        |  |  |        | 
| |                                           |  |                           |        |      |  |        |  |  |        | 
| | *
  Including shipping and handling costs |  |                           | 519    |      |  | 727    |  |  | 2,066  | 
| |                                           |  |                           |        |      |  |        |  |  |        | 

| |    |                                                                                                                                                                                                                        
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Financial and other income (loss), net:                                                                                                                                                                                
| |    |                                                                                                                                                                                                                        
| |    | Financial
  and other income (expense), net includes interest income of $529, $137 and
  $142 in 2002, 2003 and 2004, respectively, and interest expense of $340, $306
  and $592 in 2002, 2003 and 2004, respectively.
| |    |                                                                                                                                                                                                                        
| | c. | Aborted share issuance expenses:                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                        
| |    | During
  2004, the Company decided to abandon its plan for a secondary share offering
  to the public. The total accrued expenses related to this offering were
  $1,122 which were fully written-off in 2004.         

F20

---

---



CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004
(US Dollars in thousands)

|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------ | --------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14     | TAXES ON INCOME
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             | a.              | Tax under various laws:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                 | The
  Company and its subsidiaries are assessed for tax purposes on an
  unconsolidated basis. The Company is assessed under the provisions of the
  Income Tax Law (Inflationary Adjustments), 1985, pursuant to which the
  results for tax purposes are measured in Israeli currency in real terms in
  accordance with changes in the Israeli Consumer Price Index (CPI). Each of
  the subsidiaries is subject to the tax rules prevailing in the country of
  incorporation.                                                                                                                                                                                                                                                                                        
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             | b.              | Tax benefits under the Law for Encouragement of Capital
  Investments, 1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                 | The
  Companys production facilities have been granted approved enterprise
  status under the above law. The Company participates in the Alternative
  Benefits Program and, accordingly, income from its approved enterprises will
  be tax exempt for a period of 10 years, commencing in the first year in which
  the approved enterprise first generates taxable income due to the fact that
  the Company operates in Zone A in Israel.                                                                                                                                                                                                                                                                                                                          
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                 | The
  period of benefits relating to the most recently approved enterprise
  production facilities will expire in 2008. The tax benefits with regard to
  the first approved enterprise production facilities expired on
  December 31, 1999. In the event of distributions of cash dividends from
  tax-exempt income, the Company would have to pay the 25% tax in respect of
  the amount distributed (for this purpose the amount distributed includes the
  amount of the Companys tax that applies as a result of the distribution).
  The Company has decided to reinvest the amount of the tax-exempt income, and
  not to distribute such income as cash dividends. Accordingly, no deferred
  income tax has been provided with respect to the tax-exempt income.
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                 | Undistributed
  taxable earnings in Israel, for which taxes have not been provided,
  aggregated $17,253 at December 31, 2003. The amount of tax that would be
  owed if such amounts were distributed would be approximately $4,313 at
  December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                 | The
  entitlement to the above benefits is conditional upon the Companys
  fulfilling the conditions stipulated by the above law, regulations there
  under and the certificate of approval for the specific investments in
  approved enterprises. In the event of failure to comply with these
  conditions, the benefits may be canceled and the Company may be required to
  refund the amount of the benefits, in whole or in part, with the addition of
  linkage to the CPI and interest.                                                                                                                                                                                                                                                                           
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             | c.              | Tax benefits under the Law for the Encouragement of
  Industry (Taxes), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                 | The
  Company is an industrial company as defined by this law and as such is
  entitled to certain tax benefits, mainly accelerated depreciation as
  prescribed by regulations published under the Inflationary Adjustments Law
  and the right to deduct issuance costs as an expense for tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F21

---

---



CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004
(US Dollars in thousands)

| |    |                                       
| | -- | --------------------------------------
| | d. | Composition
  of income tax provision:

| |                                         |  |                         |         |      |  |        |   |  |         |  
| | --------------------------------------- |  | ----------------------- | ------- | ---- |  | ------ | - |  | ------- | -
| |                                         |  | Year Ended December 31, |        
| |                                         |  |                         |        
| |                                         |  | 2002                    |         | 2003 |  | 2004   |  
| |                                         |  |                         |         |      |  |        |  
| |                                         |  | US dollars              |        
| |                                         |  |                         |        
| | Income
  (loss) before taxes on income: |  |                         |         |      |  |        |   |  |         |  
| | Israel                                  |  |                         | (7,503  | )    |  | 874    |   |  | 12,710  |  
| | Non-Israeli                             |  |                         | (3,270  | )    |  | (2,218 | ) |  | (1,414  | )
| |                                         |  |                         |         |      |  |        |   |  |         |  
| |                                         |  |                         | (10,773 | )    |  | (1,344 | ) |  | (11,296 | )
| |                                         |  |                         |         |      |  |        |   |  |         |  
| |                                         |  |                         |         |      |  |        |   |  |         |  
| | Income
  tax (benefit) provision:       |  |                         |         |      |  |        |   |  |         |  
| | Current:                                |  |                         |         |      |  |        |   |  |         |  
| | Israel                                  |  |                         |        |      |  | 225    | * |  | 533     | *
| | Non-Israeli                             |  |                         | (31     | )    |  |       |   |  | (34     | )
| |                                         |  |                         |         |      |  |        |   |  |         |  
| |                                         |  |                         | (31     | )    |  | 225    |   |  | 499     |  
| |                                         |  |                         |         |      |  |        |   |  |         |  
| | Deferred:                               |  |                         |         |      |  |        |   |  |         |  
| | Israel                                  |  |                         | 550     |      |  |       |   |  |        |  
| | Non-Israeli                             |  |                         |        |      |  |       |   |  |        |  
| |                                         |  |                         |         |      |  |        |   |  |         |  
| |                                         |  |                         | 550     |      |  |       |   |  |        |  
| |                                         |  |                         |         |      |  |        |   |  |         |  
| |                                         |  |                         | 519     |      |  | 225    |   |  | 499     |  
| |                                         |  |                         |         |      |  |        |   |  |         |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *
  On March 31, 2004, a settlement was reached between the Company and the
  Israeli tax authorities over disputed assessments for the 1999, 2000 and 2001
  tax years. Under the settlement reached, the Company paid a total of $685 to
  settle approximately $6.7 million in assessments previously demanded by the
  Israeli tax authorities with respect to the 1999-2001 tax years. In addition,
  the Company will continue to calculate its applicable tax benefits for the
  subsequent years of the Israeli tax benefits program in which it currently
  participates (2002-2007) at the rates previously disputed by the Israeli tax authorities.
  The settlement amount resulted in a one-time provision for income taxes of
  $460 in the first quarter of 2004, in addition to the $225 that was reserved
  for this purpose in the fourth quarter of 2003.

F22

---

---



CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004
(US Dollars in thousands)

|             |                             |                                                                                                                                                                                                    
|------------ | --------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14     | TAXES ON INCOME (continued)
|             |                             |                                                                                                                                                                                                    
|             | e.                          | Taxes on income included in the income statements:                                                                                                                                                 
|             |                             |                                                                                                                                                                                                    
|             |                             | The
  following is a reconciliation of the theoretical tax expense (benefit), assuming
  all income is taxed at the regular tax rate applicable to Israeli companies,
  and the actual tax expense:

| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------ | - | - | ------ | -
| |                                                                                                                                                 |  | Year Ended
  December 31, |        
| |                                                                                                                                                 |  |                           |        
| |                                                                                                                                                 |  | 2002                      |         | 2003 |   | 2004   |  
| |                                                                                                                                                 |  |                           |         |      |   |        |  
| |                                                                                                                                                 |  | US dollars                |        
| |                                                                                                                                                 |  |                           |        
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Income
  (Loss) before income taxes (a)                                                                                                         |  |                           | (10,773 | )    |   | (1,344 | ) |   | 11,296 |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Theoretical tax provision (benefit)
on the
  above amount at 35% in 2004 and 36% in 2002 and 2003                                               |  |                           | (3,878  | )    |   | (483   | ) |   | 3,954  |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Tax
  benefits arising from approved enterprises                                                                                              |  |                           |        |      |   |       |   |   | (238   | )
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| |                                                                                                                                                 |  |                           | (3,878  | )    |   | (483   | ) |   | 3,716  |  
| | Increase
  (decrease) in taxes resulting from:                                                                                                  |  |                           |         |      |   |        |   |   |        |  
| | Losses for which no tax benefit has
been
  recorded                                                                                             |  |                           | 4,206   |      |   | 1,415  |   |   | 1,029  |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Permanent differences, including
  difference between Israeli CPI-adjusted tax returns and dollar-adjusted financial
statements-net             |  |                           | (154    | )    |   | (896   | ) |   | 11     |  
| | Other                                                                                                                                           |  |                           | (58     | )    |   | 3      |   |   |       |  
| | Interest income not subject to
tax                                                                                                              |  |                           | (147    | )    |   |       |   |   |       |  
| | Increase in valuation allowance
related to                                                                                                      |  |                           |         |      |   |        |   |   |        |  
| | Deferred tax asset balance at beginning of year                                                                                                 |  |                           | 550     |      |   |       |   |   |       |  
| | Decrease in taxes resulting from
  utilization of carryforward tax losses for which deferred tax benefits were
  not provided in previous years |  |                           |        |      |   | (39    | ) |   | (4,790 | )
| | Tax
  expenses due to previous years*                                                                                                           |  |                           |        |      |   | 225    |   |   | 533    |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Actual
  tax expenses                                                                                                                           |  |                           | 519     |      |   | 225    |   |   | 449    |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| |                                                                                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Per
  share effect of tax benefits from approved enterprises:                                                                                 |  |                           |         |      |   |        |   |   |        |  
| | Basic                                                                                                                                           |  | $                         | 0.00    |      | $ | 0.00   |   | $ | 0.01   |  
| | Diluted                                                                                                                                         |  | $                         | 0.00    |      | $ | 0.00   |   | $ | 0.01   |  

F23

---

---



CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004
(US Dollars in thousands)

|             |                             |                                                               
|------------ | --------------------------- | --------------------------------------------------------------
|NOTE 14     | TAXES ON INCOME (continued)
|             |                             |                                                               
|             | f.                          | Taxes on income included in the balance sheet:                
|             |                             |                                                               
|             |                             | Deferred
  tax assets consist of the following at December 31:

| |                                                |  |            |        |      |  |        |  
| | ---------------------------------------------- |  | ---------- | ------ | ---- |  | ------ | -
| |                                                |  | 2003       |        | 2004 | 
| |                                                |  |            |        |      | 
| |                                                |  | US dollars |       
| |                                                |  |            |       
| |                                                |  |            |        |      |  |        |  
| | Current:                                       |  |            |        |      |  |        |  
| | Provision
  for doubtful accounts              |  |            | 550    |      |  | 484    |  
| | Accrued
  warranty                             |  |            | 19     |      |  | 146    |  
| | Unearned
  revenue                             |  |            | 93     |      |  | 137    |  
| | Net
  operating losses carryforwards           |  |            | 5,614  |      |  | 3,429  |  
| | Accrued
  vacation                             |  |            | 128    |      |  | 31     |  
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            | 6,404  |      |  | 4,227  |  
| | Valuation
  allowance                          |  |            | (6,404 | )    |  | (4,227 | )
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            |        |      |  |        |  
| | Current
  deferred tax asset, net of allowance |  |            |       |      |  |       |  
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            |        |      |  |        |  
| | Long-term:                                     |  |            |        |      |  |        |  
| | Severance
  pay                                |  |            | 62     |      |  | 7      |  
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            | 62     |      |  | 7      |  
| | Valuation
  allowance                          |  |            | (62    | )    |  | (7     | )
| |                                                |  |            |        |      |  |        |  
| |                                                |  |            |       |      |  |       |  
| |                                                |  |            |        |      |  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Under SFAS No. 109,
  deferred tax assets are to be recognized for the anticipated tax benefits
  associated with net operating loss carryforwards and deductible temporary
  differences, unless it is more likely than not that some or all of the
  deferred tax assets will not be realized. The adjustment is made by a
  valuation allowance.                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Since the realization of
  the net operating loss carryforwards and deductible temporary differences is
  uncertain and not considered more likely than not, a valuation allowance has
  been established for the full amount of the tax benefits.                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | As
  of December 31, 2004, the Company has net operating loss (NOL)
  carryforwards for Israeli tax purposes of approximately $3,422, which may be
  used to offset taxable income, subject to annual limitations. Such NOL has no
  expiration date. In addition, foreign subsidiaries have NOL carryforwards
  aggregating approximately $9,650, of which approximately $4,050 expires from
  2005 to 2009, approximately $2,550 expires from 2021 to 2023 and
  approximately $3,050 has no expiration date.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | v. | Reduction
  in corporate income tax rate in Israel:                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Due to tax legislation
  approved June 2004, Israeli corporate income tax rates will be gradually
  reduced, from 36% to 30%, as follows: 35% in 2004, 34% in 2005, 32% in 2006
  and 30% in 2007 and thereon.                                                                                                                                                                                                                                                                                                   

F24

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CAMTEK LTD.
Notes to consolidated financial statements
as of December 31, 2004 
(US Dollars in thousands)

|             |                                  
|------------ | ---------------------------------
|NOTE 15     | TRANSACTIONS WITH RELATED PARTIES

| |                                                        |  |                           |     |      |  |      |   |  |       |  
| | ------------------------------------------------------ |  | ------------------------- | --- | ---- |  | ---- | - |  | ----- | -
| |                                                        |  | Year Ended
  December 31, |    
| |                                                        |  |                           |    
| |                                                        |  | 2002                      |     | 2003 |  | 2004 |  
| |                                                        |  |                           |     |      |  |      |  
| |                                                        |  | US dollars                |    
| |                                                        |  |                           |    
| |                                                        |  |                           |     |      |  |      |   |  |       |  
| | Purchases
  from Priortech Ltd. (including affiliates) |  |                           | 532 |      |  | 733  |   |  | 1,122 |  
| | Interest
  expense (income) to (from) Priortech Ltd.   |  |                           | 29  |      |  | (42  | ) |  | (30   | )
| | Sales
  to Priortech Ltd. (including affiliates)       |  |                           |    |      |  | (190 | ) |  | (230  | )

F25

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