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|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON, 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

xAnnual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal
year ended December 31, 2007

or

oTransition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

or

o Shell Company report pursuant to Section 13 or
15 (d) of the Securities Exchange Act of 1934 \
Date of event requiring this shall Company report ___________

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)

Raanan Dekel, Telephone: (972) (4) 6048100,
Facsimile: (972) (4) 6440523, E-mail:
raanand@camtek.co.il,Ramat Gavriel Industrial Zone, P.O. BOX 544,
Migdal HaEmek, Israel(Name, Telephone, Facsimile, E-Mail and Address of Company Contact
Person)

Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Ordinary Shares, nominal value 0.01 New Israeli Shekel per share
(Title of each Class)

Nasdaq Global Market
(Name of each Exchange on which registered)

Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)

1

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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:


30,133,715 Ordinary Shares, par value NIS
0.01


| |                                                                                                                                                                                                                                                                                                                                                               |                                                                                                           | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | 
| | Indicate by
 check mark if the registrant is a well-known seasoned issuer, as defined in
 Rule 405 of the Securities Act.                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                              
| | o Yes
 x No                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                              
| | If this
 report is an annual or transition report, indicate by check mark if the
 registrant is not required to file reports pursuant to Section 13 or 15(d) of
 the Securities Exchange Act of 1934.                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                              
| | o Yes
 x No                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                              
| | Indicate by
 check mark whether the registrant (1) has filed all reports required to be
 filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
 the preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days.
| |                                                                                                                                                                                                                                                                                                                                                              
| | x Yes
 o No                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                              
| | Indicate by
 check mark whether the registrant is a large accelerated filer, an
 accelerated filer, or a non-accelerated filer. See definition of accelerated
 filer and large accelerated filer in Rule 12b-2 of the Exchange Act.                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                              
| | o
 Large Accelerated
 Filer
 o
 Accelerated Filer
 x
 Non-Accelerated Filer                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                              
| | Indicate by
 check mark which basis of accounting the registrant has used to prepare the
 financial statements included in this filing:                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                               | US GAAP x                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                               |                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                               | International
 Financial Reporting Standards as issued by the International Accounting
 Standards Board o
| |                                                                                                                                                                                                                                                                                                                                                               |                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                               | Other o                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                              
| | If
 Other has been checked in response to the previous question, indicate by
 check mark which financial statement item the registrant has elected to
 follow.                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                              
| | Item 17 oItem
 18o                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                              
| | If this is
 an annual report, indicate by check mark whether the registrant is a shell
 company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                              
| | o Yes
 x No                                                                                                                                                                                                                                                                                                                                                  

2

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TABLE OF CONTENTS

|          |  |                                                                               |  |     
|--------- |  | ----------------------------------------------------------------------------- |  | ----
|          |  |                                                                               |  | PAGE
|          |  |                                                                               |  |     
|          |  |                                                                               |  |     
|PART I    |  |                                                                               |  | 5   
|          |  |                                                                               |  |     
|Item 1.   |  | Identity of Directors, Senior Management and Advisers                         |  | 5   
|          |  |                                                                               |  |     
|Item 2.   |  | Offer Statistics and Expected Timetable                                       |  | 5   
|          |  |                                                                               |  |     
|Item 3.   |  | Key Information                                                               |  | 5   
|          |  |                                                                               |  |     
|Item 4.   |  | Information on the Company                                                    |  | 18  
|          |  |                                                                               |  |     
|Item 4A.  |  | Unresolved Staff Comments                                                     |  | 26  
|          |  |                                                                               |  |     
|Item 5.   |  | Operating and Financial Review and Prospects                                  |  | 26  
|          |  |                                                                               |  |     
|Item 6.   |  | Directors, Senior Management and Employees                                    |  | 36  
|          |  |                                                                               |  |     
|Item 7.   |  | Major Shareholders and Related Party Transactions                             |  | 48  
|          |  |                                                                               |  |     
|Item 8.   |  | Financial Information                                                         |  | 49  
|          |  |                                                                               |  |     
|Item 9.   |  | The Offer and Listing                                                         |  | 51  
|          |  |                                                                               |  |     
|Item 10.  |  | Additional Information                                                        |  | 52  
|          |  |                                                                               |  |     
|Item 11.  |  | Quantitative and Qualitative Disclosures About Market Risk                    |  | 66  
|          |  |                                                                               |  |     
|Item 12.  |  | Description of Securities Other than Equity Securities                        |  | 66  
|          |  |                                                                               |  |     
|PART II   |  |                                                                               |  | 67  
|          |  |                                                                               |  |     
|Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                               |  | 67  
|          |  |                                                                               |  |     
|Item 14.  |  | Material Modifications to the Rights of Security Holders and Use
 of Proceeds |  | 67  
|          |  |                                                                               |  |     
|Item 15T. |  | Controls and Procedures                                                       |  | 67  
|          |  |                                                                               |  |     
|Item 16A. |  | Audit Committee Financial Expert                                              |  | 67  
|          |  |                                                                               |  |     
|Item 16B. |  | Code of Ethics                                                                |  | 68  
|          |  |                                                                               |  |     
|Item 16C. |  | Principal Accounting Fees and Services                                        |  | 68  
|          |  |                                                                               |  |     
|Item 16D. |  | Exemptions from the Listing Standards for Audit Committees                    |  | 68  
|          |  |                                                                               |  |     
|Item 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated
 Purchasers       |  | 69  
|          |  |                                                                               |  |     
|PART III  |  |                                                                               |  | 69  
|          |  |                                                                               |  |     
|Item 17.  |  | Financial Statements                                                          |  | 69  
|          |  |                                                                               |  |     
|Item 18.  |  | Financial Statements                                                          |  | 69  
|          |  |                                                                               |  |     
|Item 19.  |  | Exhibits                                                                      |  | 70  
|          |  |                                                                               |  |     

3

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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, you 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. You should not place undue reliance on
forward-looking statements.

As used in
this annual report, the terms we, us, our, the Company and Camtek
mean Camtek Ltd. and its subsidiaries, unless otherwise indicated.

4

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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 selected data under the captions Selected Statement of
 Operations Data for the years ended December 31, 2005, 2006 and 2007, and
 Selected Balance Sheet Data as of December 31, 2006 and 2007 from the
 audited consolidated financial statements included elsewhere in this annual
 report. The consolidated financial statements as of December 31, 2005, have
 been jointly audited by Goldstein Sabo Tevet and Brightman Almagor & Co.,
 a member firm of Deloitte Touche Tohmatsu, independent registered public
 accounting firm. Further, the consolidated financial statements for each of
 the two years in the two year period ended December 31, 2007, have been
 audited by Somekh Chaikin, a member firm of KPMG International, independent
 registered public accounting firm. We derived the selected data under the
 caption Selected Statement of Operations Data for the years ended December
 31, 2003 and 2004 and Selected Balance Sheet Data as of December 31, 2003
 and 2004 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 consolidated financial statements are prepared in accordance with
 accounting principles generally accepted in the United States.

5

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|                                                        |  |                                       |        |      |   |        |   |      |        |      |   |         |   |   |        |  
|------------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------- | - | - | ------ | -
|                                                        |  | Year Ended December 31,               |       
|                                                        |  |                                       |       
|                                                        |  | 2003                                  |        | 2004 |   | 2005   |   | 2006 |        | 2007 |  
|                                                        |  |                                       |        |      |   |        |   |      |        |      |  
|                                                        |  | (in
thousands, except per share data) |       
|Selected Statement of Operations Data:                  |  |                                       |        |      |   |        |   |      |        |      |   |         |   |   |        |  
|Revenues:                                               |  |                                       |        |      |   |        |   |      |        |      |   |         |   |   |        |  
|Sales of products                                       |  | $                                     | 26,567 |      | $ | 63,353 |   | $    | 56,987 |      | $ | 92,470  |   | $ | 59,654 |  
|Service fees                                            |  |                                       | 4,574  |      |   | 4,066  |   |      | 6,045  |      |   | 7,585   |   |   | 11,315 |  
|Total revenues                                          |  |                                       | 31,141 |      |   | 67,419 |   |      | 63,032 |      |   | 100,055 |   |   | 70,969 |  
|Cost of revenues:                                       |  |                                       |        |      |   |        |   |      |        |      |   |         |   |   |        |  
|Cost of products sold                                   |  |                                       | 13,214 |      |   | 28,193 |   |      | 28,262 |      |   | 42,600  |   |   | 32,769 |  
|Cost of services                                        |  |                                       | 3,460  |      |   | 3,168  |   |      | 4,519  |      |   | 5,842   |   |   | 9,171  |  
|Royalties to the Government of Israel                   |  |                                       | 150    |      |   | -      |   |      | -      |      |   | -       |   |   | -      |  
|Total cost of revenues                                  |  |                                       | 16,824 |      |   | 31,361 |   |      | 32,781 |      |   | 48,442  |   |   | 41,940 |  
|Gross profit                                            |  |                                       | 14,317 |      |   | 36,058 |   |      | 30,251 |      |   | 51,613  |   |   | 29,029 |  
|Research and development costs                          |  |                                       | 5,855  |      |   | 7,328  |   |      | 8,469  |      |   | 11,831  |   |   | 12,111 |  
|Selling, general and administrative expenses            |  |                                       | 10,041 |      |   | 15,953 |   |      | 18,760 |      |   | 27,850  |   |   | 24,119 |  
|Operating income (loss)                                 |  |                                       | (1,579 | )    |   | 11,655 |   |      | 3,022  |      |   | 11,932  |   |   | (7,201 | )
|Financial and other income (expenses), net              |  |                                       | 235    |      |   | (359   | ) |      | (320   | )    |   | (288    | ) |   | (128   | )
|Income (loss) before income taxes                       |  |                                       | (1,344 | )    |   | 11,296 |   |      | 2,702  |      |   | 11,644  |   |   | (7,329 | )
|Income taxes                                            |  |                                       | 225    |      |   | 499    |   |      | -      |      |   | (41     | ) |   | (362   | )
|Net income (loss)                                       |  | $                                     | (1,569 | )    | $ | 10,797 |   | $    | 2,702  |      | $ | 11,603  |   | $ | (7,691 | )
|                                                       
|Earnings (loss) per ordinary share:                     |  |                                       |        |      |   |        |   |      |        |      |   |         |   |   |        |  
|Basic                                                   |  | $                                     | (0.06  | )    | $ | 0.40   |   | $    | 0.10   |      | $ | 0.40    |   | $ | (0.25  | )
|Diluted                                                 |  | $                                     | (0.06  | )    | $ | 0.39   |   | $    | 0.10   |      | $ | 0.39    |   | $ | (0.25  | )
|                                                       
|Weighted average number of ordinary shares outstanding: |  |                                       |        |      |   |        |   |      |        |      |   |         |   |   |        |  
|Basic                                                   |  |                                       | 27,053 |      |   | 27,114 |   |      | 27,253 |      |   | 29,176  |   |   | 30,145 |  
|Diluted                                                 |  |                                       | 27,053 |      |   | 27,800 |   |      | 27,586 |      |   | 29,553  |   |   | 30,145 |  

|                               |  |                |        |      |   |        |  |      |        |      |   |         |  |   |        | 
|------------------------------ |  | -------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------- |  | - | ------ | 
|                               |  | December 31,   |       
|                               |  |                |       
|                               |  | 2003           |        | 2004 |   | 2005   |  | 2006 |        | 2007 |  
|                               |  |                |        |      |   |        |  |      |        |      |  
|                               |  | (in
thousands) |       
|Selected
  Balance Sheet Data: |  |                |        |      |   |        |  |      |        |      |   |         |  |   |        | 
|Cash and cash equivalents      |  | $              | 12,837 |      | $ | 9,141  |  | $    | 8,714  |      | $ | 23,358  |  | $ | 18,601 | 
|Total assets                   |  |                | 54,186 |      |   | 68,643 |  |      | 75,239 |      |   | 110,806 |  |   | 98,465 | 
|Bank credit                    |  |                | 2,300  |      |   | 2,335  |  |      | -      |      |   | -       |  |   | -      | 
|Convertible Loan               |  |                | -      |      |   | -      |  |      | 5,000  |      |   | 5,000   |  |   | 5,000  | 
|Shareholders equity           |  |                | 38,851 |      |   | 49,776 |  |      | 52,618 |      |   | 80,138  |  |   | 72,906 | 

|   |                                           
|-- | ------------------------------------------
|B. | Capitalization and Indebtedness.          
|  
|   | Not applicable.                           
|  
|C. | Reasons for the Offer and Use of Proceeds.
|  
|   | Not applicable.                           

6

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|   |             
|-- | ------------
|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

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

We
incurred a net loss of $1.6 million for the year ended December 31, 2003.
Despite having had net income of $10.8 million, $2.7 million and $11.6 million
in 2004, 2005 and 2006 respectively, we incurred a net loss of $7.7 million in
2007. We may not be able to achieve 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.

The markets we target are: printed circuit board,
integrated circuit (IC) substrate and semiconductor manufacturing and packaging
industries. These markets are highly cyclical and the Company does not have any
information that enables it to predict the downturns in these markets.

The
printed circuit board, IC substrate and semiconductor manufacturing and
packaging industries are highly cyclical. The printed circuit board and the IC
substrate experienced a prolonged and severe downturn in 2002 and2003, during which the overall rate of
capital spending by printed circuit board and IC substrate manufacturers had
been sharply cut and sales of our products had declined. We experienced an
expansion and growth during 2004, a seasonal adjustment down in the first
quarter of 2005, and again, an expansion during the second half of 2005 and the
first half of 2006. In the second half of 2006 and first quarter of 2007, as a
result of a downturn in the semiconductor manufacturing and packaging industry,
our revenues had been cut down. In the second and third quarters of 2007, we
experienced an increase in revenues from the printed circuit board industry,
which resulted in our total revenues increase. In the fourth quarter of 2007
and the first quarter of 2008 we achieved stability in our quarterly revenues
level.

As
a result of this cyclicality, we saw during 2004 an increase in capital
spending in the printed circuit board and IC substrate industries, and sales of
our automated optical inspection, or AOI, systems to these manufacturers
increased. In 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 but in 2006 the demand from our clients in the printed circuit board
market increased again. In the first quarter of 2007 we had a seasonal
adjustment down but then an expansion during the second and third quarters of
2007, with a further adjustment down in the fourth quarter of 2007 and first
quarter of 2008.

Also,
the semiconductor manufacturing and packaging industry is characterized by
cyclicality, which is amplified in the back-end sector, where we operate. As a
result of our market penetration to the semiconductor manufacturing and
packaging industry, we experienced growth from this market from 2004 until the
second quarter of 2006. In the second half of 2006 we were affected by the
markets weakness, which continued to affect us until the third quarter of
2007. In the last quarter of 2007 and the first quarter of 2008 we experienced
growth unrelated to increased capacity in this market.

In
the event of a permanent reduction in demand, 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.

7

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We are planning to increase our revenues from the
semiconductor manufacturing and packaging industry with our Falcon system. If
our share in the market fails to grow, our results of operations will be
adversely affected.

Our
future success in the semiconductor manufacturing and packaging industry
depends on our ability to sustain and increase the acceptance rate of our AOI
technology and upon the acceptance by our customers of new applications we
included in our AOI systems. 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 our inability to obtain repeat orders from
our customers or to acquire customers who would adopt our systems for new
applications, an economic downturn, intensified competition, presentation to
the market of alternative technologies, changes in technology, changes in
product standards, or otherwise - our results will be adversely affected. In
2007 our revenues from the Falcon significantly decreased, due to a downturn in
the semiconductor manufacturing and packaging industry. We cannot assure you
that we will be able to increase Falcon revenues to or above the levels
previously achieved.

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

While
we are expanding our product lines and customer base, our sales process for new
products to new and existing customers 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 six months. 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 engineering
efforts to fix errors, customize tasks and add new features. As a result of all
of the above factors, our finished goods inventory totaled $15.85 million at
December 31, 2007, and our costs may increase disproportionately to our
revenues as our product lines and customer base expand. Moreover, 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 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.

We operate an international sales organization. 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. The majority of
our sales were in the Asia Pacific region. In 2007, our sales in the Asia
Pacific region accounted for approximately 82% of our total revenues, including
approximately 43% of our total revenues from sales in China and Hong Kong and
18% from sales in Taiwan. 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.

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.

8

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Competition
in the markets we serve is intense. During 2002, early 2003, first half of
2005, 2007 and during the first half of 2008, competition intensified due to
the reduced demand for the type of products that we manufacture. This resulted
from the general economic conditions, cyclical downturns in the electronics
industry and/or seasonal adjustments during those times. When competitors respond
to declining demand by offering discounts, free evaluation machines or more
favorable credit terms, we may need to implement the same methods in part or in
whole in order to maintain our market position. These 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, Lloyd-Doyle, ManiaBarco, Shirai and Utechzone. 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 IC substrate industry include Orbotech
Ltd., Dainippon Screen, ATI and Utechzone. In the semiconductor manufacturing
and packaging industry, our principal competitor and the dominant market
participant is Rudolph Technologies Inc. (which purchased the IP and bumped
wafer inspection line of RVSI in January 2008), with additional competitors
including Zygo (through acquisition of Solvision in February 2008), KLA-Tencor
(through acquisition of 96% ownership in ICOS in May 30, 2008), Topcon, Toray,
Tosok and Hitachi.

Since
we entered the final inspection of silicon wafers business in early 2004, there have been several
mergers and acquisitions that changed the competitive map; starting with
Rudolph Technologies Inc.s acquisition of August Technologies in 2005 and the
acquisition of the bumped wafer inspection line of RVSI in January 2008,
continuing with Solvisions acquisition by Zygo in February 2008 and the recent
purchase of 96% of ICOSs shares by KLA-Tencor in May 2008. These acquisitions
can reinforce the previously smaller competitors with resources, financial
backing and the better market position of the acquiring companies, while
bringing new forces to the marketplace. As a result, Camtek may need to
overcome unfavorable market perception and invest more R&D efforts in
maintaining its technological position.

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.

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, IC
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.

9

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We
seek to expand our activity into unsaturated markets adjacent to our existing
served markets, such as the inspection of silicon wafers at various steps
during their manufacturing process, inside the wafer fabrication
facility. Technological developments in production processes and in process
control may reduce the growth we anticipate in demand for inspection systems.
If this happens, we may not be able to cover our investments in penetrating
these markets, or will have to increase our R&D and marketing expense to
adapt our products to such changes.

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.

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
injunctive relief and damages. Currently, the issue being dealt with by the
court is the validity of the asserted patent, which expired in February 2008.
We believe that we have substantial defenses against the validity of Orbotechs
patent and substantial defenses against Orbotechs claims.

On
February 23, 2005, a lawsuit was filed against us in the District Court in
Jerusalem by Orbotech Ltd., alleging infringement of patent held by Orbotech
Ltd. regarding a specific illumination block (an apparatus for illuminating and
controlling the illumination of scanned objects), seeking injunctive relief and
damages. The court ruled, based on a courts scientific advisors opinion, that
Camtek allegedly infringed the patent, and granted Orbotech a provisional
remedy, i.e. interim relief, which prevents Camtek from manufacturing the
allegedly infringing illumination block in suit. Following the grant of the provisional
remedy by the District Court, the Company filed a motion for leave to appeal
(permission from the Israel Supreme Court to appeal the District Courts
decision to grant a provisional remedy). The Supreme Court rejected our
request. The claim is currently in the preliminary stage of discovery and only
after evidence is presented and cross examinations are conducted will a final
judgment be rendered by the District Court, subject to the right to appeal. In
February 2007, the patent referring to the specific illumination block expired.
Among others, the Company has filed two motions for the lawsuit to be
dismissed, both still pending. We believe that we have good defenses in the
infringement aspect of the claim. We further believe that we have claims with
respect to the validity of the asserted patent, as well as other defenses such
as estoppel and lack of good faith on the part of Orbotech.

On
July 14, 2005, a lawsuit was filed against us in the United States District
Court for the District of Minnesota by one of the Companys competitors in the
field of semiconductor manufacturing and packaging, August Technology
Corporation, or August (today Rudolph Technologies Inc. together with August
Technology Corporation), alleging infringement of a patent and seeking
injunctive relief and damages. We have filed an answer and counterclaims
alleging, inter-alia,
non-infringement, invalidity and unenforceability of the patent. Fact and
expert discovery have been completed. On February 2008 the Company filed a
motion for summary judgment of invalidity of the asserted patent. A hearing on
Camteks motion for summary judgment was held on April 25, 2008. The Court took
the motion under advisement and will issue an order in due course. We believe
that we have substantial defenses to Augusts allegations.

We
cannot assure you that we will be successful in our defense against these
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 incurred by the claimants 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 the claimants in
connection with these litigations. Even if we will be successful in our defense
against these claims, we may still incur significant legal expenses while
resolving  these matters.

10

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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. For example, Camteks Reference
Generator (CRG) software is a required component in every AOI system.
Recently, Mania Technologie AG, the parent company of Mania Technologie Belgium
NV, which is currently a single source supplier of CRG, has become insolvent
and therefore its future is unclear. Although we have taken and currently take
precautions against this kind of events, an unexpected termination or
disruption 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 may encounter difficulties in purchasing key components
and subsystems to meet increased 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. Therefore we are required to predict future demands. 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.

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

We are attempting to expand our activity in the markets we
operate in through M&A activity. Such activity may result in dilution,
operating difficulties and other adverse consequences.

We invest efforts in
attempting to develop new growth engines by acquisitions, where core
competencies may provide us with synergy and competitive advantages. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or impairment
related to goodwill and other intangible assets, any of which could harm our
business. In addition, acquisitions could require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all and may be dilutive. Furthermore, we compete for acquisition and investment
opportunities with other well established and well capitalized entities. There
can be no assurance that we will be able to locate acquisition or investment
opportunities upon favorable terms.

In
addition, our operation of any acquired business or assets could involve
numerous risks, including: post-merger integration problems; diversion of
managements attention from our core business; entering markets in which we
have little or no experience; and the loss of key employees of the acquired
operations.

11

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We
can not be certain that any future acquisition or merger will be successful. If
the operation of the business
of any future acquisition or merger disrupts our operations, our business may
suffer. In addition, even if we successfully integrate the acquired business
with our own, we may not receive the intended benefits of the acquisition.

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.

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 of foreign exchange fluctuations.

We generate most of our revenues in dollars but incur a
significant portion of our salary and operating expenses in NIS. Appreciation
between US dollar and NIS may adversely affect our result of operations in
dollar terms. 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. 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 major portion of the costs of our Israeli operations, such
as personnel, subcontractors, materials and facility-related costs, are
incurred in NIS. As a result, we bear the risk that our NIS costs, as expressed
in dollars, increase to the extent by which the continued significant
appreciation of the NIS in relation to the dollar, as experienced in 2007, will
increase our costs expressed in NIS and have an effect on our net income.

We incur a significant portion of our expenses in China in
the Yuan, and these expenses may rise with our increasing activities there.
While the value of the Yuan has generally been stable in recent years, we are
now facing appreciation of the Yuan against the dollar, which may adversely
affect our results of operations in dollar terms.

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

We have one major 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.

12

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We have a supplementary manufacturing facility in China, in which we currently manufacture one type of our verification systems, but
intend to expand our manufacturing activities there in the future. Therefore, we may be influenced by changing events in China; for
example, our manufacturing activity in China may suffer as a result
of changes in Chinas geopolitical status or fluctuations in its economic stability.
In addition, we may be exposed to sourcing risks, such as supply-chain and
business interruption issues. Further potential risks may be associated with
such issues as the protection of our intellectual property; the recruitment and
retention of skilled employees.

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

Our
revenues and net income (loss), in any particular period may be lower than
revenues and net income (loss), 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;                                          
| |   |                                                                                                
| |  | temporary shifts in
  industry capacity;                                                       
| |   |                                                                                                
| |  | the timing of installation
  or, in some cases, of acceptance of our products by our customers;
| |   |                                                                                                
| |  | interest and exchange
  rates; and                                                             
| |   |                                                                                                
| |  | the timing of issuing
  required import permits in certain countries into where we sell.       

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

Our
continued growth and success largely depend on the managerial and technical
skills of the members of our senior management and key employees. If we expand
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, who is currently
handling the development of our business in the Far East, 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.

13

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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 Ltd., 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. Despite Israeli law 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. Rafi Amit
acts as the Chief Executive Officer of the Company, on a full time basis, as
well as acting as the Companys and Priortechs Chairman of the Board Of
Directors. Mr. Yotam Stern, our Executive Vice President, Business &
Strategy, spends 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, after applying certain look-through rules, 75% or more
of our gross income is passive income, or at least 50% of our assets (averaged
quarterly) 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. This characterization could result in adverse U.S.
tax consequences to our shareholders, including gain realized on the sale of
our ordinary shares being taxed at as ordinary income rates rather than capital
gain rates, and could result in punitive interest charges being applied to such
sales proceeds. Rules similar to those applicable to dispositions generally
will apply to certain excess distributions with respect to our ordinary
shares. 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 2007 we were not a
PFIC. We currently expect that we will not be a PFIC in 2008. 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, 2008 or in a future taxable year. For a
discussion of how we might be characterized as a PFIC and the related tax
consequences, please see U.S. Federal Income Tax Considerations-Tax
Consequences If We Are a Passive Foreign Investment Company.

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, 2007 through June
25, 2008, the closing price of our ordinary shares ranged from $1.09 to $4.58.
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;

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| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
  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, 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. Currently, we are facing a purported class action complaint, as
detailed in Item 8A  Legal Proceedings. This purported class action complaint
could be protracted 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 61.7% 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.

Risks Relating to
Our Operations in Israel

Conducting business in Israel entails special
risks.

Our
principal offices, sole research and development facility and major
manufacturing facility 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;

15

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| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | 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.
In 2005, Israel executed its plan of unilateral disengagement from the Gaza
Strip and some parts of the West Bank and Hamas gained majority of the
Palestinian Parliament in the elections held in the Palestinian Authority.
Further, as a result of a civil war in the Gaza Strip between Hamas and Fatah
supporters, two different Palestinian governments were established  one by
Hamas in the Gaza Strip and one by Fatah in the West Bank. These events affect
Israels security, foreign relations and the stability of the region.
Furthermore, in the summer of 2006 Israel and Lebanon entered into war, which
lasted for a month and a half and affected the Northern part of Israel, where
we are located. Any further escalation in the hostilities referred to above 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. Increased hostilities, future
armed conflicts, political developments in other states in the region, or
continued or increased terrorism could make it more difficult for us to conduct
our operations in Israel, which could increase our costs and adversely affect
our financial results. 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. Some of our 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.

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.

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From
our inception through 2000, we received government grants from the Office of
the Chief Scientist of the Ministry of Industry and Trade (the 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 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, 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 a further significant amount
of royalties than the terms of the grants required, unless the amount of
production outside Israel is less than 10% of the original rate of production
and the OCS has not objected to the transfer of products. 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 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.

17

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

|   |                                       
|-- | --------------------------------------
|A. | History and Development of the Company

Our
legal and commercial name is Camtek Ltd. 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 integrated circuits (IC) substrates. In September 2001, we acquired a
developer and producer of AOI systems for the semiconductor manufacturing and
packaging industry, or MEP. 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. The first
revenue recognition of the Falcon system was in the second quarter of 2004, and
since then, Falcon sales increased to nearly $40 million in 2006 or 40% of the
total 2006 revenues. As a result of industry weakness, Falcon sales declined in
2007 to nearly $20 million or 29% of our total 2007 revenues.

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. On August 23, 2005 we raised $5
million as a convertible loan from FIMI Opportunity Fund L.P and FIMI Israel
Opportunity Fund, Limited Partnership (FIMI). On April 30, 2006, we completed a
private placement (the Private Placement) in which we issued 2,525,252 ordinary
shares to Israeli institutional investors at a price of $5.94 per share,
raising $14.5 million. The Private Placement also included warrants that,
during a period of four years, are exercisable into additional 1,262,626
ordinary shares at a price of $6.83 per share.

We
have been a public company since July 2000. In December 2005, we re-listed on
the Tel-Aviv Stock Exchange and became a dual listed company. Our headquarters
are located in Israel, and we have operations in the Asia Pacific region, North
America and Europe.

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

Our
principal executive offices are located in Ramat Gavriel Industrial Zone, P.O.
Box 544, Migdal HaEmek 23150, Israel, and our telephone number is
011-972-4-604-8100. Our agent for service of process in the United States is
Camtek USA, Inc., located at 2000 Wyatt
Dr., Santa Clara CA 95054, Tel: (408) 986 9640. 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.

Our Business

We
design, develop, manufacture and market automated optical inspection, or AOI,
systems and related products. AOI systems are computerized systems that
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 substrates for
interconnection of integrated circuit devices, or IC substrate, industry; and
the semiconductor manufacturing and packaging industry. Our systems provide our
customers with a high level of defect detection ability; are easy to operate
and offer high productivity. We have sold more than 2300 AOI systems in 34 countries
around the world. Our PCB customer base includes the majority of the largest
100 PCB manufacturers worldwide. Since the introduction of our Falcon line for
the semiconductor industry, we have sold over 150 Falcon systems to more than
30 semiconductor manufacturers, test and assembly houses and bumping service
providers, including 12 out of the top 15 Integrated Device Manufacturers
(IDM). Our global, direct customer support organization provides responsive,
localized pre and post sales support for our customers through our wholly-owned
subsidiaries.

18

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---



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 IC substrate industry; and the
semiconductor manufacturing and packaging industry, all part of the electronic
packaging industries and the electronics supply chain.

The Printed Circuit Board Industry

A
PCB is the basic platform that supports and interconnects a broad range of
electronic components, such as IC devices, resistors, capacitors, coils and the
like, and enables them to operate as an electronic system. PCBs consist of
traces, or lines, of conductive material, such as copper, laminated on either a
rigid or a flexible insulating base. These conductive lines provide electrical
interconnections between the components. The trace integrity and conformance to
exact dimensions are essential to the functioning of the electronic product.
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.

The
trend towards 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
producing multi-layer PCBs with increasingly 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 50 to 120 microns (0.002
to 0.005 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 are used for
inspection of inner layers. Today, the number of inner layers in typical
multi-layer PCBs usually ranges from 4 to 14, 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 IC Substrate Industry

The
pursuit of electronic products that deliver more functionality, and at the same
time are smaller, lighter and less power-consuming, drives the semiconductor
industry to produce ICs (dice) requiring more input/output connections. These
dice must fit into smaller packages. The IC substrate industry, in turn, supports
these trends with high-density interconnect substrates that serve as carriers
for the IC die, providing it mechanical and electrical connection to the
printed circuit board. These substrates feature conductive lines that are 12 to
50 μm (microns) in width. Although IC substrates 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
IC is connected to the upper side of the substrate, either by wire bonding by
means of thin metal wires, or by flipping the IC and directly connecting
conductive bumps on its face to a matching array of pads or bumps on the
substrate. The latter technology is known as flip chip die attach
(Flip-Chip). The IC substrate is connected to the PCB via an array of
conductive solder balls, known as a ball grid array, or BGA.

19

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---



The
complexity of IC substrates requires advanced inspection systems with high magnification
power for detecting minuscule defects that hinder production yields. Optical
inspection of IC substrates is implemented along the manufacturing process,
where the substrates are still in panel form, similar to PCB, and at the end of
the production process, where the substrates are cut to strips or packed in
trays. Due to the high integration level of todays electronic products,
defective substrates, that pass undetected, may render the entire product
unusable. Or, if assembled in a mission-critical system, they may cause a
catastrophic failure.

The Semiconductor Manufacturing and Packaging
Industry

The
semiconductor manufacturing industry produces circuits (ICs) on silicon or
other semiconductor materials in the form of thin wafers; each wafer consists
of numerous IC dice (chips). At the end of the wafer manufacturing process,
our AOI systems inspect the wafer for various defects. At this stage, AOI
systems verify that the dice are free of defects, and that the electronic probe
tips used for functional testing of the finished dice on the wafer have caused
no critical damage to the terminal pads on the die. AOI is essential at this
stage to help ensure the reliability and service life of the electronic device
after its assembly and packaging.

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
Flip-Chip 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. Wafers designed
for Flip-Chip assembly interconnect go through a process in which solder bumps
ranging from 30 to 150 microns in height, or gold bumps about 15 microns tall,
are plated or stenciled on pads on the face of the IC. In a similar technology
termed Chip-Scale Wafer Level Packaging (CS-WLP), larger bumps up to 300 to 500
micron tall are placed on the die and the entire wafer is coated with a thick
layer of polymer  usually epoxy. After dicing, the individual die is actually
a finished device, ready to be mounted directly on the PCB. AOI with 3-D
measurement capabilities is used to detect any missing, misplaced or deformed
bump and to determine bumps 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.

A
relatively small, but fast growing segment is Micro-Electro Mechanical Systems
(MEMS), which utilizes materials, manufacturing technologies and facilities
from the semiconductor industry to produce miniature mechanisms, such as inkjet
print heads, accelerometers, image sensors, video projection devices (DLP),
sensors and microphones. Many MEMS products are packaged between layers of
glass while still at the wafer format, and diced in several steps afterwards.
The MEMS manufacturing segment relies heavily on testing to ensure the product
performance and reliability. This testing may amount to a significant amount of
the overall product cost. AOI is implemented at various stages along the
manufacturing process to detect cracks, foreign materials or mechanical damage,
as well as confirm dimensional conformity, thus eliminating subsequent testing
of defective products, increasing yield and reducing overall production costs.

Products

Our AOI
systems consist of:

| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An
  electro-optical assembly unit, either movable or fixed, which consists of a
  video camera, precision optics and illumination sources. The electro-optical
  unit captures the image of the inspected product;
| |   |                                                                                                                                                                                                                    
| |  | A precise,
  movable table, that holds the inspected product;                                                                                                                                                      
| |   |                                                                                                                                                                                                                    
| |  | An
  electronic hardware unit, which operates the entire system and includes
  embedded components that process and analyze the captured image by using our
  proprietary algorithms.                              

20

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---



The inspected
product is placed on the movable table and is scanned under the optical
assembly unit. The optical assembly unit then captures images of the product,
while the electronic hardware unit processes the image using the analysis
algorithms. Detected discrepancies are logged and reported as defects per the
user preferences. The image of the defect is immediately available for
verification by the system operator. Our systems can also compile and
communicate statistical reports of inspection findings via the customers
factory information system.

We
offer a broad range of systems for automated optical inspection of
semiconductor wafers, IC substrates and PCBs. These systems are used to enhance
production yields and assist in controlling manufacturing processes at wafer
fabrication, 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 comes from
our design philosophy and applicable know-how in basing our products on
software-intensive architectures.

Automated Optical Inspection Systems for the
PCB and IC 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 final
inspection (AFI) of IC substrate; the Mustang line for final inspection (AFI)
of HD panels; the Planet for inspection of ultra-fine-line IC substrate; and
Large Area Masks (LAM) dedicated for inspection of artwork and photo masks.

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, real-time data collection for process control 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
designed to operate in Inspectify mode of operation. Inspectify is a unique
mode of operation enabling the operator to perform verification immediately
after inspection on the same system, thus saving time and eliminating
handling-related defects. 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 IC
substrates that are subsequently used in packaging of BGA and Chip Scale
Package (CSP) devices. The Pegasus inspects both sides of the substrate,
detecting process and mechanical defects in particular in the gold-plated areas
where the substrate will interconnect with the silicon die or the PCB and in
the solder-mask areas. Pegasus models handle substrates in strip format in
magazines. In December 2006 we introduced the Pegasus 200S, an enhanced product
for inspecting IC substrates in strip format.

21

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---



Mustang

The
Mustang line includes systems for automated inspection of finished HD panels
that are subsequently used in mobile consumer electronics, such as
mobile-phones, digital cameras, PDAs and other consumer electronic devices. The
Mustang inspects both sides of the panel, detecting process and mechanical
defects, in particular in the gold-plated areas where the substrate will
interconnect with the silicon die or the PCB and in the solder-mask areas.
Mustang models handle panels in panel format (up to 150 x 300mm) in magazines.
The Mustang 600 was first introduced in the first quarter of 2008.

Planet

Planet
is designed for the inspection of ultra-fine-line IC substrate, down to 10μm
line/space technologies. Introduced in June 2007, the Planet addresses the
inspection needs of the very high end of the IC substrate industry - ultra-fine
line. The Planet integrates our experience from both the semiconductor and PCB
markets into a totally new hardware architecture to deliver the robustness and
high resolution required for high speed detection of micron-scale defects.

Integrated AOI System

AIC

The
AIC (Automated Inspectify Center) integrates inspection and verification into
one efficient cell that maximizes productivity across the entire AOI operation.
Through its pickup and transfer mechanism, the AIC bridges between the Dragon
and Camteks verification station, CVR-200. Material flow is balanced and
streamlined at the Dragons scan rate. Since panels are on and off-loaded
automatically, handling-related defects are eliminated. 
Designed to increase overall productivity and yield, AIC delivers immediate
process-control feedback to the production line, saving both time and money,
and improving the final yield.

Verification Systems

Camtek
offers various stand-alone verification systems that enable verification of
panels after Inspection. Camtek designed the verification stations to meet
operators comfort during work while delivering high image quality.

CVR-100 is
designed for verification of panels after inspection on the Dragon or Orion
AOI; 
CVR-200 is designed for verification when working in AIC configuration; and 
PVS-200 is designed for the verification of IC Substrates (strips or units) and
HD panels after they were inspected by the Pegasus or by the Mustang.

Automated Optical Inspection Systems for the Semiconductor
Industry

Falcon

The
Falcons advanced algorithms and inspection capabilities enable its dedicated
models 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 functional 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:

| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3D and 2D
  metrology and inspection of bumped-wafer prepared for packaging in the
  flip-chip technology;                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                        
| |  | 2D metrology
  and inspection of finished wafers at the end of their manufacturing process
  and in test houses, where inspection adds the value of monitoring the marks
  left by the testing probe or protects expensive probe cards from damage by
  dust particles;
| |   |                                                                                                                                                                                                                                                                        
| |  | Post-dicing
  inspection of frame-mounted wafers at assembly and packaging facilities,
  where it adds the value of detecting dicing-related damage.                                                                                                                   
| |   |                                                                                                                                                                                                                                                                        
| |  | Inspection
  and metrology of MEMS and other special applications, where customized
  handling solutions and inspection capabilities are required for complex
  structures and non-standard materials.                                                                 

22

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Customers

Our
customer base includes the majority of the largest 100 PCB manufacturers
worldwide and over 40 semiconductor manufacturing, testing and packaging
companies. Our customers, many of whom have multiple facilities, are located in
34 countries throughout Asia, Europe and North America. No individual customer
accounted for more than 10% of our total revenues during 2005. In 2006 we had
one customer that accounted for about 10% of our total revenues, and in 2007 
again - no individual customer accounted for more than 10% of our total
revenues. In the IC substrate industry, our customers are typically dedicated
substrate manufacturers, but also include large PCB manufacturers who have
separate substrate manufacturing facilities. Our IC substrate customers are
located predominantly 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 semiconductor
devices.

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

| |                     |  |                             |        |      |  |         |  |  |        | 
| | ------------------- |  | --------------------------- | ------ | ---- |  | ------- |  |  | ------ | 
| |                     |  | Year Ended December 31,     |       
| |                     |  |                             |       
| |                     |  | 2005                        |        | 2006 |  | 2007    | 
| |                     |  |                             |        |      |  |         | 
| |                     |  | U.S. Dollars (In thousands) |       
| |                     |  |                             |       
| | China and Hong Kong |  |                             | 24,665 |      |  | 33,713  |  |  | 30,187 | 
| | Other Asia          |  |                             | 5,036  |      |  | 20,413  |  |  | 12,676 | 
| | United States       |  |                             | 11,484 |      |  | 15,622  |  |  | 3,983  | 
| | Taiwan              |  |                             | 12,258 |      |  | 12,895  |  |  | 12,935 | 
| | Western Europe      |  |                             | 6,597  |      |  | 9,170   |  |  | 8,081  | 
| | Japan               |  |                             | 2,065  |      |  | 6,716   |  |  | 2,134  | 
| | Rest of the world   |  |                             | 927    |      |  | 1,526   |  |  | 973    | 
| |                     |  |                             |        |      |  |         |  |  |        | 
| | Total               |  |                             | 63,032 |      |  | 100,055 |  |  | 70,969 | 
| |                     |  |                             |        |      |  |         |  |  |        | 

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,
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, 2007, 75 of our employees were engaged in our worldwide sales,
marketing and support efforts, including support and sales administration
staff. Due to the concentration of sales in the Asia Pacific region, we
adjusted our sales organization accordingly during the past four years, and
significantly expanded our sales, marketing and support teams in this 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.

In
the second quarter of 2006, we purchased a credit insurance policy from the
ICIC  the Israeli Credit Insurance Policy Company, in order to minimize the
risk contemplated in transactions with customers which are
located overseas and which are granted with variable amount of credit. The
Policy covers, among other risks, political and financial risks of such
customers.

23

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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 for the production
of subsystems.

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 Ltd., with additional competitors including
Dainippon Screen, Lloyd-Doyle, ManiaBarco, Shirai and Utechzone. Our
competitors in the IC substrate industry include Orbotech Ltd., Dainippon
Screen, ATI and Utechzone. In the semiconductor manufacturing and packaging
industry, our primary competitor is Rudolph Technologies Inc. (which purchased
the IP and bumped wafer inspection line of RVSI), with additional competitors
including KLA-Tencor (through acquisition of 96% ownership in ICOS), Zygo
(through acquisition of Solvision) and several Japanese competitors whom we
face mostly in Japan - Topcon, Toray, Hitachi and Tosok.

We
believe that the principal elements of a sustainable competitive advantage in
the AOI market are:

| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On-going
  research, development and commercial implementation of new image acquisition,
  processing and analysis technologies;                                                                                          
| |   |                                                                                                                                                                                                                           
| |  | Product
  architecture based on proprietary core technologies and
  commercially-available hardware. Such architecture supports shorter time-to-market,
  flexible cost structure, longer service life and higher margins;
| |   |                                                                                                                                                                                                                           
| |  | Fast
  response to evolving customer needs;                                                                                                                                                                               
| |   |                                                                                                                                                                                                                           
| |  | Product
  compatibility with customer automation environment;                                                                                                                                                             
| |   |                                                                                                                                                                                                                           
| |  | Strong pre
  and post-sale support (applications, service and training) deployed in
  immediate proximity to customer sites; and                                                                                          
| |   |                                                                                                                                                                                                                           
| |  | maintaining
  a sufficient production line in order to follow the increasing demand for AOI
  products.                                                                                                                   

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

24

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Capital Expenditures

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

|                                 |  |                |     |      |   |       |  |   |       | 
|-------------------------------- |  | -------------- | --- | ---- | - | ----- |  | - | ----- | 
|                                 |  | December 31,   |    
|                                 |  |                |     |      |   |      
|                                 |  | 2005           |     | 2006 |   | 2007  | 
|                                 |  |                |     |      |   |       | 
|                                 |  | (in thousands) |    
|Real Estate                      |  | $              | 20  |      | $ | -     |  | $ | 48    | 
|Building                         |  |                | 147 |      |   | 409   |  |   | 1,960 | 
|Machinery and equipment          |  |                | 114 |      |   | 938   |  |   | 134   | 
|Office furniture and
  equipment |  |                | 362 |      |   | 162   |  |   | 1,039 | 
|Automobiles                      |  |                | 30  |      |   | 73    |  |   | 55    | 
|Total                            |  | $              | 673 |      | $ | 1,582 |  | $ | 3,236 | 
|                                 |  |                |     |      |   |       |  |   |       | 

Material Effects of Governmental Regulations

The following
EU directives, which represent the European standard required in order to sell
in Europe, apply: Low Voltage Directive (LVD) 73/23/EEC and Directive 98/37/EC,
on the approximation of the laws of the Member States relating to machinery.
The following SEMI Standards, which define uniform standards for manufacturers
in the semiconductor manufacturing and packaging industry and production
equipment producers, apply: SEMI S-2 (safety requirements for sale of equipment
in the semiconductor manufacturing and packaging industry) and SEMI S-8
(ergonomic requirements for sale of equipment in the semiconductor
manufacturing and packaging industry). We comply with the above-mentioned
governmental regulations during the systems design process, which is conducted
in accordance with the Companys quality assurance manual, and when new
products are tested by external laboratories and certified to comply with these
directives.

|   |                         
|-- | ------------------------
|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 IC substrates. Based on sales, PCB
Technologies, a subsidiary of Priortech, is one of the largest PCB
manufacturers in Israel. Priortech currently holds 61.7% of our outstanding
ordinary shares. Our revenues from sales to affiliated and subsidiaries of
Priortech, totaled $1,000, $240,000 and $27,000 in 2005, 2006 and 2007,
respectively. 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.

The
following table shows the Companys significant subsidiaries, all of which are
wholly owned, together with each subsidiarys jurisdiction of incorporation, as
of the date of this report. For a complete list of subsidiaries, see Exhibit
8.1.

|                                  |  |                               | 
|--------------------------------- |  | ----------------------------- | 
|Name of Subsidiary                |  | Jurisdiction of Incorporation | 
|                                  |  |                               | 
|Camtek H.K.
  Ltd.                |  | Hong Kong                     | 
|                                  |  |                               | 
|Camtek
  (Europe) NV              |  | Belgium                       | 
|                                  |  |                               | 
|Camtek USA
  Inc.                 |  | New Jersey,
  USA             | 
|                                  |  |                               | 
|Camtek
  Imaging Technology (CIT) |  | China                         | 
|                                  |  |                               | 
|                                  |  |                               | 

25

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|   |                               
|-- | ------------------------------
|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 manufacturing of
our products. At the end of 2006, we decided to prepare construction programs and
to apply for the necessary construction permits for the purpose of expanding
our current facilities. The expansion is planned to occupy a further 71,500
square feet, which will enable us to double our manufacturing and development
capabilities. In 2007 we invested a sum of $1,000,000 in the expansion and
improvement of our current facilities.

Also,
at the end of 2006, we entered into a lease for a new manufacturing facility in
China, in which we manufacture products that do not require the geographical
proximity to the development facilities and that are designated to be sold to
customers in Asia. The Chinese facility occupies 23,000 square feet. Since
September 2006 and until June 25, 2008, we invested approximately $424,000 in
start-up costs.

Our
sales offices and demonstration centers, which we lease in various locations
around the world, occupy an aggregate of approximately 29,000 square feet.

|         |                   |                                               | 
|-------- | ----------------- | --------------------------------------------- | 
|Item 4A. |                   | Unresolved Staff Comments                    
|         |                   |                                              
|         | None.            
|         |                   |                                               | 
|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 automated 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 integrated circuit substrate, or IC substrate, industry
and the semiconductor manufacturing and packaging industry.

We
sell our AOI systems internationally. The majority of sales of our AOI systems
in 2007 was to manufacturers in the Asia Pacific region, particularly in China,
South East Asia, Korea and Taiwan. This trend is due, among other factors, to
the migration of PCB manufacturers into this region following the development
and growth of electronics industry centers in theses regions. In 2007, our
sales to customers in the Asia Pacific region accounted for approximately 82%
of our total revenues, including approximately 43% of our total revenues from
sales in China and Hong Kong and 18% from sales in Taiwan. We expect this trend
of increasing amounts of our revenues coming from customers in the Asia Pacific
region to continue in the foreseeable future.

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.

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The
demand for AOI equipment is characterized by short notice. To meet customers
needs for quick delivery and to realize the competitive advantage of the
ability to do so, we have to pre-order components and subsystems based on our
forecast of future orders, rather than on actual orders. This need is
compounded by the fact that, in times of increasing demand in our markets, our
suppliers and subcontractors tend to extend their delivery schedules or fail to
meet their delivery deadlines. To compensate for these unscheduled delays, we
build inventories further into the future, which increases the risk that our
forecast 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 as well as for new customers in new markets. In
addition, the selling cycle in our markets may typically take several quarters
from first contact to revenue recognition, including on-site evaluation.
Naturally, repeat orders take less time. Still, a significant portion of our
finished goods inventory consists of systems under evaluation and demonstration
systems.

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. The Company
recognizes revenue from sales in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104 SAB 104 and Financial Accounting
Standard Boards Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Accordingly, 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.

Revenue
under multiple element arrangements is recognized in accordance with EITF Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables. Under this
method, if an element is determined to be a separate unit of accounting, the
revenue for the element is based on fair value and determined by vendor
objective evidence (VOE), accordingly, non-standard warranty, with determined
VOE, is deferred as unearned revenue and is recognized ratably as revenue
commencing with and over the applicable warranty term.

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
collectibility 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.

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 information at hand regarding specific customers, including aging
of the receivable balance, evaluation of the security received from customers,
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.

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Valuation of Inventory.
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. 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.

Income Taxes. We
account for income taxes under SFAS No. 109, Accounting for Income Taxes, or
SFAS 109. Under SFAS 109 deferred tax assets or liabilities are recognized in
respect of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts as well as in respect of tax
losses and other deductions which may be deductible for tax purposes in future
years, based on tax rates applicable to the periods in which such deferred
taxes will be realized. In assessing the realizability of deferred tax assets,
we consider whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible and during which
the carry-forwards are available. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount considered more likely
than not to be realized.

Our financial
statements include deferred tax assets, net, which are calculated according to
the above methodology. If there is an unexpected critical deterioration in our
operating results and forecasts, we would have to increase the valuation
allowance with respect to those assets. We believe that it is more likely than not
that those net deferred tax assets included in our financial statements will be
realized in subsequent years.

Beginning with
the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48) as of January 1, 2007, the Company recognizes the
effect of income tax positions only if those positions are more likely than not
of being sustained. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition
or measurement are reflected in the period in which the change in judgment
occurs.

The Company
records interest and penalties related to unrecognized tax benefits as a
component of income tax expense.

Stock Option and Restricted Share Plans.
In years prior to our January 1, 2006 adoption of SFAS No. 123(R), Share-Based
Payments, we had elected to apply the intrinsic value-based method of
recording compensation expense as allowed by SFAS No. 123, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of SFAS No. 123. As such, we computed and recorded compensation
expense for awards of stock options whose terms were fixed with respect to the
number of shares and option price only if the market price on the date of grant
exceeded the exercise price of the stock option. The compensation cost for
these awards was recorded over the option vesting period, generally 4 years.

Upon adoption
of SFAS 123(R) on January 1, 2006, we elected the modified-prospective method
of adoption and we began to record compensation expense for awards of employee
stock options at their fair value commencing with the date of grant. Prior
periods were not restated. Under the modified-prospective method, compensation
costs recognized in 2006 and 2007 include costs related to (1) to the fair
value of share-based payments granted in 2006 and 2007 as well as (2) the
amortization of the fair value of stock option awards which were unvested as of
January 1, 2006. In 2007, we recognized equity-based compensation expense under
SFAS 123(R) in the amount of $0.4 million. When calculating this equity-based
compensation expense we took into consideration awards that are ultimately
expected to vest. Therefore, this expense has been reduced for estimated
forfeitures. In our pro forma information required under SFAS No. 123 for the
periods prior to fiscal 2007, we accounted for forfeitures as they occurred.

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Recently Issued
Accounting Standards

In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  including an
amendment of FASB Statement No. 115 (Statement 159). Statement 159 gives the
Company the irrevocable option to carry most financial assets and liabilities
at fair value that are not currently required to be measured at fair value. If
the fair value option is elected, changes in fair value would be recorded in
earnings at each subsequent reporting date. SFAS 159 is effective for the
Companys 2008 fiscal year. The Company has evaluated the impact of this
statement and believes that adoption of SFAS 159 prospectively on January 1,
2008 will not have a material effect on its consolidated financial statements.

In September
2006, the FASB issued FASB Statement No. 157, Fair Value Measurement (Statement
157). Statement 157 defines fair value, establishes a framework for the
measurement of fair value, and enhances disclosures about fair value
measurements. The Statement does not require any new fair value measures. The
Statement is effective for fair value measures already required or permitted by
other standards for fiscal years beginning after November 15, 2007. The Company
is required to adopt Statement 157 beginning on January 1, 2008. Statement 157
is required to be applied prospectively, except for certain financial
instruments. Any transition adjustment will be recognized as an adjustment to
opening retained earnings in the year of adoption. In February 2008, the FASB
approved FAS 157-2, which grants a one-year deferral of Statement 157s
fair-value measurement requirements for non-financial assets and liabilities,
except for items that are measured or disclosed at fair value in the financial
statements on a recurring basis. The Company is currently evaluating the impact
of adopting Statement 157 on its results of operations and financial position.

In June 2007,
the FASB issued EITF Issue No. 07-03 (EITF 07-03), Accounting for
Non-Refundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities. EITF 07-03 provides guidance on whether
non-refundable advance payments for goods that will be used or services that
will be performed in future research and development activities should be accounted
for as research and development costs or deferred and capitalized until the
goods have been delivered or the related services have been rendered. EITF
07-03 is effective for fiscal years beginning after December 15, 2007. The
Company is currently evaluating the impact of adopting EITF 07-03 on its
results of operations and financial position.

In December
2007, the FASB issued FASB Statement No. 141R, Business Combinations (Statement
141R) and FASB Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements an amendment to ARB No. 51 (Statement 160). Statements
141R and 160 require most identifiable assets, liabilities, non-controlling
interests, and goodwill acquired in a business combination to be recorded at
full fair value and require non-controlling interests (previously referred to
as minority interests) to be reported as a component of equity, which changes
the accounting for transactions with non-controlling interest holders. Both
Statements are effective for periods beginning on or after December 15, 2008,
and earlier adoption is prohibited. Statement 141R will be applied to business
combinations occurring after the effective date. Statement 160 will be applied
prospectively to all non-controlling interests, including any that arose before
the effective date.

Results of Operations

Year Ended December 31, 2007 compared to Year
Ended December 31, 2006.

Revenues. In 2007, as a result of a downturn in
the semiconductor manufacturing and packaging industry, our revenues were
adversely affected. In the second and third quarters of 2007, revenues from the
PCB industry increased and drove an increase in our total revenues from prior
quarters. In the fourth quarter of 2007, we achieved stability in our quarterly
revenue level. Revenues decreased 29% to $70.9 million in the year ended
December 31, 2007 from $100.1 million in the year ended December 31, 2006.
Sales to the PCB, IC substrate and MEP industries decreased 17%, 4% and 48%,
respectively. Sales of all products decreased 35% to $59.6 million in the year
ended December 31, 2007, from $92.5 million in the year ended December 31,
2006. The mixture of products sold and their configuration and throughput
varieties make it very difficult to estimate average selling prices and pricing
trends.

Service
fees increased by 49.1% to $11.3 million in the year ended December 31, 2007,
from $7.6 million for the year ended December 31, 2006, primarily due to
increased revenue from continuing service costs as our installed base increased.

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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 2007 we experienced a decrease
in gross profit and gross margins, primarily due to decreased revenues. Our
gross profit on product sales decreased by $23 million to $26.9 million in
2007, compared to $49.9 million in 2006. Our gross profit on service revenue
increased by $0.4 million in 2007 to $2.1 million, compared to $1.7 million in
2006. Our total gross profit decreased by $22.6 million to $29 million in 2007
from $51.6 million in 2006, representing a decrease of 43.7%. Our gross margin
decreased to 40.9% in 2007, compared to a gross margin of 51.6% in 2006,
primarily due to decreased revenues and the mixture of products sold.

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 2007 were $12.1 million, compared to $11.8 million in 2006. Research
and development expenses increased in 2007 by $0.3 million, primarily due to
increased material consumption.

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 decreased by 13.4% to $24.1 million in 2007 from $27.8 million in
2006, primarily due to decreased commissions and shipping expenses. Selling,
general and administrative expenses as a percentage of revenues increased in
2007 to 34% from 27.8% in 2006.

Financial and Other (Expenses) Income, Net.
We had net financial expense of $128,000 in 2007, as compared to net financial
expense of $288,000 in 2006. These changes related primarily to exchange rate
influence and interest received and paid. Changes in currency rates resulted in
income of $66,000 in 2007, compared to expenses of $435,000 in 2006.

Provision for Income Taxes. Income tax expenses increased to
$362,000 in 2007, compared to $41,000 in 2006, as a result of increase in
valuation allowance over deferred tax assets.

Net Income (Loss). We incurred a net loss of $7.7 million
in 2007 compared to a net income of $11.6 million in 2006, in view of the
factors discussed above.

Year Ended December 31, 2006 compared to Year
Ended December 31, 2005.

Revenues. In 2006, our total sales increased on
an absolute basis as a result of the successful penetration of the Falcon
systems to the semiconductor industry, despite the weakness felt in this
industry during the second half of 2006, and high demands in the PCB and IC
substrate industries, except in the fourth quarter of 2006. Revenues increased 59% to $100.1
million in the year ended December 31, 2006 from $63.0 million in the year
ended December 31, 2005. Sales to the PCB and MEP industries increased 60% and
100%, respectively, while sales to the IC substrates industry decreased 47%.
Sales of all products increased 62% to $92.5 million in the year ended December
31, 2006, from $56.9 million in the year ended December 31, 2005.

Service
fees increased by 25.5% to $7.6 million in the year ended December 31, 2006,
from $6.0 million for the year ended December 31, 2005, primarily due to
increased revenue from continuing service costs as our installed base
increased.

Gross Profit. In 2006, we experienced an increase in
gross profit and gross margins, primarily due to increased sales to the PCB and
MEP industries. Our gross profit on product sales increased by $21.2 million to
$49.9 million in 2006, compared to $28.7 million in 2005. Our gross profit on
service revenue increased by $0.2 million in 2006 to $1.7 million, compared to
$1.5 million in 2005. Our total gross profit increased by $21.3 million to
$51.6 million in 2006 from $30.3 million in 2005, representing an increase of
70.6%. Our gross margin increased to 51.6% in 2006, compared to a gross margin
of 48.0% in 2005.

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Research and Development
Costs. Total research and development expenses for 2006 were $11.8 million, compared to $8.5 million in
2005. Research and development expenses increased in 2006 by $3.4 million,
primarily due to increased headcount and salaries and bonuses.

Selling, General and Administrative Expenses.
Our selling, general and administrative expenses increased by 48.4% to $27.8
million in 2006 from $18.8 million in 2005. Selling, general and administrative
expenses as a percentage of revenues decreased in 2006 to 27.8% from 29.8% in 2005.
Moreover, in 2006 we continued the restructuring and strengthening of our
overall sales infrastructure especially in the Asian territory. We increased
our sales employee headcount raising expenses by $1.8 million, and agent
commissions increased by $2.0 million. Our expenses for professional services,
including legal costs, increased in 2006 by $1.77 million.

Financial and Other (Expenses) Income, Net.
We had net financial expense of $288,000 in 2006, as compared to net financial
expense of $320,000 in 2005. These changes related primarily to exchange rate
influence and interest received and paid. Changes in currency rates resulted in
expenses of $435,000 in 2006 and expenses of $238,000 in 2005.

Provision for Income Taxes. We made a provision for current income
tax of $414,000 and previous years tax expenses of $61,000 against a deferred
tax asset of $434,000 in 2006, compared to no provision for income tax nor
deferred tax asset in 2005, due to our increased profitability and as we
believe that it is more likely than not that those net deferred tax assets
included in our financial statements will be realized in subsequent years.

Net Income. Our net income increased to $11.6
million in 2006 compared to a net income of $2.7 million in 2005.

|   |                                
|-- | -------------------------------
|B. | Liquidity and Capital Resources

Our
cash and cash equivalent balances totaled approximately $18.6 million at
December 31, 2007 and $23.3 million at December 31, 2006. Our investments in
marketable securities totaled approximately $2.5 million at December 31, 2007
and $2.1 million at December 31, 2006. Our cash and marketable securities
consisted mainly of money raised through equity offerings in 2000 and 2002,
money raised through a convertible loan in 2005 and money raised through a
private placement in 2006. We raised approximately $36.0 million from our
initial public offering in 2000, approximately $6.1 million in a rights
offering of ordinary shares to our then existing shareholders in 2002, $5.0
million as a convertible loan from FIMI Opportunity Fund L.P. and FIMI Israel
Opportunity Fund, Limited Partnership, and $14.5 million from the Private
Placement to Israeli institutional investors. The Private Placement also
included warrants that are exercisable into additional 1,262,626 ordinary shares
at a price of $6.83 per share, during a period of four years. Our working
capital was approximately $58.8 million at December 31, 2007 and $73.5 million
at December 31, 2006.

We
entered into accounts receivable factoring agreements with two financial
institutions (the Banks). Under the terms of the agreements, we have the
option to factor receivables with the Banks on a non-recourse basis, provided
that the Banks approve the receivables in advance. In some cases we continue to
be obligated in the event of commercial disputes, such as product defects,
which are not covered under the credit insurance policy, unrelated to the
credit worthiness of the customer. We account for the factoring of our
financial assets in accordance with the provisions of SFAS 140 accounting for
transfers and servicing of. We do not expect any reimbursements to take place
in the foreseeable future.  The
factoring fees of the above mentioned agreements aggregate $52,000 in 2007
(compared to $51,000 in 2006). As of December 31, 2007, trade receivables
amounting to approximately $560,000, were factored (compared to $2,500,000 as
of December 31, 2006).

Although
auction rate securities are readily marketable, if an auction were to fail due
to adverse conditions in the credit markets or otherwise, we may not be able to
sell these securities on the planned reset date, which would lengthen our
holding period. As of December 31, 2007 there were $1,275,000 auction rate
securities outstanding.

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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.

Cash
flow from operating activities

For
the year ended December 31, 2007, we had negative cash flow from operations of
$1.3 million, primarily due to our losses, partially offset by decrease in
receivables and inventories. For the year ended December 31, 2006, we had
positive cash flow from operations of $0.8 million, primarily due to an
increase in our net income and payables, partially offset by increase in
receivables and particularly by a $16.5 million increase in inventories.

Cash
flow from investing activities

Cash
flow used in investing activities in 2007 was $3.7 million, primarily due to
capital expenditures of $3.2 million.

Cash
flow used in investing activities in 2006 was $1.7 million, primarily due to
capital expenditures of $1.6 million.

Most
of the capital expenditures in 2007 were for the purpose of expanding our
facilities in Israel and China.

Cash
flow from financing activities

Cash
flow provided by financing activity in 2007 was $0.03 million, due to exercise
of share options.

Cash
flow provided by financing activity in 2006 was $15.1 million, due to issuance
of ordinary shares of $14.4 million and exercise of share options of $0.7
million.

Effective Corporate Tax Rate

Our
production facilities have been granted Approved Enterprise status under the
Investment Law. We participate in the Alternative Benefits Program and,
accordingly, income from our 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 we operate in
Zone A in Israel.

On
April 1, 2005, an amendment to the Investment Law came into effect (the
Amendment) and has significantly changed the provisions of the Investment Law.
The Amendment limits the scope of an enterprise which may be approved by the
Investment Center by setting criteria for the approval of a facility as a
Beneficiating Enterprise, such provisions generally require that at least 25%
of the Beneficiating Enterprises income will be derived from export.
Additionally, the Amendment enacted major changes in the manner in which tax
benefits are awarded under the Investment Law so that companies no longer
require Investment Center approval in order to qualify for tax benefits.

In
addition, the Amendment provides that terms and benefits included in any
certificate of approval issued prior to December 31, 2004 will remain subject
to the provisions of the Investment Law as they were on the date of such prior
approval. Therefore, our existing Approved Enterprise will generally not be
subject to the provisions of the Amendment. As a result of the Amendment,
tax-exempt income generated under the provisions of the new law, as part of a
new Beneficiating Enterprise, will subject us to taxes upon distribution or
liquidation.

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We
have been granted the status of Approved Enterprises, under the Investment Law,
for investment programs for the periods ending in 2007 and 2010, and the status
of Beneficiating Enterprise according to the Amendment, for the period ending
in 2014 (Programs).

Out
of our retained earnings as of December 31, 2007 approximately $19.4 million
were tax-exempt earnings attributable to our Approved Enterprise and
approximately $2.8 million are tax-exempt earnings attributable to our
Beneficiating Enterprise. The tax-exempt income attributable to the Approved
and Beneficiating Enterprise cannot be distributed to shareholders without
subjecting us to taxes. If these retained tax-exempt profits are distributed,
we would be taxed at the reduced corporate tax rate applicable to such profits.
According to the Amendment, tax-exempt income generated under the Beneficiating
Enterprise will be taxed upon dividend distribution or complete liquidation,
whereas tax exempt income generated under the Approved Enterprise will be taxed
only upon dividend distribution. As of December 31, 2007, if the income
attributed to the Approved Enterprise were distributed as dividend, we would
incur a tax liability of approximately $4.9 million. If income attributed to
the Beneficiating Enterprise were distributed as dividend or upon liquidation,
we would incur a tax liability in the amount of approximately $0.7 million.
These amounts will be recorded as an income tax expense in the period in which
we declare the dividend.

We
intend to indefinitely reinvest the amount of our tax-exempt income and not
distribute any amounts of our undistributed tax-exempt income as dividend.
Accordingly, no deferred tax liabilities have been provided on income
attributable to our Approved and Beneficiating Enterprise Programs as the
undistributed tax exempt income is essentially permanent in duration.

The
entitlement to the above benefits is conditional upon our fulfilling the
conditions stipulated by the law and the regulations published thereunder as
well as the criteria set forth in the approval for the specific investments in
Approved Enterprises. In the event of failure to meet such requirements in the
future, income attributable to our Programs could be subject to the statutory
Israeli corporate tax rates and we could be required to refund a portion of the
tax benefits already received, with respect to such Program. Our management believes
that we have met the aforementioned conditions.

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. The
prices of part 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 revaluation 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, which was the case in Europe in 2007. The
opposite effect occurs when the dollar increases in value in comparison to
these currencies. 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 major portion of the costs of
our Israeli operations, such as personnel, subcontractors, materials and
facility-related, are incurred in NIS. As a result, we bear the risk that our
NIS costs, as expressed in dollars, increase to the extent by which the
continued significant appreciation of the NIS in relation to the dollar, as
experienced in 2007, will increase our costs expressed in NIS and have an
effect on our net income.

An
increasing portion of our expenses is incurred in the Peoples Republic of
China. While the value of the Yuan has generally been stable in recent years,
we are now facing appreciation of the Yuan against the dollar, which may
adversely affect our results of operations in dollar terms.

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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.

|   |                                                  
|-- | -------------------------------------------------
|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 couple of years have resulted in the
introduction of several new AOI systems, including new models in the Dragon,
Orion, Pegasus and Falcon product lines, as well as new product lines  Planet
and Mustang.

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, while                                                                       
| |   |                                                                                                                    
| |  | simplifying
  operation and reducing the level of user expertise required to realize the
  benefits of our systems.

In
addition, we are focusing our efforts on leveraging our core technologies,
expertise and experience into continually enhancing the value to the user and
the return on investment from our products. We believe our internal
multi-disciplinary expertise will enable us to maintain and enhance our
technological edge.

As
of December 31, 2007, we had 86 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 $8.5 million, $11.8 million and $12.1
million for the years ended December 31, 2005, 2006 and 2007, respectively, representing
13.5%, 11.8% and 17% 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 2008 we expect to
introduce new products and capabilities for all of our target markets.

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 also employ specialists whose main role
is to maintain and protect our intellectual property from both professional and
legal perspectives. 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 one hundred and two (102) patents pending in Israel and worldwide (Patent
Cooperation Treaty organization or PCT, China, Japan, Taiwan, Korea, Singapore,
USA, Canada, Europe), eighteen (18) US Provisional patent applications and
thirteen (13) issued patents  one (1) in Europe, two (2) in Taiwan, six (6) in
the United States and four (4) in Israel. These patents relate to our
proprietary technology and know-how developed for AOI products in the PCB and semiconductor
industries.

34

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D.      Trend
Information.

During
2001, 2002 and early 2003, competition in the PCB and IC substrate industries
intensified due to the low demand for AOI systems, resulting from the general
economic downturn during that time. The demand increased again during 2004. We
also experienced a capacity correction of the demand for our AOI products in
the first quarter of 2005, due to seasonal adjustment of the markets, as well
as a decrease in the PCB business, mainly in the Chinese market, but in the
next quarters of 2005 the trend changed again, and the demand for AOI systems
increased. In the first three quarters of 2006 we continued to experience
steady demand for our AOI systems in the PCB industry, in which we maintained
our position, while in the fourth quarter of 2006 and first quarter of 2007 we
experienced a decline in customer demand for our systems in this industry. In
the second quarter of 2007 we faced improved demand to our systems, with a peak
in the third quarter of 2007. Nevertheless, the fourth quarter of 2007 was
weaker, while in the first quarter of 2008 we experienced a further decline in
customers demand for our systems in this industry.

In
2007, as was the case in the previous two years, the majority of sales of our
AOI systems were to 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 of increase.

Revenues
from sales of Falcon systems grew sequentially from their start in the second
quarter of 2004 until the second quarter of 2006. In the second half of 2006
the semiconductor industry entered the downward phase of its cycle, driven by
over-capacity and price erosion of IC devices. As a result, Falcon sales declined
gradually until the second quarter of 2007, totaling $20 million in 2007,
compared to nearly $40 million in 2006.

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.

However, we have entered into various non-cancelable operating lease agreements, principally for
office space and vehicles.

As of December 31, 2007, minimum future rental
payments under such non-cancelable operating leases were approximately $3.5
million.

F.      Contractual
Obligations and Other Commercial Commitments.

As of December
31, 2007, 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) |      
|Operating lease obligations (1) |  |                | 1,493 |                    |   | 726       |  |           | 767   |                     |   | -  |  |   | - | 
|Other long-term obligations (2) |  |                | 2,032 |                    |   | 931       |  |           | 1,048 |                     |   | 53 |  |   | - | 
|                                |  |                |       |                    |   |           |  |           |       |                     |   |    |  |   |   | 
|Total                           |  | $              | 3,525 |                    | $ | 657       |  | $         | 1,815 |                     | $ | 53 |  | $ | - | 

|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In May 2004, we entered
  into an operating lease for vehicles for a period of 36 months. As of
  December 31, 2007, the minimum future rental payments were approximately
  $1,493.

35

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|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Our subsidiaries have
  entered into various operating lease agreements, principally for office
  space. As of December 31, 2007, minimum future rental payments under these
  leases amounted to $2,032.

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

|   |                                 
|-- | --------------------------------
|A. | Directors and Senior Management.

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

|                   |  |     |  |                                                                  
|------------------ |  | --- |  | -----------------------------------------------------------------
|Name               |  | Age |  | Title                                                            
|                   |  |     |  |                                                                  
|Rafi Amit          |  | 59  |  | Chairman of
  the Board of Directors and Chief Executive Officer 
|Yotam Stern        |  | 55  |  | Executive
  Vice President, Business & Strategy and Director     
|Gabriela
  Heller* |  | 43  |  | Director                                                         
|Rafi Koriat*       |  | 61  |  | Director                                                         
|Eran Bendoly       |  | 43  |  | Director                                                         
|                   |  |     |  |                                                                  
|Ronit
  Dulberg    |  | 43  |  | Vice President
   Chief Financial Officer                       
|Miri Saar          |  | 50  |  | Vice
  President  Human Resources                               
|Amir Gilead        |  | 57  |  | Vice
  President, Semiconductor and Packaging
  Division         
|Moshe
  Grencel    |  | 54  |  | Vice
  President, Operations                                     
|Yuval Agami        |  | 51  |  | Vice
  President, Printed Circuit Board and IC substrate Division
|Michael Lev        |  | 54  |  | Vice
  President, Intellectual Property                          
|Roni
  Flieswasser |  | 47  |  | Chief
  Technology Officer and President of Camtek Europe        
|Roy Porat          |  | 41  |  | GM Camtek
  Ltd. and President of Camtek USA                     
|Aharon Sela        |  | 55  |  | President of
  Camtek Hong Kong                                  

*Outside
directors (as such term is defined under Israeli Companies Law)

36

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Rafi
Amithas 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.

Yotam
Sternhas 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.

Gabriela
Heller has served on our Board of Directors since
September 2006. Ms. Heller has an extensive financial experience as an
accountant, Chief Financial Officer and internal controller. Currently Ms.
Heller serves as Chief Financial Officer of Walden Israel Ltd., which is the
management company of Walden Israel Ventures, various venture capital funds
operating in Israel. From 1989 to 1994 Ms. Heller served as Manager with Kost
Forer & Gabbay - Ernst & Young Israel, one of the leading accounting
firms in Israel. In addition, from 1998 to 2000 Ms. Heller served as Internal
Controller to Vilar International Ltd., traded on TASE. Ms. Heller is currently
serving also on the Board of Directors of Kerur Holdings Ltd, traded on TASE.
From 2004 until 2007 she served on the board of directors of Electra Consumer
Products Ltd., from 1999 to 2003 Ms. Heller served on the Board of Directors of
Priortech Ltd., and from 2000 to 2003 served on the Board of Directors of One1
Products Ltd. Ms. Heller is a CPA (Israel), holds a B.A. in accounting and
Economics from the Hebrew University of Jerusalem, School of Business Administration,
and an LL.M from Bar Ilan University, Faculty of Law.

Rafi
Koriathas served on our Board of Directors since
September 2006. Mr. Koriat has extensive experience as Chief Executive Officer
(CEO) and Board member in the fields of semiconductor assembly and processing
equipment, optical network components and related emerging fields. Prior to his
present position as founder and CEO of Korel Business Ltd., which specializes
in strategic positioning and guiding high tech companies and management, Mr.
Koriat was CEO of Lambda Crossing engaged in the manufacturing of optical
components for networks (2001-2006) and Founder and CEO of Steag CVD Systems
(1992-2001). Previously, he worked for 20 years (1972 -1992) at Kulicke and
Soffa Industries Inc. in the United States and Israel as Corporate Vice
President for Engineering and Technology, Corporate Director for Business and
Marketing and Division Manager. Mr. Koriat is also the founder and chairman of
the Sub Micron Semiconductor Consortium and OptiPac Consortium (optical
communication networks), under the Israel Chief Scientist Magnet program. Mr.
Koriat holds a B.Sc. from the Technion Israel Institute of Technology, an M.Sc.
from Drexel University in Philadelphia, Pennsylvania and completed an Executive
Management Program at Stanford University.

Eran Bendoly has served on our Board of Directors
since
November 2000. Currently Mr. Bendoly serves as the Chief Financial Officer of
Personeta Inc., a leading developer of converged service creation and
application solutions. From 2003 to 2006, Mr. Bendoly served as the Chief
Executive Officer of Xenia Management Ltd., which is the managing partner of
Xenia Ventures LP, a limited partnership that operates a 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.

37

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Ronit
Dulberghas been employed by us since March 2006 as
our Chief Financial Officer. Previously, Mrs. Dulberg served as Vice President
of Finance for Creo IL, an Israeli subsidiary of Creo International. from 2000
to 2004 and prior to that she served in other senior positions in several
high-tech companies in Israel. Mrs. Dulberg has a B.A in Economics and
Accounting from Haifa University - Israel and an LLM from Bar-Ilan University
in Israel. Mrs. Dulberg is a registered CPA in Israel, she has also completed
two Executive Management Programs of the Technion - Israel Institute of
Technology and Stanford University.

Miri Saarhas been employed by us since
March 2005 as Vice President Human Resources. Previously, Ms. Saar served as HR
Manager for Conexant Systems Israel from 2001 to 2005, prior to which she
served in other senior positions in several high-tech companies in Israel. Ms
Saar has a BA in English and Applied Linguistics from Tel-Aviv University,
Israel, and is also a registered mediator at the Ministry of Justice.

Amir
Gileadhas 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 a M.Sc. in
electrical engineering from Technion - Israel Institute of Technology.

Moshe
Grencelhas been employed by us since January 2007, as
Vice President Operations. Between 2004 and 2006 Mr. Grencel served as the
Executive Vice President of Supply Chain of Delta Galil, a leading company in
the underwear textile industry. From 2001 until 2004, Mr. Grencel served as
Senior Vice President Operations of Lumenis, a medical lasers manufacturer.
From 1983 until 2000, Mr. Grencel held various executive positions with Elscint
Ltd., a diagnostic medical equipment manufacturer. Mr. Grencel has a B.Sc. in
Industrial Management from the Technion  Israel Institute of Technology.

Yuval Agamihad been employed by us during
1998-1999 as Marketing Director and Asia-Pacific Managing Director, and again
since 2005, initially as Marketing Manager and since March 2008, as our Vice
President, Printed Circuit Board and IC substrate Division.

Before joining
Camtek, Mr. Agami served in various sales and marketing executive positions in
several high-tech companies in Israel and the United States. Mr. Agami holds a
B.Sc. in Computer Engineering from Technion - Israel Institute of Technology.

Michael
Levhas been employed by us since 1994 and serves as
our Vice President, Intellectual Property, since April 2007. From 1994 until
April 2007 Mr. Lev held various positions with the Company, in the printed
circuit board and semiconductor manufacturing and packing areas. Mr. Lev has a
M.Sc. in Electrical Communication from Azerbaijan Polytechnic Institute.

Roni
Flieswasserestablished our European branch 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 serves as GM Camtek Ltd. and President of our
U.S. subsidiary, Camtek USA Inc., since March 2008. Previously, he has served
as President of Camtek Hong Kong since September 2003. From 2001 until
September 2003, Mr. Porat served as President of 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.

Aharon
Sela serves as President of Camtek Hong Kong since
March 2008. Previously, from
2004 until March 2008, he served as
V.P. Sales of the MEP Division at Camtek Europe and Camtek Hong Kong.
From 2002 until 2004 Mr. Sela served as Manager of Camtek Japan and previously
he served as Executive V.P. Sales and Marketing at Inspectech Ltd. (which was
merged with Camtek in 2001). Mr. Sela holds a B.Sc. in Electrical Engineering
from Technion - Israel Institute of Technology.

38

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|   |              
|-- | -------------
|B. | Compensation.

Compensation of Executive Officers and
Directors

The
aggregate remuneration paid by us in the year ended December 31, 2007 to all
the persons listed in Section A above (Directors and Senior Management), was
approximately $2,483,000, 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.

39

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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.

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 September 2006, 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 2008 annual general meeting of shareholders. Each of our outside
directors, Messrs. Gabriela Heller and Rafi Koriat, 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 2009.

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.

40

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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, and
afterwards, as the Company is a dual listed company, may be re-elected for
additional terms of up to three years each, provided that prior to their
election by a majority of the shares present and voting at the shareholders
meeting, such election is approved by the Companys Audit Committee and Board
of Directors, on terms referred to in relevant regulations. 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.

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.

Ms.
Gabriela Heller and Mr. Rafi Koriat currently serve as our outside directors.

The
Sarbanes-Oxley Act of 2002, as well as related rules subsequently implemented
by the Securities and Exchange Commission and the Nasdaq Global Market, or
Nasdaq, require foreign private issuers, such as us, to comply with various
corporate governance practices. Nevertheless, the Company has decided to
opt-out of certain of these practices and follows its home country practice
pursuant to Nasdaq Rule 4350(a), as disclosed in Item 9C (Markets).

In
addition, 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. Ms. Gabriela Heller and
Messrs. Rafi Koriat 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.

41

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Audit Committee. The
Audit Committee oversees and approves the retention, performance and
compensation of our independent registered public accounting firm 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 Ms. Gabriela Heller and Messrs.
Eran Bendoly and Rafi Koriat, all of whom are independent directors in
accordance with Nasdaq listing requirements. Mr. Bendoly and Ms. Heller qualify
as financial experts for purposes of the Sarbanes-Oxley Act and the Nasdaq
listing requirements, and Ms. Heller and Mr. Koriat 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
Ms. Heller and Messrs. Koriat 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 and Senior Management is one of our office holders. 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 or a close relative of
such controlling shareholder, as defined in the Companies Law, must also be
approved 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.

42

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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.

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 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;                                        

43

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| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.            

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 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 of 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, or (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.

44

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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 at the end of each year:

|                         |  |                    |     |      |  |      |  |  |     | 
|------------------------ |  | ------------------ | --- | ---- |  | ---- |  |  | --- | 
|                         |  | As of December 31, |    
|                         |  |                    |    
|                         |  | 2005               |     | 2006 |  | 2007 | 
|                         |  |                    |     |      |  |      | 
|                        
|Executive management     |  |                    | 8   |      |  | 11   |  |  | 10  | 
|Research and development |  |                    | 99  |      |  | 119  |  |  | 86  | 
|Sales support            |  |                    | 117 |      |  | 143  |  |  | 140 | 
|Sales and marketing      |  |                    | 69  |      |  | 94   |  |  | 75  | 
|Administration           |  |                    | 46  |      |  | 62   |  |  | 53  | 
|Operations               |  |                    | 65  |      |  | 105  |  |  | 92  | 
|Total                    |  |                    | 404 |      |  | 534  |  |  | 456 | 

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

|                            |  |                    |     |      |  |      |  |  |     | 
|--------------------------- |  | ------------------ | --- | ---- |  | ---- |  |  | --- | 
|                            |  | As of December 31, |    
|                            |  |                    |    
|                            |  | 2005               |     | 2006 |  | 2007 | 
|                            |  |                    |     |      |  |      | 
|China (including Hong Kong) |  |                    | 97  |      |  | 125  |  |  | 128 | 
|Taiwan                      |  |                    | 39  |      |  | 44   |  |  | 38  | 
|Japan                       |  |                    | 8   |      |  | 18   |  |  | 14  | 
|Other Asia                  |  |                    | 18  |      |  | 30   |  |  | 23  | 
|Europe                      |  |                    | 11  |      |  | 12   |  |  | 15  | 
|North America               |  |                    | 19  |      |  | 25   |  |  | 20  | 
|Israel                      |  |                    | 210 |      |  | 280  |  |  | 218 | 
|Total                       |  |                    | 402 |      |  | 534  |  |  | 456 | 

In
light of the revenues reduction in 2007 we adjusted our cost structure. As a
result, the number of employees decreased during 2007 by 14% from 534 to 456
employees, from which 218 employees are working in Israel and the rest are
working in our subsidiaries worldwide.

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.

45

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|   |                 
|-- | ----------------
|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 30,138,215 ordinary shares outstanding as of June 25, 2008.

|                                                             |  |                               |            |            |  |      |  
|------------------------------------------------------------ |  | ----------------------------- | ---------- | ---------- |  | ---- | -
|                                                             |  | Beneficial Ownership          |           
|                                                             |  | Number of Ordinary
 Shares(1) |            | Percentage | 
|                                                             |  |                               |            |            | 
|                                                            
|Rafi Amit(2)                                                 |  |                               | 18,657,290 |            |  | 61.9 | %
|Yotam Stern(3)                                               |  |                               | 18,717,230 |            |  | 62.1 | %
|                                                             |  |                               |            |            |  |      |  
|Directors and executive
 officers as a group (13 persons)(4) |  |                               | 18,924,430 |            |  | 62.8 | %

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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, the
 total number of options held by the persons included in the above table, that
 are currently exercisable or exercisable within 60 days of the date hereof,
 is 279,940.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(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s 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 343,960 of our
 ordinary shares.                                                                                                                                                                                                                                                                                                                           

Restricted Share Unit and Option Plans

General. We
currently maintain one restricted share unit plan and five share option plans.
The purpose of our restricted share unit and 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.

Restricted Share
Unit Plan. In August 2007, the Company approved
the 2007 Restricted Share Unit Plan (the RSU Plan), for the grant of
restricted share units, each of which imparts the right to an ordinary share of
the Company, to selected employees, officers, directors and consultants of the
Company. The RSU Plan is being administrated by our Board of Directors

The total
number of RSUs to be granted pursuant to the RSU Plan is 180,000, out of which
158,000 have been granted as of the date of this annual report.

46

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Under the RSU
Plan, RSUs are granted for no consideration and the exercise price for each
grantee is no more than the underlying shares nominal value, unless otherwise determined
by the Board. The RSUs vest according to a four-year vesting schedule, with 25%
of the shares vest on the first anniversary of the date of grant and the
remaining vesting on a quarterly basis.

We will file a
registration statement on Form S-8 under the Securities Act of 1933, as
amended, to register the ordinary shares issuable under the RSU Plan. Ordinary
shares issued pursuant to the RSU Plan are eligible for resale in the public
market.

Option Plans.

General. As of
December 31, 2007, there were 807,841 outstanding options to acquire our
ordinary shares pursuant to our share option plans at a weighted average
exercise price of $2.78, exercisable at various dates through July 2015. 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.

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 2006.
During 2006 we granted 60,000 options to employees at a weighted average
exercise price of $5.19, a price that reflected the price of the share in the
market at the grant date. These options are subject to the terms of the 2003
Share Option Plan.

Options Granted During 2007.
During 2007 we granted 45,000 options to employees at a weighted average
exercise price of $4.32, a price that reflected the price of the share in the
market at the grant date. These options are subject to the terms of the 2003
Share Option Plan.

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, subject to restrictions on resales by
affiliates.

As
of December 31, 2007, there were options exercisable and vested for 670,841
ordinary shares (out of the total outstanding options of 807,841) at a weighted
average exercise price of $2.56 per share, and unvested options exercisable for
137,000 ordinary shares at a weighted average exercise price of $3.84.

47

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|        |                                                   
|------- | --------------------------------------------------
|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 25, 2008, 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 has sole
voting and investment power with respect to all ordinary shares shown as beneficially
owned by it. The percentage of beneficial ownership is based upon 30,133,715 ordinary shares outstanding as of June
25, 2008.

| |                |  |                             |            |            |  |       | 
| | -------------- |  | --------------------------- | ---------- | ---------- |  | ----- | 
| |                |  | Beneficial Ownership        |           
| |                |  |                             |           
|
| |                |  | Number of Ordinary
 Shares* |            | Percentage | 
| |                |  |                             |            |            | 
| | Priortech Ltd. |  |                             | 18,605,230 |            |  | 61.7% | 

* 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.
The voting agreement does not provide for different voting rights for our major
shareholder than the voting rights of other holders of our ordinary shares.
Priortechs principal executive offices are located at South Industrial Zone,
Migdal HaEmek 23150, Israel. As of June 25, 2008, there were a total of 9
holders of record of our issued and outstanding ordinary shares, of which 7
were registered with addresses in the United States. Such United States holders
were, as of such date, the holders of record of approximately 40.9% of our issued
and outstanding ordinary shares. The number of record holders in the United
States is not representative of where such beneficial holders are resident
because many of these ordinary shares were held of record by brokers or other
nominees.

|   |                            
|-- | ---------------------------
|B. | Related Party Transactions.

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 $597,000,
$3,244,000 and $1,876,000 in 2005, 2006 and 2007, 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. Our total revenues from sales to affiliates of Priortech totaled
$1,000, $240,000 and $27,000 in 2005, 2006 and 2007, respectively. 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 5.5%. As of
December 31, 2007, the remaining balance we owed to Priortech and its
affiliates under transactions made in the ordinary course of business with them
was $615,000 and as of March 31, 2008 this balance stood at $574,000. 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, and 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.

48

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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 from us 60% of a full time salary. 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.

|   |                                  
|-- | ---------------------------------
|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.

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
injunctive relief and damages. Currently, the issue dealt with by the court is
the validity of the asserted patent, which expired in February 2008. We believe
that we have substantial defenses against the validity of Orbotechs patent and
substantial defenses against Orbotechs claims. We further believe, based on
the opinion of our legal advisors, that any liability arising from this law
suit is not probable.

49

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---



On
February 23, 2005, a lawsuit was filed against us in the District Court in
Jerusalem by Orbotech Ltd., alleging infringement of patent held by Orbotech Ltd.
regarding a specific illumination block (an apparatus for illuminating and
controlling the illumination of scanned objects), seeking injunctive relief and
damages. The court ruled, based on a courts scientific advisors opinion, that
Camtek allegedly infringed the patent, and granted Orbotech a provisional
remedy, i.e. interim relief, which prevents Camtek from manufacturing the
allegedly infringing illumination block in suit. Following the grant of the
provisional remedy by the District Court, the Company filed a motion for leave
to appeal (permission from the Israel Supreme Court to appeal the District
Courts decision to grant a provisional remedy). The Supreme Court rejected our
request since the provisional remedy was granted on the basis of prime facieevidence only. The claim is currently in the preliminary stage of discovery and
only after evidence is presented and cross examinations are conducted will a
final judgment be rendered by the District Court, subject to the right to
appeal. The particular illumination block was at the time of the preliminary
ruling still in a development stage. The Companys temporary inability to
manufacture and sell the specific illumination block, does not affect its
ability to manufacture and sell products incorporating other illumination
blocks; the Company manufactures its products with several other illumination
blocks. In February 2007 the patent referring to the specific illumination
block expired. Among others, the Company has filed two motions for the lawsuit
to be dismissed, both still pending. We believe that we have good defenses in
the infringement aspect of the claim. The Companys estimate, based on the
opinion of its legal advisors, is that any liability arising from this law suit
is not probable. The Company further believes that it has claims with respect
to the validity of the asserted patent, as well as other defenses such as
estoppel and lack of good faith on the part of Orbotech. As noted above, this
litigation is still in an early stage and the Companys defenses will be
presented before the court within the next couple of months.

On
July 14, 2005, a lawsuit was filed against the Company in the United States
District Court for the District of Minnesota by one of the Companys
competitors in the field of semiconductor manufacturing and packaging, August
Technology Corporation (today Rudolph Technologies Inc. together with August
Technology Corporation), alleging infringement of a patent and seeking
injunctive relief and damages. The Company has filed an answer and
counterclaims alleging, inter-alia,non-infringement, invalidity and
unenforceability of the patent. Fact and expert discovery have been completed.
On February 2008 the Company filed a motion for summary judgment of invalidity
of the asserted patent. A hearing on Camteks motion for summary judgment was
held on April 25th, 2008. The Court took the motion under advisement
and will issue an order in due course. We believe that we have substantial
defenses to Augusts allegations, and estimate, based on the opinion of our
legal advisors, that any liability arising from Augusts allegations is not
probable.

We
cannot assure you that we will be successful in our defense against the claims.

On
July 2005, the Company, together with our parent company, Priortech Ltd., filed
a lawsuit in Israel against our competitor, Orbotech, in the sum of $4.1
million, in respect of damages incurred by it due to a claim and a motion for
injunction filed against the Company by Orbotech in May 2004, in the District
Court in Nazareth, and the courts decision in the motion thereof. The Company
believes that Orbotechs claim and motion against it were not filed in good
faith, but in order to thwart Camteks secondary public offering that was
scheduled few days after the submission of Orbotechs claim and motion and was
supposed to infuse the Company and Priortech Ltd. approximately $40 million.
Discovery phase has not been completed yet. Trial is scheduled to continue on
or around November 2008.

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

However, On March 7, 2008, a
purported class action complaint (the Class Action Complaint), Yuval Lapiner
v. Camtek, Ltd. et al., Case No. 08-01327-MMC, was filed in the United States District
Court for the Northern District of California on behalf of purchasers of our common stock
between November 22, 2005 and December 20, 2006. The Class Action Complaint names the
Company and certain of our directors and officers as defendants. It alleges that the
defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5
promulgated thereunder, and breached fiduciary duties by making false and misleading
statements in the Companys SEC filings and press releases. The plaintiffs seek
unspecified compensatory damages against the defendants, as well as attorneys fees
and costs. At this preliminary stage, before the Company has submitted its response, we do
not believe that the Class Action Complaint has merit and intend to defend ourselves
vigorously.

50

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|   |                     
|-- | --------------------
|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 Global 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.

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 in our ordinary shares on the TASE was insignificant. At
our request, our ordinary shares were de-listed from the TASE. In December 2005,
we re-listed our ordinary shares in the TASE.

The
following table sets forth, for the periods indicated, the high and low
reported sales prices of our ordinary shares:

|                                                        |  |          |      |        |  |      |  |     |      |  |  |      | 
|------------------------------------------------------- |  | -------- | ---- | ------ |  | ---- |  | --- | ---- |  |  | ---- | 
|                                                        |  |          |      | Nasdaq | 
|                                                        |  | TASE (1) |      |        | 
|                                                        |  | High     |      | Low    |  | High |  | Low |     
|                                                        |  |          |      |        |  |      |  |     |     
|                                                        |  |          |      |        |  |      |  |     |      |  |  |      | 
|Annual and Quarterly Market
  Prices                    |  |          |      |        |  |      |  |     |      |  |  |      | 
|Fiscal Year Ended December
  31, 2003:                  |  |          |      |        |  |      |  |     | 3.64 |  |  | 0.29 | 
|Fiscal Year Ended December
  31, 2004:                  |  |          |      |        |  |      |  |     | 7.80 |  |  | 3.10 | 
|Fiscal year ended December
  31, 2005:                  |  |          | 4.42 |        |  | 4.21 |  |     | 4.70 |  |  | 2.56 | 
|2006:                                                   |  |          |      |        |  |      |  |     |      |  |  |      | 
|First Quarter                                           |  |          | 5.57 |        |  | 4.32 |  |     | 5.49 |  |  | 4.34 | 
|Second Quarter                                          |  |          | 7.96 |        |  | 4.57 |  |     | 8.40 |  |  | 4.75 | 
|Third Quarter                                           |  |          | 6.90 |        |  | 5.79 |  |     | 6.82 |  |  | 5.68 | 
|Fourth Quarter                                          |  |          | 6.86 |        |  | 4.07 |  |     | 6.95 |  |  | 4.08 | 
|Fiscal Year Ended December
  31, 2006:                  |  |          | 7.96 |        |  | 4.07 |  |     | 8.40 |  |  | 4.08 | 
|2007:                                                   |  |          |      |        |  |      |  |     |      |  |  |      | 
|First Quarter                                           |  |          | 4.57 |        |  | 3.84 |  |     | 4.65 |  |  | 3.76 | 
|Second Quarter                                          |  |          | 3.99 |        |  | 2.91 |  |     | 4.01 |  |  | 2.94 | 
|Third Quarter                                           |  |          | 3.86 |        |  | 2.97 |  |     | 3.89 |  |  | 2.76 | 
|Fourth Quarter                                          |  |          | 3.09 |        |  | 1.69 |  |     | 3.10 |  |  | 1.70 | 
|Fiscal Year Ended December
  31, 2007:                  |  |          | 4.57 |        |  | 1.69 |  |     | 4.65 |  |  | 1.70 | 
|First Quarter 2008:                                     |  |          | 1.84 |        |  | 1.03 |  |     | 1.81 |  |  | 1.01 | 
|Second Quarter 2008 through
  June 25, 2008             |  |          | 1.53 |        |  | 1.07 |  |     | 1.49 |  |  | 1.09 | 
|Monthly Market Prices for
  the Most Recent Six Months: |  |          |      |        |  |      |  |     |      |  |  |      | 
|December 2007                                           |  |          | 2.50 |        |  | 1.69 |  |     | 2.50 |  |  | 1.70 | 
|January 2008                                            |  |          | 1.84 |        |  | 1.42 |  |     | 1.81 |  |  | 1.37 | 
|February 2008                                           |  |          | 1.63 |        |  | 1.39 |  |     | 1.56 |  |  | 1.34 | 
|March 2008                                              |  |          | 1.53 |        |  | 1.03 |  |     | 1.59 |  |  | 1.01 | 
|April 2008                                              |  |          | 1.35 |        |  | 1.22 |  |     | 1.38 |  |  | 1.15 | 
|May 2008                                                |  |          | 1.53 |        |  | 1.20 |  |     | 1.49 |  |  | 1.17 | 
|June 1 until June 25, 2008                              |  |          | 1.33 |        |  | 1.07 |  |     | 1.39 |  |  | 1.09 | 

1)  The closing prices of our
ordinary shares on the TASE have been translated into U.S. dollars, using the
daily representative rate of exchange of the NIS to the U.S. dollar, as
published by the Bank of Israel for the applicable day of the high/low amount
in the specified period.

51

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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 Global
Market under the symbol CAMT. Since December 2005, our ordinary shares are
traded also on the Tel-Aviv Stock Exchange and we are subject to the Israeli
legislation, which applies to companies that are traded in dual listing.

Pursuant
to Rule 4350(a)(1) of the NASDAQ Marketplace Rules, we are relying on our home
country practice in lieu of the requirements set out in Rule 4350(l) that all
securities listed on Nasdaq be eligible for a direct registration program
operated by a registered clearing agency. Our procedures regarding the issuance
of stock certificates comply with Israeli law and practice.

The
Company has also decided to opt out of the shareholder approval requirements
regarding stock option plans and other equity based compensation arrangements
as set forth in Nasdaq Rule 4350(i)(1)(A). The Company has complied with the
relevant preconditions for the purpose of opting out of shareholder approval,
including by certification to Nasdaq by Israeli counsel that the Companys
approval practices are not prohibited by Israeli law. Thus, as required under
Israeli Companies Law, special shareholder voting procedures were followed for
the approval of compensation of office holders or employees who are controlling
shareholders or any relative thereof.

|                  |                       
|----------------- | ----------------------
|D.                | Selling Shareholders. 
|                  |                       
|Not
  applicable.
|                  |                       
|E.                | Dilution.             
|                  |                       
|Not
  applicable.
|                  |                       
|F.                | Expenses of the Issue.
|                  |                       
|Not
  applicable.

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

|                  |              
|----------------- | -------------
|A.                | Share Capital
|                  |              
|Not
  applicable.

52

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|   |                        
|-- | -----------------------
|B. | 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, 30,133,715 ordinary shares are outstanding and
fully-paid. Under the Agreement with FIMI as described in Item 4.A., we
undertook to issue to FIMI ordinary shares in the event of conversion of the $5
million debentures or any part thereof in accordance with the terms of this
agreement. Conversion of the loan, in a whole or in part, is at the lenders
option on any given business day after the closing date (August 23rd,
2005). Conversion price is $5.50 per share, however, in the event that the
average closing price of the companys shares as reported on Nasdaq for the
sixty consecutive trading days immediately preceding the first and second
anniversary of the loan agreement closing is lower than the conversion price in
effect on such date, the conversion price in effect on such date shall be
reduced to equal the higher of the average closing price and $2.00. As of
December 31, 2007, the conversion price per one ordinary share is $3.19. As of
the date of this Annual Report, no ordinary shares were issued to FIMI as no
conversion of the $5 million debentures or any part thereof has been made in
accordance with the terms of this agreement.

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.

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.

53

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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.

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.

54

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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.

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, an 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.

55

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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 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 another entity taxable as a corporation for U.S. federal
  income tax purposes) created or organized under the laws of the United
  States, any political subdivision thereof or the District of Columbia;                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | 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.

Unless
otherwise specifically indicated, this discussion does not consider the U.S.
tax consequences to a person that is not a U.S. holder (a non-U.S. holder)
and considers only U.S. holders that will own the ordinary shares as capital
assets (generally, for investment).

56

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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
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 who
have elected mark-to-market accounting, U.S. holders holding the ordinary shares
as part of a hedging, straddle or conversion transaction, U.S. holders that
received ordinary shares as a result of exercising employee stock options or
otherwise as compensation, U.S. holders whose functional currency is not the
U.S. dollar, insurance companies, tax-exempt organizations, financial
institutions or financial services entities, grantor trusts, real estate
investment trusts, regulated investment companies, certain former citizens or
former long-term residents of the United States and persons subject to the
alternative minimum tax, who may be subject to special rules not discussed
below. If a partnership (or any other entity treated as a partnership for U.S.
federal income tax purposes) holds our ordinary shares, the tax treatment of
the partnership and a partner in such partnership will generally depend on the
status of the partner and the activities of the partnership. Such a partner or
partnership should consult its tax advisor as to its tax consequences.

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 non-U.S. taxes withheld
from such distribution. 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 (currently a maximum rate of
15% for taxable years beginning on or before December 31, 2010), provided that
such dividends meet the requirements of qualified dividend income. For this
purpose, qualified dividend income generally includes dividends paid by a
non-U.S. corporation if certain holding period and other requirements are met
and either (a) the stock of the non-U.S. corporation with respect to which the
dividends are paid is readily tradable on an established securities market in
the U.S. (e.g., the NASDAQ Global Market) or (b) the non-U.S. corporation is
eligible for benefits of a comprehensive income tax treaty with the U.S. which
includes an information exchange program and is determined to be satisfactory
by the U.S. Secretary of the Treasury. The United States Internal Revenue
Service (IRS) has determined that the U.S.-Israel income tax treaty is
satisfactory for this purpose. 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 taxable year, dividends paid on
our ordinary shares in such year or in the following taxable year would not be
qualified dividends. See discussion below regarding our PFIC status at Tax
Consequences If We Are a Passive Foreign Investment Company. 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.

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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.

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 non-U.S. 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 for non-U.S. income taxes withheld from
dividends received in respect of the ordinary shares. The conditions and 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 generally will
be foreign source passive income for U.S. foreign tax credit purposes. U.S.
holders that do not elect to claim a foreign tax credit may instead claim a
deduction for the non-U.S. income taxes withheld if such U.S. holders itemize
their deductions for U.S. federal income tax purposes. 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 non-U.S. income taxes
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 31-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 the discussion below entitled 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 such ordinary shares. The gain or loss recognized on
the disposition of such 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. Long-term capital gains of certain non-corporate
shareholders are subject to a maximum rate of 15% for taxable years beginning
on or before December 31, 2010. Gain or loss recognized by a U.S. holder on a
sale, exchange or other disposition of ordinary shares generally 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.

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Tax Consequences if we are a Passive Foreign
Investment Company

For
U.S. federal income tax purposes, 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 that
other corporations assets and as directly earning our proportionate share of
that 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:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 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 taxable 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.
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| | 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 IRS. A shareholder makes a QEF election
  by attaching a completed IRS 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 IRS 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 marketable stock (e.g., regulatory traded on the NASDAQ Global
  Market). Pursuant to this regime, an electing U.S. holders ordinary shares
  are marked-to-market each taxable 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.                                                                                                                                                                                                                                                                                                            
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| | 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 taxable year for which the election is made and all later
  taxable years, unless the ordinary shares cease to be marketable stock or the
  IRS consents to the revocation of the election.                                           
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| | 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.                                                                                                                                                                                                                                                                                                                                                                                                    
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 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 taxable years or such U.S.
  holders holding period for our ordinary shares prior to the distribution
  year or (2) 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 and any taxable year prior to the first taxable year in
  which we were a PFIC, its gross income as ordinary income for that year. All
  amounts allocated to other taxable years of the U.S. holder would be taxed at
  the highest tax rate for each such year applicable to ordinary income and the
  U.S. holder also would be liable for interest on the deferred tax liability
  for each such year calculated as if such liability had been due with respect
  to each such year. The portions of gains and distributions that are not
  characterized as excess distributions are subject to tax in the current
  taxable year as ordinary income 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, is generally denied the otherwise available step-up in
  the tax basis of such shares to fair market value at the date of death.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Based
on an analysis of our assets and income, we believe that we were not a PFIC for
our taxable year ended December 31, 2007. We currently expect that we will not
be a PFIC in 2008. 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 taxable year ending December 31, 2008 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 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.

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.

Non-U.S. Holders of Ordinary Shares

Except
as described below, a non-U.S. holder of ordinary shares 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, in the case of
U.S. federal income taxes, 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 on
the disposition of ordinary shares 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 certain other conditions are met.

Information Reporting and Backup Withholding

A
U.S. holder (except for certain exempt recipients, such as corporations)
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. A U.S. holder of our ordinary shares who does not provide a
correct tax payer identification number may be subject to penalties imposed by
the I.R.S. Backup withholding will not apply if a U.S. holder provides a
correct tax payer identification number certifies that such holder is not
subject to backup withholding or otherwise establishes an exemption. Non-U.S.
holders generally will not be subject to information reporting or backup
withholding with respect to the payment of dividends on, or proceeds from the
distribution of, our ordinary shares provided the non-U.S. holder provides its
taxpayer identification number, certifies to its foreign status 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
holder, or alternatively, the 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 IRS.

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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

Until December
31, 2003, the regular tax rate applicable to income of companies (which are not
entitled to benefits due to investments in approved enterprise, as described
below) was 36%. In June 2004 and in July 2005, the Knesset (Israeli
parliament) passed amendments to the Income Tax Ordinance (No. 140 and
Temporary Provision), 2004 and (No. 147), 2005 respectively, which determine,
among other things, that the corporate tax rate is to be gradually reduced to
the following tax rates: 2004  35%, 2005  34%, 2006  31%, 2007  29%, 2008 
27%, 2009  26% and 2010 and thereafter  25%.

However,
the effective tax rate payable by a company that derives income from an approved
enterprise, discussed further below, may be considerably less. See Law for
the Encouragement of Capital Investments, 1959.

Taxation Under Inflationary Conditions

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

On
February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments)
(Amendment No. 20) (Restriction of Period of Application)  2008 (the
Amendment) was passed by the Knesset. According to the Amendment, the
Inflationary Adjustments Law will no longer be applicable subsequent to the
2007 tax year, except for certain transitional provisions.

Further,
according to the Amendment, commencing with the 2008 tax year, the adjustment
of income for the effects of inflation for tax purposes will no longer be
calculated. Additionally, depreciation on fixed assets and tax loss
carryforwards will no longer be linked to future changes in the CPI, such that
these amounts will continue to be linked only to the CPI as of the end of the
2007 tax year and will not be linked to CPI changes after this date.

Tax benefits under the Law for Encouragement
of Capital Investments, 1959 (the Investment Law)

The
Companys production facility has been granted Approved Enterprise status
under the Investment 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; this is due to the fact
that the Company operates in Zone A in Israel.

On
April 1, 2005, an amendment to the Investment Law came into effect (the
Amendment) and has significantly changed the provisions of the Investment Law.
The Amendment limits the scope of enterprises which may be approved by the
Investment Center by setting criteria for the approval of a facility as a
Beneficiating Enterprise, such as provisions generally requiring that at
least 25% of the Beneficiating Enterprises income will be derived from export.
Additionally, the Amendment enacted major changes in the manner in which tax
benefits are awarded under the Investment Law so that companies no longer
require Investment Center approval in order to qualify for tax benefits.

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In
addition, the Investment Law provides that terms and benefits included in any
certificate of approval already granted will remain subject to the provisions
of the law as they were on the date of such approval. Therefore, the Companys
existing Approved Enterprise will generally not be subject to the provisions of
the Amendment. As a result of the Amendment, tax-exempt income generated under
the provisions of the Amendment, as part of a new Beneficiating Enterprise,
will subject the Company to taxes upon distribution or liquidation.

The
Company has been granted the status of Approved Enterprise, under the
Investment Law, for investment programs for the periods ending in 2007 and
2010, and the status of Beneficiating Enterprise according to the Amendment,
for the period ending in 2014 (Programs).

Out
of the Companys retained earnings as of December 31, 2006, approximately $19.4
million are tax-exempt earnings attributable to its Approved Enterprise
programs and approximately $2.8 million are tax-exempt earnings attributable to
its Beneficiating Enterprise program. The tax-exempt income attributable to the
Approved and Beneficiating Enterprise cannot be distributed to shareholders
without subjecting the Company to taxes. If these retained tax-exempt profits
are distributed, the Company will be taxed at the reduced corporate tax rate
applicable to such profits (currently - 25% according to the implementation of
the Investment Law; effectively 33%). According to the Amendment, tax-exempt
income generated under the Beneficiating Enterprise status will be taxed upon
dividend distribution or complete liquidation, whereas tax exempt income
generated under the Approved Enterprise status will be taxed only upon dividend
distribution. As of December 31, 2006, if the income attributed to the Approved
Enterprise was distributed as dividend, the Company would incur a tax liability
of approximately $4.9 million. If income attributed to the Beneficiating
Enterprise was distributed as dividend, including upon liquidation, the Company
would incur a tax liability in the amount of approximately $ 0.7 million.

These
amounts will be recorded as an income tax expense for the period in which the
Company declares the dividend.

The
Company intends to reinvest the amount of its tax-exempt income and not
distribute any amounts of its undistributed tax exempt income as dividend.
Accordingly, no deferred income taxes have been provided on income attributable
to the Companys Approved and Beneficiating Enterprise programs, as the
undistributed tax exempt income is essentially permanent in duration.

The
entitlement to the above benefits is conditional upon the Companys fulfilling
the conditions stipulated by the Investment Law, regulations published there
under and the certificates of approval for the specific investments in approved
enterprises.

Should
the Company fail to meet such requirements in the future, income attributable
to its Programs could be subject to the statutory Israeli corporate tax rate
and the Company could be required to refund a portion of the tax benefits
already received, with respect to such program. The Companys management
believes that the Company is meeting the aforementioned conditions.

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 (OCS) are eligible for grants, in exchange for
payment of royalties from revenues generated by the products developed in
accordance with the programs. Once a project is approved, the OCS 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 OCS. These royalties must be paid starting from
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.

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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, unless the amount of production outside
Israel is less than 10% of the original rate of production of the products
developed with these grants. In this particular case, although the OCS may
resist to the transfer of production within 30 days from the receipt of an
announcement to that effect, this law does not impose obligation to pay
enlarged royalties to the OCS. Prior to the recent amendment of this 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
this 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 there under, 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 OCS is reviewed separately, and grants are based on the
programs approval by the research committee of the OCS. Expenditures supported
under other incentive programs of the State of Israel are not eligible for OCS
grants.

In
March 2001, we reached an arrangement with the OCS whereby we 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 OCS participations, up to a maximum amount
of $250,000 per quarter. We have not received any additional grants from the
OCS 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, 2007, we had a net operating loss, or NOL, of $7.8 million carryforward for
Israeli tax purposes. In addition, we had a net operating tax loss from
Approved enterprise and Beneficiating enterprise which will be available for
offset versus income derived from these enterprises only in the amount of $14.9
million.

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.

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The
following corporate tax benefits are available to Industrial Companies:

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| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; and
| |   |                                                                                                                                                     
| |  | 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.

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%. According to the 2006 Tax Reform, an individual will subject to a 20%
tax on real capital gains on the sales of securities, including debentures,
warrants and shares, so long the individual is not a controlling shareholder
(generally a shareholder with 10% or more in the right to profits, right to
nominate a director and voting rights) in the company issuing the securities.
This implies an increase in the tax rate on the gains from publicly traded
securities from 15%, which was applicable to sales before January1, 2006 to
20%. 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, generally will not be subject to Israeli capital
gains tax unless (i) 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; (ii) the U.S.
resident is present in Israel for a total of 183 days or more during the tax
years; or (iii) the capital gains from such sale can be allocated to a
permanent establishment in Israel. However, under the U.S.-Israel Tax Treaty,
this Treaty U.S. Resident should 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 complex 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%.

64

---

---



|   |                             
|-- | ----------------------------
|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 Global Market. You may inspect reports
and other information concerning us at the offices of the National Association
of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850.
Information about us is also available on our site at http://www.camtek.co.il.
Such information on our 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.      

65

---

---



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

Until
recently, we were engaged in hedging, in order to manage risks relating to
foreign currency exchange rate or interest rate fluctuations. As of December
31, 2007, we had no outstanding derivative financial instruments of any kind.
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, 2007, we had no short-term
loans except for current maturity of convertible loan in the sum of $1.67
million.

Most
of our investments are comprised of short-term bank deposits, which bear fixed
interest rates. In addition, we are invested in corporate debt and option rate
securities.

Foreign
Currency Rate Fluctuations

The
currency of the primary economic environment in which our operations are
conducted is the dollar, as most of our revenues are derived in dollars, and
the prices of part 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. Also, most of our marketing expenses are
denominated in dollars or are dollar linked, and 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 revaluation in the local currency as compared to the
dollar, which was the case in Europe in 2006 and 2007, the prices of our
products will decrease relative to that local currency and may be more
competitive. The opposite effect occurs when the dollar increases in value in
comparison to these currencies, which was the case in 2005. 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 major portion of the costs of our Israeli operations, such
as personnel, subcontractors, materials and facility-related, are incurred in
NIS. As a result, we bear the risk that our NIS costs, as expressed in dollars,
increase to the extent by which the continued appreciation of the NIS in
relation to the dollar, as experienced in the last couple of months, will
increase our costs expressed in NIS and have an effect on our net income.

An
increasing portion of our payroll 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.

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, 2007, we had net liabilities of approximately $6.5 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 $65,000 or income for the same amount in
case of increase or decrease in rates, respectively.

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

66

---

---



PART II

|          |                                                                                 |                
|--------- | ------------------------------------------------------------------------------- | ---------------
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies.                               
|          |                                                                                 |                
|          |                                                                                 | None.          
|          |                                                                                 |                
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of
  Proceeds.
|          |                                                                                 |                
|          |                                                                                 | Not Applicable.
|          |                                                                                 |                
|Item 15T. | Controls and Procedures                                                        

a. Disclosure 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, 2007, 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.

b. Managements Annual Report on Internal
Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting. Internal control over financial reporting
is designed to provide reasonable assurance to our management and the board of
directors regarding the reliability of financial reporting and the preparation
and fair presentation of published financial statements. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurances with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may decline. Our management
evaluated the effectiveness of our internal control over financial reporting
established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management has assessed the
effectiveness of our internal control over financial reporting, as at December
31, 2007, and concluded that such internal control over financial reporting is
effective.

This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities Exchange
Commission that permit us to provide only managements report in this annual
report.

c. Changes In Internal Control Over Financial
Reporting

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 Mr. Eran Bendoly and Ms.
Gabriela Heller is qualified as an audit committee financial expert as
defined in Item 401(h) of Regulation S-K.

67

---

---



|          |               
|--------- | --------------
|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. The Code of
Ethics has recently been updated and signed by all of our directors, officers
and employees.

A
copy of the Code of Ethics 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 for professional services
rendered to the Company by our principal accountant Somekh Chaikin, a member
firm of KPMG International, for the years ended December 31, 2006 and 2007:

|             |  |                                       |  |                                      
|------------ |  | ------------------------------------- |  | -------------------------------------
|Fee Category |  | For Services
  Rendered during
  2006 |  | For Services
  Rendered during
  2007
|             |  |                                       |  |                                      
|Audit
  Fees |  | $123,000                              |  | $180,000                             

Audit Fees: Consist
of the aggregate fees billed for professional services rendered for the audit
of our annual financial statements and services that are normally provided by
independent registered public accounting firm in connection with statutory and
regulatory filings or engagements.

Audit related
fees, tax fees and all other fees were rendered by Goldstein Sabo Tevet, an
unaffiliated firm.

Our Audit
Committee has adopted a policy for pre-approval of audit and permitted
non-audit services. Under the policy, the Audit Committee will pre-approve all
auditing services and permitted non-audit services (including the fees and
other terms) to be performed for the Company by its independent auditor to the
extent required by law. In addition, the Audit Committee may adopt policies and
procedures to permit delegation of authority to subcommittees consisting of one
or more members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services. Decisions of the
subcommittee to grant pre-approvals will be presented to the full Audit
Committee at its next scheduled meeting.

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

Not applicable
to registrant.

68

---

---



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

Not applicable
to registrant.

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.

Our consolidated financial statements and
report of independent registered public accounting firm in connection
therewith, as appear below, are hereby incorporated into this annual report.

69

---

---



CAMTEK
LTD. 
and its subsidiaries

Consolidated
Financial Statements 
As of and for the year 
ended December 31, 2007

---

---

CAMTEK LTD. and its subsidiaries

INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                         |                
|-------------------------------------------------------- | ---------------
|                                                         | Page           
|                                                         |                
|                                                         |                
|Report of Independent Registered
 Public Accounting Firm | F  2          
|                                                         |                
|Consolidated Balance Sheets                              | F  3          
|                                                         |                
|Consolidated Statements of
 Operations                   | F  4          
|                                                         |                
|Consolidated Statements of
 Comprehensive Income (Loss)  | F  5          
|                                                         |                
|Consolidated Statements of
 Shareholders Equity         | F  6          
|                                                         |                
|Consolidated Statements of Cash
 Flows                   | F  7 to F  8 
|                                                         |                
|Notes to Consolidated Financial
 Statements              | F  9 to F  33
|                                                         |                

---

---

Report of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of
Camtek Ltd.

We have audited the accompanying
consolidated balance sheets of Camtek Ltd. and subsidiaries (the Company) as
of December 31, 2007 and 2006, and the related consolidated statements of operations,
comprehensive income (loss), shareholders equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
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
financial position of Camtek Ltd. and subsidiaries as of December 31, 2007 and 2006, and
the results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.

As discussed in Note 2Q to the
consolidated financial statements, effective January 1, 2006, the Company adopted the fair
value method of accounting for stock-based compensation as required by Statement of
Financial Accounting Standard No. 123R  Share Based Payment.

Somekh Chaikin
Certified Public Accountants (Israel)
Member firm of KPMG International

Tel Aviv, Israel

June 30, 2008

F  2

---

---

|                                
|--------------------------------
|CAMTEK LTD. and its subsidiaries
|Consolidated Balance Sheets     
|                                
|(In thousands)                  

|                                                                                                                                                                             |  |                              |        |      |  |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | ------- | -
|                                                                                                                                                                             |  | December
 31,                |       
|                                                                                                                                                                             |  |                              |       
|                                                                                                                                                                             |  | 2007                         |        | 2006 | 
|                                                                                                                                                                             |  |                              |        |      | 
|                                                                                                                                                                             |  | U.S.
 Dollars (In thousands) |       
|                                                                                                                                                                             |  |                              |       
|Assets                                                                                                                                                                       |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Current
 assets                                                                                                                                                              |  |                              |        |      |  |         |  
|Cash and cash
 equivalents                                                                                                                                                   |  |                              | 18,601 |      |  | 23,358  |  
|Marketable
 securities (Note 3)                                                                                                                                              |  |                              | 1,395  |      |  | 2,099   |  
|Accounts
 receivable, net (Note 11B,C)                                                                                                                                       |  |                              | 23,500 |      |  | 29,434  |  
|Inventories
 (Note 4)                                                                                                                                                        |  |                              | 34,243 |      |  | 41,414  |  
|Due from
 affiliates                                                                                                                                                         |  |                              | 251    |      |  | 180     |  
|Other current
 assets (Note 5)                                                                                                                                               |  |                              | 2,616  |      |  | 2,372   |  
|Deferred tax
 asset (Note 17)                                                                                                                                                |  |                              | 124    |      |  | 65      |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Total current
 assets                                                                                                                                                        |  |                              | 80,730 |      |  | 98,922  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Fixed
 assets (Note 6)                                                                                                                                                       |  |                              |        |      |  |         |  
|Cost                                                                                                                                                                         |  |                              | 21,632 |      |  | 15,927  |  
|Less -
 Accumulated depreciation                                                                                                                                             |  |                              | 6,307  |      |  | 5,198   |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Fixed assets,
 net                                                                                                                                                           |  |                              | 15,325 |      |  | 10,729  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Marketable
 securities (Note 3)                                                                                                                                              |  |                              | 1,075  |      |  | -       |  
|Deferred tax
 asset (Note 17)                                                                                                                                                |  |                              | 612    |      |  | 584     |  
|Other assets,
 net (Note 7)                                                                                                                                                  |  |                              | 723    |      |  | 571     |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              | 2,410  |      |  | 1,155   |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Total
 assets                                                                                                                                                                |  |                              | 98,465 |      |  | 110,806 |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Liabilities
 and shareholders equity                                                                                                                                        |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Current
liabilities                                                                                                                                                          |  |                              |        |      |  |         |  
|Accounts payable
 trade                                                                                                                                                     |  |                              | 7,960  |      |  | 11,801  |  
|Due to
 affiliates                                                                                                                                                           |  |                              | 866    |      |  | 814     |  
|Convertible loan
  current portion                                                                                                                                          |  |                              | 1,667  |      |  | -       |  
|Other current
 liabilities (Note 8)                                                                                                                                          |  |                              | 11,465 |      |  | 12,831  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Total current
 liabilities                                                                                                                                                   |  |                              | 21,958 |      |  | 25,446  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Long
 term liabilities                                                                                                                                                       |  |                              |        |      |  |         |  
|Convertible loan
 (Note 9), net of current portion                                                                                                                           |  |                              | 3,333  |      |  | 5,000   |  
|Liability for
 employee severance benefits (Note 10)                                                                                                                         |  |                              | 268    |      |  | 222     |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Total liabilities                                                                                                                                                            |  |                              | 25,559 |      |  | 30,668  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Commitments
 and contingencies (Note 11)                                                                                                                                     |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Shareholders
 equity                                                                                                                                                        |  |                              |        |      |  |         |  
|Ordinary shares
 NIS 0.01 par value, authorized 100,000,000 shares, issued 31,145,334 in 2007
 and 31,052,474 in 2006, outstanding 30,133,715 in 2007 and 30,040,855 in 2006 |  |                              | 132    |      |  | 132     |  
|Additional
 paid-in capital                                                                                                                                                  |  |                              | 59,878 |      |  | 59,420  |  
|Accumulated
 other comprehensive loss                                                                                                                                        |  |                              | -      |      |  | (1      | )
|Retained
 earnings                                                                                                                                                           |  |                              | 13,889 |      |  | 21,580  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|                                                                                                                                                                             |  |                              | 73,899 |      |  | 81,131  |  
|Treasury stock,
 at cost (1,011,619 shares in 2007 and 2006)                                                                                                                 |  |                              | (993   | )    |  | (993    | )
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Total
 shareholders equity                                                                                                                                                  |  |                              | 72,906 |      |  | 80,138  |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  
|Total
 liabilities and shareholders equity                                                                                                                                  |  |                              | 98,465 |      |  | 110,806 |  
|                                                                                                                                                                             |  |                              |        |      |  |         |  

See accompanying notes to consolidated financial statements

F  3

---

---

|                                     
|-------------------------------------
|CAMTEK LTD.
 and its subsidiaries    
|Consolidated Statements of Operations
|                                     

|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|-------------------------------------------------------- |  | -------------------------------------------------- | ------ | ---- |  | ------- | - |  | ------ | -
|                                                         |  | Year Ended December 31,                            |       
|                                                         |  |                                                    |       
|                                                         |  | 2007                                               |        | 2006 |  | 2005    |  
|                                                         |  |                                                    |        |      |  |         |  
|                                                         |  | U.S. Dollars (In thousands, except per share data) |       
|                                                         |  |                                                    |       
|Revenues:                                                |  |                                                    |        |      |  |         |   |  |        |  
|Sales of products                                        |  |                                                    | 59,654 |      |  | 92,470  |   |  | 56,987 |  
|Service fees                                             |  |                                                    | 11,315 |      |  | 7,585   |   |  | 6,045  |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Total revenues (Note 15)                                 |  |                                                    | 70,969 |      |  | 100,055 |   |  | 63,032 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Cost of revenues:                                        |  |                                                    |        |      |  |         |   |  |        |  
|Cost of products sold                                    |  |                                                    | 32,769 |      |  | 42,600  |   |  | 28,262 |  
|Cost of services                                         |  |                                                    | 9,171  |      |  | 5,842   |   |  | 4,519  |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Total cost of revenues                                   |  |                                                    | 41,940 |      |  | 48,442  |   |  | 32,781 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Gross profit                                             |  |                                                    | 29,029 |      |  | 51,613  |   |  | 30,251 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Research and development costs                           |  |                                                    | 12,111 |      |  | 11,831  |   |  | 8,469  |  
|Selling, general and administrative
 expenses (Note 16A) |  |                                                    | 24,119 |      |  | 27,850  |   |  | 18,760 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Total operating expenses                                 |  |                                                    | 36,230 |      |  | 39,681  |   |  | 27,229 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Operating (loss) income                                  |  |                                                    | (7,201 | )    |  | 11,932  |   |  | 3,022  |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Financial expenses, net (Note 16B)                       |  |                                                    | (128   | )    |  | (288    | ) |  | (320   | )
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Income (loss) before income taxes                        |  |                                                    | (7,329 | )    |  | 11,644  |   |  | 2,702  |  
|Income tax expense (Note 17)                             |  |                                                    | (362   | )    |  | (41     | ) |  | -      |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Net income (loss)                                        |  |                                                    | (7,691 | )    |  | 11,603  |   |  | 2,702  |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Earnings (loss) per ordinary share (Note
 14):           |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Basic                                                    |  |                                                    | (0.25  | )    |  | 0.40    |   |  | 0.10   |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Diluted                                                  |  |                                                    | (0.25  | )    |  | 0.39    |   |  | 0.10   |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Weighted average number of ordinary shares
 outstanding: |  |                                                    |        |      |  |         |   |  |        |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Basic                                                    |  |                                                    | 30,145 |      |  | 29,176  |   |  | 27,253 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  
|Diluted                                                  |  |                                                    | 30,145 |      |  | 29,553  |   |  | 27,586 |  
|                                                         |  |                                                    |        |      |  |         |   |  |        |  

See
accompanying notes to consolidated financial statements

F  4

---

---

|                                                      
|------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                     
|                                                      
|Consolidated Statements of Comprehensive Income (loss)
|                                                      

|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | - |  | ----- | -
|                                                                                                      |  | Year Ended December 31,     |       
|                                                                                                      |  |                             |       
|                                                                                                      |  | 2007                        |        | 2006 |  | 2005   |  
|                                                                                                      |  |                             |        |      |  |        |  
|                                                                                                      |  | U.S. Dollars (In thousands) |       
|                                                                                                      |  |                             |       
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|Net income (loss)                                                                                     |  |                             | (7,691 | )    |  | 11,603 |   |  | 2,702 |  
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|Other comprehensive income:                                                                           |  |                             |        |      |  |        |   |  |       |  
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|Realization of loss on available for sale
 securities, net of taxes (nil)                             |  |                             | 1      |      |  | 2      |   |  | -     |  
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|Unrealized holding loss on available for
 sale securities arising during the year, net of taxes (nil) |  |                             | -      |      |  | (1     | ) |  | (2    | )
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  
|Comprehensive income (loss)                                                                           |  |                             | (7,690 | )    |  | 11,604 |   |  | 2,700 |  
|                                                                                                      |  |                             |        |      |  |        |   |  |       |  

See
accompanying notes to consolidated financial statements

F  5

---

---

|                                                
|------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries               
|Consolidated
 Statements of Shareholders Equity
|                                                

|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|--------------------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------- |  | ---------------------------- |  | ------------------------------------ | ---------- | ------------------------------------------------ |  | ---------------- | - | ------------- | ---- | ------------------------ |  | -- | - |  | ------ | - |  | ---- | - |  | ------ | -
|                                                          |  | Ordinary Shares
 NIS 0.01 par value |            | Number of
 treasury
 shares |  | Additional
 paid-in
 capital |  | Deferred
 share
 based
 compensation |            | Accumulated
 other
 comprehensive
 income (loss) |  | Retainedearnings |   | Treasurystock |      | Totalshareholdersequity | 
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          | 
|                                                          |  |                                     |            | U.S. Dollars                |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |  
|                                                          |  | Shares                              |            | (In Thousands)              |  | Shares                       |  | U.S. Dollars (In thousands)          |           
|                                                          |  |                                     |            |                             |  |                              |  |                                      |           
|Balances at December 31, 2004                             |  |                                     | 28,085,766 |                             |  | 125                          |  |                                      | (1,011,619 | )                                                |  | 43,732           |   |               | (363 | )                        |  | -  |   |  | 7,275  |   |  | (993 | ) |  | 49,776 |  
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|Exercise of share options                                 |  |                                     | 9,750      |                             |  | -                            |  |                                      | -          |                                                  |  | 15               |   |               | -    |                          |  | -  |   |  | -      |   |  | -    |   |  | 15     |  
|Cancellation of share options                             |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | (15              | ) |               | 15   |                          |  | -  |   |  | -      |   |  | -    |   |  | -      |  
|Amortization of deferred share options based compensation |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | 127  |                          |  | -  |   |  | -      |   |  | -    |   |  | 127    |  
|Unrealized loss on marketable securities                  |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | (2 | ) |  | -      |   |  | -    |   |  | (2     | )
|Net income                                                |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | -  |   |  | 2,702  |   |  | -    |   |  | 2,702  |  
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|Balances at December 31, 2005                             |  |                                     | 28,095,516 |                             |  | 125                          |  |                                      | (1,011,619 | )                                                |  | 43,732           |   |               | (221 | )                        |  | (2 | ) |  | 9,977  |   |  | (993 | ) |  | 52,618 |  
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|Adoption of SFAS 123-R                                    |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | (221             | ) |               | 221  |                          |  | -  |   |  | -      |   |  | -    |   |  | -      |  
|Share issuance, net of issuance expenses*                 |  |                                     | 2,525,252  |                             |  | 6                            |  |                                      | -          |                                                  |  | 14,442           |   |               | -    |                          |  | -  |   |  | -      |   |  | -    |   |  | 14,448 |  
|Exercise of share options                                 |  |                                     | 431,706    |                             |  | 1                            |  |                                      | -          |                                                  |  | 701              |   |               | -    |                          |  | -  |   |  | -      |   |  | -    |   |  | 702    |  
|Share based compensation expense                          |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | 766              |   |               | -    |                          |  | -  |   |  | -      |   |  | -    |   |  | 766    |  
|Realization of loss on marketable securities              |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | 2  |   |  | -      |   |  | -    |   |  | 2      |  
|Unrealized loss on marketable securities                  |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | (1 | ) |  | -      |   |  | -    |   |  | (1     | )
|Net income                                                |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | -  |   |  | 11,603 |   |  | -    |   |  | 11,603 |  
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|Balances at December 31, 2006                             |  |                                     | 31,052,474 |                             |  | 132                          |  |                                      | (1,011,619 | )                                                |  | 59,420           |   |               | -    |                          |  | (1 | ) |  | 21,580 |   |  | (993 | ) |  | 80,138 |  
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|Exercise of share options                                 |  |                                     | 92,860     |                             |  | **                           |  |                                      | -          |                                                  |  | 32               |   |               | -    |                          |  | -  |   |  | -      |   |  | -    |   |  | 32     |  
|Share based compensation expense                          |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | 426              |   |               | -    |                          |  | -  |   |  | -      |   |  | -    |   |  | 426    |  
|Realization of loss on marketable securities              |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | 1  |   |  | -      |   |  | -    |   |  | 1      |  
|Net Loss                                                  |  |                                     | -          |                             |  | -                            |  |                                      | -          |                                                  |  | -                |   |               | -    |                          |  | -  |   |  | (7,691 | ) |  | -    |   |  | (7,691 | )
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  
|Balances at December 31, 2007                             |  |                                     | 31,145,334 |                             |  | 132                          |  |                                      | (1,011,619 | )                                                |  | 59,878           |   |               | -    |                          |  | -  |   |  | 13,889 |   |  | (993 | ) |  | 72,906 |  
|                                                          |  |                                     |            |                             |  |                              |  |                                      |            |                                                  |  |                  |   |               |      |                          |  |    |   |  |        |   |  |      |   |  |        |  

|   |                                            
|-- | -------------------------------------------
|*  | Net of issuance expenses of
 $560 thousand.
|  
|** | Less than $ 1 thousand.                    

See accompanying notes to
consolidated financial statements

F   6

---

---

|                                     
|-------------------------------------
|CAMTEK LTD.
 and its subsidiaries    
|                                     
|Consolidated Statements of Cash Flows
|                                     

|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------- | - |  | ------ | -
|                                                                                                    |  | Year Ended December 31,     |       
|                                                                                                    |  |                             |       
|                                                                                                    |  | 2007                        |        | 2006 |  | 2005    |  
|                                                                                                    |  |                             |        |      |  |         |  
|                                                                                                    |  | U.S. Dollars (In thousands) |       
|                                                                                                    |  |                             |       
|                                                                                                   
|Cash flows from operating activities:                                                               |  |                             |        |      |  |         |   |  |        |  
|Net income (loss)                                                                                   |  |                             | (7,691 | )    |  | 11,603  |   |  | 2,702  |  
|Adjustments to reconcile net income (loss)
 to net cash provided by (used in) operating activities: |  |                             |        |      |  |         |   |  |        |  
|Depreciation and amortization                                                                       |  |                             | 1,307  |      |  | 794     |   |  | 658    |  
|Loss (gain) on disposal of fixed assets                                                             |  |                             | (40    | )    |  | 24      |   |  | (6     | )
|Gain from marketable securities, net                                                                |  |                             | (25    | )    |  | (6      | ) |  | -      |  
|Deferred tax expense (benefit)                                                                      |  |                             | (59    | )    |  | (434    | ) |  | -      |  
|Share based compensation expense                                                                    |  |                             | 426    |      |  | 766     |   |  | 127    |  
|Provision for bad debts                                                                             |  |                             | 583    |      |  | 778     |   |  | 680    |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Changes in operating assets and liabilities:                                                        |  |                             |        |      |  |         |   |  |        |  
|Accounts receivable                                                                                 |  |                             | 5,148  |      |  | (4,230  | ) |  | (4,864 | )
|Inventories                                                                                         |  |                             | 4,522  |      |  | (16,472 | ) |  | (50    | )
|Due to / from affiliates                                                                            |  |                             | (19    | )    |  | 924     |   |  | 189    |  
|Other current assets                                                                                |  |                             | (273   | )    |  | (229    | ) |  | (724   | )
|Accounts payable  trade                                                                            |  |                             | (3,841 | )    |  | 3,123   |   |  | 463    |  
|Other current liabilities                                                                           |  |                             | (1,366 | )    |  | 4,110   |   |  | 626    |  
|Liability for employee severance benefits                                                           |  |                             | 46     |      |  | -       |   |  | -      |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Net cash (used in) provided by operating
 activities                                                |  |                             | (1,282 | )    |  | 751     |   |  | (199   | )
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Cash flows from investing activities:                                                               |  |                             |        |      |  |         |   |  |        |  
|Purchase of marketable securities                                                                   |  |                             | (6,770 | )    |  | (3,891  | ) |  | (2,103 | )
|Proceeds from sale of marketable securities                                                         |  |                             | 6,425  |      |  | 3,900   |   |  | -      |  
|Purchase of fixed assets                                                                            |  |                             | (3,236 | )    |  | (1,582  | ) |  | (673   | )
|Purchase of intangible assets                                                                       |  |                             | (169   | )    |  | (114    | ) |  | -      |  
|Proceeds from disposal of fixed assets                                                              |  |                             | 40     |      |  | -       |   |  | 18     |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Net cash used in investing activities                                                               |  |                             | (3,710 | )    |  | (1,687  | ) |  | (2,758 | )
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Cash flows from financing activities:                                                               |  |                             |        |      |  |         |   |  |        |  
|Decrease in short-term bank credit                                                                  |  |                             | -      |      |  | -       |   |  | (2,335 | )
|Net proceeds from issuance of ordinary
 shares                                                      |  |                             | -      |      |  | 14,448  |   |  | -      |  
|Proceeds from exercise of share options                                                             |  |                             | 32     |      |  | 702     |   |  | 15     |  
|Proceeds from long-term convertible loan                                                            |  |                             | -      |      |  | -       |   |  | 5,000  |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Net cash provided by financing activities                                                           |  |                             | 32     |      |  | 15,150  |   |  | 2,680  |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Effect of exchange rate changes on cash                                                             |  |                             | 203    |      |  | 430     |   |  | (150   | )
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Net (decrease) increase in cash and cash
 equivalents                                               |  |                             | (4,757 | )    |  | 14,644  |   |  | (427   | )
|Cash and cash equivalents at beginning of
 the year                                                 |  |                             | 23,358 |      |  | 8,714   |   |  | 9,141  |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  
|Cash and cash equivalents at end of the
 year                                                       |  |                             | 18,601 |      |  | 23,358  |   |  | 8,714  |  
|                                                                                                    |  |                             |        |      |  |         |   |  |        |  

See
accompanying notes to consolidated financial statements

F  7

---

---

|                                     
|-------------------------------------
|CAMTEK LTD.
 and its subsidiaries    
|                                     
|Consolidated Statements of Cash Flows
|                                     

|                                      |                                        |  |                             |       |      |  |      |  |  |     | 
|------------------------------------- | -------------------------------------- |  | --------------------------- | ----- | ---- |  | ---- |  |  | --- | 
|                                      |                                        |  | Year ended December 31,     |      
|                                      |                                        |  |                             |      
|                                      |                                        |  | 2007                        |       | 2006 |  | 2005 | 
|                                      |                                        |  |                             |       |      |  |      | 
|                                      |                                        |  | U.S. Dollars (In thousands) |      
|                                      |                                        |  |                             |      
|Supplementary cash flows information: |                                        |  |                             |       |      |  |      |  |  |    
|A.                                    | Cash paid during the year for:         |  |                             |       |      |  |      |  |  |     | 
|                                      | Interest                               |  | $                           | 320   |      |  | 422  |  |  | 405 | 
|                                      |                                        |  |                             |       |      |  |      |  |  |     | 
|                                      | Income taxes                           |  | $                           | 308   |      |  | 27   |  |  | 216 | 
|                                      |                                        |  |                             |       |      |  |      |  |  |     | 
|                                      |                                        |  |                             |       |      |  |      |  |  |     | 
|B.                                    | Non-cash transactions:                 |  |                             |       |      |  |      |  |  |     | 
|                                      | Transfer of
 inventory to fixed assets |  | $                           | 2,649 |      |  | -    |  |  | -   | 
|                                      |                                        |  |                             |       |      |  |      |  |  |     | 

See accompanying notes to consolidated financial statements.

F  8

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 1    BUSINESS

Camtek Ltd.
(Camtek), an Israeli corporation, is a majority owned (61.7%) subsidiary of
Priortech Ltd. (Parent), an Israeli corporation listed on the Tel-Aviv Stock
Exchange. Camtek designs, develops manufactures and markets automatic optical
inspection systems (AOI systems) and related products. Camteks AOI systems are
used for yield enhancement for various applications in the electronic supply
chain industry. The main applications along this supply chain are the
production of Microelectronics, Printed Circuit Boards (PCB) and Electronic
packaging. Camteks activities are conducted in one reportable business
segment.

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
 accompanying 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 in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|B. | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
 preparation of the consolidated financial statements in conformity with U.S.
 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 consolidated 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 revenue
 generated by the Company is from outside of Israel and a majority thereof is
 received in U.S. Dollars. In addition, 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 U.S. Dollar/NIS exchange
 rate. A significant portion of the Companys expenses are incurred in Israel
 and paid for in NIS. Transactions not denominated in U.S. Dollar are recorded
 upon their initial recognition according to the exchange rate in effect on
 the date of the transaction. Exchange rate differences arising upon the
 settlement of monetary items or upon reporting the Companys monetary items
 at exchange rates different from that by which they were initially recorded
 during the period, or reported in previous financial statements, are charged
 to financial income or expense.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|D. | Cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | All highly
 liquid investments purchased with original maturities of three months or less
 are considered to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|E. | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company
 accounts for its investments in marketable securities in accordance with
 Statement of Financial Accounting Standard (SFAS) No. 115 Accounting for
 Certain Investments in Debt and Equity Securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | As of
 December 31, 2007 all marketable securities are designated as
 available-for-sale and accordingly are recorded at fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F  9

---

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|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES
(Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |           | 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | 
|E. | Marketable securities (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Unrealized
 holding gains and losses, net of the related tax effect, on
 available-for-sale securities are excluded from earnings and are reported as
 a separate component of other comprehensive income (loss) until realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|F. | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
 allowance for doubtful accounts represent Managements best estimate of the
 probable loss inherent in existing accounts receivable balances as a result
 of possible non-collection. In determining the appropriate allowance,
 Management bases its estimate on information available about specific
 debtors, including aging of the balance, assessment of the underlying security
 received, the history of write-offs, relationships with the customers and the
 overall creditworthiness of the customers.                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|G. | 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 cost method basis, or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Inventory write-downs are recorded for
 damaged, obsolete, excess and slow-moving inventory.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|H. | 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%       | 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |           | 
|   | Leasehold
 improvements are amortized by the straight-line method over the lower of the
 lease term or the estimated useful economic life of such improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|I. | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Intangible
 assets, comprised of patents registration costs, are capitalized at cost and
 amortized, beginning with the first year of utilization, over its expected
 life of ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|J. | Long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company
 applies SFAS No. 144, Accounting for the Impairment or Disposal of
 Long-Lived Assets. This Statement requires that long-lived assets be
 reviewed for impairment whenever events or changes in circumstances indicate
 that the carrying amount of an asset may not be recoverable. Recoverability
 of assets to be held and used is measured by a comparison of the carrying
 amount of an asset to undiscounted future cash flows expected to be generated
 by the asset. If the carrying amount of the long lived asset exceeds its
 estimated undiscounted future cash flows, an impairment charge is recognized
 as computed by subtracting the fair market value of the asset from its
 carrying value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|K. | Fair values of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The carrying
 amounts for cash and cash equivalents, accounts receivable, accounts payable,
 accrued expenses and amounts due to/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 convertible loan and amounts due to or from Parent approximate
 fair value because the interest rates on such amounts approximate the market
 rate.                                                                                                                                                                                                                             

F  10

---

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|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
  and its subsidiaries                                
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|L. | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  recognizes revenue from sales in accordance with Securities and Exchange
  Commission Staff Accounting Bulletin No. 104 SAB 104 and Financial
  Accounting Standard Boards Emerging Issues Task Force (EITF) Issue No.
  00-21, Revenue Arrangements with Multiple Deliverables. Accordingly, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Revenue
  under multiple element arrangements is recognized in accordance with EITF
  Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Under
  this method, if an element is determined to be a separate unit of accounting,
  the revenue for the element is based on fair value and determined by vendor
  objective evidence (VOE), accordingly, non-standard warranty, with
  determined VOE, is deferred as unearned revenue and is recognized ratably as
  revenue commencing with and over the applicable warranty term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|M. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|N. | 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
  asset and liability method whereby deferred tax assets and liabilities are
  recognized for the future tax consequences attributable to differences
  between financial reporting and tax bases of assets and liabilities and are
  measured using the enacted tax rates and laws expected to apply to taxable
  income in the years in which those temporary differences are expected to be
  recovered or settled. The Company provides a valuation allowance to reduce
  deferred tax assets to the amount that is more likely than not to be
  realized. Beginning with the adoption of FASB Interpretation No. 48,
  Accounting for Uncertainty in Income Taxes (FIN 48) as of January 1,
  2007, the Company recognizes the effect of income tax positions only if those
  positions are more likely than not of being sustained. Recognized income tax
  positions are measured at the largest amount that is greater than 50% likely
  of being realized. Changes in recognition or measurement are reflected in the
  period in which the change in judgment occurs. The Company records interest
  and penalties related to unrecognized tax benefits as a component of income
  tax expense.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|O. | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Research and
  development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F  11

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|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
  and its subsidiaries                                
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|P. | Earnings / Loss per ordinary share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Basic
  earnings/loss per ordinary share is calculated using only weighted average
  ordinary shares outstanding. Diluted earnings per share, if relevant, gives
  effect to dilutive potential ordinary shares outstanding during the year.
  Such dilutive shares consist of incremental shares, using the treasury stock
  method, from the assumed exercise of share options. For the year ended
  December 31 2007 the effect of the exercise of all outstanding share options
  is anti-dilutive and has not been included in computing dilutive earnings per
  ordinary share. For the years ended December 31, 2006 and 2005 the effect of
  the exercise of all outstanding share options is dilutive, and hence was
  included in computing diluted earning per ordinary share. For the years ended
  December 31, 2007, 2006 and 2005, the effects of warrants and conversion of
  convertible loan are anti-dilutive, and have not been included in computing
  dilutive earnings/loss per ordinary share.                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Q. | Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Prior to
  January 1, 2006, the Company applied the intrinsic value method as allowed by
  FASB Statement No. 123, Accounting for Stock-Based Compensation and
  provided pro forma net income and pro forma earnings per share disclosures
  for employee stock option grants as if the fair-value based method defined in
  Statement 123 had been applied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Effective
  January 1, 2006, the Company adopted FASB Statement No. 123R, Share-Based
  Payment (Statement 123R). This statement replaces FASB Statement No. 123,
  Accounting for Stock-Based Compensation (Statement 123) and supersedes APB
  No. 25. Statement 123R requires that all stock-based compensation be
  recognized as an expense in the financial statements and that such cost be
  measured at the fair value of the award. This statement was adopted using the
  modified prospective method of application, which requires the Company to
  recognize compensation cost on a prospective basis. Therefore, prior years
  financial statements have not been restated. Under this method, the Company
  recorded stock-based compensation expense for awards granted prior to, but
  not yet vested as of January 1, 2006, using the fair value amounts determined
  for pro forma disclosures under Statement 123. For stock-based awards granted
  after January 1, 2006, the Company recognizes compensation expense based on
  estimated grant date fair value using the Black-Scholes option-pricing model.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The
  following table illustrates the effect on net income for the year ended
  December 31, 2005 as if the Company had applied the fair value recognition
  provisions of Statement 123. For purposes of this pro forma disclosure, the
  value of the options is estimated using a Black-Scholes option-pricing model
  and amortized to expense over the options service periods with forfeitures
  recognized as they occurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F  12

---

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|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
  and its subsidiaries                                
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                           
|-- | --------------------------
|Q. | Stock Option Plan (contd)

|                                                                                         |  |                            |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | -
|                                                                                         |  | 2005                       |  
|                                                                                         |  |                            |  
|                                                                                         |  | U.S. Dollars(In thousands) |  
|                                                                                         |  |                            |  
|Net income, as reported                                                                  |  | 2,702                      |  
|Share-based employee compensation expense
  included in reported net income              |  | 127                        |  
|Share-based employee compensation expense
  determined under the fair value based method |  | (560                       | )
|                                                                                         |  |                            |  
|Pro forma net income                                                                     |  | 2,269                      |  
|                                                                                         |  |                            |  
|Earnings per share:                                                                      |  |                            |  
|                                                                                         |  |                            |  
|Basic  as reported                                                                      |  | 0.10                       |  
|                                                                                         |  |                            |  
|Basic  pro forma                                                                        |  | 0.08                       |  
|                                                                                         |  |                            |  
|Diluted  as reported                                                                    |  | 0.10                       |  
|                                                                                         |  |                            |  
|Diluted  pro forma                                                                      |  | 0.08                       |  
|                                                                                         |  |                            |  

|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|R. | Reclassification                                                                                                               
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Certain
  prior years amounts have been reclassified in conformity with the current
  years financial statements presentation.
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|S. | Recently Issued Accounting Standards                                                                                           
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 1.                                                                                                                              | In February
  2007, the FASB issued Statement of Financial Accounting Standards No. 159,
  The Fair Value Option for Financial Assets and Financial Liabilities 
  including an amendment of FASB Statement No. 115 (Statement 159). Statement
  159 gives the Company the irrevocable option to carry most financial assets
  and liabilities at fair value that are not currently required to be measured
  at fair value. If the fair value option is elected, changes in fair value
  would be recorded in earnings at each subsequent reporting date. SFAS 159 is
  effective for the Companys 2008 fiscal year. The Company has evaluated the
  impact of this statement and believes that adoption of SFAS No. 159
  prospectively on January 1, 2008 will not have a material effect on its
  consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 2.                                                                                                                              | In September
  2006, the FASB issued FASB Statement No. 157, Fair Value Measurement
  (Statement 157). Statement 157 defines fair value, establishes a framework
  for the measurement of fair value, and enhances disclosures about fair value
  measurements. The Statement does not require any new fair value measures. The
  Statement is effective for fair value measures already required or permitted
  by other standards for fiscal years beginning after November 15, 2007. The
  Company is required to adopt Statement 157 beginning on January 1, 2008.
  Statement 157 is required to be applied prospectively, except for certain
  financial instruments. Any transition adjustment will be recognized as an
  adjustment to opening retained earnings in the year of adoption. In February
  2008, the FASB approved FSP FAS 157-2, which grants a one-year deferral of
  Statement 157s fair-value measurement requirements for nonfinancial assets
  and liabilities, except for items that are measured or disclosed at fair
  value in the financial statements on a recurring basis. The Company is
  currently evaluating the impact of adopting Statement 157 on its results of
  operations and financial position.

F  13

---

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|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
  and its subsidiaries                                
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES (Contd)

|   |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|S. | Recently Issued Accounting Standards (contd)
|   |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | 3.                                            | In June
  2007, the FASB issued EITF Issue No. 07-03 (EITF 07-03), Accounting for
  Non-Refundable Advance Payments for Goods or Services to Be Used in Future
  Research and Development Activities. EITF 07-03 provides guidance on whether
  non-refundable advance payments for goods that will be used or services that
  will be performed in future research and development activities should be
  accounted for as research and development costs or deferred and capitalized
  until the goods have been delivered or the related services have been
  rendered. EITF 07-03 is effective for fiscal years beginning after December
  15, 2007. The Company is currently evaluating the impact of adopting EITF
  07-03 on its results of operations and financial position.                                                                                                                                                                                                                                     
|   |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | 4.                                            | In December
  2007, the FASB issued FASB Statement No. 141R, Business Combinations
  (Statement 141R) and FASB Statement No. 160, Noncontrolling Interests in
  Consolidated Financial Statements an amendment to ARB No. 51 (Statement
  160). Statements 141R and 160 require most identifiable assets, liabilities,
  noncontrolling interests, and goodwill acquired in a business combination to
  be recorded at full fair value and require noncontrolling interests
  (previously referred to as minority interests) to be reported as a component
  of equity, which changes the accounting for transactions with noncontrolling
  interest holders. Both Statements are effective for periods beginning on or
  after December 15, 2008, and earlier adoption is prohibited. Statement 141R will
  be applied to business combinations occurring after the effective date.
  Statement 160 will be applied prospectively to all noncontrolling interests,
  including any that arose before the effective date.

F  14

---

---

CAMTEK LTD.
and its subsidiaries

|                                                                   |                      
|------------------------------------------------------------------ | ---------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  
|                                                                  
|NOTE 3                                                            | MARKETABLE SECURITIES

|                          |  |                    |                             |      |  |       |  |  |       | 
|------------------------- |  | ------------------ | --------------------------- | ---- |  | ----- |  |  | ----- | 
|                          |  | Interest Rate 
  % |                             | 2007 |  | 2006  | 
|                          |  |                    |                             |      |  |      
|                          |  |                    | U.S. Dollars (In thousands) |     
|                          |  |                    |                             |      |  |      
|                          |  |                    |                             |      |  |       |  |  |       | 
|Available
  for sale:     |  |                    |                             |      |  |       |  |  |       | 
|Corporate debt
securities |  |                    | 5                           |      |  | 1,195 |  |  | 599   | 
|Auction rate
securities   |  |                    | 6                           |      |  | 1,275 |  |  | 1,500 | 
|                          |  |                    |                             |      |  |       |  |  |       | 
|                          |  |                    |                             |      |  | 2,470 |  |  | 2,099 | 
|                          |  |                    |                             |      |  |       |  |  |       | 
|                          |  |                    |                             |      |  |       |  |  |       | 

The carrying
amount, gross unrealized holding losses, and fair value of available-for-sale
debt securities by major security type and class of security at December 31,
2007 and 2006 were as follows:

|                          |  |                             |       |                                      |  |            |   |  |       | 
|------------------------- |  | --------------------------- | ----- | ------------------------------------ |  | ---------- | - |  | ----- | 
|                          |  | Carrying 
  amount          |       | Gross unrealized 
  Holding (losses) |  | Fair value |  
|                          |  |                             |       |                                      |  |            |  
|                          |  | U.S. Dollars (In thousands) |      
|                          |  |                             |      
|At December
  31, 2007:   |  |                             |       |                                      |  |            |   |  |       | 
|Available
  for sale:     |  |                             |       |                                      |  |            |   |  |       | 
|Corporate debt
securities |  |                             | 1,195 |                                      |  | -          |   |  | 1,195 | 
|Auction rate
securities   |  |                             | 1,275 |                                      |  | -          |   |  | 1,275 | 
|                          |  |                             |       |                                      |  |            |   |  |       | 
|                          |  |                             | 2,470 |                                      |  | -          |   |  | 2,470 | 
|                          |  |                             |       |                                      |  |            |   |  |       | 
|At December
  31, 2006:   |  |                             |       |                                      |  |            |   |  |       | 
|Available
  for sale:     |  |                             |       |                                      |  |            |   |  |       | 
|Corporate debt
securities |  |                             | 600   |                                      |  | (1         | ) |  | 599   | 
|Auction rate
securities   |  |                             | 1,500 |                                      |  | -          |   |  | 1,500 | 
|                          |  |                             |       |                                      |  |            |   |  |       | 
|                          |  |                             | 2,100 |                                      |  | (1         | ) |  | 2,099 | 
|                          |  |                             |       |                                      |  |            |   |  |       | 

Maturities of
debt securities classified as available-for-sale were as follows at December
31, 2007:

|                                       |  |                             |       |            |  |       | 
|-------------------------------------- |  | --------------------------- | ----- | ---------- |  | ----- | 
|                                       |  | Carrying amount             |       | Fair value | 
|                                       |  |                             |       |            | 
|                                       |  | U.S. Dollars (In thousands) |      
|                                       |  |                             |      
|Available
  for sale:                  |  |                             |       |            |  |       | 
|First year                             |  |                             | 1,195 |            |  | 1,195 | 
|Due after five years through
ten years |  |                             | 1,275 |            |  | 1,275 | 
|                                       |  |                             |       |            |  |       | 
|                                       |  |                             | 2,470 |            |  | 2,470 | 
|                                       |  |                             |       |            |  |       | 

Proceeds from
the sale of investment securities available for sale were $6,425, $3,900 and
nil in 2007, 2006 and 2005, respectively; gross realized gains included in
other finance income in 2007, 2006 and 2005 were $25, $6 and nil, respectively.

The marketable
securities are presented in:

|                   |  |                             |       |                   |  |       | 
|------------------ |  | --------------------------- | ----- | ----------------- |  | ----- | 
|                   |  | December 31, 2007           |       | December 31, 2006 | 
|                   |  |                             |       |                   | 
|                   |  | U.S. Dollars (In thousands) |      
|                   |  |                             |      
|Current
  assets   |  |                             | 1,395 |                   |  | 2,099 | 
|Long term
  assets |  |                             | 1,075 |                   |  | -     | 
|                   |  |                             |       |                   |  |       | 
|                   |  |                             | 2,470 |                   |  | 2,099 | 
|                   |  |                             |       |                   |  |       | 
|                   |  |                             |       |                   |  |       | 

F  15

---

---

CAMTEK LTD.
and its subsidiaries

|                                                                   |            
|------------------------------------------------------------------ | -----------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  
|NOTE 4                                                            | INVENTORIES

|                                                                                |  |                             |        |      |  |        | 
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | 
|                                                                                |  | December 31,                |       
|                                                                                |  |                             |       
|                                                                                |  | 2007                        |        | 2006 | 
|                                                                                |  |                             |        |      | 
|                                                                                |  | U.S. Dollars (In thousands) |       
|                                                                                |  |                             |       
|                                                                               
|Components                                                                      |  |                             | 14,654 |      |  | 17,702 | 
|Systems
  partially completed                                                   |  |                             | 3,739  |      |  | 5,340  | 
|Completed
  systems, including systems not yet purchased, at customer locations |  |                             | 15,850 |      |  | 18,372 | 
|                                                                                |  |                             |        |      |  |        | 
|                                                                                |  |                             |        |      |  |        | 
|                                                                                |  |                             | 34,243 |      |  | 41,414 | 
|                                                                                |  |                             |        |      |  |        | 

|          |                     
|--------- | --------------------
|NOTE 5   | OTHER CURRENT ASSETS

|                                  |  |                             |       |      |  |       | 
|--------------------------------- |  | --------------------------- | ----- | ---- |  | ----- | 
|                                  |  | December 31,                |      
|                                  |  |                             |      
|                                  |  | 2007                        |       | 2006 | 
|                                  |  |                             |       |      | 
|                                  |  | U.S. Dollars (In thousands) |      
|                                  |  |                             |      
|                                 
|Due from
  Government institution |  |                             | 1,265 |      |  | 689   | 
|Income tax
  receivables          |  |                             | 128   |      |  | 54    | 
|Due from
  employees              |  |                             | 146   |      |  | 196   | 
|Prepaid
  expenses                |  |                             | 485   |      |  | 480   | 
|Advances to
  suppliers           |  |                             | 6     |      |  | 519   | 
|Deposits for
  operating leases   |  |                             | 202   |      |  | 110   | 
|Other                             |  |                             | 384   |      |  | 324   | 
|                                  |  |                             |       |      |  |       | 
|                                  |  |                             |       |      |  |       | 
|                                  |  |                             | 2,616 |      |  | 2,372 | 
|                                  |  |                             |       |      |  |       | 

|          |             
|--------- | ------------
|NOTE 6   | FIXED ASSETS

|                                 |  |                             |        |      |  |        | 
|-------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | 
|                                 |  | December 31,                |       
|                                 |  |                             |       
|                                 |  | 2007                        |        | 2006 | 
|                                 |  |                             |        |      | 
|                                 |  | U.S. Dollars (In thousands) |       
|                                 |  |                             |       
|                                
|Land                             |  |                             | 863    |      |  | 815    | 
|Building                         |  |                             | 9,695  |      |  | 7,998  | 
|Machinery
  and equipment        |  |                             | 5,885  |      |  | 3,102  | 
|Office
  furniture and equipment |  |                             | 4,272  |      |  | 3,233  | 
|Automobiles                      |  |                             | 169    |      |  | 295    | 
|Leasehold
  improvements         |  |                             | 748    |      |  | 484    | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             | 21,632 |      |  | 15,927 | 
|Less
  accumulated depreciation  |  |                             | 6,307  |      |  | 5,198  | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             |        |      |  |        | 
|                                 |  |                             | 15,325 |      |  | 10,729 | 
|                                 |  |                             |        |      |  |        | 

Depreciation
expenses for the years ended December 31, 2007, 2006 and 2005 aggregated to
$1,289, $792 and $658 thousand, respectively.

F  16

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 7    OTHER ASSETS

|                               |  |                             |     |      |  |     | 
|------------------------------ |  | --------------------------- | --- | ---- |  | --- | 
|                               |  | December 31,                |    
|                               |  |                             |    
|                               |  | 2007                        |     | 2006 | 
|                               |  |                             |     |      | 
|                               |  | U.S. Dollars (In thousands) |    
|                               |  |                             |    
|                               |  |                             |     |      |  |     | 
|Deposits for
 operating leases |  |                             | 460 |      |  | 459 | 
|Intangible
 assets (A)         |  |                             | 263 |      |  | 112 | 
|                               |  |                             |     |      |  |     | 
|                               |  |                             |     |      |  |     | 
|                               |  |                             | 723 |      |  | 571 | 
|                               |  |                             |     |      |  |     | 

|   |                            
|-- | ---------------------------
|A. | Patents
 registration costs

| |                             |  |                             |     |                           |  |                         |  |                      |     |  |  |    | 
| | --------------------------- |  | --------------------------- | --- | ------------------------- |  | ----------------------- |  | -------------------- | --- |  |  | -- | 
| |                             |  | December 31, 2007           |    
| |                             |  |                             |    
| |                             |  | Gross carrying
 amount      |     | Accumulated
 amortization |  | Intangible
 Assets, net |  | Amortization
 period |    
| |                             |  |                             |     |                           |  |                         |  |                      |    
| |                             |  | U.S. Dollars (In thousands) |     | Years                     | 
| |                             |  |                             |     |                           | 
| | Patents
 registration costs |  |                             | 283 |                           |  | 20                      |  |                      | 263 |  |  | 10 | 
| |                             |  |                             |     |                           |  |                         |  |                      |     |  |  |    | 

| |                             |  |                             |     |                           |  |                         |  |                      |     |  |  |    | 
| | --------------------------- |  | --------------------------- | --- | ------------------------- |  | ----------------------- |  | -------------------- | --- |  |  | -- | 
| |                             |  | December 31, 2006           |    
| |                             |  |                             |    
| |                             |  | Gross carrying
 amount      |     | Accumulated
 amortization |  | Intangible
 Assets, net |  | Amortization
 period |    
| |                             |  |                             |     |                           |  |                         |  |                      |    
| |                             |  | U.S. Dollars (In thousands) |     | Years                     | 
| |                             |  |                             |     |                           | 
| | Patents
 registration costs |  |                             | 114 |                           |  | 2                       |  |                      | 112 |  |  | 10 | 
| |                             |  |                             |     |                           |  |                         |  |                      |     |  |  |    | 

Amortization
expense for the years ended December 31, 2007, 2006 and 2005 aggregated to $18,
$2 and nil thousand, respectively.

As of December 31, 2007, the estimated
aggregate amortization of intangible assets for the years 2008 to 2012 is $28
thousands for each of the years.

NOTE 8    OTHER CURRENT LIABILITIES

|                                               |  |                             |        |      |  |        | 
|---------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | 
|                                               |  | December 31,                |       
|                                               |  |                             |       
|                                               |  | 2007                        |        | 2006 | 
|                                               |  |                             |        |      | 
|                                               |  | U.S. Dollars (In thousands) |       
|                                               |  |                             |       
|                                               |  |                             |        |      |  |        | 
|Accrued
 compensation and related benefits     |  |                             | 4,330  |      |  | 4,825  | 
|Government
 institutions                       |  |                             | 315    |      |  | 383    | 
|Income tax
 payables                           |  |                             | 421    |      |  | 460    | 
|Accrued
 warranty costs                        |  |                             | 934    |      |  | 1,057  | 
|Commissions                                    |  |                             | 2,204  |      |  | 2,077  | 
|Advances
 from customers and deferred revenues |  |                             | 2,207  |      |  | 3,125  | 
|Other                                          |  |                             | 1,054  |      |  | 904    | 
|                                               |  |                             |        |      |  |        | 
|                                               |  |                             |        |      |  |        | 
|                                               |  |                             | 11,465 |      |  | 12,831 | 
|                                               |  |                             |        |      |  |        | 

Changes in the
product warranty obligation are as follows:

| |                      |  |                             |        |      |  |        |   |  |        |  
| | -------------------- |  | --------------------------- | ------ | ---- |  | ------ | - |  | ------ | -
| |                      |  | December 31,                |       
| |                      |  |                             |       
| |                      |  | 2007                        |        | 2006 |  | 2005   |  
| |                      |  |                             |        |      |  |        |  
| |                      |  | U.S. Dollars (In thousands) |       
| |                      |  |                             |       
| | Beginning of
 year   |  |                             | 1,057  |      |  | 1,162  |   |  | 1,703  |  
| | Change in
 estimates |  |                             | -      |      |  | (442   | ) |  | -      |  
| | New warranties       |  |                             | 1,534  |      |  | 2,020  |   |  | 2,003  |  
| | Reductions           |  |                             | (1,657 | )    |  | (1,683 | ) |  | (2,544 | )
| |                      |  |                             |        |      |  |        |   |  |        |  
| | End of year          |  |                             | 934    |      |  | 1,057  |   |  | 1,162  |  
| |                      |  |                             |        |      |  |        |   |  |        |  

F  17

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 9    CONVERTIBLE LOAN

|                              |  |                             |       |      |  |       | 
|----------------------------- |  | --------------------------- | ----- | ---- |  | ----- | 
|                              |  | December 31,                |      
|                              |  |                             |      
|                              |  | 2007                        |       | 2006 | 
|                              |  |                             |       |      | 
|                              |  | U.S. Dollars (In thousands) |      
|                              |  |                             |      
|                              |  |                             |       |      |  |       | 
|U.S. Dollar
 denominated loan |  |                             | 3,333 |      |  | 5,000 | 
|                              |  |                             |       |      |  |       | 

Repayment dates of convertible
loan subsequent to December 31, 2008:

|                                                                     |  |                               |       | 
|-------------------------------------------------------------------- |  | ----------------------------- | ----- | 
|                                                                     |  | U.S. Dollars 
 (In thousands) |      
|                                                                     |  |                               |      
|2009                                                                 |  |                               | 1,667 | 
|2010                                                                 |  |                               | 1,666 | 
|                                                                     |  |                               |       | 
|                                                                     |  |                               |       | 
|U.S. Dollar
 denominated loan, bearing annual interest of Libor+2.1% |  |                               | 3,333 | 
|                                                                     |  |                               |       | 

On August 23,
2005 (the closing date) the Company raised $5 million as a convertible loan
from FIMI Opportunity Fund L.P and FIMI Israel Opportunity Fund, Limited
Partnership (FIMI). The loan is payable in three equal annual payments
starting at the third anniversary of the closing date. The lenders have the
right to postpone the repayments to the end of the fifth anniversary from the
closing date. The loan bears annual interest of Libor + 2.1%. The interest is
payable every three months. Conversion of the loan, in a whole or in part, is
at the lenders option on any given business day after the closing date.

Conversion price per one ordinary share is $5.50, however, in the event that
the average closing price of the Companys shares as reported on Nasdaq for the
sixty consecutive trading days immediately preceding the first and second
anniversary of the loan agreement closing date, is lower than the conversion
price in effect on such date, the conversion price in effect on such date shall
be reduced to equal the higher of the average closing price and $2.00. As of
December 31, 2007 the conversion price per one ordinary share is $3.19.

The
Company is subject to the following main covenants:

|   |                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | The
 shareholders equity should not decrease to below $45 million, or, $40
 million as a result of dividend distributions. Shareholders equity may not
 decrease by more then 10%, unless such deviation is cured within three
 consecutive financial quarters immediately following the financial quarter in
 which such decrease had occurred.
|   |                                                                                                                                                                                                                                                                                                                                                   
|2. | The
 shareholders equity shall represent at least 55% of the total assets of the
 Company.                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                   
|3. | The net loss
 shall not exceed an aggregate of $10 million in any single financial quarter
 or any year.                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                   
|4. | No further
 borrowings which exceed the aggregate amount of $15 million (other than the
 loans and credit lines which were in effect at the closing date) and no new
 transactions with the Companys affiliates.                                                                                                                                 

As of December 31, 2007 the
 Company was in compliance with the aforementioned covenants.

F  18

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 10    SEVERANCE PAY

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | The
 liability in respect of most of its employees is discharged by participating
 in a defined contribution pension plan and making regular deposits with a
 pension fund. The liability deposited with the pension fund is based on
 salary components as prescribed in the existing labor agreement. The custody
 and management of the amounts so deposited are independent of the companies
 and accordingly such amounts funded (included in expenses on an accrual
 basis) and related liabilities are not reflected in the balance sheet.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | In respect
 of the liability to other employees, individual insurance policies are
 purchased and deposits are made with recognized severance pay funds. The
 liability for severance pay is calculated on the basis of the latest salary
 paid to each employee multiplied by the number of years of employment. The
 liability is covered by the amounts deposited including accumulated income
 thereon as well as by the unfunded provision, which amounted to $268 and $222
 thousand as of December 31, 2007 and 2006, respectively.       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3. | Severance
 pay expenses were $851, $750 and $544 thousand in 2007, 2006 and 2005,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F  19

---

---

CAMTEK LTD. and its
subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 11    COMMITMENTS AND CONTINGENCIES
(contd)

|   |                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Operating leases                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                 
|   | The
 Companys subsidiaries have entered into various nonconancelable operating
 lease agreements, principally for office space. In May 2007, the Company
 entered into a noncancelable operating lease for vehicles for a period of 36
 months.
|   |                                                                                                                                                                                                                                                 
|   | As of
 December 31, 2007, minimum future rental payments under such noncancelable operating
 leases are as follows:                                                                                                                             

|                          |  |                            |       | 
|------------------------- |  | -------------------------- | ----- | 
|Year Ending
 December 31, |  | U.S. Dollars(In thousands) |      
|                          |  |                            |      
|2008                      |  |                            | 1,657 | 
|2009                      |  |                            | 1,182 | 
|2010                      |  |                            | 465   | 
|2011                      |  |                            | 168   | 
|Thereafter                |  |                            | 53    | 
|                          |  |                            |       | 
|                          |  |                            | 3,525 | 
|                          |  |                            |       | 

|   |                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------
|   | Aggregate
 office rent expenses amounted to $730, $572 and $546 thousand in 2007, 2006
 and 2005, 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 |  | Write-off |  | Balance at
 end of
 period |     
|     |  |                                  |       |           |  |           |  |                            |     
|     |  | U.S. Dollars (In thousands)      |      
|     |  |                                  |      
|2005 |  |                                  | 2,236 |           |  | 680       |  |                            | (710 | ) |  | 2,206 | 
|2006 |  |                                  | 2,206 |           |  | 778       |  |                            | (131 | ) |  | 2,853 | 
|2007 |  |                                  | 2,853 |           |  | 583       |  |                            | (167 | ) |  | 3,269 | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | Factoring of financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   | The Company
 entered into accounts receivable factoring agreements with two financial
 institutions (the banks). Under the terms of the agreements, the Company
 has the option to factor receivables, with the banks on a non-recourse basis,
 provided that the banks approve the receivables in advance. In some cases,
 the Company continues to be obligated in the event of commercial disputes,
 (such as product defects) which are not covered under the credit insurance
 policy, unrelated to the credit worthiness of the customer. The Company
 accounts for the factoring of its financial assets in accordance with the
 provisions of SFAS 140 Accounting for Transfers and Servicing of
 Financial Assets and Extinguishments of Liabilities- a replacement of FASB
 Statement No. 125. The Company does not expect any reimbursements
 to take place in the foreseeable future.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The
 factoring fees of the above mentioned agreements aggregate $ 52 thousands in
 2007. ($ 51 thousands in 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | As of December
 31, 2007 trade receivables amounting to approximately $ 560 thousands, were
 factored. (December 31, 2006 - $ 2,500 thousands).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F  20

---

---

CAMTEK LTD. and its
subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 11    COMMITMENTS AND CONTINGENT
LIABILITIES (Contd)

|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | Litigation
|   |           
|   | 1.         | On May 10,
 2004, a lawsuit was filed against the Company in the District Court in
 Nazareth, Israel, by a competitor, Orbotech Ltd., alleging that the Dragon
 and Falcon systems infringe upon a patent held by Orbotech Ltd. and
 requesting an injunctive relief and damages. Currently, the issue dealt with
 by the court is the validity of the asserted patent, which expired in
 February 2008. The Company based on the opinion of its legal advisors,
 believes that any liability arising from the law suit is not probable.
 Accordingly, no provision has been recorded by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 2.         | On February
 23, 2005, a lawsuit was filed against the Company in the District Court in
 Jerusalem by Orbotech Ltd., alleging infringement of patent held by Orbotech
 Ltd. regarding a specific illumination block, seeking injunctive relief and
 damages. The court ruled, based on a courts scientific advisor opinion, that
 the Company allegedly infringed the patent, and granted Orbotech a
 provisional remedy. Following the grant of the provisional remedy by the
 District Court, the Company filed a motion for leave to appeal. The Supreme
 Court rejected the Companys request since the provisional remedy was granted
 on the basis of prime facie evidence only. The claim is currently in the
 preliminary stage of discovery and only after evidence is presented and cross
 examinations are conducted will a final judgment be rendered by the District
 Court, subject to the right to appeal. The particular illumination block was
 at the time of the preliminary ruling still in a development stage. The
 Companys temporary inability to manufacture and sell the specific
 illumination block, does not affect its ability to manufacture and sell products
 incorporating other illumination blocks; the Company manufactures its
 products with several other illumination blocks. In February 2007 the patent
 referring to the specific illumination block expired. The Company has filed
 two requests for the lawsuit to be dismissed. The Company based on the
 opinion of its legal advisors, believes that any liability arising from the
 law suit is not probable. The Company further believes that it has claims
 with respect to the validity of the asserted patent, as well as other
 defenses such as estoppel and lack of good faith on the part of Orbotech.
 Accordingly, no provision has been recorded by the Company.
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 3.         | On July 14,
 2005, a lawsuit was filed against the Company in the United States District
 Court for the District of Minnesota by one of the Companys competitors in
 the field of semiconductor manufacturing and packaging, August Technology
 Corporation (today Rudolph Technologies Inc. together with August Technology
 Corporation), alleging infringement of a patent and seeking injunctive relief
 and damages. The Company has filed an answer and counterclaims alleging,
 inter-alia, non-infringement, invalidity and unenforceability of the patent.
 The fact and expert discovery have been completed. On February 2008, the Company
 filled a motion for summary judgment of invalidity of the asserted patent. A
 Hearing on Camteks motion for summary judgment was held on April 25, 2008.
 The court took the motion under advisement and will issue an order in due
 course. The Company based on the opinion of its legal advisors, believes that
 any liability arising from the Augusts allegations is not probable.
 Accordingly, no provision has been recorded by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 4.         | See Note 19B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F  21

---

---

CAMTEK LTD. and its
subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 12    CONCENTRATION OF RISK

Financial
instruments that potentially subject the Company to concentrations of credit
risk consist of cash equivalents, short-term bank deposits, marketable
securities and trade receivables. The Companys cash equivalents and marketable
securities are maintained with high-quality institutions and the composition
and maturities of investments are regularly monitored by management. Generally,
these securities and deposits are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk.

The Companys
marketable securities include auction rate securities and highly rated
corporate bonds. The trade receivables of the Company are derived from sales to
a large number of customers, mainly large industrial corporations located
mainly in Asia, the United States and Europe. The Company generally does not
require collateral: however, in certain circumstances, the Company may require
letter of credit, other collateral or additional guarantees. An allowance for
doubtful accounts is determined with respect to those amounts that the Company
has determined to be doubtful of collection. The Company performs ongoing
credit evaluations of its customers. The carrying amounts of financial
instruments approximate fair value.

NOTE 13    SHAREHOLDERS EQUITY

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Initial Public Offering                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company shares are traded on the NASDAQ National Market under the
 symbol of CAMT.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In December 2005 the Company registered its shares to be listed and
 traded in the Tel-Aviv stock exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|B. | Private Placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In April 2006, the Company raised $14.5 million, net of issuance
 expenses, by issuing 2,525,252 ordinary shares at a price of $5.94 per share
 in a private placement to Israeli institutional investors. The private
 placement also included warrants that are exercisable into 1,262,626 ordinary
 shares at a price of $6.83 per share during a period of four years. The
 warrants issued in April 2006 have been classified in equity.                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|C. | Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | As of December 31, 2007, the Company has five stock option plans for
 employees and directors. Future options will be granted only pursuant to the
 2003 Share Option Plan described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In October 2003, the Company adopted a stock option plan (the Plan)
 pursuant to which the Companys board of directors may grant stock options to
 officers and key employees. The total number of options, which may be granted
 to directors, officers, employees and consultants under this plan, is limited
 to 998,800 options. Stock options can be granted with an exercise price equal
 to or less than the stocks fair market value at the date of grant. All stock
 options have 10-year terms and vest and become fully exercisable after 4
 years from the date of grant with 30% to vest at the end of each of the first
 three years and remaining 10% to vest at the end of the fourth year following
 the grant date.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | As of December 31, 2007, there were no additional shares available
 for the Company grant under the Plan. The fair value of each option award is
 estimated on the date of grant using the Black-Scholes option-pricing model
 that used the weighted average assumptions in the following table. The
 risk-free rate for the expected term of the option is based on the U.S.
 Treasury yield curve in effect at the time of grant.                                                                                                                                                                                                                                                                                                   

F  22

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
  and its subsidiaries                                
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

|           |                              
|---------- | -----------------------------
|NOTE 13   | SHAREHOLDERS EQUITY (Contd)

|   |                           
|-- | --------------------------
|C. | Stock Option Plan (Contd)

| |                            |  |            |  |            |  |           
| | -------------------------- |  | ---------- |  | ---------- |  | ----------
| |                            |  | 2007 Grant |  | 2006 Grant |  | 2005 Grant
| |                            |  |            |  |            |  |           
| | Dividend
  yield           |  | 0          |  | 0          |  | 0         
| | Expected
  volatility *    |  | 83%-84%    |  | 86%-87%    |  | 90%       
| | Risk-free
  interest rate  |  | 5%         |  | 5%         |  | 4.2%      
| | Expected
  life (years) ** |  | 6          |  | 6          |  | 6         

| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------
| | *                                                                                                                                                                                                                                                                                                                                                                                               | Historical
  volatility                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                       
| | **                                                                                                                                                                                                                                                                                                                                                                                              | The company
  used the simplified method to estimate the expected life as permissible under
  SAB 107.
| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                       
| | The weighted
  average grant date fair value of options granted during the years ended 2007,
  2006 and 2005 was $3.19, $5.38 and $2.30 respectively. The total intrinsic
  value of options exercised during the years ended December 31, 2007, 2006 and
  2005 was $101,128, $246,756 and $5,859 respectively. The total intrinsic
  value of options vested at December 31, 2007 is $63,151.
| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                       
| | As of
  December 31, 2007, there was $378,143 of total unrecognized compensation cost
  related to nonvested share-based compensation arrangements. That cost is
  expected to be recognized over a weighted-average period of 1.5 years.                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                       
| | Share option
  activity during the past three years is as follows:                                                                                                                                                                                                                                                                                                                             

|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        |  |  |           |   |  |      | 
|-------------------------- |  | ----------------------- | ------- | ----------------------------------------- |  | -------------- |  | ----------------------------------------- | --------- | -------------- |  | -------------------------------------- |  |  | --------- | - |  | ---- | 
|                           |  | Year Ended December 31, |        
|                           |  |                         |        
|                           |  | 2007                    |         | 2006                                      |  | 2005           | 
|                           |  |                         |         |                                           |  |                | 
|                           |  | Number
  of
  shares    |         | Weighted
  average
  exercise
  price US$ |  | Numberofshares |  | Weighted
  average
  exercise
  price US$ |           | Numberofshares |  | Weighted
  average
  exerciseprice US$ | 
|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        | 
|Outstanding
  at January 1 |  |                         | 929,964 |                                           |  | 2.46           |  |                                           | 1,315,650 |                |  | 2.06                                   |  |  | 1,250,000 |   |  | 1.98 | 
|Granted                    |  |                         | 45,000  |                                           |  | 4.32           |  |                                           | 60,000    |                |  | 5.19                                   |  |  | 144,000   |   |  | 3.00 | 
|Forfeited                  |  |                         | (74,263 | )                                         |  | 2.78           |  |                                           | (13,980   | )              |  | 2.37                                   |  |  | (68,600   | ) |  | 2.59 | 
|Exercised                  |  |                         | (92,860 | )                                         |  | 0.34           |  |                                           | (431,706  | )              |  | 1.63                                   |  |  | (9,750    | ) |  | 1.56 | 
|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        |  |  |           |   |  |      | 
|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        |  |  |           |   |  |      | 
|Outstanding
  at year end  |  |                         | 807,841 |                                           |  | 2.78           |  |                                           | 929,964   |                |  | 2.46                                   |  |  | 1,315,650 |   |  | 2.06 | 
|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        |  |  |           |   |  |      | 
|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        |  |  |           |   |  |      | 
|Vested at
  year end       |  |                         | 670,841 |                                           |  | 2.56           |  |                                           | 665,729   |                |  | 2.22                                   |  |  | 702,990   |   |  | 1.95 | 
|                           |  |                         |         |                                           |  |                |  |                                           |           |                |  |                                        |  |  |           |   |  |      | 

| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |      |  |  |         | 
| | -------------------------------------------------- |  | ------------------------- | ------- | -------------------------------- |  | ----------------------------------------------------------- |  | ----------------------------------------- | ---- |  |  | ------- | 
| |                                                    |  | Numberofsharesoutstanding |         | Weightedaverageexerciseprice US$ |  | Weighted
  average
  remaining
  contractual
  term (years) |  | AggregateintrinsicValue (inUS$ thousands) |     
| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |     
| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |     
| | Outstanding as of December 31, 2007                |  |                           | 807,841 |                                  |  | 2.78                                                        |  |                                           | 6.55 |  |  | 244,340 | 
| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |      |  |  |         | 
| | Vested and expected to vest at December 31,
  2007 |  |                           | 759,371 |                                  |  | 2.78                                                        |  |                                           | 6.55 |  |  | 229,680 | 
| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |      |  |  |         | 
| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |      |  |  |         | 
| | Exercisable at December 31, 2007                   |  |                           | 670,841 |                                  |  | 2.52                                                        |  |                                           | 6.17 |  |  | 176,090 | 
| |                                                    |  |                           |         |                                  |  |                                                             |  |                                           |      |  |  |         | 

F  23

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
  and its subsidiaries                                
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

|           |                              
|---------- | -----------------------------
|NOTE 13   | SHAREHOLDERS EQUITY (Contd)

The following table summarizes information about
share options at
December 31, 2007:

| |  |                            |           |                   |  |                                                              |  |  |                                  |      |  |                   |  |                                  |      |  |  |  |         |  |  |      | 
| |  | -------------------------- | --------- | ----------------- |  | ------------------------------------------------------------ |  |  | -------------------------------- | ---- |  | ----------------- |  | -------------------------------- | ---- |  |  |  | ------- |  |  | ---- | 
| |  | Range ofexercise price US$ |           | Numberoutstanding |  | Weighted
  average
  remaining
  contractual
  life in years |  |  | Weightedaverageexerciseprice US$ |      |  | Numberexercisable |  | Weightedaverageexerciseprice US$ |     
| |  |                            |           |                   |  |                                                              |  |  |                                  |      |  |                   |  |                                  |     
| |  |                            |           |                   |  |                                                              |  |  |                                  |      |  |                   | 
| |  |                            | 0.00      |                   |  | 116,540                                                      |  |  |                                  | 5.56 |  |                   |  |                                  | 0.00 |  |  |  | 116,540 |  |  | 0.00 | 
| |  |                            | 2.98-3.29 |                   |  | 461,301                                                      |  |  |                                  | 5.98 |  |                   |  |                                  | 2.98 |  |  |  | 461,301 |  |  | 2.98 | 
| |  |                            | 3.00      |                   |  | 125,000                                                      |  |  |                                  | 7.74 |  |                   |  |                                  | 3.00 |  |  |  | 75,000  |  |  | 3.00 | 
| |  |                            | 5.00      |                   |  | 50,000                                                       |  |  |                                  | 8.38 |  |                   |  |                                  | 5.00 |  |  |  | 15,000  |  |  | 5.00 | 
| |  |                            | 6.15      |                   |  | 10,000                                                       |  |  |                                  | 8.58 |  |                   |  |                                  | 6.15 |  |  |  | 3,000   |  |  | 6.15 | 
| |  |                            | 4.50      |                   |  | 30,000                                                       |  |  |                                  | 9.07 |  |                   |  |                                  | 4.50 |  |  |  | -       |  |  | 4.50 | 
| |  |                            | 3.95      |                   |  | 15,000                                                       |  |  |                                  | 9.24 |  |                   |  |                                  | 3.95 |  |  |  | -       |  |  | 3.95 | 
| |  |                            |           |                   |  |                                                              |  |  |                                  |      |  |                   |  |                                  |      |  |  |  |         |  |  |      | 
| |  |                            |           |                   |  | 807,841                                                      |  |  |                                  | 6.55 |  |                   |  |                                  | 2.78 |  |  |  | 670,841 |  |  | 2.56 | 
| |  |                            |           |                   |  |                                                              |  |  |                                  |      |  |                   |  |                                  |      |  |  |  |         |  |  |      | 

The
following table summarizes information about nonvested options at December 31,
2007:

| |                                |  |         |          |                                        |  |  |      | 
| | ------------------------------ |  | ------- | -------- | -------------------------------------- |  |  | ---- | 
| |                                |  | Options |          | Weighted averagegrant- date fair value | 
| |                                |  |         |          |                                        | 
| |                                |  |         |          |                                       
| | Balance at
  January 1, 2007   |  |         | 264,235  |                                        |  |  | 2.87 | 
| | Granted                        |  |         | 45,000   |                                        |  |  | 3.19 | 
| | Vested                         |  |         | (157,820 | )                                      |  |  | 2.06 | 
| | Forfeited                      |  |         | (14,415  | )                                      |  |  | 3.60 | 
| |                                |  |         |          |                                        |  |  |      | 
| | Balance at
  December 31, 2007 |  |         | 137,000  |                                        |  |  | 3.84 | 
| |                                |  |         |          |                                        |  |  |      | 

|   |                           
|-- | --------------------------
|D. | Restricted Share Unit Plan

In August 2007,
the Company adopted a Restricted Share Unit (RSU) Plan (the Plan) pursuant
to which the Companys board of directors may grant shares to officers and key
employees.The total number of
shares, which may be granted to directors, officers, employees and consultants
under this plan, is limited to 180,000 authorized but unissued Shares.

The Exercise
Price for each Grantee shall be as determined by the Board and specified in the
applicable RSU Notice of Grant; provided, however, that unless otherwise determined
by the Board (which determination shall not require shareholder approval unless
so required in order to comply with Mandatory Law), the Exercise Price shall be
no more than the underlying Shares nominal value. For the removal of any
doubt, the Board is authorized (without the need for shareholder approval
unless so required in order to comply with Mandatory Law) to determine that the
Exercise Price of an RSU is to be $0.00.

Unless
otherwise determined by the Board with respect to any specific Grantee or to
any specific grant, (which determination shall not require shareholder approval
unless so required in order to comply with Mandatory Law) and provided
accordingly in the applicable RSU Notice of Grant, the RSUs shall vest (become
automatically exercised) according to the following 4-year vesting schedule:

a. Upon the
completion of a full 12 (twelve) months of continuous Service25%.

b. Upon the
lapse of each full additional 3 (three) month(s) of the Grantees continuous
Service thereafter, until all the RSU are vested, i.e. 100% of the grant will
be vested after 4 years.6.25%.

On December
27, 2007, 25,200 RSU were granted. The share price at the grant date was $1.88.
The total compensation amounted to $47 thousands, which is being amortized over
vesting period. All of the RSUs are not yet vested. (see also note 19)

F  24

---

---

CAMTEK LTD.
and its subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  
|                                                                  
|NOTE 13    SHAREHOLDERS EQUITY (Contd)                         

|   |                                                                                  
|-- | ---------------------------------------------------------------------------------
|D. | Restricted Share Unit Plan (contd)                                              
|   |                                                                                  
|   | As of the
 balance sheet date the number of RSUs available for grant is 154,800.
|   |                                                                                  
|   | Activity
 under the Restricted Share Unit Plan is as follows:                    

| |                                  |  |                              |         |                                |  |                                |  |   |      | 
| | -------------------------------- |  | ---------------------------- | ------- | ------------------------------ |  | ------------------------------ |  | - | ---- | 
| |                                  |  | Awards
 Available
 For grant |         | Number of
 awards
 outstanding |  | Weighted-
 average
 fair value | 
| |                                  |  |                              |         |                                |  |                                | 
| |                                  |  |                              |         |                                |  |                                | 
| | Balance as
 of January 1, 2007   |  |                              | -       |                                |  | -                              |  | $ | -    | 
| | RSU Plan                         |  |                              | 180,000 |                                |  | -                              |  |   | -    | 
| | Awards
 granted                  |  |                              | (25,200 | )                              |  | 25,200                         |  |   | 1.88 | 
| |                                  |  |                              |         |                                |  |                                |  |   |      | 
| | Balance as
 of December 31, 2007 |  |                              | 154,800 |                                |  | 25,200                         |  |   | 1.88 | 
| |                                  |  |                              |         |                                |  |                                |  |   |      | 

NOTE 14    EARNINGS (LOSS) PER ORDINARY SHARE

The following
table summarizes information related to the computation of basic and diluted
earnings (loss) per Ordinary Share for the years indicated:

|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                                                                                |  | Year ended December 31, |       
|                                                                                                                |  |                         |       
|                                                                                                                |  | 2007                    |        | 2006 |   | 2005   | 
|                                                                                                                |  |                         |        |      |   |        | 
|                                                                                                                |  | (In thousands)          |       
|                                                                                                                |  |                         |       
|Net income (loss) attributable to Ordinary
 Shares                                                              |  | $                       | (7,473 | )    | $ | 11,603 |  | $ | 2,702  | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|Weighted average number of Ordinary Shares
 outstanding used in basic earnings per Ordinary Share calculation   |  |                         | 30,145 |      |   | 29,176 |  |   | 27,253 | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|Add assumed exercise of outstanding dilutive
 potential Ordinary Shares                                         |  |                         | -      |      |   | 377    |  |   | 333    | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|Weighted average number of Ordinary Shares
 outstanding used in diluted earnings per Ordinary Share calculation |  |                         | 30,145 |      |   | 29,553 |  |   | 27,586 | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|Basic earnings (losses) per Ordinary
Share                                                                      |  |                         | (0.25  | )    | $ | 0.40   |  | $ | 0.10   | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 
|Diluted earnings (losses) per Ordinary
 Share                                                                   |  |                         | (0.25  | )    | $ | 0.39   |  | $ | 0.10   | 
|                                                                                                                |  |                         |        |      |   |        |  |   |        | 

The number of
options which were not considered in computing dilutive earnings (losses) per
share because their impact is anti-dilutive aggregated 176,314 in 2007.

Convertible
loan which is convertible to 1,567,398 and 909,091 shares in 2007 and 2006,
respectively, was not considered in computing diluted earnings (losses) because
of anti-dilutive impact.

F  25

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 15    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
and related services as follows:

|                     |  |                             |        |      |  |         |  |  |        | 
|-------------------- |  | --------------------------- | ------ | ---- |  | ------- |  |  | ------ | 
|                     |  | Year Ended December 31,     |       
|                     |  |                             |       
|                     |  | 2007                        |        | 2006 |  | 2005    | 
|                     |  |                             |        |      |  |         | 
|                     |  | U.S. Dollars (In thousands) |       
|                     |  |                             |       
|China and
 Hong Kong |  |                             | 30,187 |      |  | 33,713  |  |  | 24,665 | 
|Asia- Other          |  |                             | 12,676 |      |  | 20,413  |  |  | 5,036  | 
|United
 States       |  |                             | 3,983  |      |  | 15,622  |  |  | 11,484 | 
|Taiwan               |  |                             | 12,935 |      |  | 12,895  |  |  | 12,258 | 
|Western
 Europe      |  |                             | 8,081  |      |  | 9,170   |  |  | 6,597  | 
|Japan                |  |                             | 2,134  |      |  | 6,716   |  |  | 2,065  | 
|Rest of the
 world   |  |                             | 973    |      |  | 1,526   |  |  | 927    | 
|                     |  |                             |        |      |  |         |  |  |        | 
|                     |  |                             | 70,969 |      |  | 100,055 |  |  | 63,032 | 
|                     |  |                             |        |      |  |         |  |  |        | 

NOTE 16    SELECTED INCOME STATEMENT DATA

|   |                                             
|-- | --------------------------------------------
|A. | Selling, general and administrative expenses

|   |                                             |  |                             |        |      |  |        |  |  |        | 
|-- | ------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ |  |  | ------ | 
|   |                                             |  | Year Ended December 31,     |       
|   |                                             |  |                             |       
|   |                                             |  | 2007                        |        | 2006 |  | 2005   | 
|   |                                             |  |                             |        |      |  |        | 
|   |                                             |  | U.S. Dollars (In thousands) |       
|   |                                             |  |                             |       
|  
|   | Selling (a1)                                |  |                             | 17,309 |      |  | 21,000 |  |  | 14,559 | 
|   | General and
 administrative                 |  |                             | 6,810  |      |  | 6,850  |  |  | 4,201  | 
|   |                                             |  |                             |        |      |  |        |  |  |        | 
|   |                                             |  |                             | 24,119 |      |  | 27,850 |  |  | 18,760 | 
|   |                                             |  |                             |        |      |  |        |  |  |        | 
|   | (a1)
 Including shipping and handling costs |  |                             | 2,173  |      |  | 2,626  |  |  | 1,890  | 
|   |                                             |  |                             |        |      |  |        |  |  |        | 
|   |                                             |  |                             |        |      |  |        |  |  |        | 
|B. | Financial expenses, net                     |  |                             |        |      |  |        |  |  |        | 

| |                   |  |                             |      |      |  |      |   |  |      |  
| | ----------------- |  | --------------------------- | ---- | ---- |  | ---- | - |  | ---- | -
| |                   |  | Year Ended December 31,     |     
| |                   |  |                             |     
| |                   |  | 2007                        |      | 2006 |  | 2005 |  
| |                   |  |                             |      |      |  |      |  
| |                   |  | U.S. Dollars (In thousands) |     
| |                   |  |                             |     
|
| | Interest
 expense |  |                             | 320  |      |  | 422  |   |  | 405  |  
| | Interest
 income  |  |                             | (311 | )    |  | (795 | ) |  | (336 | )
| | Other, net        |  |                             | 119  |      |  | 661  |   |  | 251  |  
| |                   |  |                             |      |      |  |      |   |  |      |  
| |                   |  |                             | 128  |      |  | 288  |   |  | 320  |  
| |                   |  |                             |      |      |  |      |   |  |      |  

Other, net
includes foreign currency income (expense) resulting from transactions not denominated
in U.S. Dollars amounting to $ 66, $ (435) and $(238) thousand in 2007, 2006
and 2005, respectively.

F  26

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 17    INCOME TAXES

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 (the inflationary Adjustments Law),
 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 Investment Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The
 Companys production facilities have been granted Approved Enterprise
 status under the Investment 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On April 1,
 2005, an amendment to the Investment Law came into effect (the Amendment)
 and has significantly changed the provisions of the Investment Law. The
 Amendment limits the scope of an enterprise, which may be approved by the
 Investment Center by setting criteria for the approval of a facility as a
 Beneficiating Enterprise, such provisions generally require that at least
 25% of the Beneficiating Enterprises income will be derived from export.
 Additionally, the Amendment enacted major changes in the manner in which tax
 benefits are awarded under the Investment Law so that companies no longer
 require Investment Center approval in order to qualify for the tax benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In addition,
 the Amendment provides that terms and benefits included in any approval
 certificate issued prior to December 31, 2004 will remain subject to the
 provisions of the Investment Law as they were on the date of such prior
 approval. Therefore, the Companys existing Approved Enterprise will
 generally not be subject to the provisions of the Amendment. As a result of
 the Amendment, tax-exempt income generated under the provisions of the new
 law, as part of a new Beneficiating Enterprise, will subject the Company to
 taxes upon distribution or liquidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company
 has been granted the status of Approved Enterprises, under the Investment
 Law, for investment programs for the periods ending in 2007 and 2010, and the
 status of Beneficiating Enterprise according to the Amendment, for the period
 ending in 2014 (Programs).Out of the Companys retained earnings as of
 December 31, 2007 approximately $19.4 million are tax-exempt earnings
 attributable to its Approved Enterprise and approximately $ 2.8 million are
 tax-exempt earnings attributable to its Beneficiating Enterprise. The
 tax-exempt income attributable to the Approved and Beneficiating Enterprises
 cannot be distributed to shareholders without subjecting the Company to
 taxes. If these retained tax-exempt profits are distributed, the Company
 would be taxed at the reduced corporate tax rate applicable to such profits
 (currently - 25% pursuant to the implementation of the Investment Law;
 effectively 33%). According to the Amendment, tax-exempt income generated
 under the Beneficiating Enterprise will be taxed upon dividend distribution
 or complete liquidation, whereas tax exempt income generated under the
 Approved Enterprise will be taxed only upon dividend distribution (but not
 upon complete liquidation, as the tax liability will be incurred by the
 shareholders). As of December 31, 2007, if the income attributed to the
 Approved Enterprise were distributed as dividend, the Company would incur a
 tax liability of approximately $4.9 million. If income attributed to the
 Beneficiating Enterprise were distributed as dividend, or upon liquidation,
 the Company would incur a tax liability in the amount of approximately $ 0.7
 million. These amounts will be recorded as an income tax expense in the
 period in which the Company declares the dividend.

F  27

---

---

|                                                                  
|------------------------------------------------------------------
|CAMTEK LTD.
 and its subsidiaries                                 
|                                                                  
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 17    INCOME TAXES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Tax benefits under the Law for Encouragement of Capital Investments,
 1959 (the Investments Law) (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company
 intends to indefinitely reinvest the amount of its tax-exempt income and not
 distribute any amounts of its undistributed tax exempt income as dividend.
 Accordingly, no deferred tax liabilities have been provided on income attributable
 to the Companys Approved and Beneficiating Enterprise Programs as the
 undistributed tax exempt income is essentially permanent in duration.                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
 entitlement to the above benefits is conditional upon the Companys
 fulfilling the conditions stipulated by the law and the regulations published
 thereunder as well as the criteria set forth in the approval for the specific
 investments in the Approved Enterprises. In the event of failure to meet such
 requirements in the future, income attributable to its Programs could be
 subject to the statutory Israeli corporate tax rates and the Company could be
 required to refund a portion of the tax benefits already received, with
 respect to such Programs. The Companys management believes that the Company
 has met the aforementioned conditions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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.                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|D. | Composition of income (loss) before income taxes and income tax
 expense (benefit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                     |  |                             |        |      |  |        |   |  |       | 
| | ----------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | - |  | ----- | 
| |                                     |  | Year Ended December 31,     |       
| |                                     |  |                             |       
| |                                     |  | 2007                        |        | 2006 |  | 2005   |  
| |                                     |  |                             |        |      |  |        |  
| |                                     |  | U.S. Dollars (In thousands) |       
| |                                     |  |                             |       
| | Income
 (loss) before income taxes: |  |                             |        |      |  |        |   |  |       | 
| | Israel                              |  |                             | (9,515 | )    |  | 10,256 |   |  | 2,399 | 
| | Non-Israeli                         |  |                             | 2,186  |      |  | 1,388  |   |  | 303   | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| |                                     |  |                             | (7,329 | )    |  | 11,644 |   |  | 2,702 | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| | Income tax
 expense (benefit):      |  |                             |        |      |  |        |   |  |       | 
| | Current:                            |  |                             |        |      |  |        |   |  |       | 
| | Israel                              |  |                             | -      |      |  | -      |   |  | -     | 
| | Non-Israeli                         |  |                             | 394    |      |  | 475    |   |  | -     | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| |                                     |  |                             | 394    |      |  | 475    |   |  | -     | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| | Deferred:                           |  |                             |        |      |  |        |   |  |       | 
| | Israel                              |  |                             | 16     |      |  | (160   | ) |  | -     | 
| | Non-Israeli                         |  |                             | (48    | )    |  | (274   | ) |  | -     | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| |                                     |  |                             | (32    | )    |  | (434   | ) |  | -     | 
| |                                     |  |                             |        |      |  |        |   |  |       | 
| |                                     |  |                             | 362    |      |  | 41     |   |  | -     | 
| |                                     |  |                             |        |      |  |        |   |  |       | 

F  28

---

---

CAMTEK LTD.
and its subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 17     INCOME TAXES (Contd)

|   |                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E. | Income taxes included in the income statements:                                                                                                                                                                              
|   |                                                                                                                                                                                                                              
|   | The
  following is a reconciliation of the theoretical income tax expense
  (benefit), assuming all income is taxed at the statutory tax rate applicable
  to Israeli companies, and the actual income tax expense (benefit):

| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                                                                                                                                                                      |  | Year Ended December 31,     |       
| |                                                                                                                                                                                      |  |                             |       
| |                                                                                                                                                                                      |  | 2007                        |        | 2006 |   | 2005   |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |  
| |                                                                                                                                                                                      |  | U.S. Dollars (In thousands) |       
| |                                                                                                                                                                                      |  |                             |       
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Income (loss) before income taxes                                                                                                                                                    |  |                             | (7,329 | )    |   | 11,644 |   |   | 2,702  |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Statutory tax rate                                                                                                                                                                   |  |                             | 29     | %    |   | 31     | % |   | 34     | %
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Theoretical income tax expense (benefit)                                                                                                                                             |  |                             | (2,125 | )    |   | 3,610  |   |   | 918    |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Increase (decrease) in income tax expense
  resulting from:                                                                                                                          |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Tax benefits arising from Approved and
  Beneficiating Enterprises                                                                                                                 |  |                             | -      |      |   | (1,641 | ) |   | (281   | )
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Decrease in taxes resulting from
  utilization of carryforward tax losses and deductible temporary differences
  for which deferred tax benefits were not provided in previous years |  |                             | (1,205 | )    |   | (1,337 | ) |   | (2,066 | )
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Tax losses and deductible temporary
  differences for which no tax benefit has been recorded                                                                                         |  |                             | 6,931  |      |   | 351    |   |   | 371    |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Permanent differences and nondeductible
  expenses, including difference between Israeli CPI-adjusted tax returns and
  dollar-adjusted financial statements-net                     |  |                             | (2,560 | )    |   | (1,318 | ) |   | 970    |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Nondeductible stock-based compensation                                                                                                                                               |  |                             | 124    |      |   | 237    |   |   | 43     |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Prior period adjustments                                                                                                                                                             |  |                             | 138    |      |   | 61     |   |   | -      |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Other *                                                                                                                                                                              |  |                             | (941   | )    |   | 78     |   |   | 45     |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Actual income tax expense                                                                                                                                                            |  |                             | 362    |      |   | 41     |   |   | -      |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Per share effect of the tax benefits
  arising from Approved and Beneficiating Enterprises:                                                                                        |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Basic                                                                                                                                                                                |  | $                           | 0.00   |      | $ | 0.06   |   | $ | 0.01   |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  
| | Diluted                                                                                                                                                                              |  | $                           | 0.00   |      | $ | 0.06   |   | $ | 0.01   |  
| |                                                                                                                                                                                      |  |                             |        |      |   |        |   |   |        |  

| |                                       
| | --------------------------------------
| | * Mainly due
  to different tax rates.

F  29

---

---

CAMTEK LTD.
and its subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 17    INCOME TAXES (Contd)

|   |                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|F. | Income taxes included in the balance sheet                                                                                                         
|   |                                                                                                                                                    
|   | The tax
  effects of temporary differences that give rise to significant portions of
  the deferred tax assets and liabilities are presented below:

| |                                                  |  |                             |        |      |  |        |  
| | ------------------------------------------------ |  | --------------------------- | ------ | ---- |  | ------ | -
| |                                                  |  | December 31                 |       
| |                                                  |  |                             |       
| |                                                  |  | 2007                        |        | 2006 | 
| |                                                  |  |                             |        |      | 
| |                                                  |  | U.S. Dollars (In thousands) |       
| |                                                  |  |                             |       
| | Current:                                         |  |                             |        |      |  |        |  
| | Provision for doubtful accounts                  |  |                             | 294    |      |  | 194    |  
| | Accrued warranty                                 |  |                             | 15     |      |  | 97     |  
| | Unearned revenue                                 |  |                             | 230    |      |  | 185    |  
| | Net operating losses carryforwards               |  |                             | -      |      |  | 91     |  
| | Accrued expenses                                 |  |                             | 215    |      |  | 134    |  
| | Other temporary differences *                    |  |                             | 538    |      |  | -      |  
| |                                                  |  |                             |        |      |  |        |  
| | Total gross current deferred tax assets          |  |                             | 1,292  |      |  | 701    |  
| | Valuation allowance                              |  |                             | (1,168 | )    |  | (636   | )
| |                                                  |  |                             |        |      |  |        |  
| | Current deferred tax asset, net of
  allowance   |  |                             | 124    |      |  | 65     |  
| |                                                  |  |                             |        |      |  |        |  
| |                                                  |  |                             |        |      |  |        |  
| | Long-term:                                       |  |                             |        |      |  |        |  
| | Net operating losses carryforwards               |  |                             | 3,552  |      |  | 1,759  |  
| | Severance pay                                    |  |                             | 5      |      |  | 14     |  
| | Fixed assets                                     |  |                             | (19    | )    |  | (53    | )
| | Other temporary differences *                    |  |                             | 536    |      |  | 413    |  
| |                                                  |  |                             |        |      |  |        |  
| | Total gross long-term deferred tax assets        |  |                             | 4,074  |      |  | 2,133  |  
| | Valuation allowance                              |  |                             | (3,462 | )    |  | (1,549 | )
| |                                                  |  |                             |        |      |  |        |  
| | Long-term deferred tax asset, net of
  allowance |  |                             | 612    |      |  | 584    |  
| |                                                  |  |                             |        |      |  |        |  
|
| | Net deferred tax assets                          |  |                             | 736    |      |  | 649    |  
| |                                                  |  |                             |        |      |  |        |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * Other
  temporary differences mainly relate to research and development expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 to reduce deferred tax assets to their
  estimated realizable value. The net change in the total valuation allowance
  was an increase of $ 2,445 thousand for the year ended December 31, 2007 and a
  decrease of $ 501 thousand, and $ 1,548 thousand for the years ended December
  31, 2006 and 2005, respectively.   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | As of
  December 31, 2007, Camtek has not provided for income taxes on the
  undistributed earnings of approximately US$ 1,500 thousand of one of its
  foreign subsidiaries since these earnings are intended to be indefinitely
  reinvested. A deferred tax liability will be recognized when the Company no
  longer demonstrates that it plans to indefinitely reinvest these
  undistributed earnings. It is not practicable to estimate the amount of
  additional taxes that might be payable on such undistributed earnings.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | As of
  December 31, 2007, the Company and its subsidiary in Israel have NOL
  carryforwards aggregating approximately $7,810 thousand, and NOL available
  for offset from Approved and Beneficiating Enterprises aggregating
  approximately $14,942 thousands.                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | As of
  December 31, 2007, the major foreign subsidiaries have NOL carryforwards
  aggregating approximately $4,842 thousand, of which approximately $2,764
  thousand will expire from 2009 to 2023 and approximately $2,078 thousand can
  be carried forward indefinitely.                                                                                                                                                                                                                                                        

F  30

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CAMTEK LTD. and its subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 17    INCOME TAXES (Contd)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G. | Reduction in corporate income tax rate in Israel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | On July 25,
 2005, an amendment to the Israeli tax law was approved by the Israeli
 parliament, which reduces the
 tax rates imposed on Israeli companies to 31% for 2006. This amendment states that the corporate tax rate will
 be further reduced in subsequent tax years as follows: in2007 29%, in 2008 27%, in 2009 26% and
 thereafter 25%. This change does not have a material effect on the Companys financial
 statements.                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|H. | On February
 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment
 No. 20) (Restriction of Period of Application)  2008 (the 2008 Amendment)
 was passed by the Knesset. According to the 2008 Amendment, the Inflationary
 Adjustments Law will no longer be applicable subsequent to the 2007 tax year,
 except for certain transitional provisions. Further, according to the 2008
 Amendment, commencing with the 2008 tax year, the adjustment of income for
 the effects of inflation for tax purposes will no longer be calculated.
 Additionally, depreciation on fixed assets and tax loss carryforwards will no
 longer be linked to future changes in the CPI subsequent to the 2007 tax
 year, and the balances that have been linked to the CPI through the end of
 the 2007 tax year will be used going forward.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|I. | Accounting for uncertainty in income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | FIN 48
 clarifies the accounting for uncertainty in income taxes recognized in an
 enterprises financial statements in accordance with FAS 109. This
 interpretation prescribes a minimum recognition threshold a tax position is
 required to meet before being recognized in the financial statements. FIN 48
 also provides guidance on derecognition of tax positions, classification on
 the balance sheet, interest and penalties, accounting in interim periods,
 disclosure, and transition. FIN 48 requires significant judgment in
 determining what constitutes an individual tax position as well as assessing
 the outcome of each tax position.                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company
 adopted the provisions of FIN 48 as of January 1, 2007, and there was no
 effect on the financial statements. As a result, the Company did not record
 any cumulative effect adjustment related to adopting FIN 48.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | As of
 January 1, 2007, and for the year ended December 31, 2007, the Company did
 not have any unrecognized tax benefits. In addition, the Company does not
 expect that the amount of unrecognized tax benefits will change significantly
 within the next twelve months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company
 accounts for interest and penalties related to unrecognized tax benefits as a
 component of income tax expense. As of January 1, 2007 and for the
 twelve-month period ended December 31, 2007, no interest and penalties
 related to unrecognized tax benefits have been accrued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company
 files its income tax returns in Israel while its principle foreign
 subsidiaries file their income tax returns in Belgium, Hong-Kong and United
 States of America. The Israeli tax returns of the Company and its Israeli
 subsidiary are open to examination by the Israeli Tax Authorities for the tax
 years beginning in 2003 while the tax returns of its principle foreign
 subsidiaries remain subject to examination for the tax years beginning in
 1997 in Belgium, 2001 in Hong-Kong and 2004 in the United States of America.                                                                                                                                                                                                                                                                                                

F  31

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---

CAMTEK LTD. and its subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 18    TRANSACTIONS WITH RELATED PARTIES

|                                      |  |                             |       |      |  |       |  |  |     | 
|------------------------------------- |  | --------------------------- | ----- | ---- |  | ----- |  |  | --- | 
|                                      |  | Year Ended December 31,     |      
|                                      |  |                             |      
|                                      |  | 2007                        |       | 2006 |  | 2005  | 
|                                      |  |                             |       |      |  |       | 
|                                      |  | U.S. Dollars (In thousands) |      
|                                      |  |                             |      
|Purchases from Parent and affiliates  |  |                             | 1,876 |      |  | 3,244 |  |  | 597 | 
|Interest income (expense) from Parent |  |                             | (33   | )    |  | 16    |  |  | 19  | 
|Sales to Parent and affiliates        |  |                             | 27    |      |  | 240   |  |  | 1   | 

Registration Rights Agreement with Parent

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

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

Employment Agreements with the CEO and the
COO

Effective
January 1, 1998, the Company entered into an employment agreement with its
Chief Executive Officer (CEO). Pursuant to his employment agreement, the CEO
may dedicate up to 20% of his time to work for Parent or any of the Parents
entities.

Also effective
January 1, 1998, the Company entered into an employment agreement with its
Executive Vice President, Business & Strategy (EVP). Pursuant to his
employment agreement, the EVP may dedicate up to 40% of his time to work for
Parent or any of the Parents entities.

The CEO works
on a full time basis for the Company and therefore receives a full time salary,
while the EVP receives from the Company 60% of a full time salary. The EVP is
compensated directly by each of the Parent entities for which he works. The CEO
also serves as the Chairman of Parent, and the EVP also serves as the Chief
Executive Officer and as a director of Parent.

The CEO and
EVP do not receive any additional compensation for their service as the
Companys directors.

F  32

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---

CAMTEK LTD. and its subsidiaries

|                                                                  
|------------------------------------------------------------------
|Notes to Consolidated Financial Statements As of December 31, 2007
|                                                                  

NOTE 19    SUBSEQUENT EVENTS

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | On January
 1, 2008 132,800 RSU were granted to employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | B. | On March 7, 2008, a purported class
action complaint (the Class Action Complaint), Yuval Lapiner v. Camtek, Ltd.
et al., Case No. 08-01327-MMC, was filed in the United States District Court for the
Northern District of California on behalf of purchasers of our common stock between
November 22, 2005 and December 20, 2006. The Class Action Complaint names the Company and
certain of our directors and officers as defendants. It alleges that the defendants
violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated
thereunder, and breached fiduciary duties by making false and misleading statements in the
Companys SEC filings and press releases. The plaintiffs seek unspecified
compensatory damages against the defendants, as well as attorneys fees and costs. At
this preliminary stage, before the Company has submitted its response, management does not
believe that the Class Action Complaint has merit and intends to defend itself vigorously.
Accordingly, no provision has been made in the financial statements in respect of this
claim.

F  33

---

---

|         |          
|-------- | ---------
|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         |  | 2007 Restricted Share Unit
  Plan*                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.9         |  | 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).                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.10        |  | 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).                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.11        |  | Registration Rights Amended
  and Restated Agreement by and between the Registrant and Priortech Ltd.,
  dated December 30, 2004. (incorporated herein by reference to Exhibit 4.10 to
  the Registrants Registration Statement on Form F-20 File No.000-30664 filed
  with the Securities and Exchange Commission on June 30, 2005).                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.12        |  | Convertible Loan Agreement,
  by and between the Registrant and FIMI Opportunity Fund, L.P., and FIMI
  Israel Opportunity Fund, dated August 8, 2005 (incorporated herein by
  reference to Exhibit 4.11 to the Registrants Registration Statement on Form
  20-F File No.000-30664 filed with the Securities and Exchange Commission on
  June 29, 2006).                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.13        |  | Press Release announcing
  the Companys completion of $15,000,000 Private Placement dated April 28,
  2006; Press Release announcing Priortech Ltd. Sale of Camtek shares to
  Israeli Institutional Investors dated June 21, 2006 (incorporated herein by
  reference to Exhibit 4.12 to the Registrants Registration Statement on Form
  20-F File No.000-30664 filed with the Securities and Exchange Commission on
  June 29, 2006).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|8.1         |  | Subsidiaries of the
  Registrant*                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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.*                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12.2        |  | 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.*                                                                                                                                                                                                                                                    

70

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|     |  |                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------
|15.1 |  | Consent of Somekh Chaikin,
  a member firm of KPMG International.*                                            
|     |  |                                                                                                               
|15.2 |  | Consent of Brightman
  Almagor & Co., a member firm of Deliotte, Touche Tohmatsu, and Goldstein
  Sabo Tevet *

|  |                                             
|- | --------------------------------------------
| 
|  |                                             
| | English translations from
  Hebrew original.
|  |                                             
|* | Filed herewith.                             

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,
2008

71

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---