---

---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
      FISCAL YEAR ENDED DECEMBER 31, 2007
|- | --------------------------------------------------------------------------------------------------------------------------------------

OR

|o | TRANSITION
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 shell company report.............................

For the transition period from ____________ to ______________

Commission file number
000-27974



CIMATRON LTD.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

11 Gush Etzion St., Givat Shmuel 54030, Israel (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE

Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary shares, par value NIS 0.10 per share

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

Indicate the number of outstanding
shares of each of the registrants classes of capital or common stock as of the close
of the period covered by the Annual Report:

# 7,887,682 Ordinary
Shares, par value NIS 0.10 per share



---

---

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.

Large accelerated filer: o     Accelerated filer: o     Non-accelerated filer: x

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

|            |                                                         |        
|----------- | ------------------------------------------------------- | -------
|x U.S. GAAP | o International Financial Reporting Standards as issued | o Other
|            | by the International Accounting Standards Board         |        

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

o Item 17     x             Item 18

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

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.

# x Yes     No o

2

---

---

Table Of Contents

|                                                                                      |   
|------------------------------------------------------------------------------------- | --
|PART I                                                                                |   
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                         | 4 
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 4 
|ITEM 3. KEY INFORMATION                                                               | 4 
|ITEM 4. INFORMATION ON THE COMPANY                                                    | 18
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 34
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 51
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 61
|ITEM 8. FINANCIAL INFORMATION                                                         | 65
|ITEM 9. THE OFFER AND LISTING                                                         | 66
|ITEM 10. ADDITIONAL INFORMATION                                                       | 67
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 80
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 81
|PART II                                                                              
|ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES                                | 82
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 82
|ITEM 15. CONTROLS AND PROCEDURES                                                      | 82
|ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT                                           | 82
|ITEM 16B.  CODE OF ETHICS                                                             | 82
|ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES                                     | 83
|ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                 | 84
|ITEM 16E.  REPURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS    | 84
|PART III.                                                                            
|ITEM 17. FINANCIAL STATEMENTS                                                         | 84
|ITEM 18. FINANCIAL STATEMENTS                                                         | 84
|ITEM 19. EXHIBITS                                                                     | 85
|SIGNATURES                                                                            | 86

3

---

---

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

Selected Financial Data

Our  historical   consolidated
 financial  statements  are  prepared  in  accordance  with  generally  accepted
accounting  principles  in the  United  States  ("GAAP")  and are  presented  in  U.S.
 dollars.  The  selected historical  consolidated  financial  information  as of
 December  31,  2006 and 2007 and for each of the three years ended December 31, 2005,
 2006 and 2007 have been derived from,  and should be read in conjunction  with, the
consolidated  financial  statements of Cimatron Ltd. and notes thereto  appearing
 elsewhere in this annual report.  The  selected  financial data as of  December 31,
2003, 2004 and 2005 and for each of  the years ended December  31, 2003 and 2004 have
been  derived  from the audited  financial  statements  of Cimatron  Ltd.  not included
in this annual report.

The  information  presented  below
 is  qualified  by  the  more  detailed  historical  consolidated  financial statements
 set  forth in this  annual  report,  and  should be read in  conjunction  with  those
 consolidated financial  statements,  the notes thereto and the discussion  under Item 5
- Operating and Financial Review and Prospects - included elsewhere in this annual report.

|                                 | December 31,
|-------------------------------- | ------------
|
|
|
|
|Statement of Income Data:        |             
|Revenue:                         |             
|                                 |             
|Products                         |             
|Services                         |             
|                                 |             
|Total                            |             
|                                 |             
|Cost of revenue:                 |             
|Products                         |             
|Services                         |             
|                                 |             
|Total                            |             
|                                 |             
|Gross profit                     |             
|Research and development         |             
|costs, net                       |             
|Restructuring costs              |             
|Selling, general and             |             
|administrative expenses          |             
|                                 |             
|Operating profit (loss)          |             
|Financial income (expenses), net |             
|Other income (expenses)          |             
|                                 |             
|Income (loss) before taxes       |             
|Taxes on income                  |             
|                                 |             
|Income (loss) after income taxes |             
|                                 |             
|Company's equity in results of   |             
|affiliated company               |             
|Minority interest in results     |             
|of subsidiary                    |             
|                                 |             
|Net income (loss)                |             
|                                 |             
|Net income (loss) per share      |             
|Weighted average number of       |             
|shares outstanding               |             

* Less than $ 0.01

4

---

---

|                                 | December 31,
|-------------------------------- | ------------
|
|
|
|
|Balance Sheet Data               |             
|Cash and cash equivalents.       |             
|Short-term investments           |             
|                                 |             
|Total cash, cash equivalents and |             
|short-term investments           |             
|Working capital                  |             
|Total assets                     |             
|Total liabilities.               |             
|Shareholders' equity             |             

# Risk Factors

This
annual report and statements that we may make from time to time may contain
forward-looking information. There can be no assurance that actual results will not differ
materially from our expectations, statements or projections. Factors that could cause
actual results to differ from our expectations, statements or projections include the
risks and uncertainties relating to our business described below. The risks described
below are not the only ones we face. Additional risks that we currently do not know about
or that we currently believe to be immaterial may also impair our business operations.

# Risks Related to our
Business

We face intensive
competition in our industry.

The
CAD/CAM software industry, characterized by rapid advances in technology and changing
customer requirements, is highly competitive.We design, develop, manufacture,
market and support a family of modular, high performance, fully integrated, computer-aided
design/computer aided manufacturing, or CAD/CAM, software products. Traditionally, our
competitors in the CAD/CAM market are at both the high and low end of the market. The
lower end of the market consists of dedicated Numerical Control, or NC, programming
systems offerings, which have limited or no modeling capability,while the high end
of the market, including our Cimatron E and GibbsCAM product families, consists of
integrated CAD/CAM systems, Mill/Turn and Multi Task Machining software. Many high-end
market products are roughly similar to our Cimatron E product.

5

---

---

As
the CAD/CAM software industry is highly fragmented and characterized by many relatively
small and privately owned companies, we face competition from numerous companies in
relation to all of our products. In addition, some of our competitors are more
established, benefit from greater market recognition and have greater financial,
production and marketing resources than us. We believe that, due to the large number of
companies that operate in this market, we do not have a single major competitor or a group
of competitors. The principal factors permitting our products to compete successfully
against our competitors products are:

| |  | the
 compatibility  of our  products  with other  software  applications  and  existing  and
 emerging         industry standards;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | our
ongoing product and feature development;
| | - | --------------------------------------------

| |  | the
offering of unique innovative products to the tooling industry;
| | - | -------------------------------------------------------------------

| |  | the
level of our product breadth and integration;
| | - | -------------------------------------------------

| |  | the
technical expertise and support that we provide;
| | - | ----------------------------------------------------

| |  | the
flexibility  of our products;
| | - | ---------------------------------

| |  | the
reputation we maintain among certain independent  distributors of our products,  to which
we refer         as Providers; and
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | the
relatively low overall price and total cost of ownership of our products combined with
the high-end capabilities of our products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------

Although
we believe that the attributes of our products provide us with a competitive advantage
over our competitors, there can be no assurance that the marketplace will consider
Cimatron E and/or GibbsCAM to be superior to existing competing products. In addition, new
competitors may arise in each of the markets in which we currently operate.Furthermore, as we enter new geographic markets, we may encounter significant
competition from companies that are more established in such markets. Accordingly, there
can be no assurance that our existing or future products will successfully compete against
our competitors products.

We are heavily reliant on
the sale of two families of products.

Sales
and services related to the Cimatron E product family have historically accounted for
substantially all of our revenue. While we have introduced the GibbsCAM product family
following our merger with Gibbs System, Inc., if sales of the Cimatron E family and/or the
GibbsCAM family were to decline, or fail to grow, or the profit margin on these products
were to decrease significantly, our business, financial condition and results of
operations would be materially and adversely affected.

6

---

---

Our business depends
significantly upon sales by our customers of products in the consumer market. This market
is extremely competitive and is highly susceptible to fluctuations in demand.

Our
products are designed for use by manufacturers of consumer products or consumer product
components. The consumer products market is intensely competitive and price sensitive.
Sales of consumer products have historically been dependent upon discretionary spending by
consumers. Consumers may defer or alter purchasing decisions based on economic conditions
or other factors, and accordingly could cause a reduction in demand for products
manufactured by our customers. Softening consumer demand for consumer products has in the
past caused a decline in the demand for our products. Current global economic conditions,
especially inflation and the credit crisis in the U.S., may cause a decrease in demand for
our products in the near term and possibly longer. Any softening in demand for consumer
products could cause uncertainty with respect to our expected revenues or adversely affect
our revenues and operating results.

Increases in oil
prices may significantly increase our customers costs of operations, which
could decrease demand for our products.

Many
of our customers use oil-based products as an integral part of their manufacturing
processes, including as components of their products.  Increases in the cost
of crude oil, which are subject to many economic and political factors that
are beyond their control, have resulted in global increases in the price
of oil-based products. These increases have caused and may continue to cause
increases in the operating expenses of our customers. To the extent that these
customers accordingly increase their prices, demand for their products may decrease,
thereby causing them to purchase less of our products.  In addition, these customers
may respond to the increases in the price of oil by placing pressure on the prices they
are willing to pay for our products.  In that event, our business and results of
operation may be adversely affected.

Unfavorable economic and
market conditions and reduced consumer spending may lead to a decreased demand for our products
and services and may harm our business, financial condition and results of operations.

We
are subject to the effects of global, economic and market conditions. Recent changes in
global and U.S. macroeconomic conditions such as inflation and the weakening of the U.S.
dollar in relation to many world currencies which make it more expensive to import
consumer products into the U.S., as well as changes in microeconomic conditions such as
tightening of local credit markets which could negatively impact the ability of
manufacturers to obtain growth and working capital from local lenders, may negatively
impact our enterprise business.To the extent that our business suffers as a result of such
unfavorable economic and market conditions, our operating results may be materially
adversely affected.

One of our shareholders
beneficially owns a substantial amount of our ordinary shares and may therefore influence
our affairs.

DBSI
Investments Ltd. or DBSI, beneficially owns approximately 45.6% of our share capital.
Accordingly, DBSI effectively has the ability to control the outcome of most matters
submitted to a vote of our shareholders, including the election of members of our board of
directors and approval of significant corporate transactions. The concentration of
ownership of our Ordinary Shares by DBSI could delay or prevent proxy contests, mergers,
tender offers, open-market purchase programs or other purchases of our Ordinary Shares
that might otherwise give you the opportunity to realize a premium over the
then-prevailing market price of our Ordinary Shares. This concentration of ownership may
also adversely affect our share price, especially if this shareholder sells substantial
amounts of our ordinary shares under its registration rights. See Item 7. Major
Shareholders and Related Party Transactions for additional details.

7

---

---

Integration of recent
acquisitions and any future acquisitions of companies or technologies may distract our
management and disrupt our business. In addition, the issuance by us of securities as
consideration payable in such acquisitions could be dilutive to our existing shareholders.

One
of our strategies is to acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. For instance, in
July 2005 we acquired 27.5% of the shares of our Italian distributor and an option to
purchase the remaining outstanding shares of that company from its stockholders, and
granted the distributors shareholders an option to require us to purchase 49% of the
distributors share capital under specific circumstances. In July 2007 we exercised
our option to increase our holdings in our Italian distributor to 51%. During August 2006,
we acquired the remaining 69.83% of the outstanding shares of our Korean provider, which
thereafter became a wholly owned subsidiary. In January 2008 we completed the merger of
Gibbs into a wholly owned subsidiary  Cimatron Gibbs LLC. As consideration for the
merger with Gibbs, we paid cash in the amount of approximately $5 million and we issued
1,500,000 of our Ordinary Shares, which represent approximately 16% of our issued and
outstanding share capital. See Item 5. Operating and Financial Review and Prospects
 Overview for additional details. We may in the future engage in discussions
and negotiations with companies about our acquiring or investing in those companies
businesses, products, services or technologies. We cannot give assurances that we will be
able to identify future suitable acquisition or investment candidates, or, if we do
identify suitable candidates, that we will be able to make the acquisitions or investments
on commercially acceptable terms or at all. In addition, in the context of our merger with
Gibbs or any future acquisition or investment in another company, we could experience
difficulties assimilating that companys personnel, operations, technology or
products and service offerings into our own or in retaining and motivating key personnel
from these businesses. Any such difficulties could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our results of
operations. Furthermore we cannot provide assurance that we will realize the benefits
and/or synergies of any business combination with another company. In addition, we may
incur indebtedness or dilute our existing shareholders by issuing equity securities to pay
for any future acquisitions.

We are subject to several
risks as a result of our international sales.

To
date, our products have been sold primarily in Europe, the Far East, North America and
Israel. We expect that international sales will continue to represent a substantial
portion of our business. Companies that engage in international sales are subject to a
number of risks, such as:

| |  | agreements
may be difficult to enforce through a foreign company's legal system;
| | - | --------------------------------------------------------------------------------

8

---

---

| |  | foreign
countries could impose additional withholding or other taxes on our income;
| | - | -----------------------------------------------------------------------------------

| |  | foreign
countries could impose tariffs or adopt other restrictions on foreign trade;
| | - | ------------------------------------------------------------------------------------

| |  | fluctuations
in exchange rates;
| | - | -------------------------------

| |  | changes
in general economic conditions in one or more countries could affect product demand;
| | - | --------------------------------------------------------------------------------------------

| |  | the
protection of intellectual  property rights in foreign  countries may be limited or more
difficult         to enforce; and
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | difficulties
in managing overseas subsidiaries and international operations, including difficulty in
retaining or replacing local management.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

There
can be no assurance that these and similar factors will not have a material adverse effect
on our future international sales and, consequently, on our business, future prospects and
results of operations.

Many customers of the CAD/CAM
industry have migrated their operations to the Far East. In order to remain competitive in
the industry, we need to penetrate the Far East markets; operation in these markets
subjects us to specific risks.

Many
mold, tool, die and fixture makers have migrated or intend to migrate their operations to
markets in the Far East, such as China, in order to take advantage of the relatively lower
cost of labor available in those markets for their manufacturing activities. We anticipate
that this migration will continue. In order to continue to compete in the CAD/CAM software
industry, we will need to increase our penetration of these markets. Many of those
markets, including China, are characterized by lower prices and by higher usage of pirated
copies of software products. While those markets are also often much larger than a number
of our traditional markets in Europe, to the extent that we cannot offset the effects of
lower prices and higher incidents of pirated software usage, our revenues and
profitability may be materially adversely affected.

We are reliant upon
independent distributors to market and support our products.

We
rely on independent distributors, to whom we refer as Providers, to market, sell,
serviceand support our products worldwide. Generally, our relationships with our
Providers are based on agreements with two-year terms (subject to rolling two-year
extensions) and which enable Providers to purchase our products at a discounted price.
While we have exclusive relationships with certain of our Providers, there can be no
assurance that these Providers will give high priority to the marketing and support of our
products. In July 2005 we acquired 27.5% of the shares of MicroSystem, our Italian
Provider, and an option to purchase its remaining outstanding shares from its shareholders
and granted the Providers shareholders an option to require us to purchase 49% of
the Providers share capital under specific circumstances. In July 2007, we exercised
our option to increase our holdings in the Italian Provider to 51%. See Item 5.
Operating and Financial Review and Prospects  Overview for additional details
regarding the transaction with our Italian Provider and the options received both by us
and the Providers shareholders. The results of our operations could be adversely
affected by changes in the financial condition of a Provider, which could occur rapidly,
or to other changes in our current Providers business or marketing strategies. There
can be no assurance that we will retain our current Providers, nor can there be any
assurance that, in the event that we lose any of our Providers, we will be successful in
recruiting other highly professional and technically competent Providers to represent us.
Any such changes in our distribution channels, especially those in the Far East and
Europe, could materially adversely affect our business, operating results and financial
condition. Whereas approximately 90% of Gibbs total revenues in 2007 resulted from
sales made by Gibbs independent distributors, whom we refer to as Resellers, the
merger with Gibbs has increased our reliance on independent distributors. See Item 4
 Information on the Company  Business Overview.

9

---

---

Following our acquisition
of 51% of MicroSystem, its results of operations may have a material impact on our results
of operations.

Following
the exercise of our option to increase our holdings in MicroSystem, our Italian Provider,
to 51%, which increase took effect during July 2007, we have fully consolidated the
results of Microsystem as of the 3rd quarter of 2007. Therefore,
Microsystems results of operation, including revenues, gross margins and operating
income, could have a material effect on our results of operation including revenues, gross
margins and operating income. The consolidation of Microsystems financial statements
will also increase the impact of changes in the Euro  dollar exchange rate on our
revenues and expenses, as substantially all of Microsystems revenues and expenses
are Euro-denominated.

We cannot assure you that
we will continue to remain profitable on an annual basis or remain profitable on a quarterly
basis in the future.

We
incurred a net loss of approximately $4.6 million in 2005. Although we had net income of
$0.5 million in 2006 and net income of $1.9 million in 2007, we incurred a net loss of
approximately $0.3 million in the first quarter of 2008, and we cannot be certain that we
will maintain profitability on a quarterly or annual basis.

We may experience
significant fluctuations in our quarterly results, which makes it difficult for investors to
make reliable period-to-period comparisons and may contribute to volatility in the
market price for our ordinary shares.

Our
quarterly revenues, gross profits and results of operations have fluctuated significantly
in the past and may be subject to continued fluctuation in the future. The following
events may cause such fluctuations:

| |  | changes
in timing of orders, especially large orders, for our products and services;
| | - | ------------------------------------------------------------------------------------

| |  | changes
in the prices for our products and services;
| | - | ----------------------------------------------------

| |  | adverse
economic conditions and international exchange rate and currency fluctuations;
| | - | --------------------------------------------------------------------------------------

| |  | delays
in the implementation of our solutions by customers;
| | - | -----------------------------------------------------------

| |  | changes
in the proportion of service and license revenues;
| | - | ----------------------------------------------------------

| |  | timing
of product releases;
| | - | ---------------------------

10

---

---

| |  | changes
in the economic conditions of the various industries in which our customers operate;
| | - | --------------------------------------------------------------------------------------------

| |  | price
and product competition;
| | - | ------------------------------

| |  | increases
in selling and marketing expenses, as well as other operating expenses;
| | - | ---------------------------------------------------------------------------------

| |  | technological
changes; and
| | - | --------------------------

| |  | political
instability in the Middle East.
| | - | -----------------------------------------

A
substantial portion of our expenses, including most product development, selling and
marketing expenses, must be incurred in advance of when revenue is generated. If our
projected revenue does not meet our expectations, we are likely to experience a shortfall
in our operating profit relative to our expectations. As a result, we believe that
period-to-period comparisons of our historical results of operations are not necessarily
meaningful and that you should not rely on them as an indication for future performance.
Also, our quarterly results of operations have, on separate occasions, been below the
expectations of public market analysts and investors and the price of our ordinary shares
subsequently decreased. If that would happen in the future, the price of our ordinary
shares will likely decrease again.

Because of our
international operations, changes in exchange rates against the U.S. dollar have and could continue
to have a significant effect on our results of operations. In addition, local
economic conditions or currency fluctuations could cause customers to decrease or
cancel orders or default on payment.

Although
part of our revenues are denominated and paid in U.S. dollars, the majority are not so
denominated and paid. Therefore inflation and fluctuations in the U.S. dollar exchange
rate have and may continue to have a material effect on our revenue. In addition, a
significant portion of our international sales is denominated in Euros, and in the future
additional sales may be denominated in currencies other than U.S. dollars, thereby
exposing us to gains and losses on non-U.S. currency transactions.  We may choose to
limit this exposure by entering into hedging transactions.  However, hedging
transactions may not prevent exchange-related losses, and our business may be harmed by
exchange rate fluctuations.  Furthermore, as we seek to expand our sales to regions
throughout the world, we might be exposed to risks of customers located in countries
suffering from uncertain economic environments such as high inflation and solvency
problems. Those issues and devaluation in local currencies of our customers relative to
the U.S. dollar where our sales are denominated in U.S. dollars could cause customers to
decrease or cancel orders or default on payment. To the extent that the value of the New
Israeli Shekel increases against the U.S. dollar, our expenses on a U.S. dollar cost
basis increase. We cannot predict any future trends in the rate of devaluation of the NIS
against the U.S. dollar. If the U.S. dollar cost of our operations in Israel continues to
increase, our U.S. dollar-measured results of operations will be adversely affected. If
the U.S. dollar cost of our operations in Israel continues to increase, our
dollar-measured results of operations will be adversely affected. The New Israeli Shekel
revaluation (devaluation) in relation to the U.S. dollar amounted to (6.8%), 8.2% and
8.9% for the years ended December 31, 2005, 2006 and 2007, and to (7.6%) for the first
quarter of 2008. We are also exposed to the risk that the rate of inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the U.S. dollar or that the
timing of this devaluation lags behind inflation in Israel. The Israeli rate of inflation
(deflation) amounted to 2.4%, (0.1)% and 3.4% for the years ended December 31, 2005, 2006
and 2007, respectively.

11

---

---

Prior to 2006 we experienced
decreases in our revenues from products. If this trend will return, it will likely
adversely affect our gross margins and profitability.

Although
our revenues from the sales of products increased to approximately $14.3 million in 2007
from approximately $9.6 million in 2006 and from approximately $9.0 million in 2005,
product revenues in 2006 and in 2005 decreased from approximately $11.4 million in 2004.
At the same time, revenues from maintenance and services increased in 2007 to $14.3
million from approximately $11.8 million in 2006 and approximately $12.0 million in 2005.
Our gross margin from most of our products is higher than our gross margin from services.
This is because our cost of services, which includes expenses of salaries and related
benefits of the employees and subcontractors engaged in providing the services, is
relatively higher than our cost of products. If our overall percentage of revenues
comprised by maintenance and service revenues will increase, our gross margins and
profitability will likely be adversely affected. In addition, if our revenues from the
sale of products will decrease, such decrease may adversely affect our future maintenance
and service revenues, as it may result in a smaller user base to purchase maintenance and
service contracts from us.

If we are unable to
accurately predict and respond to market developments or demands, or if our products are not
accepted in the marketplace, our business will be adversely affected.

It
is difficult to predict demand and CAD/CAM market acceptance for our solutions and
products. We cannot guarantee that the market for our solutions and products will grow or
that they will become widely accepted. If the market for our solutions and products does
not develop as quickly as we expect, our future revenues and profitability will be
adversely affected. Changes in technologies, industry standards, client requirements and
new product introductions by existing or future competitors could render our existing
offerings obsolete and unmarketable, or require us to develop new products. If our
solutions and products do not achieve or maintain market acceptance or if our competitors
release new products that achieve quicker market acceptance, have more advanced features,
offer better performance or are more price competitive, our revenues may not grow and may
even decline. In addition, if a product we develop and introduce does not achieve market
acceptance, we may not be able to recover the costs associated with developing the
product, which would have a negative effect on our profitability.

If we are unable to
attract, train and retain qualified personnel, we may not be able to achieve our objectives
and our business could be harmed.

Our
future success depends on our ability to absorb and retain senior employees and to
attract, motivate and retain highly qualified professional employees. Competition for
these employees can be intense, especially in a number of our key markets and locations.
The process of locating, training and successfully integrating qualified personnel into
our operations can be lengthy and expensive. The market for the qualified personnel we
require is very competitive because of the limited number of people available with the
necessary technical and sales skills and understanding of our products and technology.
This is particularly true for the markets in which the majority of our research and
development personnel are located, namely Israel and in the State of California, as
competition for qualified personnel is intense in those markets. We may not be able to
compete effectively for the personnel we need. Any loss of members of senior management or
key technical personnel, or any failure to attract or retain highly qualified employees as
needed, could materially adversely affect our ability to achieve our research and
development and sales objectives.

12

---

---

Under current Israeli and
California laws, we may not be able to enforce covenants not to compete and therefore may be unable
to prevent our competitors from benefiting from the expertise of some of our former
employees.

We
have entered into non-competition agreements with substantially all of our employees in
Israel and in California. These agreements prohibit our employees, during the term of
their employment with us and after they cease working for us, from competing directly with
us or working for our competitors for a limited period. However, under current Israeli and
California laws, we may be unable to enforce these agreements and it may be difficult for
us to restrict our competitors from gaining the expertise our former employees gained
while working for us.

We are affected by
volatility in the securities markets.

Securities
markets have in recent years experienced volatility that has particularly affected the
securities of many high-technology companies. This volatility has often been unrelated to
the operating performance of these companies, including Cimatron. As a result, we may
experience difficulties in securing the additional financing required to effectively
operate and grow our business due to the volatility in the price of our shares, resulting
in a material adverse affect on our business and results of operations.

# Risks Related to
Licenses and Intellectual Property

We rely, to a certain extent,
on third parties software. If we lose the ability to continue to license that
software, our business could be materially adversely affected.

To
date, most of the software relating to the Cimatron E family of products has been
developed internally by our research and development staff. However, to accelerate our
product development and improve our time to market, we also review opportunities to
acquire or license products or technologies from third parties. Mainly, we utilize
software tools and engines that we acquire from Spatial Corp., a subsidiary of Dassault
Systems, and D-Cubed, for the representation and processing of three dimensional objects
and surfaces in order to expedite the continued development of our new Cimatron Eproduct family.In addition, we use software from ModuleWorks GmbH,
a German company, for advanced 5-Axis NC calculations, and advanced metal forming software
from Forming Technologies Incorporated (FTI), a Canadian company. We rely, to a certain
extent, upon such third parties abilities to enhance their current products and
develop new products on a timely and cost-effective basis that will meet changing customer
requirements and emerging industry standards or other technological changes. Our business
would be disrupted if functional versions of the third party software we rely on were
either no longer available to us or no longer offered to us on commercially reasonable
terms and we may, as a result, suffer a material adverse effect on our business and
operations. Most of the software relating to GibbsCAM has also been developed internally,
however, Gibbs, like Cimatron, also relies on certain third party software and tools
embedded in GibbsCAM product.

13

---

---

We may not be successful
in protecting our intellectual proprietary technology and this could result in the loss
of revenue.

We
primarily rely on a combination of trade secret, copyright and trademark laws, together
with non-disclosure agreements and trademark measures (such as software protection
locks), to establish and protect proprietary rights in our products. The
measures afford only limited protection and, accordingly, there can be no assurance that
the steps that we take to protect these proprietary rights will be adequate to provide
misappropriation of the technology or independent development of similar technology by
others. This is particularly a problem in foreign countries where the laws may not protect
our proprietary rights as fully as the laws of the United States do. For instance, we have
encountered significant piracy problems in certain jurisdictions, including in Brazil,
Taiwan, Israel and China, where we face significant competition from pirated copies of our
products. These problems may increase as many of our customers and their competitors
migrate their businesses to lower cost labor markets in the Far East. Despite our best
efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary.

We may be subject to
litigation to determine the scope of proprietary rights of others.

Significant
and protracted litigation may be necessary to protect our intellectual property rights, to
determine the scope of the proprietary rights of others or to defend against claims of
infringement. We believe that our systems do not infringe upon any existing third-party
proprietary rights, and to our knowledge there have been no claims of infringement by us
of third-party proprietary rights to date; however, there can be no assurance that any
such claims will not be asserted against us in the future. If infringement is alleged, we
could be required to discontinue the use of certain software codes or processes, to cease
the manufacture, use and sale of infringing products, to incur significant litigation
damages, costs and expenses and to develop non-infringing technology or to obtain licenses
to the alleged infringing technology. There can be no assurance that we would be able to
develop alternative technologies or to obtain such licenses on terms commercially
acceptable to us, if at all.

# Risks Related to our
Operations in Israel

We may be adversely
affected if the rate of inflation in Israel exceeds the rate of devaluation of the New Israeli
Shekel against the U.S. dollar.

Our
functional currency is the U.S. dollar while a portion of our expenses, principally
salaries and the related personnel expenses, are in new Israeli shekels, or NIS. As a
result, we are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this
devaluation lags behind inflation in Israel. We cannot predict any future trends in the
rate of inflation/ deflation in Israel. If the U.S. dollar cost of our operations in
Israel increases, our U.S. dollar-measured results of operations will be adversely
affected. The Israeli rate of inflation (deflation) amounted to 2.4% (0.1)% and 3.4% for
the years ended December 31, 2005, 2006 and 2007, respectively.

14

---

---

Security, political and
economic instability in Israel may impede our ability to operate and harm our financial
results.

Our
principal executive offices and research and development facilities are located in Israel.
In addition, a portion of our sales is made to customers in Israel. Accordingly, security,
political and economic conditions in Israel may directly affect our business. Over the
past several decades, a number of armed conflicts have occurred between Israel and its
Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could affect adversely our
operations. From October 2000 until recently, terrorist violence in Israel increased
significantly and negotiations between Israel and Palestinian representatives effectively
ceased. In February 2006, Hamas, a radical Islamic organization, won the Palestinian
Parliament elections. In July and August 2006, significant fighting took place between
Israel and Hezbollah in Lebanon, resulting in rockets being fired from Lebanon into
northern Israel. There can be no assurance that the recent relative calm will continue.
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, several countries still restrict business with Israel and
Israeli companies. These restrictive laws and policies may limit our ability to sell our
products in those countries.

Our operations may be
disrupted by the obligation of our personnel to perform military service.

Many
of our officers and employees in Israel are obligated to perform annual military reserve
duty and may be called to active duty under emergency circumstances. At various times over
the last five years, there have been significant call-ups of military reservists, and it
is possible that there will be additional call-ups in the future. While we have operated
effectively despite these conditions in the past, we cannot assess what impact these
conditions may have in the future, particularly if emergency circumstances arise. Our
operations could be disrupted by the absence for a significant period of one or more of
our executive officers or key employees or a significant number of our other employees due
to military service. Any disruption in our operations would harm our business.

15

---

---

The government programs
and tax benefits that we currently receive require us to meet several conditions and may
be terminated or reduced in the future, which would increase our costs and taxes.

We
benefit from certain government programs and tax benefits, particularly as a result of 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 property and
equipment and financing a percentage of investments with share capital. If we fail to meet
such conditions in the future, the tax benefits would be canceled and we could be required
to refund the tax benefits already received, together with an adjustment based on the
Israeli consumer price index and an interest factor. These programs and tax benefits may
not be continued in the future at their current levels or at any level. From time to time,
the Israeli Government has discussed reducing or eliminating the availability of these
grants, programs and benefits and there can be no assurance that the Israeli
Governments support of grants, programs and benefits will continue. If grants,
programs and benefits available to us or the laws, rules and regulations under which they
were granted are eliminated or their scope is further reduced, or if we fail to meet the
conditions of existing grants, programs or benefits and are required to refund grants or
tax benefits already received (together with interest and certain inflation adjustments)
or fail to meet the criteria for future Approved or Privileged Enterprises,
our business, financial condition and results of operations could be materially adversely
affected including an increase in our provision for income taxes.

In
connection with research and development grants received from the Office of the Chief
Scientist of Israel, or the OCS, we must pay royalties to the OCS on the revenue derived
from the sale of products, technologies and services developed with the grant from the
OCS. The terms of the OCS grants and the law pursuant to which grants are made may impair
our ability to manufacture products or transfer technologies developed using OCS grants
outside of Israel. The transfer to a non-Israeli entity of technology developed with OCS
funding, including pursuant to a merger or similar transaction, and the transfer of rights
related to the manufacture of more than ten percent of a product developed with OCS
funding are subject to approval by an OCS committee and to various conditions, including
payment by us to the OCS of a percentage of the consideration paid to us or our
shareholders in the transaction in which the technology is transferred. In connection with
a merger or similar transaction, the amount payable would be a fraction of the
consideration equal to the relative amount invested by the OCS in the development of the
relevant technology compared to the total investment in our company, net of financial
assets that we have at the time of the transaction, but in no event less than the amount
of the grant. In addition, in the event that the committee believes that the consideration
to be paid in a transaction requiring payment to the OCS pursuant to the provisions of the
law described above does not reflect the true value of the technology or the company being
acquired, it may determine an alternate value to be used as the basis for calculating the
requisite payments. These restrictions may impair our ability to enter into agreements for
those products or technologies, without OCS approval. We cannot be certain that any
approval of the OCS will be obtained on terms that are acceptable to us, or at all.
Furthermore, in the event that we undertake a transaction involving the transfer to a
non-Israeli entity of technology developed with OCS funding pursuant to a merger or
similar transaction, the consideration available to our shareholders may be reduced by the
amounts we are required to pay to the OCS.

In
connection with our grant applications, we have made certain representations, including
information provided in periodical performance reports, and we have committed to certain
performance-based covenants. The funding from the OCS is subject to the accuracy of these
representations and covenants and to our compliance with the conditions and restrictions
imposed by the OCS. If we fail to comply with any of these conditions or restrictions, we
could be required to repay any grants previously received, together with an adjustment
based on the Israeli consumer price index and an interest factor in addition to certain
other penalties. In addition, if we fail to comply with any of these conditions or
restrictions, we would likely be ineligible to receive OCS grants in the future. The
inability to receive these grants would result in an increase in our research and
development expenses.

16

---

---

We may be required to pay
royalties to the OCS in respect of sales since January 1, 2005.

We
believe that the majority of products that we have sold since January 1, 2005 are not
based on technology developed with funds provided by the OCS and that, accordingly, such
sales should not be subject to the payment of royalties to the OCS. Therefore, the royalty
reports we submitted to the OCS for the period starting January 1, 2005 and thereafter
have reflected significantly reduced royalty obligations in comparison to our royalty
reports for the years prior to 2005. In addition, during the second half of 2005 we
initiated a process with the OCS in an attempt to obtain the agreement of the OCS with our
position and to the cessation of our obligation to pay future royalties. This process is
still ongoing. Although we believe we have strong arguments to support our position, we
have accrued royalty expenses in our financial reports for the periods from January
1st, 2005 to March 31st, 2008 in the amount of $2.3 million, but we
have not paid any royalties associated with the products mentioned above to the OCS. In
light of the above-mentioned facts, we intend to consider our next steps with the OCS and
whether further royalty expenses accruals will be necessary. A determination that we are
in fact obligated to pay royalties in respect of sales after January 1, 2005, could
negatively impact our liquidity and if that determination is made after we cease to accrue
for any such royalties on our financial statements or if the amount that we become
obligated to pay exceeds the amounts for which we have accrued in our financial
statements, such payments would negatively impact our earnings.

It may be difficult to
effect service of process and enforce judgments against directors or officers in Israel.

We
are incorporated in Israel. The majority of our executive officers and directors are
located outside the United States, and a majority of our assets and the assets of these
persons are located outside the United States. Therefore, a judgment obtained against us
or any of them in the United States, including one based on the civil liability provisions
of the U.S. federal securities laws, may not be collectible in the United States and may
not be enforced by an Israeli court. Further, if a foreign judgment is enforced by an
Israeli court, it generally will be payable in Israeli currency. It also may be difficult
for you to assert U.S. securities law claims in original actions instituted in Israel
since Israel is not the most appropriate forum in which to bring such a claim. In
addition, even if an Israeli court agreed to hear such a claim, it may determine that
Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which can be a
time-consuming and costly process. Certain matters of procedure will also be governed by
Israeli law.

17

---

---

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

# History and development
of the Company

We
design, develop, manufacture, market and support a family of modular, high-performance,
CAD/CAM software products. Our products provide an integrated design through manufacturing
solution for small-to-medium-sized companies and manufacturing divisions of large
corporations, and interface easily with other CAD/CAM systems. They offer high-end
functionality, especially in the areas of design for manufacturing and manufacturing, at
an attractive price/performance ratio. These attributes have made our CAD/CAM products
especially popular in the design and manufacturing segments of the CAD/CAM market,
particularly among mold, tool, die and fixture makers, as well as discrete part
manufacturers. We focus our research and development efforts on providing complete design
through manufacturing solutions to the specific needs of this market segment. We are
committed to providing mold, tool, die and fixture makers and discrete part manufacturers
with comprehensive, cost-effective CAD/CAM solutions that streamline manufacturing cycles,
enable collaboration with outside vendors and shorten delivery time. Following our merger
with Gibbs, we have enhanced our product offering for discrete part manufacturers.

In
July 2005 we acquired 27.5% of the shares of Microsystem Srl, our Italian distributor, for
575,000 Euro. Under the agreement, we also received an option to acquire up to 100% of
Microsystem from Microsystems shareholders and Microsystems shareholders
received an option to require us to purchase 49% of Microsystems share capital under
specific circumstances. In July 2007 we exercised our option to increase our holdings in
Microsystem to 51%. See Item 5. Operating and Financial Review and Prospects 
Overview for additional details regarding the transaction with Microsystem and the
options received both by us and Microsystems shareholders. The transaction was
designed to significantly enhance Microsystems financial position and balance sheet,
and to strengthen our leading position in Italy, one of our key markets in Western Europe.
Under the terms of the agreement, Microsystems marketing, sales, and support groups
remained in their current offices throughout Italy, nevertheless, in the last two years
Microsystem went through a comprehensive restructuring and turnaround.

During
August 2006, we acquired the remaining 69.83% of the outstanding shares of KCT Co. Ltd,
our South Korean provider for approximately $225,000 plus an additional payment subject to
collection of certain receivables, following which such provider became our wholly owned
subsidiary.

During
January 2008, we merged Gibbs System, Inc., also known as Gibbs & Associates, with and
into a newly established US subsidiary (Cimatron Gibbs LLC) of Cimatron Technologies Inc,
our US subsidiary. In consideration for the transaction, Cimatron paid to Mr. William F.
Gibbs, founder, Chairman and CEO of Gibbs System, and its sole shareholder, cash
consideration of approximately $5 million, as well as 1,500,000 newly issued Ordinary
Shares of Cimatron.

Our
full name is Cimatron Ltd. and we were incorporated under Israeli law in 1982. Our
corporate headquarters are located at 11 Gush Etzion Street, Givat Shmuel 54030, Israel.
Our telephone number is 972-3-531-2121 and our web site is located at
www.cimatron.com. Our U.S. agent is Cimatron Technologies, Inc., with an address at
26800 Meadowbrook Road, Suite 113, Novi, Michigan 48377

18

---

---

# Industry Background

Manufacturers
worldwide face ever-increasing pressures to produce high-quality and increasingly complex
products in the shortest time possible and at minimum cost. To meet these demands and keep
pace with market changes, production commitments and the need for product differentiation,
companies are increasing their reliance on CAD/CAM software tools to automate the
designing, drafting and manufacturing of their products.

The
development process for the mechanical design and manufacturing of products generally
includes the following steps:

| |  | conceptual
design of the product and its components;
| | - | ----------------------------------------------------

| |  | tool
design and detailed design for manufacturing;
| | - | --------------------------------------------------

| |  | creating
the toolpath data in the form of numerical control, or NC, codes that provide the
instructions for a machine to cut a part according to specifications received; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | manufacturing
the product.
| | - | --------------------------

The
earliest users of CAD/CAM systems were dedicated design and engineering departments of
large organizations that could afford the cost and complexity of high-end
CAD/CAM systems. These systems were used by highly trained designers and engineers, who
were responsible for a particular portion of the manufacturing process. The systems also
generally operated on mainframe computers or high-end workstations which often required
many months to master. To improve efficiency, large corporations that operate with
high-cost, highly complex CAD/CAM systems have increasingly outsourced a portion of the
design and manufacturing process to subcontractors.

This
created a large market need for easier-to-use, less programming-intensive CAD/CAM
solutions that operate on different hardware and operating systems and interface with a
variety of software systems. In addition, as a result of continuing market pressure and
technological changes, including personal computers offering improved price and
performance, divisions of large companies also shifted towards CAD/CAM software providing
more cost-effective solutions and shorter learning curves which could co-exist in the
corporate design and manufacturing environment. However, while many of these systems were
designed to provide advanced conceptual design capabilities, they were more limited in
their detailed design for manufacturing and toolpath creation capabilities. As a result,
they did not meet the needs of users involved in manufacturing the process, such as mold,
tool, die and fixture makers.

At
the other end of the market were low-cost, dedicated toolpath creation software products,
which were limited in their design capabilities. These limitations caused the process of
taking data regarding the conceptual design of the product and creating a detailed design
for manufacturing to remain largely manual. As a result, subcontractors and manufacturing
divisions of large corporations were hampered in their ability to take complex conceptual
designs received from the design departments of the manufacturer and produce appropriate
molds, tools, dies or fixtures in a timely manner. As a result, an increasing number of
these subcontractors and manufacturing divisions have begun or are continuing to seek
comprehensive design through manufacturing automation solutions to compete more
effectively.

19

---

---

These
trends have created a market for an integrated CAD/CAM system which is geared towards
small-to medium-sized subcontractors or divisions of large corporations involved in the
manufacturing process, particularly mold, tool, die and fixture makers. These users have a
unique set of needs that have generally not been met by traditional CAD/CAM systems.

The
CAD/CAM software industry that developed in response to these needs is highly fragmented
and characterized by many relatively small and privately owned companies. We believe that,
due to the large number of companies that operate in this market, we do not have a single
major competitor or a group of competitors. The principal factors permitting our products
to compete successfully against our competitors products are:

| |  | the
 compatibility  of our  products  with other  software  applications  and  existing  and
 emerging         industry standards;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | our
ongoing product and feature development;
| | - | --------------------------------------------

| |  | the
offering of unique innovative products to the tooling and manufacturing industries;
| | - | ---------------------------------------------------------------------------------------

| |  | the
level of our product breadth and integration;
| | - | -------------------------------------------------

| |  | the
technical expertise and support that we provide;
| | - | ----------------------------------------------------

| |  | the
flexibility of our products;
| | - | --------------------------------

| |  | the
reputation we maintain among certain independent  distributors of our products,  to which
we refer         as Providers; and
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | the
relatively low overall price and total cost of ownership of our products combined with
the high-end capabilities of our products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------

# Business Overview

# Principal Operations,
Products and Developments

Cimatron
E

Cimatron E, our current generation of
CAD/CAM solutions for the tooling and production industries, was initially released in
September 2001. We released our newest major version of the Cimatron E (Version 8.0) in
March 2007. Cimatron E provides comprehensive tools, applications and process-automation
solutions for the tooling and manufacturing industries.

20

---

---

With Version 8 of Cimatron E,
Cimatron helps toolmakers and manufacturers of complex discrete parts step up to new
levels of productivity, introducing breakthrough improvements such as:

| |  | A
new application for progressive die design, covering the entire spectrum of quoting,
strip design, tool design, and manufacturing, compressing weeks of work into days;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | New
automated drilling capabilities, reducing programming time by up to 80%;
| | - | ----------------------------------------------------------------------------

| |  | NC-Preview
 functionality,  presenting  machining  results in a matter of seconds and  eliminating
 NC          programming errors early in the process;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Concurrent
mold design and the ability to handle mega-size molds, allowing multiple users to work on
the same assembly with increased speed and ease; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | New
enhancements in 5-Axis Production, delivering higher performance and better user control.
| | - | ---------------------------------------------------------------------------------------------

Cimatron
E encompasses a set of powerful and easy-to-use 3D design tools. The unified
solid-surface-wireframe environment allows the user to manipulate important data or create
conceptual part designs with equal ease. In the design process, Cimatron E integrates
tools to split part geometry, find and implement changes, create electrodes and inserts,
and detail tooling components. During manufacturing, Cimatron E implements 2.5 to 5 axis
toolpaths using high-speed machining, knowledge of stock remaining and templates to reduce
programming and machine time. The mission critical tasks of splitting the model, applying
engineering changes, and extracting electrodes and inserts are all handled by
Cimatrons Quick Tooling wizard-based applications.

Cimatron
E communicates with most other CAD/CAM systems, runs on personal computers, as well as
engineering workstations employing Windows based operating systems (which are the primary
operating systems used for the personal computer and workstation platforms on which our
products are used) and transfers data easily and reliably among different hardware and
software environments.

Cimatron
E is built around a set of compatible modules using a unified database, which
can be accessed and modified for all applications. Users can move easily among wireframe,
surface and solid models choosing the application most appropriate for a specific job.
Cimatron E enables the user to work top-down (i.e., beginning at the conceptual
level and moving down to subassemblies and individual parts) or bottom-up (i.e.,
modeling elements first and then grouping them into assemblies), and permits the user to
combine the two approaches. Cimatron E stores product data hierarchically to ensure
overall structural integrity of the product and the ability to interface with engineering
data management systems. Cimatron Es CAM applications operate directly on the design
model to generate intelligent toolpaths for NC manufacturing processes and enable fast and
accurate graphic simulation of NC operations. In addition, Cimatron E includes advanced
data exchange interfaces, which enable the transfer of CAD/CAM data between ourselves and
other CAD/CAM systems through industry standard interfaces, as well as several dedicated
interfaces. Cimatron E offers an intuitive and consistent user interface throughout all
applications (e.g., design, drafting and NC). Since all applications have the same
look and feel, there is no need for the user to relearn the operation of the system with
each module. Cimatron Es architecture is based upon a software kernel, which
includes database utilities, the graphic sub-system and the user interface, which provide
the operating environment for all applications. Applications are separate from the
software kernel, which facilitates enhancement of the applications, reduces development
and maintenance costs and enables efficient technological updates to the systems
components, without affecting the application base.

21

---

---

The
Cimatron E product family includes the following basic modules:

# Designer Solution

Designer Solution is a CAD-only
solution. It provides users with full 3D design and modeling capabilities, as well as
fully associative 2D drawing and sketching functions. Designer Solution includes a hybrid
3D wireframe, surfaces and solid modeler, with full assembly support. Designer Solution
includes SAT, STL, PFM and one DI optional module (DWG, DXF or VDA).

# NC Solution

NC Solution is a manufacturing-only
solution. This base solution offers comprehensive milling, drilling, simulation and
verification capabilities up to 2.5 axes + 2X Positioning. NC Solution provides access to
a wide range of CAD capabilities necessary to undertake any NC job. The system includes
tool libraries and a post processor. NC Solution includes SAT, STL, PFM and one DI
optional module (DWG, DXF or VDA).

# Master Solution

Master Solution includes all features
of the Designer Solution and the NC Solution integrated into an end-to-end system,
providing the tools and capabilities users need for designing and manufacturing complex
CAD/CAM projects. Master Solution includes SAT, STL, PFM and one DI optional module (DWG,
DXF or VDA)

# Electrode Solution

Electrode Solution includes all the
tools necessary to create and design EDM electrodes out of a given part model, including
the industry leading QuickElectrode application. Electrode Solution comes complete with a
choice of one DI optional module (IGES, STEP or VDA). The Electrode Solution is
competitively priced in comparison with a similar general purpose configuration.

# Electrode Pro Solution

Electrode Pro Solution includes the
tools necessary to create, design and manufacture EDM electrodes, including the industry
leading QuickElectrode application and full 3X milling tools. Electrode Pro Solution comes
complete with a choice of one DI module (IGES, STEP or VDA). The Electrode Pro Solution is
competitively priced in comparison with a similar general purpose configuration.

22

---

---

# Student Package

The Cimatron Student Package is a
limited Cimatron package for students home use. The package covers most of Cimatron
Es capabilities, and enables execution of small non-commercial projects. CAD modules
include the following: Wire-frame, Surfacing and Solid part Modeling; Assembly; Drafting;
Sketcher; Catalog Tools; QuickSplit; QuickCompare; QuickElectrode; and MoldDesign. CAM
modules include 2.5X  3X milling and 3X simulator. The system includes read-only
Data Interface for IGES, VDA, STEP, DXF, and DWG. The package is protected via software
mechanism and does not require a hardware protection plug.

# View Only System

View Only System provides tools to
view and check CAD/CAM projects. The system includes powerful 3D modeling and drafting
capabilities, as well as key Cimatron modules, such as QuickSplit, QuickElectrode and
viewing of 2.5X  3X milling, including the 3X simulator. No save is
possible with a View Only system. The system includes read-only translators to all leading
standard formats: DXF, DWG, IGES, STEP, VDA, SAT, STL, and PFM.

In
addition, the Cimatron E product family includes the following optional vertical
applications, optimized for manufacturing:

# Mold Design

A complete Mold Design vertical
application based on hybrid 2D/3D technology. Mold Design automates the mold base and
component design process, and offers an innovative parametric and fully associative
approach to the mold housing design process. Optimized applicative tools support the
various mold design sub-systems, such as Cooling, Ejection, Sliders and Lifters and
Inserts.

# Die Design

The Die Design application allows the
user to create complex strips for progressive dies, as well as transfer dies. It offers
analysis tools, nesting and strip layout tools, and many advanced forming tools (bend,
unbend, twist, unfold and more) that allow the creation of intermediary shapes that form
the strip. In addition it includes a set of tools that help the user create and locate a
complex array of trimming punches on the strip.

Following Strip Design, the
application allows the user to build the die tool around the strip. It includes tools for
creation of die sets as well as trimming and forming punches and other die components.

# Quick Electrode

QuickElectrode is an EDM electrode
design package used to automate the whole electrode process. QuickElectrode is used for
burn area selection, electrode design, management, documentation and manufacturing. It
also includes the generic EDM Setup utility, which exports burning parameters from Quick
Electrode.

# ECO Manager

This is a complete Change Management
application. It contains interactive tools that automatically compare between two geometry
sets to identify engineering changes. It marks and displays the differences and changes,
and saves the results in different file levels, supporting multiple ECO handling.

23

---

---

# 5 Axes Production

Complete package for 5X milling and
drilling, including 5X Rough, finish and local operations. Ideal for complex tasks, such
as milling inlets and impelers, 5X Production is mainly used for discrete part
manufacturing in demanding industries, such as Aerospace.

# Micro-Milling

Dedicated NC application for milling
miniature high precision parts, with sub-micron tolerances. Micro Milling allows the use
of all Cimatron NC procedures with very small tools and for very fine geometry. Micro
milling is supported in 3X and 5X configurations.

# GibbsCAM®

GibbsCAM,
our current generation of CAD/CAM software for discrete part production manufacturing, was
first released in 1993. The current shipping version, GibbsCAM 2007 v8.7, was released in
November 2007. GibbsCAM provides a comprehensive suite of tools, applications and
process-automation/standardization solutions for industrial manufacturers.

GibbsCAM
is modular product family of PC-based, computer-aided manufacturing software, which allows
customers to configure a seat of software specific to their current functionality needs,
while protecting their investment by allowing the system to be seamlessly expanded over
time to meet their on-going needs. GibbsCAM focuses on ease-of-use through an advanced
graphical user interface (GUI) design, interactive graphics, full data associativity
between part geometry, process and toolpath, and machining efficiency. GibbsCAM provides
manufacturing-focused wireframe, surface and solid modeling (CAD) as well as a
comprehensive range of CAM functionality for CNC toolpath creation. It provides post
processing and machine simulation for a wide variety of CNC machines, including 3- through
5-axis mills, lathes, mill-turns, Swiss machine, wire-EDM, and multi-task machines (MTM).
Since original part design is usually performed by a different user and different CAD
software, GibbsCAM provides a variety of CAD data import options covering virtually all
brands of CAD software in use today. GibbsCAM is certified under Autodesks AICAP
program, is a Solid Edge Voyager Select Product and is a SolidWorks Certified CAM Product.
GibbsCAM is certified for use on Windows XP and Windows Vista, Microsofts currently
supported Windows operating systems.

The GibbsCAM product family includes
the following module options:

# Mill

GibbsCAM
Production Milling supports 2- through simple 3 -axis wireframe machining with full
functionality for contouring, pocketing with unlimited bosses/islands, thread milling,
face milling, 2D/3D spiral creation, drilling with support for many drill cycles, tapping,
and boring. Simple 4th-axis positioning is also supported. Automatic cycles for face
milling, such as spiral, zig-zag, back and forth and one direction, allow material to be
cleaned off the top of a part. GibbsCAM Production Milling provides easy to use, powerful
programming capability for milling machine tools.

24

---

---

# Lathe

GibbsCAM
Production Turning supports full 2-axis wireframe machining with full functionality for
contouring, automatic roughing, multiple hills and valleys, plunge roughing, threading,
repetitive shape roughing, drilling, tapping and boring. Advanced functionalities, such as
maintaining an awareness of the current stock condition, make programming lathes not only
easy but also extremely efficient. GibbsCAM Production Turning provides easy to use,
powerful capability for programming turning centers.

# Solid Import

GibbsCAM
Solids Import provides entry-level support for machining solid models. Solid models can be
read, viewed and manipulated. Geometry can be selected and extracted for machining. Using
this option users can import a solid model, view it, extract geometry from selected edges,
which can then be machined. This option is ideal for users who have been machining
wireframe geometry who want to expand their capabilities to support rudimentary machining
of solids.

# 2.5D Solids

GibbsCAM
2.5D Solids provides significant surface and solid modeling capabilities. Functionality to
directly machine surfaces and solids is also included. With this module, users have the
ability to create, import and modify solid models and then generate programs to machine
them. Specialized tools are also provided to import, repair and automatically solidify
surface data. Using GibbsCAM 2.5D Solids, CNC programs can be created faster and easier,
making users more efficient and productive.

# SolidSurfacer®

GibbsCAM
SolidSurfacer provides higher-level surface and solid modeling capabilities. Advanced
functionality to machine surfaces and solids is also included. GibbsCAMs intuitive
graphical user interface allows complex surface and solid functions to be easy to use.
Using SolidSurfacer, users can address the demanding surface and solid modeling and
machining requirements for complex mold, tool and die work.

# Advanced CS

GibbsCAMs
standard functionality is to machine on conventional, orthogonal coordinate systems (XY,
XZ, YZ planes). The Advanced CS option introduces support for non-orthogonal coordinate
systems allowing local coordinate systems to be defined in any 3D orientation.

# Rotary Mill

GibbsCAM
Rotary Mill supports machining using a rotary 4th axis. The part geometry can
either be radially defined, or can be flat geometry which is wrapped around an axis. This
functionality is ideally suited for roller dies, feed screws, threading, engraving and any
other application where geometry is machined around an axis.

25

---

---

# 4-Axis Milling

GibbsCAM
4-Axis Milling supports machining using a rotary 4th axis. The part geometry is
3D wireframe geometry with surface controls, typically extracted from radially prismatic
solid models. The user has complete control over the tools orientation relative to
the part, including lead and lag angles. This functionality is ideal of off-center, Y-axis
milling, such a camshafts, or pockets or grooves with variable tapers on the floors and
walls.

# 5-Axis Simultaneous
Milling

GibbsCAM
5-Axis introduces support for 4th and 5th axis simultaneous rotary
milling of multiple surfaces and solid models. Full support for tool types (ball, flat,
bull, conical, and lollipop) is provided with collision checking of the tool tip, tool
shaft and holder. With complete control over all aspects of the tool axis, superior
surface finishes can be realized. Task oriented dialog panels are provided to only display
the parameters specific to a particular machining situation, such as projection machining,
swarf milling, mold cavity machining, cylinder head machining, electrode machining, and
turbine blade shaft finishing. A set of dialog panels are also provided specifically for
machining impellers: floor machining, general rouging and blade finishing. A variety of
posting solutions are also available from Gibbs posts, ProAXYZ 5-axis drivers, or APT-CL,
which allows users to make use of established posting solutions.

# TMS (Tombstone
Management System)

GibbsCAM
TMS supports part placement and program generation of multiple parts positioned on a
tombstone fixture, a high-efficiency mode of machining on 4-axis horizontal machining
centers. Various sequences can be examined and compared to identify the optimal machining
strategy, minimizing traversals and tool changes. Full flexible is provided to the user
while developing the program, allowing different aspects to be resolved independently and
then optimized as a while. When complete, TMS outputs a complete G-code program, with
optional sub-routines, canned cycles and B-rotation positions.

# MTM (Multi-Task
Machining)

GibbsCAM
MTM (Multi-Task Machining) was specifically designed to address the CNC programming
requirements of multi-task machine tools, providing powerful programming tools that are
easy to learn and use with the ultimate in flexibility and configurability. Machining
processes are easily defined with GibbsCAMs intuitive graphical user interface that
provides seamless access to both turning and milling capabilities, and GibbsCAMs
associativity allows operations to be updated easily when modifications are made.
Factory-supplied post processors output multi-flow NC code complete with utility
operations and sync codes.

# Wire-EDM

Designed
to handle the most demanding Wire-EDM programs while being easy-to-use, GibbsCAM Wire-EDM
supports programming 2- thru 4-axis CNC Wire-EDM machines. With a very flexible and robust
graphical user, novice users will find the system easy to understand and learn, while
experienced users will find it a straightforward, efficient way to access its breadth of
capability and options. GibbsCAM Wire-EDM provides the user with complete control over the
Wire-EDM machining operations. Post processors for all major brands of Wire-EDM machines
are included.

26

---

---

# Machine Simulation

GibbsCAM
Machine Simulation allows programs and corresponding machine tool motions to be
graphically verified before running them on an actual CNC machine tool, avoiding potential
mistakes which could result in scrap or potential machine crashes. While verifying the
program, potential opportunities for optimization can also be identified, allowing the
program to be further refined. Machine Simulation also provides an environment in which to
do a virtual set-up of the machine tool, allowing various set-up parameters to also be
verified before going to the actual machine tool.

# Data Exchange Options

In
order to ensure that GibbsCAM is able to work with data files from the widest variety of
CAD sources, a comprehensive selection of various data exchange options are available.
These range from DXF/DWG, to IGES, VDA-FS, STEP AP203/AP214, CATIA V4, CATIA V5,
Pro/ENGINEER and Granite, and ACIS. In addition, GibbsCAM has the ability to read the
native data files of most popular CAD systems: SolidEdge, Unigraphics/NX, SolidWorks,
Rhinoceros, and KeyCreator. The data exchange options or capabilities may require other
GibbsCAM options.

# CutDATA

Machining
feeds and speeds database

# Post Processors

GibbsCAM
offers a variety of approaches to generate G-code for machine tools. For users who prefer
to develop their own posts, GibbsCAM offers PostHASTE, a template-based post processing
system along with over 225 post templates. For users who already have a legacy posting
system based on APT-CL, GibbsCAM outputs APT-CL output. GibbsCAM also has a library of
over 6500 post processors for a wide variety of controller and machine tool
configurations. For the ultimate level of support, GibbsCAM also offers high-efficiency,
custom post processors created by a team of expert developers.

# Marketing and
Distribution

We
employ a broad range of marketing activities to promote our products and develop name
recognition and visibility. We use print and online advertising, trade shows, seminars,
direct mail, online promotions, and regional marketing development in an effort to further
penetrate the tooling and manufacturing segments of the CAD/CAM market. In addition to
online promotions, we use the Internet as a marketing tool that increases our visibility
in the marketplace, offers downloadable product demonstrations and facilitates
communication between our clients and us.

27

---

---

Additionally,
we have been increasing our penetration to the target market of mold, tool, die and
fixture makers, as well as discrete part manufacturers, in an effort to become the lead
supplier of CAD/CAM solutions to these segments of the manufacturing market. Our strategy
involves examining the functionality of current and future products through in-depth
focus-meetings with mold, tool, die fixture and discrete part makers, thereby making
customers partners in the development of custom solutions for these market segments.

Following
our merger with Gibbs, we distribute our products to end-users in over 35 countries in
five continents through certain of our subsidiaries, directly in Israeland the US and through a network of independent Providers and Resellers.
Between us, our subsidiaries (including Gibbs) and our Providers and Resellers, our family
of products has more than 40,000 installations.

Providers

We
believe that our Providers are technically competent in the mechanical engineering and
manufacturing aspects of CAD/CAM markets and offer a full range of sales, service and
support functions. Most of the Providers assume overall responsibility for the integrity
of each end-user customers CAD/CAM system in their respective territories, including
selling, installation, training and maintenance. Providers are, in most cases, carefully
selected on the basis of their ability to distribute and service our entire product line,
with special emphasis on the ability of their engineering and sales teams to provide
customer support.

We
furnish our Providers with technical guidance and marketing and sales resources. Providers
regularly visit our Israeli headquarters, while our employees from various departments
visit Providers sites. Our relationship with our Providers is further enhanced by
international conferences, that we organize from time to time, regional workshops and
cooperative exhibitions, and participation in local user meetings.

Providers
serve as an integral part of our marketing and service network around the world. They give
our products a local feel by (a) offering technical support in the
end-users native language, (b) being available to attend to customer needs
during local business hours, (c) translating our manuals, product and marketing
literature into the local language and (d) frequently organizing user programs and
seminars. Providers continually develop new ways to adapt and enhance our products to meet
their respective customers regional and company-specific needs.

A
typical agreement with a Provider is for a term of two years (subject to rolling two-year
extensions). Our Providers are distributors and our agreements with them enable the
Providers to purchase our products at a discounted price. Certain of our Providers act as
our exclusive distributors in a single country or region. Other than our Provider in
Japan, no Provider accounted for more than 1.5% of our total revenue for the year ended
December 31, 2007. In July 2005 we acquired 27.5% of our Italian Provider and an
option to purchase its remaining outstanding shares from its stockholders. In July 2007 we
exercised our option to increase our holdings in our Italian distributor to 51%. This
holding increase changed its status from an independent provider to a subsidiary.

28

---

---

There
can be no assurance that all existing relationships with our Providers will be renewed. We
believe that with the exception of our Provider in Japan, the termination of our
relationship with a single Provider would not adversely effect us; however, the
termination of our relationship with several of our Providers at approximately the same
time or with one of our two Providers in Japan who accounted for 7.4% of our sales in 2007
could adversely affect us. There can be no assurance that, in the event that we lose any
of our Providers, we will be successful in recruiting replacement professional and
technically competent Providers.

Gibbs
Resellers

We
believe that our Resellers are technically competent in the mechanical engineering and
manufacturing aspects of CAD/CAM markets and offer a full range of sales, service and
support functions. Most of the Resellers assume overall responsibility for the integrity
of each end-user customers CAD/CAM system in their respective territories, including
selling, installation, training and maintenance. Resellers are, in most cases, carefully
selected on the basis of their ability to distribute and service our entire product line.
US-based Resellers count on Gibbs corporate for much of their service and support.
Training is also provided at Gibbs Corporate Headquarters based in Moorpark, CA, USA. In
International markets, Resellers are selected with special emphasis on their ability to
provide customer service, support, and training.

We
furnish our Resellers with technical guidance and marketing, technical and sales resources
in addition to the product and associated documentation. Resellers visit Gibbs
headquarters in California, while our employees from various departments visit Resellers
sites as needed. Our relationship with our Resellers is further enhanced by international
conferences, that we organize from time to time, regional workshops and cooperative
exhibitions, and participation in local user meetings.

Resellers
serve as an integral part of our marketing and service network around the world. They give
our products a local feel by (a) offering technical support in the
end-users native language, (b) being available to attend to customer needs
during local business hours, (c) translating our manuals, product and marketing
literature into the local language and (d) frequently organizing user programs and
seminars. Resellers continually develop new ways to adapt and enhance our products to meet
their respective customers regional and company-specific needs.

A
typical agreement with a Reseller is for a term of one year (subject to rolling one-year
extensions). According to the terms of our agreements with them, the Resellers are able to
purchase our products at a discounted price. Certain of our Resellers act as our only
sales agent in a single country or region, even though we do not have an
exclusivity agreement with any Reseller.

Gibbs
resellers include seven who comprise the Gibbs Presidents Club. Each of
these seven resellers are independent companies that primarily engage in reselling Gibbs
products and that represent the resellers with the highest total sales of Gibbs products
for the preceding year. Other than the seven Presidents Club resellers, no reseller
accounted for more than 3.3% of Gibbs total revenue for the year ended
December 31, 2007. However, none of the Presidents Club members accounted for more
than 7% of Gibbs revenue during 2007.

29

---

---

There
can be no assurance that all existing relationships with our Resellers will be renewed. We
believe that with the exception of our Presidents Club Members, the termination of
our relationship with a single Reseller would not adversely effect us; however, the
termination of our relationship with several of our Resellers at approximately the same
time or with many of our Presidents Club Resellers could adversely affect us. There
can be no assurance that, in the event that we lose any of our Resellers, we will be
successful in recruiting replacement professional and technically competent Resellers.

Subsidiaries

Our
strategy over the years has been to increase our direct involvement in certain key markets
in which we felt the Providers were not maximizing the business opportunities, through the
formation or acquisition of marketing and support subsidiaries. In furtherance of this
strategy, we have incorporated subsidiaries in France, Japan, United Kingdom, China, as
well as India, where we formed a subsidiary at the end of 2005 that started commercial
activities during the second quarter of 2006. We have also acquired all of the outstanding
voting interests in Cimatron Technologies, Inc., our North American Provider, and have had
our German subsidiary, Cimatron GmbH, purchase all of the Cimatron-related business of our
German Provider. During August 2006, we acquired the remaining 69.83% of the outstanding
shares of our Korean provider following which it became a wholly owned subsidiary. In
January 2005 we announced the formation of Cimatron Guangzhou, a new joint venture in
Guangzhou, China, with SGV, a distributor of our products since 1998. In late 2006 we
transferred our business activity in France to an independent provider and substantially
ceased the activity of our French subsidiary. During 2007 we transitioned our business
activity in the United Kingdom from our United Kingdom subsidiary to an independent
provider with the intent of achieving greater efficiencies in our United Kingdom business.
See Item 5. Operating and Financial Review and Prospects  Overview for
additional details regarding the merger with Gibbs and with respect to the transaction
with Microsystem, our Italian provider and our increase in holdings thereof.

Customers

Our
end-users are typically small to medium-sized companies involved in the mechanical
engineering and manufacturing industry, subcontractors that supply major corporations
within the core mechanical engineering and manufacturing industry and departments or
divisions within these major corporations.Our customers are located in over 35
countries worldwide.

In
the years ended December 31, 2007, 2006 and 2005, approximately 66%, 52% and 51%,
respectively, of our revenues were from Europe; approximately 4%, 7% and 8%, respectively,
of our revenues were from Israel; approximately 18%, 23% and 22%, respectively, of our
revenues were from the Far East; approximately 11%, 17% and 18%, respectively, of our
revenues were from North America; and approximately 1%, 1% and 1%, respectively, of our
revenues were from other countries.

30

---

---

# Geographical Breakdown
of Our Revenue

The
following tables represent a geographical breakdown of our revenues from products and
services from the last three years (in thousands of U.S. dollars):

2007

|Geographical Region | Products | Services
|------------------- | -------- | --------
|
|
|
|
|Europe              |          |         
|Israel              |          |         
|Far East            |          |         
|North America       |          |         
|Other               |          |         
|Total               |          |         

2006

|Geographical Region | Products | Services
|------------------- | -------- | --------
|
|
|
|
|Europe              |          |         
|Israel              |          |         
|Far East            |          |         
|North America       |          |         
|Other               |          |         
|Total               |          |         

2005

|Geographical Region | Products | Services
|------------------- | -------- | --------
|
|
|
|
|Europe              |          |         
|Israel              |          |         
|Far East            |          |         
|North America       |          |         
|Other               |          |         
|Total               |          |         

31

---

---

Other
than our Provider agreements and certain maintenance contracts with customers in Israel,
we currently have no significant long-term contracts with any customer and sales are
generally made pursuant to purchase orders received from distributors.

# Potential Fluctuations
in Operating Results; Seasonality

Potential
Fluctuations in Operating Results

See
Item 3  Risk Factors  We may experience significant fluctuations in our
quarterly results, which makes it difficult for investors to make reliable
period-to-period comparisons and may contribute to volatility in the market price for our
ordinary shares for a discussion of factors that may cause annual or quarterly
fluctuations in the results of our operations.

Seasonality

We
sell our products to corporations and our sales are therefore subject to the fiscal and
budgeting cycles of these corporations. Accordingly, a large percentage of our sales occur
in the fourth quarter, while sales in the third quarter are traditionally the lowest due
to the summer vacations and in the first and second quarters sales are slower than in the
fourth quarter but higher than in the third quarter.

Organizational
Structure

Our
principal shareholder, DBSI, holds 4,265,950 shares, representing approximately 45.6% of
our outstanding share capital. Until June 2008, Koonras Technologies Ltd., or Koonras,
held 2,554,360 of our Ordinary Shares. On June 3, 2008, Koonras sold 854,360 Ordinary
Shares to 3Kotek 2 B.V., or Kotek. Following the consummation of such transaction Kotek
holds approximately 9.1% of our share capital. On or about June 26, 2008, Koonras sold the
remaining 1,700,000 Ordinary Shares to DBSI. Following the consummation of such
transaction, DBSI holds approximately 45.6% of our share capital and effectively has the
ability to control the outcome of most matters submitted to a vote of our shareholders.
See Item 7. Major Shareholders and Related Party Transactions for additional
details.

For
information about Cimatrons subsidiaries and its beneficial ownership therein, see
Exhibit 8.1.

32

---

---

Property,
Plants and Equipment

We
do not own any real property. We lease the office premises that we occupy in Givat Shmuel,
Israel from a private commercial property owner pursuant to the terms of a lease agreement
we entered into in February 2003. Until January 2006 we occupied an aggregate of
approximately 2.100 square meters at this facility. As of January 10, 2006, we occupy
approximately 1,750 square meters at this facility. In 2007, the aggregate annual lease
payments for the office premises were approximately $290 thousand.The initial term of this lease ended on June 30, 2006 and wehave
exercised our option to extend the lease for an additional three years.

Following
the merger with Gibbs, we lease office space in Moonpark, California from a limited
liability corporation controlled by Mr. Gibbs. In connection with the merger of Gibbs, the
term of the lease was shortened from 2020 to December 31, 2012, with an option to extend
the lease for an additional 5 years. The rent due to be paid during the initial term shall
be $24,710 per month.

The
following table represents a breakdown of our approximate aggregate annual lease payments
for office premises worldwide for the year 2007 (in thousands of U.S. Dollars):

|ENTITY                    | LOCATIONS                                                 | APPROXIMATE ANNUAL
EXPENSE
(in thousands of US$)
|------------------------- | --------------------------------------------------------- | ------------------------------------------------
|
|
|
|
|Headquarters in Israel    | Givat Shmuel                                              | 255                                             
|                         
|North American subsidiary | Michigan and Illinois (U.S.)*                             | 81                                              
|                         
|German subsidiary         | Ettlingen, Hamm, Nurenberg, Koln and Ismaning             | 220                                             
|                         
|Microsystem               | Bologna, Milano, Ancona, Treviso                          | 337                                             
|                         
|UK subsidiary             | Huddersfield                                              | 6                                               
|                         
|Japanese subsidiary       | Tokyo                                                     | 4                                               
|                         
|Chinese subsidiaries      | Beijing, Wuxi, Chengdu, Shanghai Guangzhou, Fujian, Wuhan | 68                                              
|                         
|Korean subsidiary         | Seoul                                                     | 26                                              
|                         
|India subsidiary          | Pune                                                      | 5                                               
|                          |                                                           |                                                 
|                         
|                          | Total                                                     | 1,002                                           

*  These offices
are responsible for our marketing efforts in Canada as well.

33

---

---

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

# Overview

We
design, develop, manufacture, market and support a family of modular, high-performance,
CAD/CAM software products. Our products provide an integrated design through manufacturing
solution for small-to-medium sized companies and manufacturing divisions of large
corporations, and interface easily with other CAD/CAM systems.

In
July 2005 we acquired 27.5% of the shares of Microsystem Srl, our Italian distributor, for
575,000 Euro, and an option, which we refer to as the First Call Option, to acquire up to
additional 23.5% of Microsystem from Microsystems shareholders. In July 2007 we
exercised this option at the stated exercise price of $599,250. In addition, upon exercise
of the First Call Option we received a second option, which we refer to as the Second Call
Option, to acquire up to the remaining 49% of Microsystems share capital, for an
exercise price of approximately $1.25 million. The Second Call Option is exercisable at
any time within a 30 day period, which we refer to as the Second Option Exercise Period,
starting on July 3rd, 2008, the 12 month anniversary of our exercise of the
First Call Option. In addition, as a result of our exercise of the First Call Option, any
remaining other shareholders of Microsystem have an option to require us to purchase, at
any time during the Second Exercise Period, 49% of Microsystems share capital, for
consideration of approximately $1.25 million. We have accounted for the original
acquisition under the equity method and accordingly, as of July 1, 2005 we commenced
recording our share of Microsystemss profits or losses in our consolidated financial
statements. Following the exercise of the First Call Option and the increase in our
holding in Microsystem to 51%, we have fully consolidated the results of Microsystem.

During
August 2006, we acquired the remaining 69.83% of the outstanding shares of KCT Co. Ltd,
our South Korean provider for approximately $225,000 plus an additional payment subject to
collection of certain receivables, following which such provider became our wholly owned
subsidiary.

During
January 2008, we merged Gibbs System, Inc., also known as Gibbs & Associates, with and
into a newly established US subsidiary (Cimatron Gibbs LLC) of Cimatron Technologies Inc,
our US subsidiary. In consideration for the transaction, Cimatron paid to Mr. William F.
Gibbs, founder, Chairman and CEO of Gibbs System, and its sole shareholder, cash
consideration of approximately $5 million, as well as 1,500,000 newly issued Ordinary
Shares of Cimatron. Following such transaction, Cimatron Gibbs LLC acts as a separate unit
in the Cimatron group that is responsible for the marketing, selling and developing of the
GibbsCAM product family, in substantially the same manner as conducted prior to the
merger.

We
released our newest major version of the Cimatron E (Version 8.0) in March 2007, to
include significant improvements such as a new application for progressive die design, new
automated drilling capabilities, NC-Preview functionality, concurrent mold design and the
ability to handle mega-size molds, and new enhancements in 5-Axis Production.

34

---

---

Revenues

We
derive revenues mainly from (a) sale of our products, including software and hardware
components, and (b) services which include primarily maintenance fees and the provision of
technical support for our software products and, to a lesser extent, fees from the
provision of engineering, training, consulting and implementation services. Revenues from
sales of our products are generated by a relatively large number of sales and no one
customer accounts for a material portion of our revenues. We provide maintenance services
mainly pursuant to maintenance contracts, which usually provide for annual maintenance
fees. Generally, maintenance contracts are for a one-year term. It has been our experience
that most of our customers who purchase maintenance contracts elect to receive maintenance
services from us on a continuing basis. While customers in most markets do purchase
maintenance services from us, our customers in the Far East (other than in Japan)
generally do not purchase maintenance but instead purchase product upgrades on a
case-by-case basis.

Cost
of Revenues

Our
cost of revenues consists of five major components: (a) the cost of our Israel-based
operations, which include primarily salaries (mostly for technical support personnel),
subcontractors and facilities costs, (b) hardware costs in Israel and in our
subsidiaries, (c) royalties payable to third parties for third party software and
maintenance, (d) royalties payable to the Israeli Office of the Chief Scientist and (e)
amortization of capitalized software development costs.

Software
Development Costs

Costs
for the development of new software products and substantial enhancements to existing
software products are expensed as incurred until technological feasibility has been
established, at which time any additional development costs are capitalized. Based on our
product development process, technological feasibility is established upon completion of a
working model. Any capitalization of software development costs continues up to the time
the software is available for general release to customers. However, during 2004, 2006 and
2007 costs incurred between the completion of the working model and the point at which the
products were ready for general release were insignificant. Therefore, all research and
development costs incurred in 2004, 2006 and 2007 have been expensed. In 2005 we
capitalized approximately $0.2 million in connection with the development of Cimatron E
7.0.

Primary
and Reporting Currency

We
market and sell our products and services in Europe, the Far East, North America and
Israel and derive a significant portion of our revenues from customers in Europe and Asia.
A majority of our revenues in 2005, 2006 and 2007 were from customers in Europe. Since our
financial results are reported in U.S. dollars, decreases in the rate of exchange of
non-U.S. dollar currencies in which we make sales relative to the U.S. dollar will
decrease the U.S. dollar-based reported value of those sales. To the extent that decreases
in exchange rates are not offset by a reduction in our costs, they may in the future
materially adversely affect our results of operations.

35

---

---

Our
reporting currency is the U.S. dollar while a portion of our expenses, principally
salaries and the related personnel expenses are in new Israeli shekels, or NIS. As a
result, we are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this
devaluation lags behind inflation in Israel. This would have the effect of increasing the
U.S. dollar cost of our operations. In 2006 and 2007 the rate of devaluation of the NIS
against the U.S. dollar exceeded the rate of inflation. During the first five months of
2008 the US Dollar has continued to devaluate against the NIS. If the U.S. dollar cost of
our operations in Israel continues to increase, our U.S. dollar-measured results of
operations will continue to be adversely affected. Following the merger with Gibbs, we
anticipate an increase in the relative portion of our U.S. dollar based expenses and
revenues from our total expenses and revenues. During the second quarter of 2008 we have
taken cost control measures to counter the effect of the weakening U.S. dollar on our
financial results. These measures mainly involved cost reductions in Israel and the US.

See
- Liquidity and Capital Resources  Impact of Inflation and Devaluation on
Results of Operation, Liabilities and Assets for information relating to our policy
of hedging against currency fluctuations.

# Critical Accounting
Policies

The
discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which were prepared in accordance with U.S.
GAAP. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We evaluate these estimates
on an on-going basis. We base our estimates on our historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.

We
believe that application of the following critical accounting policies entails the most
significant judgments and estimates used in the preparation of our consolidated financial
statements.

Revenue Recognition

We
recognize revenues in accordance with the American Institute of Certified Public
Accountants Statement of Position 97-2, Software Revenue Recognition, as amended.

Revenues
from software license fees are recognized when persuasive evidence of an arrangement
exists, the software product covered by written agreement or a purchase order signed by
the customer has been delivered, the license fees are fixed and determinable and
collection of the license fees is considered probable. When software arrangements involve
multiple elements we allocate revenue to each element based on the relative fair values of
the elements. Our determination of fair value of each element in multiple element
arrangements is based on vendor-specific objective evidence (VSOE). We limit
our assessment of VSOE for each element to the price charged when the same element is sold
separately.

36

---

---

In
judging the probability of collection of software license fees we continuously monitor
collection and payments from our customers and maintain a provision for estimated credit
losses based upon our historical experience and any specific customer collection issues
that we have identified. In connection with customers with whom we have no previous
experience, we may utilize independent resources to evaluate the creditworthiness of those
customers. For some customers, typically those with whom we have long-term relationships,
we may grant extended payment terms. We perform on-going credit evaluations of our
customers and adjust credit limits based upon payment history and the customers
current creditworthiness, as determined by our review of their current credit information.
If the financial situation of any of our customers were to deteriorate, resulting in an
impairment of their ability to pay the indebtedness they incur with us, additional
allowances may be required.

Our
software products do not require significant customization or modification. Service
revenues include consulting services, post-contract customer support and maintenance and
training. Consulting revenues are generally recognized on a time and material basis.
Software maintenance agreements provide technical customer support and the right to
unspecified upgrades on an if-and-when-available basis. Post-contract customer support
revenues are recognized ratably over the term of the support period (generally one year)
and training and other service revenues are recognized as the related services are
provided. Deferred revenues represent mainly amounts received on account of service
agreements.

Our
sales are made pursuant to standard purchase orders, containing payment terms averaging
between 30  120 days. For some customers with whom we have long-standing
relationships and based on past experience with those customers and the same software
products, we may grant payment terms of not over 180 days. Any payment terms that exceed
180 days must be approved by our Chief Financial Officer prior to the signing of any
purchase order.

Our
arrangements do not include any refund provisions nor are payments subject to milestones.
In addition, substantially all of our arrangements do not contain customer acceptance
provisions.

Allowance
for Doubtful Accounts

We
evaluate the collectability of our accounts receivable based on a combination of factors.
In circumstances where we are aware of a specific customers inability to meet its
financial obligations to us (e.g. bankruptcy filings, substantial down-grading of credit
ratings), we record a specific reserve for bad debts against amounts due to reduce the net
recognized receivable to the amount we reasonably believe will be collected. For all other
customers, we recognize reserves for bad debts based on the length of time the receivables
are past due and on our historical experience in collecting such receivables.

37

---

---

# Operating Results

|                                       | December 31,
|-------------------------------------- | ------------
|
|
|
|
|Statement of Income Data:              |             
|Revenue:                               |             
|                                       |             
|Products                               |             
|Services                               |             
|                                       |             
|Total                                  |             
|                                       |             
|Cost of revenue:                       |             
|Products                               |             
|Services                               |             
|                                       |             
|Total                                  |             
|                                       |             
|Gross profit                           |             
|                                       |             
|Research and development costs         |             
|Selling, general and administrative    |             
|expenses                               |             
|                                       |             
|Operating income (loss)                |             
|Financial income (expenses), net       |             
|Other income (expenses)                |             
|                                       |             
|Income (loss) before taxes             |             
|Taxes on income                        |             
|                                       |             
|Income (loss) after income taxes       |             
|Company's equity in results of         |             
|affiliated company                     |             
|Minority interest in results of        |             
|subsidiary                             |             
|                                       |             
|Net income (loss)                      |             
|                                       |             
|Net income (loss) per share (basic and |             
|diluted)                               |             
|                                       |             
|Weighted average number of shares      |             
|outstanding                            |             
|                                       |             

38

---

---

|                                 | December 31,
|-------------------------------- | ------------
|
|
|
|
|Balance Sheet Data               |             
|Cash and cash equivalents..      |             
|Short-term investments           |             
|                                 |             
|Total cash, cash equivalents and |             
|short-term investments           |             
|Long term marketable investments |             
|Working capital                  |             
|Total assets                     |             
|Total liabilities.               |             
|Shareholders' equity             |             

Revenue

Our
total revenues increased to approximately $28.6 million in 2007 from approximately $21.5
million in 2006 and from approximately $20.9 million in 2005. Our revenues from the sale
of products increased to approximately $14.3 million in 2007 from approximately $9.6
million in 2006 and from approximately $9.0 in 2005. The increase in the sale of products
in 2007 was mainly due to an increase of approximately $4.9 million in product sales in
Europe, which was in part due to the higher Euro  dollar exchange rate, but the
majority of the increase in Europe was related to the consolidation of Microsystems
results starting in the third quarter of 2007 and to real sales growth in Germany. We also
experienced product sales growth in South Korea, India, Taiwan and Israel. Such increases
were partially offset by decreases of sales in other regions. As 65% of our 2007 revenues
were derived from Europe, changes in the Euro  dollar exchange rate can
significantly influence our revenues. As of the third quarter of 2007, the Euro 
dollar exchange rate had an increasing influence on our revenues and results of operation
due to the consolidation of Microsystems financial results with ours, since
substantially all of Microsystems revenues are Euro-denominated. While we believe
that the trend of migration of European mold, tool, die and fixture makers operations to
low cost labor markets in the Far East, which markets are also characterized by lower
prices and by higher usage of pirated copies of software products, may continue, we have
previously adjusted our European strategy slightly in order to increasingly focus on
penetrating the high end European market, in which such migration is less frequent. In
2007, our largest organic revenue growth came from Europe, mainly from Germany. We
continue to increase our sales efforts in China and in other emerging markets. In
addition, following the Gibbs acquisition, we have begun to introduce the GibbsCAM product
line into our legacy Cimatron sales channels in Germany, Italy, China, South Korea and
Israel, and ultimately in all our other sales channels. As a percentage of revenues, our
revenues from the sale of products increased from approximately 42.9% in 2005, and
approximately 45% in 2006 to approximately 50% in 2007. Our revenues from services
increased in 2007 to approximately S14.3 million, from approximately $11.8 million in 2006
and approximately $12.0 million in 2005. This increase is mainly attributed to the
consolidation of Microsytems results starting in the third quarter of 2007, but also
to organic growth in maintenance and other services revenues. As a percentage of revenues,
our revenues from services decreased to approximately 50% in 2007 from approximately 57.1%
in 2005 and approximately 55% in 2006.

39

---

---

Cost
of Revenue

Cost
of revenue increased in 2007 to $5.4 million, from approximately $3.6 million in 2006 and
$4.9 million in 2005. The increase in 2007 is mainly due to the consolidation of
Microystems results starting in the third quarter of 2007. The decrease in 2006
resulted mainly from the implementation of a cost reduction plan in the second half of
2005. The overall increase in costs of revenue in 2005 was due to our write-off of
capitalized software development expenses in the amount of $0.8 million, which was offset
by a decrease in all other components of our cost of revenue, in line with the decrease in
product sales.

Gross
Profit

Gross
profit, as a percentage of total revenue, was 81.0%, 83.1% and 76.4% in 2007, 2006 and
2005, respectively. The decrease in percentage in 2007 resulted mainly from the
consolidation of Microystems results starting in the third quarter of 2007, as a
portion of Microsystems product revenues include hardware sales, which feature lower
gross profit margins than software. The increase in percentage in 2006 resulted mainly
from our cost reduction plan implemented during the second half of 2005.

Research
and Development, Patents and Licenses, etc.

Research
and development costs primarily consist of salaries and related costs of employees engaged
in ongoing research, design and development activities. Research and development costs
were $4.3 million in 2007, $4.4 million in 2006 and $4.8 million in 2005. In 2007 we
maintained the same level of research and development activity as in 2006. The decrease in
2006 was due mainly to our cost reduction plan implemented during the second half of 2005
and during 2006.

Selling,
General and Administrative Expenses

Selling
expenses consist of costs relating to promotion, advertising, trade shows and exhibitions,
compensation (including sales commissions), sales support, travel and travel-related
expenses and royalties to the Fund for the Encouragement of Marketing of the Government of
Israel, or the Marketing Fund, including all such expenses for our subsidiaries. We did
not receive any grants from the Marketing Fund in the years 2005, 2006 or 2007 and do not
expect to receive any such grants in the future. General and administrative expenses
consist of (a) compensation costs for administration, finance and general management
personnel, (b) office maintenance and administrative costs, (c) rent, (d) fees
paid for management services to DBSI and Koonras (e) reserves for doubtful debts and (f)
amortization of investment in acquired companies.

Selling,
general and administrative expenses increased to $17.2 million in 2007 from $13.4 million
in 2006 and $15.6 million in 2005. The main reason for the increase in 2007 was the
consolidation of Microystems results starting in the third quarter of 2007, but we
also increased our selling and marketing expenses in order to enhance our sales and
marketing efforts in some selected markets. As our operations in Europe are in Euro, we
also faced higher expense in Dollar terms due to the relative weakness of the US Dollar
versus the Euro. As of the third quarter of 2007, the Euro  dollar exchange rate has
had an increasing influence on our revenues and results of operation due to the
consolidation of Microsystems financial results with ours, as substantially all of
Microsystems revenues are Euro-denominated. The main reason for the decrease in 2006
was the cost reduction plan implemented in the second half of 2005.

40

---

---

Financial
Income (Expenses), net

Financial
income (expenses), net, consists primarily of interest earned on our cash reserves, gains
(losses) from sale of bonds and funds, as well as interest on trade receivables and tax
rebates and currency translation adjustments between the U.S. dollar exchange rate imposed
on our assets and liabilities. Financial income (expenses), net, were $0.4 million in 2007
compared to $0.6 million in 2006 and $(0.1 million) in 2005. The decrease in financial
income, net, in 2007 was due primarily to lower income from changes in currency exchange
rates. The $5 million consideration in the merger with Gibbs was funded from our
accumulated cash and cash equivalents. As a result, we expect our financial income to
significantly decrease.

Net
Income (Loss)

We
incurred net income of approximately $1.9 million and $0.5 million in 2007 and 2006,
respectively. In 2004 and 2005 we incurred net losses. We cannot be certain that we will
maintain profitability on a quarterly or annual basis. If the percentage of our overall
revenues comprised by service revenue will increase, our gross margins and profitability
will likely be adversely affected. In addition, if our revenues from the sale of products
will decrease, such decrease may adversely affect our future service revenues, as it may
result in a smaller user base to purchase service contracts from us. See Item 3
 Risk Factors. For a geographical breakdown of our revenues, please refer to
Item 4  Information on the Company  Geographical Breakdown of our
Revenue.

# Effective Corporate Tax
Rate

We
and each of our subsidiaries are subject to corporate taxes in various countries in which
we and they operate. We are currently most significantly affected by corporate taxes in
Israel where we received a final tax assessment through the tax year ended December 31,
2000. Generally, as of January 1, 2008, Israeli companies are subject to corporate tax of
27% on taxable income and are subject to capital gains tax at a rate of 25% on capital
gains derived after January 1, 2003 (other than capital gains from the sale of listed
securities, which are subject to tax at the current rate of 31%). The corporate tax rate
was reduced in July 2005, from 31% for the 2006 tax year to 29% for the 2007 tax year, 27%
for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and
thereafter. However, the effective tax rate payable by a company that derives income from
an approved enterprise (as discussed below) may be considerably less. We believe that our
effective tax rates in the U.S., Germany, Italy, France, the U.K., China, Japan, India and
Korea would have been approximately 34%, 25%, 31%, 33%, 19%, 35%, 31%, 34% and 27.5%,
respectively, for the year ended December 31, 2007, had we not incurred tax losses in such
countries. We believe that we had tax loss carryforwards in Israel in the aggregate amount
of $7.3 million as of the end of 2007. In addition, as of December 31, 2007, we had
approximately $6 million in net operating loss carryforwards in North America, $0.9
million in Germany, $2.8 million in France $0.5 million in the U.K and $0.5 millions in
Korea. There can be no assurance that we will be able to use all the above-mentioned tax
loss carryforwards at any time in the future. We expect that as our profits increase and
our subsidiaries utilize their respective loss carryforwards, particularly in countries
with relatively high corporate tax rates, our consolidated effective tax rate will
increase.

41

---

---

We
have been granted Approved Enterprise status under the Israeli Law for the
Encouragement of Capital Investments, 1959 continuously since 1994. Consequently, we are
eligible for certain Israeli tax benefits. Income derived from our Approved Enterprise
plan is exempt from tax for a period of two years, commencing in the first year in which
we generate taxable income from such Approved Enterprise (subsequent to use of all Israeli
tax loss carryforwards), and is subject to a reduced tax rate of 25% for a further five
years, respectively. See Note 13 of the notes to our consolidated financial statements
included elsewhere in this annual report.

# Liquidity and Capital
Resources

We
finance our operations primarily from funds provided by operations and, to a lesser
extent, from accumulated cash and cash generated by the sale of our investments. We
believe that our accumulated cash, in addition to cash generated from operations and
available funds, will be sufficient to meet our cash requirements for working capital and
capital expenditures for at least the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we may sell additional
equity or debt securities or obtain credit facilities. Prior to the closing of the merger
with Gibbs we obtained two credit lines from banks for an aggregate amount of $8 million.
Annual interest rates may vary from Libor + 0.9% to Libor +1.2%. Both credit lines are
secured by negative pledges and certain financial covenants, such as minimum equity and
minimum equity as percentage of total balance sheet assets, maximum financial debt and
maximum financial debt as a percentage of total balance sheet assets, minimum cash
balance, minimum current ratio, minimum EBITDA and maximum ratio between financial debt
and EBITDA. As of March 31, 2008, we were in compliance with the covenants under these
credit lines, and the aggregate outstanding amount drawn thereunder was approximately
$250,000.

As
of December 31, 2007, we had $10.2 million in cash and marketable investments. During
2007, net cash provided by operating activities was $3.4 million, and was comprised of our
net profit of $1.9 million, non-cash use of depreciation and amortization of $0.9 million,
increase in trade payables, accrued expenses and other liabilities of $0.5 million,
partially offset by increase in accrued severance fund of $0.2 million and decrease in
deferred taxes of $0.1 million. Furthermore, we utilized a renewable loan in the amount of
$0.5 million from a Swiss bank, which was secured by all our assets held by the bank. Such
assets varied from time to time. In March 2008 we re-paid this loan to the bank and have
not renewed it since. As of December 31, 2007, Microsystem had outstanding a long-term
government loan of $0.4 million. and a short term bank credit in the amount of $0.3
million.

In
addition to the cash provided by investing activities described above, we gained a net
amount of $0.3 million from the acquisition of Microsystem and $0.3 million from
redemption of bonds, and invested $0.6 million in the purchase of property and equipment,
resulting in net cash used in investing activities of $0 million.

42

---

---

These
transactions caused our aggregate amount of cash and cash equivalents to be $9 million as
of December 31, 2007 as compared to $5.6 million as of December 31, 2006, our long-term
marketable investments to be $1.2 million as of December 31, 2007, as compared to $1.3
million as at December 31, 2006, and our short-term bank credit to be $0.8 million as of
December 31, 2007, as compared to $0.5 million as at December 31, 2006.

As
of December 31, 2007, our working capital was $6.1 million and our total assets were $27.3
million, compared to $5.3 million and $17.9 million, respectively, as of December 31,
2006. The increase in working capital resulted mainly from an increase in cash and cash
equivalents and short term investments, net of short-term bank credit. The change in total
assets resulted mainly from the acquisition of Microsystem and the consolidation of its
financial statements starting in the third quarter of 2007.

Our
trade receivables, net of allowance for doubtful accounts on December 31, 2007 totaled
$7.3 million, compared to $4.8 million on December 31, 2006. The increase was mainly
attributed to the consolidation of Microsystems financial statements, and to a
lesser extent to higher sales in 2007. The collection cycle remained unchangedduring 2007 compared to 2006. We believe that, generally, the quality of receivables
remained unchanged and we will continue our efforts to shorten the collection cycle.

Our
capital expenditures for 2007 amounted to approximately $0.6 million and were mostly for
the purchase of computers, computer equipment and other office equipment

We
financed the consideration in the merger with Gibbs from our accumulated cash and cash
equivalents, as a result of which our cash, cash equivalents and marketable securities,
net of short-term and long-term credit, were decreased immediately after the closing to
approximately $5 million.

Upon
exercise of the First Call Option to acquire additional Microsystems share capital
we received a second option, which we refer to as the Second Call Option, to acquire up to
the remaining 49% of Microsystems share capital, for an exercise price of
approximately $1.25 million. The Second Call Option is exercisable at any time within a 30
day period, which we refer to as the Second Option Exercise Period, starting on July
3rd, 2008, the 12 month anniversary of our exercise of the First Call Option.
In addition, as a result of our exercise of the First Call Option, the remaining
shareholders of Microsystem have an option to require us to purchase, at any time during
the Second Exercise Period, 49% of Microsystems share capital, for consideration of
approximately $1.25 million.As a result, we expect that during July 2008 we will
increase our holdings in Microsystem from 51% to 100% for a cash consideration of $1.25
million. This amount was already included in our current liabilities as of December 31,
2007.

43

---

---

Concentration
of credit risk.

Financial
instruments that potentially subject us to concentration of credit risk consist
principally of cash and cash equivalents, short-term investments and accounts receivable.
Our cash and cash equivalents, short-term investments and long-term investments are
invested in deposits with major banks in the United States, Europe and Israel. We believe
that the financial institutions holding our cash funds are financially sound, and that
minimal credit risk exists with respect to our marketable securities, which consist of
debt securities of the Government of Israeland highly rated corporate bonds. Our
accounts receivable are generated from a large number of customers located in Europe,
Asia, the United States and Israel. We perform ongoing evaluations of our accounts
receivable and maintain an allowance for doubtful accounts that we believe is adequate to
cover all anticipated losses with respect to our accounts

Impact
of Inflation and Devaluation on Results of Operations, Liabilities and Assets

Although
part of our revenues are denominated and paid in U.S. dollars, the majority are not so
denominated and paid. Therefore we believe that inflation and fluctuations in the U.S.
dollar exchange rate may have a material effect on our revenue. The cost of our Israel
operations, as expressed in U.S. dollars, is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a lagging
basis) by a devaluation of the NIS in relation to the U.S. dollar.

The
exchange rate between NIS and the U.S. dollar has fluctuated during 2007 and during the
past 5 months (December 2007  May 2008) from a low of NIS 3.242 to the dollar to a
high of NIS 4.008 to the dollar. The high and low exchange rates between the NIS and U.S.
dollar during the 6 most recent months, as published by the Bank of Israel, were as
follows:

|MONTH         | LOW 1 U.S. dollar = | HIGH 1 U.S. dollar =
|------------- | ------------------- | --------------------
|
|
|
|
|December 2007 | 3.841               | 4.008               
|January 2008  | 3.625               | 3.861               
|February 2008 | 3.553               | 3.849               
|March 2008    | 3.347               | 3.666               
|April 2008    | 3.432               | 3.641               
|May 2008      | 3.242               | 3.471               

The
average exchange rate, using the average of the exchange rates on the last day of each
month during the period, for each of the five most recent fiscal years, was as follows:

|Period                              | Exchange Rate
|----------------------------------- | -------------
|
|
|
|
|January 1, 2003 - December 31, 2003 | 4.548 NIS/$1 
|January 1, 2004 - December 31, 2004 | 4.478 NIS/$1 
|January 1, 2005 - December 31, 2005 | 4.503 NIS/$1 
|January 1, 2006 - December 31, 2006 | 4.466 NIS/$1 
|January 1, 2007 - December 31, 2007 | 4.085 NIS/$1 

44

---

---

In
2005 the rate of inflation was approximately 2.4% and the U.S. dollar was devaluated
against the NIS by 6.8%. In 2006 the rate of inflation was approximately (0.1)% and the
U.S dollar was devaluated against the NIS by 8.2%. In 2007 the rate of inflation was
approximately 3.4% and the U.S dollar was devaluated against the NIS by 8.9%.

Since
our financial results are reported in dollars, fluctuations in the rates of exchange
between the dollar and non-dollar currencies may have a material effect on our results of
operations. We therefore use currency exchange forward contracts and currency exchange
options to hedge the impact of the variability in the exchange rates on future cash flows
from certain Euro-denominated transactions, as well as certain NIS-denominated expenses.
Our policy is to hedge up to 100% of our Euro denominated future cash flows to protect
against a reduction in reported operating income arising from decreases in the Euro 
U.S. dollar exchange rate and to hedge up to 100% of our NIS denominated expenses to
protect against an increase in reported expenses arising from increases in the U.S. dollar
 NIS exchange rate. However, we may decide not to hedge in accordance with this
policy where, in our judgment, the applicable exchange rate is sufficiently low. The
counter-parties to our forward contracts and currency exchange options are major financial
institutions with high credit ratings. We believe the risk of incurring losses on such
forward contracts and currency exchange options related to credit risks is remote and that
any losses would be immaterial. As of December 31, 2007 we had currency exchange options
to sell up to 2.4 million Euro for a total amount of $3.36 million, and had written
currency exchange options to sell up to 2.4 million Euro for a total amount of $3.75
million that were scheduled to expire prior to December 29, 2008. As of May 31, 2008, we
had currency exchange options to sell up to 2.8 million Euro for a total amount of $4
million, and had written currency exchange options to sell up to 2.8 million Euro for a
total amount of $4.4 million that were scheduled to expire prior to December 29, 2008. See
Item 11  Quantitative and Qualitative Disclosure about Market Risk for a
description of hedging and other similar transactions.

# Research and
development, patents, licenses, etc.

We
conduct our research and development operations primarily in Israel and to a small extent
in Russia. Following the merger with Gibbs in January 2008 we now also have substantial
research and development operations in California. Our research and development efforts
have been financed through internal resources and through plans sponsored by the Chief
Scientist of the Government of Israel, or the OCS. In the years ended December 31, 2005,
2006 and 2007 our gross research and development expenditures were $4.8 million, $4.4
million and $4.3 million, respectively (23%, 21% and 15% of total revenues, respectively).
Prior to 2001, we were granted royalty-bearing grants from the OCS for research and
development activities. Under the provisions of Israeli law in effect until 1996,
royalties of 2%-3% of the revenues derived from the sale of software products developed
under a research and development program funded by the OCS and certain related services
must be paid to the State of Israel. Pursuant to an amendment effected in 1996 effective
with respect to OCS plans funded in or after 1994, royalties generally at the rate of 3%
during the first three years, 4% over the following three years and 5% in or after the
seventh year of the revenues derived in connection with products developed according to
such plans are payable to the State of Israel. The maximum aggregate royalties will not
exceed 100% (for funding prior to 1994, 100% to 150%) of the U.S. dollar-linked value of
the total grants received. Pursuant to an amendment effected in 2000, effective with
respect to OCS plans funded in or after 2000, the royalty rates described above were
updated to 3% during the first three years and 3.5% in or after the fourth year, of the
revenues derived in connection with products developed under such plans. Pursuant to an
amendment effected on January 1, 1999, effective with respect to OCS plans approved in or
after 1999, funds received from the OCS shall bear annual interest at a rate equal to
LIBOR for twelve months. As of December 31, 2007, our contingent liability with respect to
such grants was approximately $1.4 million, contingent upon us generating revenues from
sales of products developed with funds provided by the OCS.

45

---

---

We
believe that the majority of products that we have sold since January 1, 2005 are not
based on technology developed with funds provided by the OCS and that, accordingly, such
sales should not be subject to the payment of royalties to the OCS. Therefore, the royalty
reports we submitted to the OCS for the period starting January 1, 2005 and thereafter
have reflected significantly reduced royalty obligations in comparison to our royalty
reports for the years prior to 2005. In addition, during the second half of 2005 we
initiated a process with the OCS in an attempt to obtain the agreement of the OCS with our
position and to the cessation of our obligation to pay future royalties. Following this
application and further correspondence between the OCS and us, the OCS appointed an
external professional examiner to examine our claim from a technological point of view.
This examiner submitted his report to the OCS in November 2005. In December 2005, the OCS
appointed a second professional examiner to submit a second opinion regarding our
technological claim. During January 2006 our management met with the OCS in an attempt to,
among other things, accelerate the OCSs treatment of our application. In September
2006 we received a letter from the OCS rejecting our application. Following further
inquiries made by us, we continued corresponding with the OCS and in January 2007 our
management met again with the OCS. As a result of this meeting the OCS agreed to continue
its examination of our application. In July 2007 we met with an OCS examiner and two
additional OCS representatives. However, to date, we have not received any final decision
from the OCS, despite our ongoing efforts to resolve this matter.

Although
we believe we have strong arguments to support our position, we have accrued royalty
expenses in the amount of $2.3 million in our financial reports for the periods from
January 1st, 2005 to March 31st, 2008, but we have not paid to the OCS any royalties
associated with the products mentioned above. In light of the above-mentioned facts, we
continue to evaluate and consider our next steps with the OCS, including without
limitation, whether further royalty expense accruals will be necessary. See Item 3.
Risk Factors  We may be required to pay royalties to the OCS in respect of sales
since January 1, 2005 for a discussion of the risks to us arising from the
possibility that we may be obligated to pay to the OCS the amount we have accrued with
regard to this issue or even more than such amount.

46

---

---

The
State of Israel does not own proprietary rights in technology developed with OCS funding
and there is no restriction on the export of products manufactured using technology
developed with OCS funding. The technology is, however, subject to transfer restrictions,
as described below. These restrictions may impair our ability to sell our technology
assets or to outsource manufacturing and the restrictions continue to apply even after we
have paid the full amount of royalties payable for the grants. In addition, the
restrictions may impair our ability to consummate a merger or similar transaction in which
the surviving entity is not an Israeli company.

The
transfer to a non-Israeli entity of technology developed with OCS funding, including
pursuant to a merger or similar transaction, and the transfer of rights related to the
manufacture of more than ten percent of a product developed with OCS funding are subject
to approval by an OCS committee and to the following conditions:

| |  | Transfer
of Technology. If the committee approves the transfer of OCS-backed technology, such
a transfer would be subject to the payment to the OCS of a portion of the consideration
we receive for such technology. The amount payable would be a fraction of the
consideration equal to the relative amount invested by the OCS in the development of such
technology compared to our total investment in the technology, but in no event less than
the amount of the grant. However, in the event that in consideration for our transfer of
technology out of Israel we receive technology from a non-Israeli entity for use in
Israel, we would not be required to make payments to the OCS if the approval committee
finds that such transfer of non-Israeli technology would significantly increase the
future return to the OCS.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transfer
of Manufacturing Rights. The committee is authorized to approve transfers of
manufacturing rights only if the transfer is conditioned upon either (1) payment of
increased aggregate royalties, ranging from 120% to 300% of the amount of the grant plus
interest, depending on the percentage of foreign manufacture or (2) a transfer of
manufacturing rights into Israel of another product of similar or more advanced
technology.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Merger
or Acquisition. If the committee approves a merger or similar transaction in which
the surviving entity is not an Israeli company, such a transaction would be subject to
the payment to the OCS of a portion of the consideration paid. The amount payable would
be a fraction of the consideration equal to the relative amount invested by the OCS in
the development of such technology compared to the total investment in the company, net
of financial assets that the company has at the time of the transaction, but in no event
less than the amount of the grant.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
the event that the committee believes that the consideration to be paid in a transaction
requiring payment to the OCS pursuant to the provisions of the law described above does
not reflect the true value of the technology or the company being acquired, it may
determine an alternate value to be used as the basis for calculating the requisite
payments.

In
the years ended December 31, 2005, 2006 and 2007, we paid or accrued royalties to the OCS
in the amount of $0.7 million, $0.7 million, and $0.8 million, respectively. We intend to
consider whether further accruals will be necessary in light of the facts described above
concerning our application to the OCS to recognize our claim that we are no longer
obligated to pay royalties on a majority of our sales subsequent to January 1, 2005.

47

---

---

In
addition to the OCS grants, we received grants from the Fund for the Encouragement of
Overseas Marketing of the Israeli Governments Ministry of Industry and Trade, with
respect to which we are obligated to pay royalties amounting to 3% to 4% of the
incremental exports, up to a maximum of 100% of the grants received. Our contingent
liability as of December 31, 2007 with respect to such grants was $0.6 million, contingent
upon our incremental exports.

In
addition, we are currently participating in a four year project of the European Sixth
Research and Technological Development Framework Program, as part of a consortium led by
European companies, with respect to machining of very high precision parts and molds aimed
at mass production of optical lenses. Grants received under this project are not subject
to any future royalty payments. As of December 31, 2007, we have recorded in our profit
and loss statements only negligible amounts of grants received. In the first quarter of
2008 we recorded in our profit and loss statement a grant of $121,000 as R&D
participation.

Trend
Information

We
are subject to various trends and uncertainties in the CAD/CAM business, including
changing customer demands, new products developed by competitors, consolidation of
operations and the use of cost-cutting measures. Following is a summary of the material
trends and uncertainties influencing our operations:

Cash
and Cash Equivalents. The consideration in the merger with Gibbs was funded from
accumulated cash and cash equivalents, as a result of which our cash and cash equivalents
was decreased immediately after the closing from approximately $9 million dollars to
approximately $3.5 million dollars.

Merger
with Gibbs and Related Effects. As a result of the merger with Gibbs we anticipate an
increase in the following: (i) the Companys overall expenses and revenues; (ii)
relative portion of the U.S. dollar based expenses and revenues of the Company group; and
(iii) geographic diversity due mainly to increase in sales in the U.S. market.

Migration
to Far East. Many mold, tool, die and fixture makers as well as discrete part
manufacturers have migrated or intend to migrate their operations to markets in the Far
East, such as China, in order to take advantage of the relatively lower cost of labor
available in those markets for the manufacturing activities. We anticipate that this
migration will continue and have expanded our operations in Asia, including in China,
South Korea and India, in order to increase our share of those growing markets. Many of
those markets, including China, South Korea and India, are characterized by lower prices
and by higher usage of pirated copies of software products. While those markets are also
often much larger than a number of our traditional markets in Europe, to the extent that
we cannot offset the effects of lower prices and higher incidents of pirated software
usage, our revenues and profitability may be adversely affected.

Maintenance
Revenues. It has been our experience that most of our customers who purchase
maintenance contracts elect to receive maintenance services from us on a continuing basis.
While customers in most markets do purchase maintenance services from us, our customers in
the Far East (other than in Japan, and South Korea to a certain extent) generally do not
purchase maintenance but instead purchase product upgrades on a case-by-case basis.
Accordingly, our maintenance revenues may be adversely impacted to the extent that our
customer base shifts to those markets in the Far East where customers often do not
purchase maintenance and there is no corresponding increase in customers in other markets.

48

---

---

Maintenance
Revenues. It has been our experience that most of our customers who purchase
maintenance contracts elect to receive maintenance services from us on a continuing basis.
While customers in most markets do purchase maintenance services from us, our customers in
the Far East (other than in Japan, and South Korea to a certain extent) generally do not
purchase maintenance but instead purchase product upgrades on a case-by-case basis.
Accordingly, our maintenance revenues may be adversely impacted to the extent that our
customer base shifts to those markets in the Far East where customers often do not
purchase maintenance and there is no corresponding increase in customers in other markets.

Decrease
in prices. The strong competition in the software business generally, and in the
CAD/CAM business specifically, has caused prices of products in our industry to decrease.
Such decrease in software prices has resulted in a decrease in our revenues and thus in
our profits. As a result, we have been forced to employ cost-cutting measures. If the
foregoing trend continues, we may have to employ additional cost-reduction measures.

Risk
factors. In addition, our results of operations and financial condition may be
affected by various other factors discussed in Item 3  Key Information 
Risk Factors, including market acceptance of our products, changes in political,
military or economic conditions in Israel and in the Middle East, general slowing of local
or global economies and decreased economic activity in one or more of our target
industries.

|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

Other
than as discussed below, we are not party to any off-balance sheet arrangements or subject
to any contingent liabilities.

1.       
          With respect to our contingent liability relating to payment of royalties to the
          OCS, see   Research and development, patents, licenses, etc.
          above.

2.       
          As consideration for grants received from the Fund for the Encouragement of
          Overseas Marketing of the Israeli Governments Ministry of Industry and
          Trade, we are obligated to pay the Fund royalties amounting to 3% to 4% of the
          incremental exports, up to a maximum of 100% of the grants received. Our
          contingent liability as of December 31, 2007 was $0.6 million, contingent upon
          our incremental exports.

49

---

---

|F. | TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|-- | ---------------------------------------------

The
following table summarizes our contractual obligations and commercial commitments as of
December 31, 2007:

|Contractual Obligations as of
December 31, 2007 | Payments due by Period
(US$ in thousands)
|----------------------------------------------- | -----------------------------------------
|
|
|
|
|Operating Leases                                |                                          
|Purchase Obligations and Commitments            |                                          
|Other Long-Term Liabilities                     |                                          
|Total Contractual Cash Obligations              |                                          

(1)
          Represents a provision for future severance pay obligations.

|G. | Safe
Harbor
|-- | -----------

This
annual report on Form 20-F contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the 1934 Act) (collectively, the
Safe Harbor Provisions). These are statements that are not historical
facts and include statements about our beliefs and expectations. These statements contain
potential risks and uncertainties, and actual results may differ significantly.
Forward-looking statements are typically identified by the words believe,
expect, intend, estimate and similar expressions. Such
statements appear in this annual report and include statements regarding the intent,
belief or current expectation of the Company or its directors or officers. Actual results
may differ materially from those projected, expressed or implied in the forward-looking
statements as a result of various factors, including, without limitation, the factors set
forth in Item 3 (Key Information) under the caption Risk Factors
(Cautionary Statements). Any forward-looking statements contained in this
annual report speak only as of the date hereof, and we caution potential investors not to
place undue reliance on such statements. We undertake no obligation to update or revise
any forward-looking statements. All subsequent written or oral forward-looking statements
attributable to us or to persons acting on our behalf are expressly qualified in their
entirety by the Cautionary Statements.

50

---

---

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

# Directors and Senior
Management

As
of the date of this annual report, our directors, senior management and key employees were
as follows:

|Name             | Age |  | Position                             
|---------------- | --- |  | -------------------------------------
|
|
|
|
|Yossi Ben Shalom | 53  |  | Chairman of the Board                
|William F. Gibbs | 54  |  | Vice Chairman of the Board           
|Barak Dotan      | 40  |  | Director                             
|Yoel Rosenthal   | 53  |  | Director                             
|David Golan      | 67  |  | Director                             
|Eti Livni        | 59  |  | External Director                    
|Rami Entin       | 57  |  | External Director                    
|Dan Haran        | 50  |  | President and Chief Executive Officer
|Ilan Erez        | 40  |  | Chief Financial Officer              

Yossi Ben Shalom is a co-founder of DBSI Investments Ltd. Prior to establishing DBSI Investments, Mr.
Ben Shalom served as Executive Vice President and Chief Financial Officer of Koor
Industries Ltd. (NYSE:KOR), from 1998 through 2000. Prior to that, he served as Chief
Financial Officer of Tadiran Ltd. Mr. Ben Shalom has also been an active director on
numerous boards, such as NICE Systems (NASDAQ:NICE), Machteshim Agan, Bank Klali and
others. Mr. Ben Shalom holds a bachelors degree in economics and a masters
degree in business administration from Tel Aviv University.

William F. Gibbs is the founder of Gibbs System, Inc. (aka Gibbs and Associates), the makers of
GibbsCAM. He joined Cimatron in January 2, 2008, with the merger of Gibbs into Cimatron.
Mr. Gibbs worked as a mechanical design engineer from 1972 to 1978. He designed his first
CAM system for the Hasbach Co., as their VP of software development from 1978 to 1982. He
started Gibbs and Associates as a contract programming service for CNC part programming in
1982, beginning CAM software development for the Macintosh computer in 1984. GibbsCAM, the
2nd generation Gibbs software, was first released in 1993. Mr. Gibbs holds a
Bachelor of Science degree in computer science from the California State University at
Northridge California.

Barak Dotan is a co-founder of
DBSI Investments Ltd. Prior to establishing DBSI Investments, Mr. Dotan worked as Product
Manager for Jacada (NASDAQ:JCDA), formerly CST and later managed private investments in
high-tech and other areas. Mr. Dotan graduated summa cum laude from the Hebrew University
of Jerusalem with a bachelors degree in computer science and business
administration.

Yoel Rosenthal has been the
CFO of DBSI Investments Ltd. since 2001. Prior to joining D.B.S.I., Mr. Rosenthal was a
founder and partner of a private accounting firm in Israel, Bruckner, Rosenthal, Ingber
&Co. Prior to that he held the position of Loan Officer for multinational corporations
at the Bank of Montreal in the USA. Mr. Rosenthal holds an MBA from the University of
California in Los Angeles and a BA in Economics and Accounting from Tel Aviv University.

David Golan has been a
director on our board since 1992 and is a former Chairman of the board. Mr. Golan is
currently an independent businessman and a director. Previously he was an executive
director in the Binat Group and served on the board of directors of several public and
private companies. From May 1998 to September 2000 Mr. Golan was Managing Director in
charge of Zeevi Holdings investments, not including ZCT. From March 1997 to May
1998, he was the Chief Executive Officer of Clal Trading Ltd., a subsidiary of the IDB
group. From 1992 to March 1997, he was Executive Vice President of Clal Trading. Mr. Golan
was formerly president of Gal Weisfield Industries Ltd. Mr. Golan holds a bachelors
degree in economics and statistics from Hebrew University in Jerusalem and a masters
degree in business administration from New York University.

51

---

---

Eti Livni is currently active
as a lawyer in commercial issues, environmental issues, intellectual property and also
serves as an arbitrator and mediator in various disputes. Mrs. Livni also currently serves
as a director in various Israeli public companies, including the Israel Military Industry
(IMI), New Makefet Pension and Benefit Funds Management Ltd., and Alrov Ltd. From 2003
until 2006, Mrs. Livni served as a member of the 16th Knesset and as a member of several
Knesset committees. From 1999 until 2006, Mrs. Livni was a member of the Shinui Party and
was also acting as head of the womens section in the party. From 1995 until 2003,
Mrs. Livni acted as a member of the managing committee of the Israeli Bar Association and
as a member of the Associations ethics committee. Mrs. Livni holds an L.L.B from the
Hebrew University of Jerusalem, and is a certified lawyer in Israel.

Rami Entin currently serves as
a director of ECtel Ltd., a Nasdaq-traded company that develops and markets fraud
prevention and revenue assurance solutions for circuit-switched and packet-switched
wireline and wireless networks, and is an external director of Solomon Holdings Ltd., an
Israeli publicly traded construction company. Mr. Entin is also a director of Hilan-Tech
Ltd., of Incentives Solutions Ltd. and of Gilon Business Insight Ltd., and serves as an
external director of B.S.P. Biological Signals Processing Ltd. From 2002 until 2003, Mr.
Entin was the chairman of the Hashavim Group, a data center for direct taxation and
employment laws and a processor of wages and personnel data. From 1999 until 2001, Mr.
Entin was Co-Chief Executive Officer and a director of Hilan-Tech Ltd., where he was in
charge of financial, personnel, sales and marketing and Lotus Notes operations. From 1985
until 1999 he was financial manager and a director of Hilan Ltd., where he was in charge
of financial and personnel operations. From 1981 until 1985, Mr. Entin worked for
Kesselman & Kesselman, an accounting firm, where he served various publicly traded
companies engaged in the services and industry fields. Mr. Entin holds a B.A. degree in
accounting and economics and an M.B.A. degree from the Tel Aviv University, and is a
certified accountant in Israel. He is also a graduate of the Advanced Management Program
at Harvard University.

Dan Haran has been our
President and Chief Executive Officer since July 2005. Mr. Haran joined Cimatron as Vice
President of Marketing and Chief Operating Officer in November 2003 after having been
employed by Comverse (Nasdaq:CMVT) where he held several senior management positions, most
recently as Chief Operating Officer of the Intelligent Network Division. Prior to
Comverse, Mr. Haran managed Medcon Systems, an Israeli-based start-up company. Mr. Haran
holds a bachelor of science degree in computer engineering from the Technion, a master of
science degree from the Weitzman Institute, and a master of business administration degree
from Tel Aviv University.

Ilan Erez joined us as VP
Finance in May 2005 and became Chief Financial Officer in July 2005. From 1998 to 2005 Mr.
Erez served as the Chief Financial Officer of Silicom Ltd., a NASDAQ listed company
engaged in the design, manufacturing and selling of server-networking cards. He also
served as VP Operations of Silicom from May 2001 until his departure. From 1996 to 1998
Mr. Erez served as a Controller and assistant to the Chief Executive Officer at Bio-Dar
Ltd. From 1994 until 1996 Mr. Erez served as an Auditor at Kesselman & Kesselman, a
member of PriceWaterhouseCoopers. Mr. Erez is a Certified Public Accountant in Israel and
holds a B.A in Accounting and Economics from the Hebrew University in Jerusalem and an
LL.M. in Business Law from Bar-Ilan University.

52

---

---

# Arrangements for the
Election of Directors

DBSI
Investments Ltd., our largest shareholder (holding approximately 45.6% of our share
capital), controls the outcome of most matters submitted to a vote of our shareholders,
including the election of members of our board of directors. Koonras and DBSI were parties
to an agreement by which, among other matters, they would each appoint one half of our
directors, not including our external directors, and vote together at our
shareholders meetings. Following the sale of the 1,700,000 Ordinary Shares to DBSI
and the sale of 854,360 Ordinary Shares to Kotek, Koonras is no longer a shareholder of
the Company and such agreement has been terminated.

Following
the merger with Gibbs System, Mr. Gibbs was issued 1,500,000 Ordinary Shares which
represent approximately 16% of our outstanding share capital. Additionally, Mr. Gibbs has
been appointed as the vice chairman of our Board of Directors. Under the merger agreement,
we undertook to Mr. Gibbs that he will serve as the vice chairman of our Board of
Directors as long as he continues to hold 9% of our issued and outstanding share capital.

# Compensation

During
the year ended December 31, 2007, we paid, in the aggregate, approximately $0.7 million in
direct remuneration to our directors and officers for services provided by them to the
Company in such capacities. The above does not include amounts expended by us for
automobiles made available to our officers, expenses (including business travel,
professional and business association dues and expenses) reimbursed to officers and other
fringe benefits commonly reimbursed or paid by companies in Israel. We pay our external
directors, as well as Mr. David Golan and Mr. William F. Gibbs an annual fee of
approximately $8,000 plus approximately $410 for each meeting of the board of directors
attended and each meeting of a committee of the board of directors attended and
reimbursement for expenses incurred in connection with the discharge of responsibilities
as a board member, including attending board of directors meeting.

Please
see Item 7  Major Shareholders and Related Party Transactions for the
employment agreement entered into with Mr. Gibbs, and the terms pursuant to which Cimatron
Gibbs leases office space from Mr. Gibbs.

53

---

---

# Board of Directors

Our
Articles of Association provide for a Board of not less than two members. Each director,
with the exception of external directors who are elected to serve set periods of time as
described below, is elected to serve until the next annual general meeting of shareholders
and until his or her successor has been duly elected. Officers serve at the discretion of
the Board.

Substitute
Directors

Our
Articles of Association provide that any director may, by written notice to us, appoint
another person to serve as a substitute director and may cancel such appointment. A person
may not serve as a substitute director for more than one director and may not serve as
both director and as a substitute director.

The
term of appointment of a substitute director may be for one meeting of the board of
directors or for a specified period or until notice is given of the cancellation of the
appointment. Any substitute director will have all of the rights and obligations of the
director appointing him or her, except the power to appoint a substitute (unless the
instrument appointing him or her provides otherwise), and the right to remuneration. The
substitute director may not act at any meeting at which the director appointing him or her
is present. Unless the appointing director limits the time period or scope of any
appointment, the appointment is effective for all purposes, but will expire upon the
expiration of the appointing directors term. To our knowledge, no director currently
intends to appoint any other person as a substitute director, except if the director is
unable to attend a meeting of the board of directors.

External
Directors

The
Israeli Companies Law requires Israeli companies with shares that have been offered to the
public in or outside of Israel to appoint at least two external directors.

No
person may be appointed as an external director if the person or the persons
relative, partner, employer or any entity under the persons control, has or had, on
or within the two years preceding the date of the persons appointment to serve as
external director, any affiliation with the company or any entity controlling, controlled
by or under common control with the company. The term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

No
person may serve as an external director if the persons position or other business
activities create, or may create, a conflict of interest with the persons
responsibilities as an external director or may otherwise interfere with the persons
ability to serve as an external director. If, at the time external directors are to be
appointed, all current members of the board of directors are of the same gender, and then
at least one external director must be of the other gender.

54

---

---

External
directors are to be elected by a majority vote at a shareholders meeting, provided
that either:

| |  | the
majority of shares voted at the meeting, including at least one-third of the shares held
by non-controlling shareholders voted at the meeting, vote in favor of election of the
director; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares held by non-controlling shareholders voted against the election of
the director does not exceed one percent of the aggregate voting rights in the company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
initial term of an external director is three years, and he or she may be reelected to one
additional term of three years by a majority vote at a shareholders meeting. In
addition, under a recent amendment to the regulations promulgated under the Companies Law,
external directors of public companies whose shares are also registered for trading in
certain stock exchanges outside of Israel, like ours, may be elected for additional three
year terms (in excess of the original six year term) provided that in light of such
external directors expertise and special contribution to the work of the
companys board of directors and audit committee, the re-election of such external
director is for the benefit of the company. An external director may be removed only by
the same percentage of shareholders as is required for his or her election, or by a court,
and then only if he or she ceases to meet the statutory requirements for his or her
appointment or if he or she violates the duty of loyalty to the company.

Each
committee of a companys board of directors that has the right to exercise powers
delegated by the board must include at least one external director and our audit committee
is required to include all of the external directors. Our external directors are Eti Livni
and Rami Entin, who will complete their current terms in April 2011, in accordance with
Israeli law.

An
external director is entitled to compensation as provided in regulations adopted under the
Companies Law and is otherwise prohibited from receiving any other compensation, directly
or indirectly, in connection with service provided as an external director.

Under
the Companies Law, at least one of the external directors serving on a companys
board of directors is requiredto have financial expertise and theother external director or directors are required to have professional
expertise. A director is deemed to have professional expertise if he or
she either (i) has an academic degree in economics, business management, accounting, law
or public service, (ii) has an academic or other degree or completed another higher
education, all in the field of business of the company or relevant for his/her position,
or (iii) has at least 5 years experience as either a senior managing officer in the
companys line of business with a significant volume of business, a public office, or
a senior position in the companys main line of business. A director with
financial expertise is a director that due to his education, experience and
skills has a high expertise and understanding in financial and accounting matters and
financial statements, in such a manner which allows him to deeply understand the financial
statements of the company and initiate a discussion about the presentation of financial
data. However, under regulations promulgated under the Companies Law, a public company
whose shares are also registered for trading in certain stock exchanges outside of Israel,
like ours, is not required to appoint an external director with financial and accounting
expertise, if at such time there is another director serving on the board of directors of
such company who has financial and accounting expertise and who is an independent director
for purposes of membership on the audit committee thereof, in accordance with the
applicable laws of the state in which such shares are registered (and the rules and
regulations of such foreign stock exchange).

55

---

---

Audit
Committee

The
Companies Law requires public companies to appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in the
management of the companys business, approving related party transactions as
required by law, and reviewing the quarterly and annual balance reports and recommending
their approval before our board or directors. An audit committee must consist of at least
three directors, including all the external directors of the company. The chairman of the
board of directors, any director employed by or otherwise providing services to the
company, and a controlling shareholder or any relative of a controlling shareholder, may
not be a member of the audit committee.

Under
the Nasdaq rules, we are required to have at least three independent directors on the
audit committee. In addition, Nasdaq requires that the members of the audit committee (a)
not have any relationship to the company that may interfere with the exercise of their
independence, and (b) must be financially literate.

Under
the Nasdaq rules and the Sarbanes-Oxley Act, the audit committee (i) has the sole
authority and responsibility to select, evaluate, and, where appropriate, replace the
companys independent auditors, (ii) is directly responsible for the appointment,
compensation and oversight of the work of the independent auditors for the purpose of
preparing its audit report or related work, and (iii) is responsible for establishing
procedures for (A) the receipt, retention and treatment of complaints received by the
company regarding accounting, internal accounting controls or auditing matters, and (B)
the confidential, anonymous submission by employees of the company of concerns regarding
questionable accounting or auditing matters. The audit committee is required to consult
with management but may not delegate these responsibilities. In addition, under the
Sarbanes-Oxley Act, the audit committee is responsible, among other things, for the
following:

| |  | Have
the sole authority to review in advance, and grant any appropriate pre-approvals of, (i)
all audit and non-audit services to be provided by the independent auditors and (ii) all
fees and other terms of engagement;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Review
and discuss with management and the independent auditors the companys quarterly
financial statements (including the independent auditors review of the quarterly
financial statements) prior to any required submission to shareholders, the SEC, any
stock exchange or the public;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Review
and discuss with management and the independent auditors the companys annual
audited financial statements prior to any required submission to shareholders, the SEC,
any stock exchange or the public;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Recommend
to the Board, if appropriate, that the companys annual audited financial statements
be included in the companys annual report;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

56

---

---

| |  | Review
and discuss with management all disclosures made by the company concerning any material
changes in the financial condition or operations of the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Review
disclosures made to the audit committee by the companys chief executive officer and
chief financial officer during their certification process for the companys annual
report about any significant deficiencies in the design or operation of internal controls
or material weaknesses therein and any fraud involving management or other employees who
have a significant role in the companys internal controls; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Review
and approve all related-party transactions.
| | - | --------------------------------------------------

As
of the date of this annual  report,  Mr. David  Golan,  Ms. Eti Livni and Mr. Rami Entin
are serving as members of our audit committee.

Internal
Auditor

Under
the Companies Law, the board of directors must appoint an internal auditor, nominated by
the audit committee. The role of the internal auditor is to examine, among other matters,
whether the companys actions comply with the law and orderly business procedure.
Under the Companies Law, the internal auditor may be an employee of the company but not an
office holder, or an affiliate, or a relative of an office holder or affiliate, and he may
not be the companys independent accountant or its representative. During November
2007, we appointed Fahn Kanne Control Management, a member firm of Grant Thornton, as our
internal auditor, replacing Ernst & Young  Kost, Forer, Gabbay & Kasierer
Business Risk Services who informed us that it could not continue to serve as our internal
auditor due to a conflict of interests arising from auditing services provided to third
parties.

Nasdaq
Listing Requirements

Nasdaq
rules enable foreign private issuers, such as ourselves, to comply with the prevalent
practice in our jurisdiction of incorporation in place of certain Nasdaq listing
requirements.  To the extent that we choose to do so, we are required to disclose in
our annual reports filed with the Commission each Nasdaq listing requirement that we do
not follow and describe the home country practice we follow in lieu of such requirement.

We
have chosen not to comply with Nasdaq Marketplace Rules 4350(c)(4)(B) (requiring companies
to adopt a formal written charter or board resolution addressing the companys
nominations process), 4350(c)(1) (majority of the board must be comprised of independent
directors) and 4350(c)(2) (Regularly scheduled meetings of the companys independent
directors). Under Israeli law, the nominations process is conducted by the full board of
directors. Similarly, under Israeli law all matters that are subject to the approval of a
companys board of directors are discussed by the full board of directors.
Furthermore, under Israeli law, the board of directors needs to include external directors
(as specified herein) but independent or external directors do not need to comprise a
majority of the board. In addition, we do not intend to comply (if and when the events
underlying such rule become relevant) with the Nasdaq listing requirement of shareholder
approval for the establishment of and amendments to stock option or purchase plans (Rule
4350(i)(A)), which matter is not subject to shareholder approval under Israeli law and
practice.

57

---

---

# Employees

The
following table sets forth for the last three financial years, the number of our employees
broken down into categories.

|Period ending December 31,                        | 2007 | 2006 | 2005
|------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Research and Development                          |      |      |     
|Marketing, Sales and Customer Support             |      |      |     
|Administration Management and Information Systems |      |      |     
|Total                                             |      |      |     

As
of May 31, 2007, we employed 312 full-time personnel, of whom 74 (most of whom hold
advanced technical degrees) were employed in research and development, 206 were employed
in marketing, sales and customer support and 32 were employed in various administrative,
information systems and management positions. Of these employees, 94 were employed in
Israel operations, 20 were employed by our North American subsidiary and 61 were employed
by Cimatron Gibbs LLC (the surviving entity in the merger with Gibbs) in North America, 33
were employed by our German subsidiary, 47 were employed by our Italian subsidiary, 48
were employed by our Chinese subsidiaries, 1 was employed by our Indian subsidiary and 8
were employed by our Korean subsidiary. In addition, we employed 9 subcontractors or
free-lance personnel on average during the year 2007 and as of May 31, 2007 we employed 10
subcontractors personnel.

Certain
provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations
(including the Industrialists Associations) are applicable to our employees in
Israel by order of the Israeli Ministry of Labor. These provisions concern principally the
length of the workday; minimum daily wages for professional workers, insurance for
work-related accidents, procedures for dismissing employees, determination of severance
pay and other conditions of employment. We generally provide our employees with benefits
and working conditions beyond the required minimums. In addition to salary and other
benefits, certain of our marketing personnel are paid commissions based on our performance
in certain territories worldwide.

Israeli
law generally requires severance pay, which may be funded by Managers Insurance
described below, upon the retirement or death of an employee or termination of employment
without cause (as defined in the law). The payments thereto amount to approximately 8.33%
of wages. Furthermore, Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute, which is similar to the United States Social
Security Administration. Such amounts also include payments by the employee for national
health insurance. The total payments to the National Insurance Institute are equal to
approximately 14.6% of the employees wages (up to a specified amount), of which the
employee contributes approximately 66% and the employer contributes approximately 34%.

58

---

---

A
general practice that we follow, which, as of May 2006, is also legally required, is the
contribution of funds on behalf of our employees to a fund known as Managers
Insurance. This fund provides a combination of savings plan, insurance and severance
pay benefits to the employee, giving the employee payments upon retirement or death and
securing the severance pay, if legally entitled, upon termination of employment. While
prior to May 2006 we could decide whether each employee was entitled to participate in the
plan, after that date, we are required to enable participation of all employees in the
plan. Each employee is required to contribute an amount equal to 5% of their salary per
month for the managers insurance and we contribute an additional amount between 13.3% and
15.8% of their salary per month.

# Share Ownership

1998
Share Option Plan

In
April 1998, the board of directors adopted an additional share option plan (the 1998
Share Option Plan) pursuant to which 620,000 Ordinary Shares were reserved for
issuance upon the exercise of options to be granted to our directors, officers, employees
and consultants. The 1998 Share Option Plan is administered by our Board, which designates
the optionees and dates of grant. The exercise price of an option granted under the 1998
Share Option Plan may be no less than 85% of the fair market value of an Ordinary Share,
as determined by the board on the date that the option is granted. Options granted vest
over a period determined by the board, terminate three years after they become
exercisable, and are non-assignable except by the laws of descent. The board has the
authority to amend the terms of option grants, provided that any such amendment is in the
best interest of the grantee. The grantee will be responsible for all personal tax
consequences of the grant and the exercise thereof. In March 2000, the board adopted new
guidelines for the options to purchase Ordinary Shares reserved for issuance under the
1998 Share Option Plan upon the exercise of options to be granted to our directors,
officers, employees and consultants. In August 2003, the board of directors approved the
grant of options to purchase 150,000 of the Companys shares at a price of $2.50 per
share to two officers of the Company. These options are exercisable commencing one year
after the date of grant at a rate of 25% per year, subject to the continued employment of
the officers. As of December 31, 2007, 37,500 such options were outstanding at a price of
$2.50 per share. For additional information relating to the stock options granted by us
under the 1998 Share Option Plan, see Note 12(B) to our financial statements included in
Item 18.

As
of May 31, 2008, 37,500 options were outstanding under the 1998 Share Option Plan. Other
than such outstanding options, no shares are reserved for future issuances as such reserve
has been previously transferred into the 2004 Share Option Plan (as defined below).

59

---

---

2004
Share Option Plan

In
October 2004, our board of directors and shareholders adopted the 2004 Share Option and
Restricted Shares Incentive Plan (2004 Share Option Plan) pursuant to which
240,000 Ordinary Shares were reserved for issuance upon the exercise of options to be
granted to our directors, officers, employees and consultants. The 2004 Share Option Plan
is administered by our Board, which designates the optionees and dates of grant. The
exercise price of an option granted under the 2004 Share Option Plan may be no less than
95% of the fair market value of an Ordinary Share, as determined by the board on the date
that the option is granted. Options granted vest over a period determined by the board,
terminate ten years from the date of grant, unless otherwise determined by the Board, and
are non-assignable except by the laws of descent. The board has the authority to amend the
terms of the option plan, provided that any such amendment does not adversely effect any
options granted thereunder. In February 2005, 238,500 of such options were granted to
employees of the Company at an exercise price of $2.20 per share and with a term of ten
years, and in August 2005, the board of directors approved the grant of 32,000 of such
options at an exercise price of $2.00 per share to the Companys Chief Executive
Officer. In December 2005 our board of directors increased the 2004 Share Option Plan
reserve by an additional 250,000 shares. In May 2006 an additional 189,000 options were
granted to Company employees under the 2004 Share Option Plan at exercise prices ranging
from $1.75-$2.00 and with a term of five years. During August 2007, the Company granted an
additional 74,000 options to Company employees at an exercise price of $2.78 and with a
term of five years. During January 2008, the Company granted an additional 68,000 options
to Company employees at an exercise price of $2.75 and with a term of five years
including, 2,000 options to William F. Gibbs. As of May 31, 2008, 68,000 of such options
were outstanding.These options are exercisable pursuant to a three
(3) year vesting schedule as follows: (i) thirty three percent (33%) of the shares covered
by the options become exercisable on the first anniversary of the grant date; and (ii)
sixteen and one-half percent (16.5%) of the shares covered by the options become
exercisable at the end of each subsequent six months period over the course of the
following two (2) years, subject to the continued employment of each employee. The grantee
will be responsible for all personal tax consequences of the grant and the exercise
thereof. We intend to grant additional options under the 2004 Share Option Plan to various
of our directors, executive officers and employees.

In
November 2007, our board of directors approved the transfer of a pool of 618,500
unallocated options from the 1998 Share Option Plan to the 2004 Share Option Plan for
future grants.

At
May 31, 2008 options to purchase 540,666 of our ordinary shares were available for grants
to various of our directors, officers, employees and consultants under the 2004 Share
Option Plan.

Repurchase
of Our Shares

We
purchased 161,100 of our shares in the open market during 2002 and 2003 at an average
price of $0.95 per share. Under Israeli law, while these shares are considered to be part
of our outstanding share capital that can be reissued by us in the future, they are
dormant shares and as such they cannot be voted and do not provide any other
rights, other than upon liquidation.

60

---

---

On
June 4, 2008, our Board of Directors has authorized the use of up to $1 million of our
available cash to repurchase our ordinary shares. Under the repurchase program, share
purchases may be made from time to time at the discretion of management in the open market
or in privately negotiated transactions depending on market conditions, share price,
trading volume and other factors. Such purchases will be made in accordance with the
requirements of the Commission. The repurchase program has no time limit, does not require
us to acquire a specific number of shares, and may be suspended from time to time or
discontinued. As of June 27, 2008, we have purchased 29,722 of our shares pursuant to this
plan at an average price of $2.24 per share.

# Beneficial Ownership by
Officers and Directors

Messrs.
          Ben Shalom, Dotan and Rosenthal may be deemed to have beneficial ownership of an
          aggregate of 4,265,950 of our shares, representing 45.6% of our issued and
          outstanding capital share, by virtue of their positions with DBSI.

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

# Major Shareholders

The following
table sets forth information, as of June 27, 2008, concerning the beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of ordinary shares by (i)
any person who is known to own at least 5% of the ordinary shares of our company and (ii)
all directors and executive officers as a group. The voting rights of our major
shareholders do not differ from the voting rights of holders of all our ordinary shares.

|Name and Address                          | Number of
Ordinary Shares | Percent of
Ordinary Shares
|----------------------------------------- | ------------------------- | --------------------------
|
|
|
|
|DBSI Investments Ltd.                     |                           |                           
|85 Medinat Hayehudim St.                  |                           |                           
|Herzliya, Israel                          |                           |                           
|William F. Gibbs                          |                           |                           
|4017 N. Cedarpine Lane                    |                           |                           
|Moonpark, CA 93021                        |                           |                           
|California, U.S                           |                           |                           
|3Kotek 2  B.V. Wielewaaleg 1, 4791, PD,   |                           |                           
|Klundert, Netherlands                     |                           |                           
|All directors and executive officers as a |                           |                           
|group (12 persons)                        |                           |                           

61

---

---

(1)    
          Includes an aggregate of 4,265,950 shares beneficially held by DBSI, by virtue
          of the positions held by certain of our directors on the board of directors of
          DBSI, as to which such individuals disclaim beneficial ownership.

(2)    
          Includes an aggregate of 1,500,000 Ordinary Shares beneficially held by William
          F. Gibbs.

(3)    
          Of such 894,360 Ordinary Shares reported in this Statement, 854,360 Ordinary
          Shares are held by Kotek and 40,000 Ordinary Shares are held by a company wholly
          owned by Mr. Joel Koschitzki. Messrs. Jaap Stomp and Mr. Joel Koschitzki are the
          directors of Kotek and therefore may be deemed to beneficially own the Ordinary
          Shares held by Kotek. Messrs. Stomp and Koschitzki disclaim beneficial ownership
          of the Ordinary Shares held by Kotek.

In February 2002, Koonras, a
subsidiary of Polar Communications Ltd., and DBSI consummated a transaction with Zeevi
Computers and Technology Ltd., or ZCT, by which they acquired, for approximately
$9,900,000, all of our Ordinary Shares previously held by ZCT, representing 64.3% of our
share capital (including in this calculation 161,100 of our ordinary shares which we have
repurchased and which, pursuant to Israeli law, cannot be voted and possess no rights
other than upon liquidation). Following this transaction, each of Koonras and DBSI
beneficially owned approximately 33% of our ordinary shares. Accordingly, DBSI and Koonras
effectively had the ability to control the outcome of most matters that were submitted to
a vote of our shareholders, including the election of members of our board of directors
and approval of significant corporate transactions. Koonras and DBSI had entered into an
agreement by which, among other matters, they had each appointed one half of our
directors, not including our external directors, and vote together at our
shareholders meetings. Following the consummation of the transactions described
below, Koonras no longer holds any shares of the Company and all such arrangements with
DBSI were terminated.

On May 11, 2008, DBSI and Koonras
signed an agreement pursuant to which DBSI purchased 1,700,000 shares from Koonras
(comprising approximately 18% of our outstanding share capital) at a price per share of
$2.80. Following the consummation of such transaction on or about June 26, 2008, DBSI
holds approximately 45.6% of our outstanding share capital.

On June 3, 2008, 3Kotek 2 B.V., a
company incorporated under the laws of the Netherlands, purchased 854,360 shares from
Koonras. Following the consummation of such transaction, Kotek holds approximately 9.1% of
our share capital and Koonras does not hold any share capital of the Company.

# Record Holders

As
of May 15, 2008, there were 30 record holders of our ordinary shares, of which 18
represented United States record holders owning an aggregate of approximately 48% of our
outstanding ordinary shares.

62

---

---

# Related Party
Transactions

Services Agreement and
Lease Agreements

Until
February 2002, our former principal shareholder ZCT, provided us with certain corporate
and administrative services, including, but not limited to, executive management,
facilities and other such services as were agreed upon from time to time between us and
ZCT. The primary executive management services that we received under the agreement
represented the services of the chief executive officer and the chief financial officer of
ZCT, who did not receive separate fees for such services.Pursuant to such
agreement, we shared the expenses relating to the specific services we received from ZCT
with the other subsidiaries of ZCT that also received such services from ZCT.

As
of February 21, 2002, ZCT assigned all rights and obligations under the foregoing services
agreement to Koonras and DBSI. An assignment of this agreement to Koonras and DBSI was
ratified by our shareholders on July 11, 2002. From February 21, 2002 through December 31,
2003 we paid Koonras and DBSI an aggregate of NIS 2,919,500 for these services. Koonras
and DBSI continued to provide these services to the Company for an annual fee of NIS
1,560,000 (linked to the Israeli Consumer Price Index as of July 2002). Following the
consummation of the sale of 1,700,000 of our shares from Koonras to DBSI, and the approval
of our shareholders on June 24, 2008, the management agreement was assigned in full to
DBSI, who will continue to provide all the services and receive the entire annual fee.

Prior
to the merger with Cimatron, Gibbs System, Inc. leased office space in Moonpark,
California from a limited liability corporation controlled by Mr. Gibbs. In connection
with the merger of Gibbs, the parties entered into an amendment to the original lease,
pursuant to which the term of the lease was shortened from 2020 to December 31, 2012, with
an option to extend the lease for an additional 5 years, and the rent to be paid during
the initial term shall be $24,710 per month (in lieu of $22,464 per month).

Registration Rights

In
October 2004, we granted to Koonras and DBSI the registration rights described below. This
action was approved by our board, audit committee and the requisite majority of
disinterested shareholders in accordance with the related party transaction requirements
of Israeli law. Pursuant to the registration rights agreement entered into with them,
Koonras and DBSI have the right, subject to various conditions and limitations, to require
us to file a registration statement for the resale of their shares or to include their
shares in certain registration statements that we file. On June 3, 2008, in connection
with the sale of certain of its shares to Kotek, Koonras assigned to Kotek all
registration rights applicable to the Ordinary Shares transferred by Koonras to Kotek.

In
January 2008 and in connection with the merger agreement with Gibbs System, Inc., we
granted Mr. Gibbs the registration rights described below, relating to the shares issued
to him as part of the merger consideration. This action was approved by our board.
Pursuant to the registration rights agreement entered into with him, Mr. Gibbs has the
right, subject to various conditions and limitations, to include his shares in certain
registration statements that we file.

63

---

---

Demand
Registration Rights

DBSI
and Kotek, together, and pro-rata between themselves, are entitled to up to two demand
registrations on Form F-1 (or an equivalent form) promulgated under the U.S. Securities
Act of 1933, as amended, at our expense, provided that the anticipated aggregate offering
price for the shares to be registered, net of any underwriting discounts and commissions,
shall exceed US$1,000,000.

Notwithstanding
the foregoing, we are not required to effect a demand registration during the period
starting with the date of filing of, and ending on the date one hundred eighty (180) days
following the effective date of, a registration statement pertaining to our securities.

DBSI
and Kotek, together, and pro-rata between themselves, also have the right to require us to
effect up to four F-3 registrations, including for an offering to be made on a delayed or
continuous basis pursuant to Rule 415 of the Securities Act registering for resale
from time to time by such holders of all of their shares (the Shelf Registration
Statement), but no more than two such registrations in any 12 month period, in each
case, at our expense, provided, however, that we are not required to bear the cost of more
than one counsel for such holders. Mr. Gibbs has the right to require us to effect up to
two F-3 registrations, under substantially the same terms specified above.

We
are required to use our best efforts to (a) cause the Shelf Registration Statement to be
declared effective under the Securities Act within three months after the
demand is made and (b) keep such Shelf Registration Statement continuously
effective under the Securities Act until the expiration of five (5) years from the date
that a Shelf Registration Statement is declared effective by the United States Securities
and Exchange Commission.

Piggyback
Registration

If
(but without any obligation to do so) we propose to register for our own account any of
our capital stock or other securities under the Securities Act in connection with a public
offering of such securities solely for cash (subject to certain exceptions, such as the
registration of employees options), then DBSI, Kotek and Mr. Gibbs shall be entitled to
include their shares in such registration.

The
underwriter of any such offering by us shall have the right to reduce the number of shares
proposed to be registered in light of market conditions, and in such event (a) the capital
stock that we propose to register shall have first priority for inclusion in the relevant
registration statement, and following our priority, (b) DBSI, Kotek and Mr. Gibbs shall
have priority (pro rata among them) to have their shares included in such registration,
before any other shares are included.

64

---

---

Employment Agreement

In
connection with the merger of Gibbs, Cimatron Gibbs LLC, our subsidiary into which the
Gibbs business was merged into, entered into an employment agreement with Mr. Gibbs. The
employment agreement provides, among others, for an annual base salary of USD $160,000, an
annual bonus based on increase in contribution to the Companys sales in North
America and to the sale of Gibbs products, and other fringe benefits as customary for
comparable officers of the Company group in the United States. Mr. Gibbs also signed
non-compete undertakings for our benefit. On February 15, 2008, we announced that Mr.
Gibbs was appointed as President North America, replacing Mr. Sam Golan. Mr. Gibbs, who
continues to maintain his position as President and CEO of Cimatron Gibbs is now
responsible for promoting both Cimatron E and GibbsCAM product lines in North America. In
addition, as part of an option grant approved in January 2008, Mr. Gibbs was granted 2,000
options to purchase our ordinary shares.

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

# Consolidated Statements
and Other Financial Information

Our
consolidated financial statements and other financial information are included in this
annual repot in Item 18  Financial Statements.

Legal Proceedings

In
April 2004, Omega  Adem Technologies Ltd., an Israeli privately held company engaged
in the development of software, filed a lawsuit against us, claiming that we caused four
employees of the plaintiff located in Russia to terminate their employment with the
plaintiff and join us. In June, 2004, the court rejected the plaintiffs request for
an injunction. In September 2004, Omega initiated arbitration proceedings against us
pursuant to the services agreement between the parties and submitted to an arbitrator
agreed upon between the parties a statement of claim for an amount of $20,000,000 for
damages caused to Omega due to the employment of the four employees in question. On July
1, 2007 the arbitrator ruled that Cimatron pay to Omega NIS 600,000 as a final resolution
of all of Omegas claims. While we believed that there were no merits to the claim,
we had nevertheless accrued in the fourth quarter of 2005 a sum of $250,000 for this
claim. As a result of this accrual and the size of the final arbitration award, after
paying Omega and all other expenses incurred in this case, no further expense was required
to be recorded on our financial statements.

On
May 9, 2007, Collins & Aikman Corporation, on behalf of themselves and certain related
parties, filed a complaint with the United States Bankruptcy court of Michigan, Detroit,
against our wholly owned subsidiary, Cimatron Technologies, Inc. On May 17, 2005 the
plaintiffs filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
The plaintiffs demanded repayment of an amount of $318,515 plus interest and expenses on
the basis that, among other things, such payment was made within ninety days preceding the
petition date. The payment to the subsidiary was mainly made in consideration for software
delivered to the plaintiff, and to negligible extent, for services and maintenance
provided to the plaintiff. The subsidiary engaged local counsel to vigorously oppose such
claim. During March 2008,the parties reached a settlement agreement
pursuant to which the subsidiary agreed to pay an amount of $5,000 in return for
plaintiffs waiving and releasing the subsidiary from any and all claims.

65

---

---

Dividend
Distribution Policy

Certain
of our enterprises are Approved Enterprises. In the event of a distribution to
shareholders of cash dividends out of earnings subject to the exemption from the payment
of corporate tax provided to an Approved Enterprise, the Company will be subject to tax at
a rate of 25%. We have not provided deferred taxes on future distributions of
tax-exempt earnings, as management and the Board of Directors have determined not to make
any distribution that may result in a tax liability for the Company. Accordingly, such
earnings have been considered to be permanently reinvested. The tax-exempt earnings may be
distributed to shareholders without subjecting the Company to taxes only upon a complete
liquidation of the Company.

Significant
Changes

Since
the date of our consolidated financial statements there has not been a significant change
in our Company other then as set forth in the Financial Statements.

See
Item 5. Operating and Financial Review and Prospects  Overview for
additional details regarding the transaction with Microsystem, our Italian provider and
our anticipated increase in holdings thereof.

See
Item 6. Directors, Senior Management and Employees  Repurchase of Our
Shares for additional details regarding the Companys repurchase of shares.

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

# Offer and listing details

Our
ordinary shares were quoted on the NASDAQ Global Market System from March 1996 until April
17, 2001, from which time our ordinary shares have been traded on the NASDAQ Capital
Market. Through April 16, 2000, we were quoted under the symbol CIMTF and since April 17,
2000 we have been quoted under the symbol CIMT. The Ordinary Shares are not listed on any
other stock exchange and have not been publicly traded outside the United States. The
table below sets forth the high and low bid prices of the Ordinary Shares, as reported by
NASDAQ during the indicated fiscal quarters:

|Period                  | High (U.S. $) | Low (U.S. $)
|----------------------- | ------------- | ------------
|
|
|
|
|Six most recent months: |               |             
|May 2008                |               |             
|April 2008              |               |             
|March 2008              |               |             
|February 2008           |               |             
|January 2008            |               |             
|December 2007           |               |             

66

---

---

|Period                                                      | High (U.S. $) | Low (U.S. $)
|----------------------------------------------------------- | ------------- | ------------
|
|
|
|
|Two most recent full financial yearsand subsequent periods: |               |             
|First Quarter 2008                                          |               |             
|Forth Quarter 2007                                          |               |             
|Third Quarter 2007                                          |               |             
|Second Quarter 2007                                         |               |             
|First Quarter 2007                                          |               |             
|Forth Quarter 2006                                          |               |             
|Third Quarter 2006                                          |               |             
|Second Quarter 2006                                         |               |             
|First Quarter 2006                                          |               |             
|                                                            |               |             
|Five most recent years:                                     |               |             
|2007                                                        |               |             
|2006                                                        |               |             
|2005                                                        |               |             
|2004                                                        |               |             
|2003                                                        |               |             

# Markets

Our
shares are traded only on the NASDAQ Capital Market, where they are listed and traded
under the symbol CIMT.

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

# Memorandum and Articles
of Association

# Articles of Association;
Israeli Companies Law

In
December 2006, our shareholders adopted amended and restated articles of association which
replaced in their entirety our previous articles of association, which were approved prior
to the adoption of the Companies Law and were not always consistent with the provisions of
the Companies Law. Our objective as stated in our Articles and in our Memorandum of
Association is to engage in any lawful activity.

We
currently have only one class of securities outstanding, our Ordinary Shares, par value
NIS 0.10 per share. No preferred shares are currently authorized.

Holders
of Ordinary Shares have one vote per share, and are entitled to participate equally in the
payment of dividends and share distributions and, in the event of our liquidation, in the
distribution of assets after satisfaction of liabilities to creditors. Our Articles may be
amended by a resolution carried at a General Meeting by a majority of the shares present
and voting thereon (excluding abstained votes). The shareholders rights may not be
modified in any other way unless otherwise expressly provided in the terms of issuance of
the shares.

67

---

---

Our
Articles require that we hold our annual general meeting of shareholders each year no
later than 15 months from the last annual meeting, at a time and place determined by the
board of directors, upon at least 21 days prior notice to our shareholders. No business
may be commenced in any annual meeting until a quorum of two or more shareholders holding
at least 33% of the voting rights are present in person or by proxy. Shareholders may vote
in person or by proxy, and will be required to prove title to their shares as required by
the Companies Law pursuant to procedures established by the board of directors.
Resolutions regarding the following matters must be passed at a general meeting of
shareholders:

| |  | amendments
to our Articles;
| | - | ---------------------------

| |  | appointment
or termination of our auditors;
| | - | -------------------------------------------

| |  | appointment
and dismissal of directors;
| | - | ---------------------------------------

| |  | approval
of acts and transactions requiring general meeting approval under the Companies Law;
| | - | ---------------------------------------------------------------------------------------------

| |  | increase
or reduction of our  authorized  share  capital or the rights of  shareholders  or a
class of         shareholders;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | any
merger as provided in section 320 of the Companies Law;
| | - | -----------------------------------------------------------

| |  | the
exercise of the board of directors powers by a general meeting, if the board of
directors is unable to exercise its powers and the exercise of any of its powers is vital
for our proper management, as provided in section 52(a) of the Companies Law.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, the Companies Law provides that an extraordinary meeting of our shareholders
shall be convened by the board, at the request of any two directors or one quarter of the
directors, or by request of one or more shareholders holding at least 5% of our issued
share capital and 1% of the voting rights, or by request of one or more shareholders
holding at least 5% of the voting rights. Shareholders requesting a special meeting must
submit their proposed resolution(s) with their request.

Our
Articles provide that our board of directors may from time to time, at their discretion,
borrow or secure the payment of any sum of money for the objectives of the Company. Our
directors may raise or secure the repayment of such sum in a manner, time and terms as
they see fit.

According
to our Articles, the board of directors may delegate any authority they have to a
committee comprised of members of the board. Any committee to whom the boards powers
were delegated to must abide by the regulations enacted by the board in respect of such
delegated powers. In the absence of any such regulations, the committee must abide by our
Articles. Our board has currently appointed one committee, which is our Audit Committee as
described above in Item 6.

68

---

---

Transactions
with Certain Shareholders

The
Companies Law codifies the fiduciary duties that office holders, including
directors and executive officers, owe to a company. An office holder, is defined in the
Companies Law, as a (i) director, (ii) general manager, (iii) chief business manager, (iv)
deputy general manager, (v) vice general manager, (vi) executive vice president, (vii)
vice president, (viii) another manager directly subordinate to the managing director or
(ix) any other person assuming the responsibilities of any of the forgoing positions
without regard to such persons title. The duty of care prescribed by the Companies
Law requires an office holder to act with the level of care, which a reasonable office
holder in the same position would have acted under the same circumstances. The duty of
loyalty prescribed by the Companies Law generally requires an office holder to act in good
faith and for the good of the company.

The
Companies Law requires that an office holder of a company promptly disclose any personal
interest that he or she may have and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In addition, if
the transaction is an extraordinary transaction, as defined under Israeli law, the office
holder must also disclose any personal interest held by the office holders spouse,
siblings, parents, grandparents, descendants, spouses descendants and the spouses of
any of the foregoing, or by any corporation in which the office holder is a 5% or greater
shareholder, holder of 5% or more of the voting power, director or general manager or in
which he or she has the right to appoint at least one director or the general manager. An
extraordinary transaction is defined as a transaction not in the ordinary course of
business, not on market terms, or that is likely to have a material impact on the
companys profitability, assets or liabilities.

In
the case of a transaction that is not an extraordinary transaction, after the office
holder complies with the above disclosure requirement, only board approval is required
unless the Articles of Association of the company provide otherwise. The transaction must
not be adverse to the companys interest. If the transaction is an extraordinary
transaction, then, in addition to any approval required by the Articles of Association, it
must also be approved by the audit committee and by the board of directors, and, under
specified circumstances, by a meeting of the shareholders.

Agreements
regarding directors terms of employment require the approval of the audit committee,
the board of directors and the shareholders. In all matters in which a director has a
personal interest, including matters of his/her terms of employment, he/she shall not be
permitted to vote on the matter or be present in the meeting in which the matter is
considered. However, should a majority of the audit committee or of the board of directors
have a personal interest in the matter then:

| |  | all
of the  directors  shall be  permitted  to vote on the matter and attend the  meeting in
which the         matter is considered; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | the
matter requires approval of the shareholders at a general meeting.
| | - | ----------------------------------------------------------------------

According
to the Companies Law, the disclosure requirements discussed above also apply to a
controlling shareholder of a public company. In general, extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal interest, and
agreements relating to employment and compensation terms of a controlling shareholder
require the approval of the audit committee, the board of directors and the shareholders
of the company. The term controlling shareholder is defined as a shareholder
who has the ability to direct the activities of a company, other than if this power
derives solely from the shareholders position on the board of directors or any other
position with the company. The definition also includes shareholders that hold 25% or more
of the voting rights if no other shareholder owns more than 50% of the voting rights in
the company.

69

---

---

The
shareholder approval must either include at least one-third of the shares held by
disinterested shareholders who are present in person or by proxy at the meeting and who
are voting thereon, or, alternatively, the total shareholdings of the disinterested
shareholders who vote against the transaction must not represent more than one percent of
the voting rights in the company.

In
addition, a private placement of securities that (i) includes the issuance of twenty
percent or more of the companys outstanding voting rights (prior to such issuance)
in which the consideration, in whole or in part, is not in cash or in registered
securities or is not at market value, and as a result of which a person holding five
percent of more of the companys share capital or voting rights will increase or that
will cause any person to become, as a result of the issuance, a holder of more than five
percent of the companys outstanding share capital, or (ii) will cause any person to
become, as a result of the issuance, a controlling shareholder of the company, requires
approval by the board of directors and the shareholders of the company. The regulations to
the Companies Law provide certain exceptions. Any placement of securities that does not
fit the above description may be issued at the discretion of the Board of Directors.

Under
the Companies Law, a shareholder has a duty to act in good faith towards the company and
other shareholders and refrain from abusing his power in the company, including, among
other things, voting in the general meeting of shareholders on the following matters:

| |  | any
amendment to the Articles of Association;
| | - | ---------------------------------------------

| |  | an
increase of the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of interested party transactions that require shareholder approval.
| | - | ----------------------------------------------------------------------------

In
addition, any controlling shareholder, any shareholder who knows that it possesses the
power to determine the outcome of a shareholder vote and any shareholder who has the power
to appoint or prevent the appointment office holder in the company is under a duty to act
with fairness towards the company. The Companies Law does not describe the substance of
this duty, except to state that the remedies generally available upon a breach of contract
will apply also in the event of a breach of the duty to act with fairness.

Limitation
on Ownership of Securities

The
ownership and voting of our ordinary shares by non-residents of Israel are not restricted
in any way by our articles of association or by the laws of the State of Israel, except
for shareholders who are subjects of countries which are in a state of war with Israel.

70

---

---

Mergers and Acquisitions;
Anti-Takeover Provisions

The
Companies Law includes provisions with respect to the approval of corporate mergers that
are applicable to us. These provisions require that the board of directors of each company
that is party to the merger approve the transaction. In addition, the shareholders of each
company must approve the merger by a vote of the majority of the companys shares,
present and voting on the proposed merger at a shareholders meeting. In determining
whether the requisite majority has approved the merger, shares held by the other party to
the merger or any person holding at least 25% of such other party or otherwise affiliated
with such other party are excluded from the vote.

The
Companies Law does not require court approval of a merger other than in specified
situations. However, upon the request of a creditor of either party to the proposed
merger, a court may delay or prevent the merger if it concludes that there exists a
reasonable concern that as a result of the merger, the surviving company will be unable to
satisfy the obligations of any of the parties of the merger to their creditors.

A
merger may not be completed unless at least 50 days have passed from the date that a
proposal of the merger was filed with the Israeli Registrar of Companies by each merging
company and 30 days from the date that shareholder approval of both merging companies was
obtained. The merger proposal may be filed once a shareholder meeting has been called to
approve the merger.

The
Companies Law also provides that the acquisition of shares in a public company on the open
market must be made by means of a tender offer if, as a result of the acquisition, the
purchaser would become a 25% shareholder of the company. The rule does not apply if there
already is another 25% shareholder of the company. Similarly, the law provides that an
acquisition of shares in a public company must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a 45% shareholder of the company,
unless there already is a 45% shareholder of the company.

If,
following any acquisition of shares, the purchaser would hold 90% or more of the shares of
the company that acquisition must be made by means of a tender offer for all of the target
companys shares. An acquirer who wishes to eliminate all minority shareholders must
do so by means of a tender offer and acquire 95% of all shares not held by or for the
benefit of the acquirer prior to the acquisition. However, in the event that the tender
offer to acquire that 95% is not successful, the acquirer may not acquire tendered shares
if by doing so the acquirer would own more than 90% of the shares of the target company.

# Material Contracts

Other
than the registration rights agreements, service agreement and lease agreements described
in Item 6  Major Shareholders and Related Party Transactions  Related
Party Transactions, our current lease agreement described below, the Microsystems
investment contracts and the merger agreement with Gibbs System, Inc., both of which are
described in Item 4. History and development of the Company, all of the
contracts that we have entered into over the past two years have been in the ordinary
course of our business.

71

---

---

We
lease the office premises that we occupy in Givat Shmuel, Israel from a private commercial
property owner pursuant to the terms of a lease agreement we entered into in February
2003. As of January 10, 2006, we occupy approximately 1,750 square meters at this
facility. The initial term of the lease was three years, expiring in June 30, 2006,
following which we exercised our option to extend the lease for an additional three years.

# Exchange Controls

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding some transactions. However, legislation remains in effect under which
currency controls can be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

# Taxation

The
following is a summary of the current tax law applicable to companies in Israel, with
special reference to its effect on our subsidiaries and us.  The following also
contains a discussion of specified Israeli tax consequences to our shareholders and
government programs from which we, and some of our subsidiaries, benefit.  To the
extent that the discussion is based on tax legislation that has not been subject to
judicial or administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the tax authorities in question.

The
discussion is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations.

# General Corporate Tax
Structure

Generally,
as of January 1, 2008, Israeli companies are subject to corporate tax at a rate of 27% on
taxable income and are subject to capital gains tax at a rate of 25% on capital gains
derived after January 1, 2003 (other than capital gains from the sale of listed
securities, which are subject to tax at the current rate of 27%). The effective tax rate
payable by a company that derives income from an Approved Enterprise (as discussed below),
however, may be considerably less. Corporate tax rates, which were reduced from a rate of
31% for the 2006 tax year, to a rate of 29% for the 2007 tax year and 27% for the 2008 tax
year, will further decline to 26% for the 2009 tax year and 25% for the 2010 tax year and
thereafter. Capital gains derived after January 1, 2003 (other than gains derived from the
sale of listed securities that are taxed at the prevailing corporate tax rates) are
subject to tax at a rate of 25%. Under the Income Tax Law (Adjustment for Inflation) 1985,
income for tax purposes is measured in terms of earnings in NIS adjusted for the increase
in the Israeli Consumer Price Index. The difference between the annual changes in the
Israeli Consumer Price Index and in the NIS/U.S. Dollar exchange rates causes a difference
between taxable income and the income reflected in our financial statements. See note 13D
of our financial statements.

72

---

---

# Law for the
Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investment, 1959, or the Investment Law provides that
a proposed capital investment in production facilities or other eligible facilities may be
designated as an Approved Enterprise. An application to the Investment Center of the
Ministry of Industry and Trade, or the Investment Center, must be submitted to obtain
Approved Enterprise status. Each instrument of approval for an Approved Enterprise relates
to a specific investment program that is defined both by the financial scope of the
investment, including sources of funds, and by the physical characteristics of the
facility or other assets.

The
tax benefits available under any instrument of approval relate only to taxable profits
attributable to the specific program and are contingent upon meeting the criteria set out
in the instrument of approval. If a company has more than one approval or only a portion
of its capital investments are approved, its effective tax rate is the weighted average of
the applicable rates. Subject to certain qualifications, however, if a company with one or
more approvals distributes dividends, the dividends are deemed attributable to the entire
enterprise. As explained below, following the amendment of the Investment Law which became
effective on April, 1, 2005, companies may receive tax benefits under the law without
applying for an Approved Enterprise status.

Tax benefits for income
from Approved Enterprises approved before April 1, 2005

Before
April 1, 2005, an Approved Enterprise was entitled to receive a grant from the Government
of Israel or an alternative package of tax benefits, which we refer to as alternative
benefits. We have elected to forego the entitlement to grants and have applied for the
alternative benefits, under which undistributed income that we generate from our Approved
Enterprises will be completely tax-exempt for two years commencing from the year that we
first produce taxable income and will be subject to a tax rate of 10% to 25% for an
additional five to eight years, depending on the extent of foreign investment in the
company. Alternative benefits are available to us until the earlier of (i) seven
consecutive years, commencing in the year in which the specific Approved Enterprise first
generates taxable income, (ii) twelve years from commencement of production and (iii)
fourteen years from the date of approval of the Approved Enterprise status.

Dividends
paid out of income generated by an Approved Enterprise (or out of dividends received from
a company whose income is generated by an Approved Enterprise) are generally subject to
withholding tax at the rate of 15%. This withholding tax is deductible at source by the
Approved Enterprise. The 15% tax rate is limited to dividends and distributions out of
income derived during the benefits period and actually paid at any time up to twelve years
thereafter. We elected the alternative benefits track, and will additionally be subject to
pay corporate tax at the rate of 25% in respect of the gross amount of the dividend that
we may distribute out of profits which were exempt from corporate tax in accordance with
the provisions of the alternative benefits track. If we are also deemed to be a Foreign
Investors Company, or FIC (as defined below), and if the FIC is at least 49% owned by
non-Israeli residents, the corporate tax rate paid by us in respect of the dividend we may
distribute from income derived by our Approved Enterprises during the tax exemption period
may be taxed at a lower rate.

73

---

---

As
we have elected the alternative benefits package, we are not obligated to attribute any
part of dividends that we may distribute to exempt profits, and we may decide from which
years profits to declare dividends. We currently intend to reinvest any income that
we may in the future derive from our Approved Enterprise programs and not to distribute
the income as a dividend.

If
we qualify as a FIC, our Approved Enterprises will be entitled to additional tax benefits.
Subject to certain conditions, a FIC is a company with a level of foreign investment of
more than 25%. The level of foreign investment is measured as the percentage of rights in
the company (in terms of shares, rights to profits, voting and appointment of directors),
and of combined share and loan capital, that are owned, directly or indirectly, by persons
who are not residents of Israel. Such a company will be eligible for an extension of the
period during which it is entitled to tax benefits under its Approved Enterprise status
(so that the benefit periods may be up to ten years) and for further tax benefits if the
level of foreign investment exceeds 49%.

The
benefits available to an Approved Enterprise are subject to the fulfillment of conditions
stipulated in the Investment Law and its regulations and the criteria in the specific
certificate of approval, as described above. If a company does not meet these conditions,
it would be required to refund the amount of tax benefits, together with consumer price
index linkage adjustment and interest. In February 2007 we received a letter from the
investment center stating that our approved enterprise from April 2001 is about to be
terminated if we do not submit a final performance report. We have decided not to pursue
the completion of this investment plan, as we have not had any tax benefits from it, and
we intend to apply for tax benefits pursuant the amended law as described below, if and
when relevant.

Tax benefits under an
Amendment that became effective on April 1, 2005

On
April 1, 2005, the Investment Law was significantly amended. The amendment provides that
terms and benefits included in any certificate of approval that was granted before the
amendment came into effect will remain subject to the provisions of the Investment Law as
they were on the date of such approval. Furthermore, the Investment Center will continue
to grant Approved Enterprise status to qualifying investments. However, the amendment
limits the scope of enterprises that may be approved by the Investment Center by setting
criteria for the approval of a facility as an Approved Enterprise, such as provisions
generally requiring that at least 25% of the Approved Enterprises income will be
derived from export.

The
amendment provides that Approved Enterprise status will only be necessary for receiving
grants. As a result, it is no longer necessary for a company to acquire Approved
Enterprise status in order to receive the tax benefits previously available under the
alternative benefits provisions. Rather, a company may claim the tax benefits offered by
the Investment Law directly in its tax returns, provided that its facilities meet the
criteria for tax benefits set out by the amendment. Companies are entitled to approach the
Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the
amendment.

74

---

---

Tax
benefits are available under the amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export. In order to receive the tax benefits, the amendment states that the company
must make an investment that meets all the conditions set out in the amendment for tax
benefits and exceeds a minimum amount specified in the Investment Law. Such investment
allows the company to receive a benefited enterprise status, and may be made over a period
of no more than three years ending at the end of the year in which the company requested
to have the tax benefits apply to the benefited enterprise. Where the company requests to
have the tax benefits apply to an expansion of existing facilities, only the expansion
will be considered to be a benefited enterprise and the companys effective tax rate
will be the weighted average of the applicable rates. In this case, the minimum investment
required in order to qualify as a benefited enterprise is required to exceed a certain
percentage of the value of the companys production assets before the expansion.

The
extent of the tax benefits available under the amendment to qualifying income of a
benefited enterprise are determined by the geographic location of the benefited
enterprise. The location will also determine the period for which tax benefits are
available.

Dividends
paid out of income derived by a benefited enterprise will be treated similarly to payment
of dividends by an Approved Enterprise under the alternative benefits track. Therefore,
dividends paid out of income derived by a benefited enterprise (or out of dividends
received from a company whose income is derived from a benefited enterprise) are generally
subject to withholding tax at the rate of 15%. The reduced rate of 15% is limited to
dividends and distributions out of income derived from a benefited enterprise during the
benefits period and actually paid at any time up to twelve years thereafter. A company
qualifying for tax benefits under the amendment which pays a dividend out of income
derived by its benefited enterprise during the tax exemption period will be subject to
corporate tax in respect of the gross amount of the dividend at the otherwise applicable
rate of 25%, or lower in the case of a qualified FIC which is at least 49% owned by
non-Israeli residents. The dividend recipient would be subject to tax at the rate of 15%
on the amount received which tax would be deducted at source.

As
a result of the Amendment, tax-exempt income generated under the provisions of the new law
will subject us to taxes upon distribution of the tax-exempt income to shareholders or
liquidation of the company, and we may be required to record a deferred tax liability with
respect to such tax-exempt income.

The
amendment sets a minimal amount of foreign investment required for a company to be
regarded as a FIC.

75

---

---

# Law for the
Encouragement of Industrial Research and Development, 1984

Under
the Law for the Encouragement of Industrial Research and Development, 1984 (the
Research Law), research and development programs approved by the Research
Committee of the Office of the Chief Scientist (the Research Committee) are
eligible for grants or loans if they meet certain criteria, in return for the payment of
royalties from the sale of the product developed in accordance with the program. Once a
project is approved, the Office of the Chief Scientist, or OCS, will award grants of up to
50% of the projects expenditures in return for royalties, usually at rates between
3% to 5% of sales of products developed with such grants, up to a dollar-linked amount
equal to 100% to 150% of such grants. Grants received under programs approved after
January 1, 1999, are subject to interest at an annual rate of LIBOR for 12 months
applicable to dollar deposits, which will accrue annually based on the LIBOR rate
published on the first day of each year.

For
information regarding restrictions upon, and conditions to, (a) the manufacture outside of
Israel of products using technology developed using OCS funding and (b) the transfer of
such technology to a non-Israeli entity whether through the direct transfer of the
technology or through a transaction involving the company that received such funding, see
Item 5  Operating and Financial Review and Prospects  Research and
development, patents, licenses, etc.

# Tax Benefits and Grants
for Research and Development

Israeli
tax law allows, under specified conditions, a tax deduction for research and development
expenditures, including capital expenditures, for the year in which they are incurred.
These expenses must relate to scientific research and development projects, and must be
approved by the relevant Israeli government ministry, determined by the field of research.
Furthermore, the research and development must be for the promotion of the company and
carried out by or on behalf of the company seeking such tax deduction. The amount of such
deductible expenses, however, is reduced by the sum of any funds received through
government grants for the finance of such scientific research and development projects.
Expenditures not so approved are deductible over a three-year period.

# Law for the
Encouragement of Industry (Taxes), 1969

The
following preferred corporate tax benefits, among others, are available to Industrial
Corporations (including us).

| |  | Deduction
of purchases of know-how and patents over eight years for tax purposes.
| | - | ---------------------------------------------------------------------------------

| |  | Deduction,
for tax purposes, of expenses incurred in connection with certain public securities
issuances.
| | - | ---------------------------------------------------------------------------------------------------------

| |  | Accelerated
depreciation rates on both equipment and buildings.
| | - | ---------------------------------------------------------------

| |  | The
right to elect, under specified conditions, to file a consolidated tax return with
additional related Israeli industrial companies and an industrial holding company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

76

---

---

# Taxation under
Inflationary Conditions

Under
the Law for the Encouragement of Industry (Taxes), 1969, industrial companies, as defined
under the law, are entitled to the following tax benefits, among others:

| |  | deductions
over an eight-year period for purchases of know-how and patents;
| | - | ---------------------------------------------------------------------------

| |  | expenses
related to a public offering are deductible over a three-year period in equal amounts;
| | - | -----------------------------------------------------------------------------------------------

| |  | the
right to elect, under specified conditions, to file a consolidated tax return with other
related          Israeli industrial companies; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

Eligibility
for benefits under the Law for the Encouragement of Industry is not subject to receipt of
prior approval from any governmental authority. Under the law, an industrial company is
defined as a company resident in Israel, at least 90% of the income of which, in any tax
year, determined in Israeli currency, exclusive of income from government 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 activity.

We
believe that we currently qualify as an industrial company within the definition under the
Law for the Encouragement of Industry (Taxes). No assurance can be given that we will
continue to qualify as an industrial company or that the benefits described above will be
available in the future.

# Capital Gains Tax

Israeli
law imposes a capital gains tax on the sale of capital assets by both residents and
non-residents of Israel. The law distinguishes between the Real Gain and the
Inflationary Amount. The Real Gain is the excess of the total capital gain
over the Inflationary Amount, computed on the basis of the increase in the Israeli
Consumer Price Index between the date of purchase and the date of sale. The Inflationary
Amount accumulated prior to December 31, 1993 is taxed at a rate of 10% for residents of
Israel (reduced to no tax for non-residents if calculated according to the exchange rate
of the dollar instead of the Israeli CPI), while the Inflationary Amount accumulated
following December 31, 1993 is exempt from any capital gains tax. Until the end of the
year 2002, capital gains from the sale of our ordinary shares were generally exempt from
Israeli Capital Gains Tax. This exemption did not apply to a shareholder whose taxable
income is determined pursuant to the Israeli Income Tax Law (Inflationary Adjustments),
1985, or to a person whose gains from selling or otherwise disposing of our securities are
deemed to be business income.

An
individual is subject to a 20% tax rate on real capital gains derived from the sale of
shares, as long as the individual has not demanded a deduction of interest and linkage
differences in connection with the purchase and holding of the securities; and as long as
the individual is not a substantial shareholder of the company issuing the shares, which
is generally a shareholder with 10% or more of the right to profits, the right to nominate
a director and voting rights. A substantial shareholder (or a shareholder who has demanded
a deduction of interest and linkage differences) will be subject to tax at a rate of 25%
on real capital gains derived from the sale of shares issued by the company. The
determination of whether the individual is a substantial shareholder will be made on the
date that the securities are sold. In addition, the individual will be deemed to be a
substantial shareholder if at any time during the twelve months preceding this date he or
she had been a substantial shareholder. The foregoing tax rates, however, will not apply
to dealers in securities. However, according to the tax reform legislation, non-residents
of Israel will be exempt from any capital gains tax from the sale of our ordinary shares
so long as the gains are not derived through a permanent establishment that the
non-resident maintains in Israel, and so long as our ordinary shares remain listed for
trading as described above.

77

---

---

# U.S.-Israel Tax Treaty

Pursuant
to the Convention Between the Government of the United States of America and the
Government of Israel with Respect to Taxes on Income (referred to as the U.S.-Israel Tax
Treaty), the sale, exchange or disposition of Ordinary Shares by a person who qualifies as
a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and who
is entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty
(called a Treaty U.S. Resident) will generally not be subject to Israeli
capital gains tax unless (a) such Treaty U.S. Resident is an individual and was present in
Israel for more than 183 days during the relevant taxable year or (b) such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of the voting
power of a company during any part of the 12-month period preceding such sale, exchange or
disposition. A sale, exchange or disposition of shares by a Treaty U.S. Resident who
either is an individual and was present in Israel for more than 183 days during the
relevant taxable year or who holds, directly or indirectly, shares representing 10% or
more of the voting power of a company at any time during such preceding 12-month period
would be subject to such Israeli tax, to the extent applicable; however, under the
U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for
such taxes against the U.S. income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.

# Taxation of Non-Residents

Non-residents
of Israel, including corporations, will generally be exempt from any capital gains tax
from the sale of shares so long as (i) the gains are not derived through a permanent
establishment that the non-resident maintains in Israel, (ii) the shares remain listed for
trading on a designated stock market and (iii) the shares were purchased after being
listed on the designated stock market. These provisions dealing with capital gains are not
applicable to a person whose gains from selling or otherwise disposing of the shares are
deemed to be business income. However, non-Israeli corporations will not be entitled to
the foregoing exemptions if an Israeli resident (i) has a controlling interest of 25% or
more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25%
or more of the revenues or profits of such non-Israeli corporation, whether directly or
indirectly. In addition, pursuant to the Convention between the Government of the United
States of America and the Government of Israel with Respect to Taxes on Income, as
amended, which we refer to as the United States-Israel Tax Treaty, the sale, exchange or
disposition of ordinary shares by a person who qualifies as a resident of the United
States within the meaning of the United States-Israel Tax Treaty and who is entitled to
claim the benefits afforded to such person by the United States-Israel Tax Treaty, which
we refer to as a Treaty United States Resident, generally will not be subject to the
Israeli capital gains tax unless such Treaty United States Resident holds, directly or
indirectly, shares representing 10% or more of our voting power during any part of the
twelve-month period preceding such sale, exchange or disposition, subject to certain
conditions. Under the United States-Israel Tax Treaty, such Treaty United States Resident
would be permitted to claim a credit for such taxes against the U.S. federal income tax
imposed with respect to such sale, exchange or disposition, subject to the limitations in
U.S. laws applicable to foreign tax credits. The United States-Israel Tax Treaty does not
relate to state or local taxes in the U.S.

78

---

---

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income include passive income, including dividends, royalties and
interest, as well as non-passive income from services rendered in Israel. On distribution
of dividends other than bonus shares or share dividends, income tax is withheld at the
rate of 20% for dividends paid to an individual or foreign corporation who is not a
substantial shareholder, 25% for dividends paid to a substantial shareholder and 15% for
dividends generated by an Approved Enterprise, unless in each case a different rate is
provided in a treaty between Israel and shareholders country of residence. Under the
United States-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary
shares who is a U.S. resident will be 25%. The maximum tax rate on dividends not generated
by an Approved Enterprise paid to a U.S. corporation holding at least 10% of our voting
power is 12.5%.

A
non-resident of Israel who receives dividends from which tax was withheld is generally
exempt from the duty to file returns in Israel in respect of such income, provided such
income was not derived from a business conducted in Israel by the taxpayer, and the
taxpayer has no other taxable sources of income in Israel.

# Documents on Display

We
are required to file reports and other information with the SEC under the Securities
Exchange Act of 1934 and the regulations thereunder applicable to foreign private issuers.
Reports and other information filed by us with the SEC may be inspected and copied at the
SECs public reference facilities described below. Although as a foreign private
issuer we are not required to file periodic information as frequently or as promptly as
United States companies, we generally do publicly announce our quarterly and year-end
results promptly and file periodic information with the SEC under cover of Form 6-K. As a
foreign private issuer, we are also exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements and our officers, directors and
principal shareholders are exempt from the reporting and other provisions in Section 16 of
the Exchange Act.

This
annual report and the exhibits thereto, are available for inspection and copying at the
public reference facilities of the Securities and Exchange Commission located a Room 1024,
450 Fifth Street, NW, Washington, D.C. 20549, and the Commissions regional offices
located in New York, New York and Chicago, Illinois. Copies of all or any part of the
annual report or other filings may be obtained from these offices after payment of fees
required by the Commission. Please call the Commission at 1-800-SEC-0330 for further
information. The Exchange Act file number for our Securities and Exchange Commission
filing is 1-8201.

79

---

---

The
Commission also maintains a website at http://www.sec.gov from which certain
filings may be accessed.

All
documents referenced herein concerning us are archived and may also be inspected at our
head offices located at 11 Gush Etzion Street, Givat Shmuel, Israel. Information about us
is also available on our website at http://www.cimatron.com. Such information is
not part of this annual report.

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

We
are exposed to market risks from changes in foreign currency exchange rates and interest
rates, which could impact our results of operations and financial condition. We seek to
manage the exposure to these market risks through our regular operating and financing
activities and through the use of foreign currency exchange contracts and other financial
instruments.

All
of such financial instruments are managed and controlled under a program of risk
management in accordance with established policies. These policies are reviewed and
approved by our Board of Directors. Our treasury operations are subject to an internal
audit on a regular basis.

As
of December 31, 2007 we had currency exchange options to sell up to 2.4 million Euro for a
total amount of $3.36 million, and had written currency exchange options to sell up to 2.4
million Euro for a total amount of $3.75 million that were scheduled to expire prior to
December 29, 2008. As of May 31, 2008, we had currency exchange options to sell up to 2.8
million Euro for a total amount of $4 million, and had written currency exchange options
to sell up to 2.8 million Euro for a total amount of $4.4 million that were scheduled to
expire prior to December 29, 2008.

Interest Rate Risks

Our
exposure to market rate risk for changes in interest rates relates primarily to our
investment portfolio. We have not used derivative financial instruments in our investment
portfolio. As of December 31, 2007, we had financial assets totaling approximately $10.2
million. Fixed rate financial assets, comprised of cash, bank deposits and debt
securities, totaled approximately $9 million. For the year 2007 we have classified all of
our marketable debt securities as available for sale securities which exposes
the consolidated statement of operations or balance sheets to fluctuations in interest
rates. As of December 31, 2007, variable rate financial assets totaled approximately $1.2
million. As of May 31, 2008, variable rate financial assets totaled approximately $0.4
million. Assuming a 10% interest rate decrease, the net decrease in our earnings would be
approximately $4,000 holding other variables constant.

80

---

---

Currency Exchange Rate
Risks

Our
operating and pricing strategies take into account changes in exchange rates over time.
However, there can be no assurance that future fluctuations in the value of foreign
currencies will not have a material adverse effect on our business, operating results or
financial condition. As of the beginning of 2000, we have been using financial instruments
to hedge the following foreign currency exposure risks:

Our
Subsidiaries  We operate internationally and our subsidiaries in Germany and
Italy conduct their respective operations in Euros. This exposes us to market risk from
changes in foreign exchange rates to the extent that the functional currency of our
subsidiaries will decline in value as compared to the U.S. dollar, resulting in a foreign
currency exchange rate loss. Assuming an adverse 20% foreign exchange rate fluctuation, we
would experience exchange rate losses of approximately $1,250 thousand excluding the
effect of our hedging transactions.

Our
Providers  Commencing on June 1, 2000 we initiated a Euro denominated price list
for all of our Providers in countries whose currency is linked to the Euro. Our revenues
from these Providers are therefore exposed to exchange rate differences between the Euro
and the United States dollar. Assuming an adverse 20% foreign exchange rate fluctuation,
we would experience exchange rate losses from these providers of approximately $210
thousand excluding the effect of our hedging transactions.

Expenses
in New Israeli Shekels

The
cost of our Israel operations, as expressed in U.S. dollars, is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is offset on a
lagging basis) by a devaluation of the NIS in relation to the U.S. dollar. The inflation
rate in Israel was 3.4%, (0.1)%, and 2.4%, in 2007, 2006 and 2005, respectively. The
devaluation (appreciation) of the NIS against the U.S. dollar was (8.9)%, (8.2)% and 6.4%
in 2007, 2006, and 2005, respectively. Assuming a 10% devaluation of the U.S. dollar
against the NIS, and assuming a maximum deviation of 1% in inflation, we would experience
exchange rate losses of approximately $1.0 million excluding the effect of our hedging
transactions.

A
significant portion of our expenditures is employee compensation-related. Salaries are
paid in NIS and may be adjusted for changes in the CPI through salary increases or
adjustments. This increases salary expenses in U.S. dollar terms. The devaluation /
appreciation of the NIS against the U.S. dollar decreases / increases employee
compensation expenditures as expressed in dollars proportionally. Some of our other
NIS-based expenses are either currently adjusted to U.S. dollars or are adjusted to the
CPI.

|Item 12. |  | Descriptions of Securities Other than Equity Securities
|-------- |  | -------------------------------------------------------

Not Applicable

81

---

---

# PART II

|Item 13. |  | Defaults, Dividend Arrearages and Delinquencies
|-------- |  | -----------------------------------------------

None.

|Item 14. |  | Material Modifications to the Rights of Security Holders and Use of Proceeds
|-------- |  | ----------------------------------------------------------------------------

None.

|Item 15. |  | Controls and Procedures
|-------- |  | -----------------------

(a) Disclosure
Controls and Procedures  our management evaluated, with the participation of our
principal executive and principal financial officers, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of December 31, 2007.  Based on their evaluation, our principal
executive and principal financial officers concluded that our disclosure controls and
procedures were effective as of December 31, 2007.

(b)
Not applicable.

(c)
Not applicable.

(d) Changes
in Internal Control Over Financial Reporting  There has been no change in our
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during 2006, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

|Item 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our
Board of Directors has determined that Rami Entin qualifies to serve as our audit
committee financial expert as well as our external director with financial
expertise under the Companies Law.

|Item 16B. |  | CODE OF ETHICS
|--------- |  | --------------

We
have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial
Officer, Controller and persons performing similar functions, and which complies with the
rules promulgated by the SEC. We will provide to any person, without charge, upon request,
a copy of the code of ethics and respond to any questions concerning the code. Requests to
receive a copy of the code should be sent to us at our corporate headquarters located at
11 Gush Etzion Street, Givat Shmuel 54030, Israel, Attention: Chief Financial Officer. In
addition, we have adopted a code of business conduct that applies to all of our directors,
officers and employees, and which complies with the rules of the Nasdaq Capital Market.

82

---

---

The
Chairman of our Audit Committee may approve a request by our Chief Executive Officer,
Chief Financial Officer, Principal Accounting Officer, Controller or any person performing
similar functions for a waiver from the requirements of the code of ethics pertaining to
(i) honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationship; (ii) full, fair,
accurate, timely and understandable disclosure in reports and documents that we must file
with, or submit to, the Securities and Exchange Commission and in other public
communications made by us; (iii) compliance with applicable governmental laws, rules and
regulations; (iv) the prompt internal reporting of violation of the code to the Chairman
of our Audit Committee; and (v) accountability for adherence to the code; provided in each
case that the person requesting such waiver provides to our Audit Committee a full
disclosure of the particular circumstances relating to such request. The Chairman of our
Audit Committee will first determine whether a waiver of the relevant requirements of the
code of ethics is required and, if such waiver is required, whether a waiver will be
granted. The person requesting such waiver may be required to agree to certain conditions
before a waiver or a continuing waiver is granted.

Any
amendments to the code of ethics and all waivers from compliance with the code of ethics
granted to the persons subject thereto have to be publicly disclosed by us as, and to the
extent, required by any applicable law, rule and regulations.

|Item 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

Audit
and Audit-related Fees

The
aggregate fees billed for professional services rendered to us by our principal
accountants for the audit of our financial statements and for audit-related services in
2005, 2006 and 2007 were $66,000, $66,000 and $66,000, respectively.

Tax
Fees

The
aggregate fees billed for professional services rendered to us by our principal
accountants for tax compliance, tax advice and tax planning in 2005, 2006 and 2007 were
$18,000, $0, and $0 respectively. In 2005 we received from our principal accountants tax
advice with respect to a transfer pricing study.

All
Other Fees

In
2007 we received from our principal accountants additional services for which we paid an
amount of $13 thousand.

Audit
Committee Approval

In
December 2007, our shareholders approved the engagement of Brightman Almagor & Co., a
member of Deloitte Touche Tohmatsu, as our independent auditors for the fiscal year ended
December 31, 2007 and until the next annual shareholder meeting. Such approval followed
the approval by our board of directors and audit committee of such engagement.

83

---

---

|Item 16D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES - Not applicable
|--------- |  | ---------------------------------------------------------------------------

|Item 16E. |  | REPURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFLIATED PURCHASERS
|--------- |  | ----------------------------------------------------------------------

Issuer Purchases of Equity Securities(1)

|Period                       | (a) Total Number
of Shares
Purchased | (b) Average
Price Paid
Per Share | (c) Total
Numbers of
Shares
Purchased as
part of
Publicly
Announced
Plans or
Programs | (d) Maximum
Dollar Value of
Shares that May
Yet Be Purchased
Under Plans or
Programs
|---------------------------- | ------------------------------------ | -------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------
|
|
|
|
|June 5 through June 27, 2008 |                                      |                                  |                                                                                       | 29,722                                                                              

|(1) | On
June 4, 2008 we announced that our board had approved the use of up to $1
               million of ouravailable cash to repurchase our ordinary shares.                Under
the repurchase program, sharepurchases may be made from time to
               time at the discretion of management in the open marketor in
privately                negotiated transactions depending on market conditions, share
price, tradingvolume and other factors. Such purchases will be made in accordance
with                the requirements ofthe Commission. For a portion of the
authorized                repurchase amount, we may enter into a planthat is
compliant with Rule                10b5-1 of the Securities Exchange Act of 1934 that is
designedto                facilitate such purchases. The repurchase program has
no time limit, does not                require usto acquire a specific number of
shares, and may be suspended                from time to time ordiscontinued.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART III

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

Not Applicable

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

See page F-1 through F-25.

84

---

---

|Item 19. |  | Exhibits
|-------- |  | --------

|1.1 |  | Amended
and Restated Articles of Association.*
|--- |  | ----------------------------------------------

|4.1 |  | Services
Agreement with Koonras Technologies Ltd. and DBSI Investments   Ltd., as assigned to them
         by Zeevi Computers and Technology Ltd.**
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|4.2.1 |  | Letter
of Agreement with Microsystem Srl and all the shareholders of Microsystem Srl dated May
24, 2005, including the First Call Option Agreement, the Second Call Option Agreement,
and the Put Option Agreement, and the Shareholders Agreement, all dated July 1, 2005 with
Microsystem Srl and all the shareholders of Microsystem Srl.***
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2.2 |  | Registration
Rights Agreement with Koonras Technologies Ltd. and DBSI Investments Ltd.****
|----- |  | ------------------------------------------------------------------------------------------

|4.2.3 |  | Registration
Rights Agreement with William F. Gibbs.
|----- |  | ----------------------------------------------------

|4.2.4 |  | Merger
Agreement and Plan of Reorganization, dated December 31, 2007, by and among Cimatron
Ltd.,          Cimatron Technologies, Inc., Nortamic LLC (name later changed to Cimatron
Gibbs LLC), Gibbs System,          Inc., and William F. Gibbs.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2.5 |  | Employment
Agreement dated January 2, 2008 by and between William F. Gibbs and Cimatron Gibbs LLC.
|----- |  | --------------------------------------------------------------------------------------------------

|8.1 |  | List
of subsidiaries.
|--- |  | ---------------------

|12.1 |  | Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
|---- |  | --------------------------------------------------------------------------------

|12.2 |  | Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
|---- |  | --------------------------------------------------------------------------------

|13 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
         1350
|-- |  | ----------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Independent Public Accountants.
|---- |  | ------------------------------------------

|* |  | Incorporated
by reference to our current report on Form 6-K, filed on November 22, 2006.
|- |  | ----------------------------------------------------------------------------------------

|** |  | Incorporated
by reference to our Registration Statement on Form F-1, File No. 333-1484, as amended,
filed with the Securities and Exchange Commission on February 16, 1996.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** |  | Incorporated
by reference to our Annual Report on Form 20-F for the fiscal year ended December 31,
2005, filed June 29, 2006 (File No. 0-27974).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated
by reference to our Annual Report on Form 20-F for the fiscal year ended December 31,
2006, filed June 28, 2007 (File No. 0-27974).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

85

---

---

# SIGNATURES

Pursuant to the requirements of
Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets
all the requirements for filing on Form 20-F and has duly caused and authorized the
undersigned to sign this annual report on its behalf in the City of Givat Shmuel, State of
Israel, on this  30th day of June, 2008.

| |  | CIMATRON LTD.By: /s/ Dan Haran 
Dan Haran President and Chief Executive Officer
| |  | ---------------------------------------------------------------------------------------------

86

---

---

CIMATRON LIMITED

CONSOLIDATED
FINANCIAL STATEMENTS

TABLE OF
CONTENTS

|                                                                                                                            |            
|--------------------------------------------------------------------------------------------------------------------------- | -----------
|                                                                                                                            | Page       
|                                                                                                                            |            
|                                                                                                                            |            
|Report of
  Independent Registered Public Accounting Firm                                                                   |            
|                                                                                                                            |            
|Consolidated
  Financial Statements:                                                                                        |            
|                                                                                                                            |            
|Balance
  Sheets as of December 31, 2007 and 2006                                                                           | F-3        
|                                                                                                                            |            
|Statements
  of Operations for the years ended December
  31, 2007, 2006 and 2005                                           | F-5        
|                                                                                                                            |            
|Statement
  of Shareholders Equity and
  Comprehensive Income (Loss) for the years
  ended December 31, 2007,2006 and 2005 | F-6        
|                                                                                                                            |            
|Statements
  of Cash Flows for the years ended December
  31, 2007, 2006 and 2005                                           | F-7        
|                                                                                                                            |            
|Notes
  to the Consolidated Financial Statements                                                                            | F-9 to F-32

---

---

|                                                                                                     |                                                                                            
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|(DELOITTE LOGO)                                                                                      |                                                                                            
|Brightman Almagor Zohar
  1 Azrieli Center
  Tel Aviv 67021
  P.O.B. 16593
  Tel Aviv 61164
  Israel |                                                                                            
|                                                                                                    
|                                                                                                     |                                                                                            
|                                                                                                     | Tel:  +972 (3) 608 5555
  Fax: +972 (3) 609 4022
  info@deloitte.co.il
  www.deloitte.co.il

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To the Shareholders of
Cimatron Ltd

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

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the
consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2007 and 2006 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2007 in conformity with U.S. generally accepted accounting principles.

|                                           
|-------------------------------------------
|-s- Brightman  Almagor & Co.               
|Brightman  Almagor & Co.                   
|Certified
  Public Accountants             
|A member
  firm of Deloitte Touche Tohmatsu

Tel-Aviv, Israel
June 12, 2008

|                                               |                         
|---------------------------------------------- | ------------------------
|                                               | Member of               
|Audit  Tax  Consulting  Financial Advisory | Deloitte Touche Tohmatsu

F-2

---

---

CIMATRON LIMITED

CONSOLIDATED BALANCE SHEETS(in thousands, except share data)

|                                                                                                                                                  |  |              |        |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                                                                                                                                  |  | December 31, |       
|                                                                                                                                                  |  |              |       
|                                                                                                                                                  |  | 2007         |        | 2006 |  
|                                                                                                                                                  |  |              |        |      |  
|                                                                                                                                                  |  |              |        |      |  
|ASSETS                                                                                                                                            |  |              |        |      |  
|                                                                                                                                                  |  |              |        |      |   |        | 
|Current
  assets                                                                                                                                  |  |              |        |      |   |        | 
|Cash and cash equivalents                                                                                                                         |  | $            | 9,026  |      | $ | 5,597  | 
|Trade accounts receivable, net
  of allowance for doubtful accounts of $1,397 and $1,625 as of December 31,
  2007 and 2006 respectively (Note 4) |  |              | 7,308  |      |   | 4,848  | 
|Other accounts receivable and
  prepaid expenses (Note 5)                                                                                         |  |              | 1,258  |      |   | 853    | 
|Inventory                                                                                                                                         |  |              | 209    |      |   | 127    | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Total current assets                                                                                                                              |  |              | 17,801 |      |   | 11,425 | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Long-term
  investments (Note 3)                                                                                                                  |  |              | 1,158  |      |   | 2,035  | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Deposits with
  insurance companies and severance pay funds
  (Note 9)                                                                            |  |              | 2,703  |      |   | 2,653  | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Property and
  equipment (Note 6)                                                                                                                 |  |              |        |      |   |        | 
|Cost                                                                                                                                              |  |              | 8,375  |      |   | 5,840  | 
|Less - accumulated
  depreciation                                                                                                                 |  |              | 7,038  |      |   | 4,830  | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Property and equipment, net                                                                                                                       |  |              | 1,337  |      |   | 1,010  | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Other assets                                                                                                                                      |  |              |        |      |   |        | 
|Software development costs,
  net (Note 7)                                                                                                        |  |              | 112    |      |   | 156    | 
|Goodwill, net                                                                                                                                     |  |              | 3,343  |      |   | 628    | 
|Other Intangible Assets                                                                                                                           |  |              | 873    |      |   |       | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Total other assets                                                                                                                                |  |              | 4,328  |      |   | 784    | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|                                                                                                                                                  |  |              |        |      |   |        | 
|Total assets                                                                                                                                      |  |              | 27,327 |      |   | 17,907 | 
|                                                                                                                                                  |  |              |        |      |   |        | 

F-3

---

---

CIMATRON LIMITED

CONSOLIDATED BALANCE SHEETS(in thousands, except share data) (cont)

|                                                                                                                                                                                |  |              |        |      |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ------ | -
|                                                                                                                                                                                |  | December 31, |       
|                                                                                                                                                                                |  |              |       
|                                                                                                                                                                                |  | 2007         |        | 2006 | 
|                                                                                                                                                                                |  |              |        |      | 
|                                                                                                                                                                                |  |              |        |      |  |        |  
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                          |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Current
  liabilities                                                                                                                                                           |  |              |        |      |  |        |  
|Short-term bank credit                                                                                                                                                          |  |              | 791    |      |  | 500    |  
|Related parties                                                                                                                                                                 |  |              | 124    |      |  | 109    |  
|Trade payables                                                                                                                                                                  |  |              | 2,258  |      |  | 828    |  
|Other liabilities and accrued
  expenses (Note 8)                                                                                                                               |  |              | 7,765  |      |  | 4,221  |  
|Deferred revenues                                                                                                                                                               |  |              | 742    |      |  | 425    |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Total current liabilities                                                                                                                                                       |  |              | 11,680 |      |  | 6,083  |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Long-term
  liabilities                                                                                                                                                         |  |              |        |      |  |        |  
|Accrued severance pay (Note 9)                                                                                                                                                  |  |              | 3,929  |      |  | 3,003  |  
|Long term loan                                                                                                                                                                  |  |              | 403    |      |  |       |  
|Deferred tax liability                                                                                                                                                          |  |              | 282    |      |  |       |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              | 4,614  |      |  | 3,003  |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Minority
  interests                                                                                                                                                            |  |              | 63     |      |  | (24    | )
|                                                                                                                                                                                |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Contingent
  liabilities and commitments (Note 10)                                                                                                                              |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Shareholders
  equity                                                                                                                                                          |  |              |        |      |  |        |  
|Share capital (Note 11):                                                                                                                                                        |  |              |        |      |  |        |  
|Ordinary shares
  of NIS 0.10 par value (Authorized - 19,950,000 shares, issued and
  outstanding - 8,053,782 shares at December 31, 2007 and 8,001,270 at December
  31, 2006) |  |              | 265    |      |  | 264    |  
|Additional paid-in capital                                                                                                                                                      |  |              | 13,754 |      |  | 13,521 |  
|Accumulated other
  comprehensive loss:                                                                                                                                         |  |              |        |      |  |        |  
|Foreign currency translation
  adjustments                                                                                                                                      |  |              | (170   | )    |  | (515   | )
|Unrealized loss on available
  for-sale securities                                                                                                                              |  |              | (88    | )    |  | (209   | )
|Unrealized gain (loss) on
  derivative instruments                                                                                                                              |  |              |       |      |  | 131    |  
|Accumulated deficit                                                                                                                                                             |  |              | (2,632 | )    |  | (4,188 | )
|                                                                                                                                                                                |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              | 11,129 |      |  | 9,004  |  
|Treasury stock, at cost;
  166,100 shares at December 31, 2007 and
  2006                                                                                                       |  |              | (159   | )    |  | (159   | )
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Total shareholders equity                                                                                                                                                      |  |              | 10,970 |      |  | 8,845  |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|                                                                                                                                                                                |  |              |        |      |  |        |  
|Total liabilities and
  shareholders equity                                                                                                                                    |  |              | 27,327 |      |  | 17,907 |  
|                                                                                                                                                                                |  |              |        |      |  |        |  

The accompanying notes are an integral part of the
financial statements.

F-4

---

---

CIMATRON LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)

|                                                          |  |                           |        |         |   |         |   |   |        |  
|--------------------------------------------------------- |  | ------------------------- | ------ | ------- | - | ------- | - | - | ------ | -
|                                                          |  | Year ended December
  31, |       
|                                                          |  |                           |       
|                                                          |  | 2 0 0 7                   |        | 2 0 0 6 |   | 2 0 0 5 |  
|                                                          |  |                           |        |         |   |         |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Revenues (Note 14a):                                      |  |                           |        |         |   |         |   |   |        |  
|Products                                                  |  | $                         | 14,331 |         | $ | 9,642   |   | $ | 8,968  |  
|Services                                                  |  |                           | 14,309 |         |   | 11,817  |   |   | 11,957 |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Total                                                     |  |                           | 28,640 |         |   | 21,459  |   |   | 20,925 |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Cost of revenues (Note 14b):                              |  |                           |        |         |   |         |   |   |        |  
|Products                                                  |  |                           | 3,867  |         |   | 2,154   |   |   | 3,367  |  
|Services                                                  |  |                           | 1,573  |         |   | 1,469   |   |   | 1,568  |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Total                                                     |  |                           | 5,440  |         |   | 3,623   |   |   | 4,935  |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Gross profit                                              |  |                           | 23,200 |         |   | 17,836  |   |   | 15,990 |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Research and development
  expenses, net                  |  |                           | 4,281  |         |   | 4,426   |   |   | 4,815  |  
|Selling, general and
  administrative expenses (Note 14c) |  |                           | 17,243 |         |   | 13,362  |   |   | 15,650 |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Operating income (loss)                                   |  |                           | 1,676  |         |   | 48      |   |   | (4,475 | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Financial income (expenses),
  net                        |  |                           | 353    |         |   | 574     |   |   | (148   | )
|Other income (expenses)                                   |  |                           | (3     | )       |   | (5      | ) |   | 1      |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Income (loss) before income
  taxes                       |  |                           | 2,026  |         |   | 617     |   |   | (4,622 | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Income taxes (Note 12)                                    |  |                           |       |         |   | (27     | ) |   | (2     | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Income (loss) after income
  taxes                        |  |                           | 2,026  |         |   | 590     |   |   | (4,624 | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Companys equity in results of
  affiliated company       |  |                           | (52    | )       |   | (105    | ) |   | (5     | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Minority interest in results
  of subsidiary              |  |                           | (51    | )       |   | 29      |   |   | 36     |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Net Income (loss)                                         |  | $                         | 1,923  |         | $ | 514     |   | $ | (4,593 | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Net Income (loss) per share
  (basic and diluted)         |  | $                         | 0.24   |         | $ | 0.07    |   | $ | (0.59  | )
|                                                          |  |                           |        |         |   |         |   |   |        |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Weighted average number of
  shares outstanding           |  |                           |        |         |   |         |   |   |        |  
|Basic EPS (in thousands)                                  |  |                           | 7,866  |         |   | 7,835   |   |   | 7,835  |  
|                                                          |  |                           |        |         |   |         |   |   |        |  
|Diluted EPS (in thousands)                                |  |                           | 7,910  |         |   | 7,835   |   |   | 7,835  |  
|                                                          |  |                           |        |         |   |         |   |   |        |  

The accompanying notes are an integral part of the
financial statements.

F-5

---

---

CIMATRON LIMITED

STATEMENTS OF
SHAREHOLDERS EQUITY AND COMPREHENSIVE
INCOME (LOSS)(in thousands)

|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|----------------------------------------------------------------------------------- |  | --------------- | --- | ------------------------------ |  | --------------------------------------------------- |  | --------------------------------------------- | ---- | ---------------- |  | ----------------------------- | - | ------------------------------ | ---- | - | - | ------ | - |  | ------ | -
|                                                                                    |  | Share
  capital |     | Additional
  paid-in
  capital |  | Accumulated
  other
  comprehensive
  income (loss) |  | Retained
  earnings
  (accumulated
  deficit) |      | Treasury
  stock |  | Comprehensive
  income (loss) |   | Total
  shareholders
  equity |     
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |     
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Total
  comprehensive loss                                                          |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   | $ | (673   | ) |  |        |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Balance at
  January 1, 2005                                                        |  |                 | 264 |                                |  | 13,417                                              |  |                                               | (565 | )                |  | (109                          | ) |                                | (159 | ) |   |        |   |  | 12,848 |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Changes
  during the year ended December 31, 2005:                                  |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Net loss                                                                            |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  | (4,593                        | ) |                                |      |   |   | (4,593 | ) |  | (4,593 | )
|Unrealized loss on
  available-for-sale securities                                  |  |                 |     |                                |  |                                                     |  |                                               | 64   |                  |  |                               |   |                                |      |   |   | 64     |   |  | 64     |  
|Unrealized loss on derivative
  instruments                                         |  |                 |     |                                |  |                                                     |  |                                               | (158 | )                |  |                               |   |                                |      |   |   | (158   | ) |  | (158   | )
|Foreign currency
  translation adjustment                                           |  |                 |     |                                |  |                                                     |  |                                               | (179 | )                |  |                               |   |                                |      |   |   | (179   | ) |  | (179   | )
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Total
  comprehensive loss                                                          |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   | $ | (4,866 | ) |  |        |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Balance at
  December 31, 2005                                                      |  |                 | 264 |                                |  | 13,417                                              |  |                                               | (838 | )                |  | (4,702                        | ) |                                | (159 | ) |   |        |   |  | 7,982  |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Changes
  during the year ended December 31, 2006:                                  |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Net loss                                                                            |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  | 514                           |   |                                |      |   |   | 514    |   |  | 514    |  
|Unrealized gain on
  available-for-sale securities                                  |  |                 |     |                                |  |                                                     |  |                                               | (7   | )                |  |                               |   |                                |      |   |   | (7     | ) |  | (7     | )
|Unrealized loss on derivative
  instruments                                         |  |                 |     |                                |  |                                                     |  |                                               | 289  |                  |  |                               |   |                                |      |   |   | 289    |   |  | 289    |  
|Foreign currency
  translation adjustment                                           |  |                 |     |                                |  |                                                     |  |                                               | (37  | )                |  |                               |   |                                |      |   |   | (37    | ) |  | (37    | )
|Stock option compensation                                                           |  |                 |     |                                |  | 104                                                 |  |                                               |      |                  |  |                               |   |                                |      |   |   | 104    |   |  | 104    |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Total
  comprehensive income                                                        |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   | $ | 863    |   |  |        |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Balance at
  December 31, 2006                                                      |  |                 | 264 |                                |  | 13,521                                              |  |                                               | (593 | )                |  | (4,188                        | ) |                                | (159 | ) |   |        |   |  | 8,845  |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Changes
  during the year ended December 31, 2007:                                  |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Net Income                                                                          |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  | 1,923                         |   |                                |      |   |   | 1,923  |   |  | 1,923  |  
|Adjustment
  for the cumulative effect of prior years Adoption of Interpretation 48 |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  | (367                          | ) |                                |      |   |   |        |   |  | (367   | )
|Unrealized loss on
  available-for-sale securities                                  |  |                 |     |                                |  |                                                     |  |                                               | 121  |                  |  |                               |   |                                |      |   |   | 121    |   |  | 121    |  
|Unrealized gain on derivative
  instruments                                         |  |                 |     |                                |  |                                                     |  |                                               | (131 | )                |  |                               |   |                                |      |   |   | (131   | ) |  | (131   | )
|Foreign currency
  translation adjustment                                           |  |                 |     |                                |  |                                                     |  |                                               | 345  |                  |  |                               |   |                                |      |   |   | 345    |   |  | 345    |  
|Exercise of stock
  options                                                         |  |                 | 1   |                                |  | 113                                                 |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  | 114    |  
|Stock option compensation                                                           |  |                 |     |                                |  | 120                                                 |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  | 120    |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Total
  comprehensive income                                                        |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   | 2,258  |   |  |        |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  
|Balance at
  December 31, 2007                                                      |  |                 | 265 |                                |  | 13,754                                              |  |                                               | (258 | )                |  | (2,632                        | ) |                                | (159 | ) |   |        |   |  | 10,970 |  
|                                                                                    |  |                 |     |                                |  |                                                     |  |                                               |      |                  |  |                               |   |                                |      |   |   |        |   |  |        |  

F-6

---

---

CIMATRON LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------- | ----- | ------- | - | ----- | - | - | ------ | -
|                                                                                            |  | Year ended December
  31, |      
|                                                                                            |  |                           |      
|                                                                                            |  | 2 0 0 7                   |       | 2 0 0 6 |   | 2005  |  
|                                                                                            |  |                           |       |         |   |       |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|CASH FLOWS -
  OPERATING ACTIVITIES                                                         |  |                           |       |         |   |       |   |   |        |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Net Income (loss)                                                                           |  | $                         | 1,923 |         | $ | 514   |   | $ | (4,593 | )
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Adjustments
  to reconcile net loss to net cash provided by (used in) operating activities: |  |                           |       |         |   |       |   |   |        |  
|Depreciation and amortization                                                               |  |                           | 891   |         |   | 521   |   |   | 1,676  |  
|Increase (decrease) in accrued
  severance pay                                              |  |                           | (210  | )       |   | 464   |   |   | (736   | )
|Gain from sale of property and
  equipment, net                                             |  |                           |      |         |   |      |   |   | (13    | )
|stock options compensation                                                                  |  |                           | 120   |         |   | 104   |   |   |       |  
|Loss (gain) from sale and
  devaluation (revaluation) of bonds and funds                    |  |                           |      |         |   | 22    |   |   | 284    |  
|Companys equity in results of
  affiliated company                                         |  |                           | 51    |         |   | 116   |   |   | 5      |  
|Minority interest in results
  of subsidiary                                                |  |                           | 69    |         |   | (28   | ) |   | (36    | )
|Deferred taxes, net                                                                         |  |                           | (125  | )       |   |      |   |   |       |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Changes in
  assets and liabilities:                                                        |  |                           |       |         |   |       |   |   |        |  
|Decrease (increase) in
  accounts receivable and prepaid expenses                           |  |                           | 20    |         |   | (266  | ) |   | 1,354  |  
|Decrease (increase) in
  inventory                                                          |  |                           | 18    |         |   | 6     |   |   | (11    | )
|Decrease (increase) in
  deposits with insurance companies and severance pay fund           |  |                           | 89    |         |   | (434  | ) |   | 727    |  
|Increase in debts to related
  parties                                                      |  |                           | 15    |         |   | (195  | ) |   | 205    |  
|Increase (decrease) in trade
  payables, accrued expenses and other liabilities             |  |                           | 532   |         |   | 434   |   |   | 935    |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Net cash
  provided by (used in) operating activities                                       |  |                           | 3,393 |         |   | 1,258 |   |   | (203   | )
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|CASH FLOWS -
  INVESTING ACTIVITIES                                                         |  |                           |       |         |   |       |   |   |        |  
|Investment in bonds                                                                         |  |                           |      |         |   |      |   |   | (250   | )
|Proceeds from sale and
  redemption of bonds                                                |  |                           | 250   |         |   | 2,160 |   |   | 2,935  |  
|Purchase of property and
  equipment                                                        |  |                           | (555  | )       |   | (444  | ) |   | (429   | )
|Proceeds from sale of property
  and equipment                                              |  |                           |      |         |   | 7     |   |   | 27     |  
|Acquisition of affiliated
  companies                                                       |  |                           |      |         |   |      |   |   | (891   | )
|Capitalization of software
  development costs                                              |  |                           |      |         |   |      |   |   | (193   | )
|Acquisition of subsidiary, net
  of cash acquired (Appendix A)                              |  |                           | 301   |         |   | (127  | ) |   | 40     |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Net cash
  provided by (used in) investing activities                                       |  |                           | (4    | )       |   | 1,596 |   |   | 1,239  |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|CASH FLOWS -
  FINANCING ACTIVITIES                                                         |  |                           |       |         |   |       |   |   |        |  
|Short-term bank credit                                                                      |  |                           | 204   |         |   | (1    | ) |   |       |  
|Long-term bank credit                                                                       |  |                           | (9    | )       |   |      |   |   |       |  
|Proceeds from issuance of shares upon exercise of
options                                   |  |                           | 114   |         |   |      |   |   |       |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Net cash used
  in financing activities                                                     |  |                           | 309   |         |   | (1    | ) |   |       |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Effect of exchange rate
  changes on cash                                                   |  |                           | (269  | )       |   | 36    |   |   | (39    | )
|Net increase (decrease) in
  cash and cash equivalents                                      |  |                           | 3,698 |         |   | 2,853 |   |   | 1,036  |  
|Cash and cash equivalents at
  beginning of year                                            |  |                           | 5,597 |         |   | 2,708 |   |   | 1,711  |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Cash and cash
  equivalents at end of year                                                  |  | $                         | 9,026 |         | $ | 5,597 |   | $ | 2,708  |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  
|Supplemental
  information:                                                                 |  |                           |       |         |   |       |   |   |        |  
|Cash paid during the year for
  income taxes                                                |  | $                         | 47    |         | $ |      |   | $ | 47     |  
|                                                                                            |  |                           |       |         |   |       |   |   |        |  

The accompanying notes are an integral part of the
financial statements.

F-7

---

---

CIMATRON LIMITED

APPENDIX TO STATEMENTS OF CASH FLOWS(U.S. dollars in thousands)

|                                                                 |  |                           |        |         |   |      |  |   |    | 
|---------------------------------------------------------------- |  | ------------------------- | ------ | ------- | - | ---- |  | - | -- | 
|                                                                 |  | Year ended December
  31, |       
|                                                                 |  |                           |       
|                                                                 |  | 2 0 0 7                   |        | 2 0 0 6 |   | 2005 | 
|                                                                 |  |                           |        |         |   |      | 
|                                                                 |  |                           |        |         |   |      |  |   |    | 
|Appendix
  A - Acquisition of subsidiary, net of cash
  acquired |  |                           |        |         |   |      |  |   |    | 
|                                                                 |  |                           |        |         |   |      |  |   |    | 
|Working
  capital - excluding cash                               |  |                           | (2,938 | )       |   | 59   |  |   |   | 
|Goodwill                                                         |  |                           | 2,598  |         |   | 41   |  |   |   | 
|Other
  intangible assets                                        |  |                           | 968    |         |   |     |  |   |   | 
|Property
  and equipment                                         |  |                           | 444    |         |   | 27   |  |   |   | 
|Investment                                                       |  |                           | (771   | )       |   |     |  |   |   | 
|                                                                 |  |                           |        |         |   |      |  |   |    | 
|                                                                 |  | $                         | 301    |         | $ | 127  |  | $ |   | 
|                                                                 |  |                           |        |         |   |      |  |   |    | 
|                                                                
|Appendix
  B - Non-cash transactions                             |  |                           |        |         |   |      |  |   |    | 
|                                                                 |  |                           |        |         |   |      |  |   |    | 
|Purchase of property on credit                                   |  | $                         | 28     |         | $ | 60   |  | $ | 36 | 
|                                                                 |  |                           |        |         |   |      |  |   |    | 

The accompanying notes are an integral part of the
financial statements.

F-8

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1      | GENERAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | Cimatron
  Limited (the Company) designs, develops, manufactures, markets and supports
  a family of modular CAD/CAM software products which offer integrated
  design-through-manufacturing solutions for small to medium-sized companies.
  The Companys products have been sold to end-users in numerous industries,
  including automotive, aviation and aerospace, household goods, mold and die
  making, machinery and tools, and telecommunications. The Company markets its
  products through distributors and through its subsidiaries located in
  different countries.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | The
  financial statements are prepared in conformity with U.S. generally accepted
  accounting principles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Useofestimates
  in preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  preparation of financial statements in conformity with GAAP requires
  management to make estimates and assumptions in determining the reported
  amounts of assets and liabilities and disclosure of contingent assets and
  liabilities at the date of the financial statements and the reported amounts
  of revenues and expenses during the reporting period. Actual results could
  differ from those estimates.                                                                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Financial statements in U.S. dollars                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  reporting currency of the Company is the U.S. dollar (dollar).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  dollar is the functional currency of the Company and its subsidiaries in the
  United States and Canada. Transactions and balances originally denominated in
  dollars are presented at their original amounts. Non-dollar transactions and
  balances are remeasured into dollars in accordance with the principles set
  forth in Statement of Financial Accounting Standards (SFAS) No. 52 Foreign
  Currency Translation (SFAS No. 52). All exchange gains and losses from
  remeasurement of monetary balance sheet items resulting from transactions in
  non-dollar currencies are recorded in the statement of operations as they
  arise.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  financial statements of certain subsidiaries whose functional currency is
  other than the dollar are translated into dollars in accordance with the
  principles set forth in SFAS No. 52. Assets and liabilities have been translated
  at year-end exchange rates; results of operations have been translated at
  average exchange rates. The translation adjustments have been reported as a
  separate component of shareholders equity.                                                                                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  consolidated financial statements include the financial statements of the
  Company and all of its subsidiaries. All significant intercompany
  transactions and balances have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-9

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (cont)                                                                                                                        
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | D.                                                                                                                                                             | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | Cash
  equivalents consist of short-term, highly liquid investments that are readily
  convertible into cash with original maturities of three months or less.
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | E.                                                                                                                                                             | Marketable debt securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                | The Company accounts for its investments in
  marketable securities in accordance with SFAS No. 115, Accounting for
  Certain Investments in Debt and Equity Securities (SFAS 115).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                | Management determines the appropriate
  classification of the Companys investments in marketable debt securities at
  the time of purchase and reevaluates such determinations at each balance
  sheet date. Debt securities for which the Company does not have the intent or
  ability to hold to maturity are classified as available-for-sale.                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                | As of December 31, 2007 and 2006 all marketable
  debt securities are designated as available-for-sale and accordingly are
  stated at fair value, with the unrealized gains and losses reported in
  shareholders equity under accumulated other comprehensive income (loss).
  Realized gains and losses on sales of investments, as determined on a
  specific identification basis, are included in the consolidated statement of
  operations.                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | F.                                                                                                                                                             | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                | The financial instruments of the Company consist
  mainly of cash and cash equivalents, short-term investments, current accounts
  receivable, accounts payable and long-term liabilities. In view of their
  nature, the fair value of the financial instruments included in working
  capital of the Company is usually identical or close to their carrying
  amounts.                                                                                                                                                                                                                                                                                                                                                              
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | G.                                                                                                                                                             | Concentrations of credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                | Financial
  instruments which potentially subject the Company to concentration of credit
  risk consist principally of cash and cash equivalents, and accounts
  receivable. The Companys cash and cash equivalents are invested primarily in
  deposits with major banks worldwide. Management believes that the financial
  institutions that hold the Companys investments are financially sound, and
  accordingly, minimal credit risk exists with respect to these investments.
  The Companys trade receivables are derived from sales to customers located
  primarily in the U.S., Europe, Asia and Israel. The allowance for doubtful
  accounts is provided with respect to all balances deemed doubtful of
  collection.
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | H.                                                                                                                                                             | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                | The
  allowance for doubtful accounts is computed on the specific identification
  basis for accounts, the collection of which, in managements estimation, is
  doubtful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-10

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                
|------------ | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                
|             | I.                                      | Inventory                                                                                                                                                      
|             |                                         |                                                                                                                                                                
|             |                                         | Inventory
  is presented at the lower of cost or market. Cost is determined by the first
  in, first out method.                                             
|             |                                         |                                                                                                                                                                
|             | J.                                      | Property and equipment                                                                                                                                         
|             |                                         |                                                                                                                                                                
|             |                                         | Property
  and equipment are stated at cost. Depreciation is computed using the straight-line
  method, over the estimated useful life of assets, as follows:

| |  |                                  |                    | 
| |  | -------------------------------- | ------------------ | 
| |  | Computers
  and software         | 3 years           
| |  | Office
  furniture and equipment | 6.5
  - 16.5 years

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Leasehold
  improvements are amortized over the shorter of the life of the respective
  lease or the service life of the improvements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | K. | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  Company regularly reviews whether facts and circumstances exist which
  indicate that the carrying amount of assets may not be recoverable. The
  Company assesses the recoverability of the carrying amount of its long-lived
  assets based on expected undiscounted cash flows. If an assets carrying
  amount is determined to be not recoverable, the Company recognizes an
  impairment loss based upon the difference between the carrying amount and the
  fair value of such assets, in accordance with SFAS No. 144 Accounting for
  the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | L. | Software development cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  Company capitalizes software development costs in accordance with SFAS No. 86
  Accounting for the Costs of Computer Software to be Sold, Leased or
  Otherwise Marketed (SFAS No. 86). Capitalization of software development
  costs begins upon the establishment of technological feasibility, and continues
  up to the time the software is available for general release to customers.
  The establishment of technological feasibility and the ongoing assessment of
  the recoverability of these costs requires considerable judgment by
  management with respect to certain external factors including, but not
  limited to, anticipated future gross product revenue, estimated economic life
  and changes in software and hardware technology.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Capitalized
  software development cost is amortized on a product-by-product basis and
  begins when the product is available for general release to customers. Annual
  amortization is the greater of the amount computed using the ratio of current
  gross revenue for a product to the total of current and anticipated product
  revenue or the straight-line basis over the remaining economic useful life of
  the software, which is not more than five years.                                                                                                                                                                                                                                                                                                 

F-11

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------ | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | M.                                      | Acquisition-related intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                         | The
  Company accounts for its business combinations in accordance with SFAS No.
  141 Business Combinations (SFAS 141) and the related acquired intangible
  assets and goodwill in accordance with SFAS No. 142 Goodwill and Other
  Intangible Assets (SFAS 142). SFAS 141 specifies the accounting for
  business combinations and the criteria for recognizing and reporting
  intangible assets apart from goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                         | Acquisition-related intangible assets result from
  the Companys acquisitions of businesses accounted for under the purchase
  method and consist of the values of identifiable intangible assets including
  developed software products, established workforce and trade names, as well
  as goodwill. Goodwill is the amount by which the acquisition cost exceeds the
  fair values of identifiable acquired net assets on the date of purchase.
  Acquisition-related intangible assets are reported at cost, net of
  accumulated amortization.                                                                                                                                                                                                                                                                                                                                                            
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | N.                                      | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                         | Effective January 1, 2006, the Company adopted the provisions of SFAS
  No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)). SFAS No.
  123(R) requires employee share-based equity awards to be accounted for under
  the fair value method. Accordingly, stock-based compensation is measured at
  the grant date, based on the fair value of the award. Prior to January 1,
  2006, the Company accounted for stock-based equity awards granted using the
  intrinsic value method prescribed by Accounting Principles Board (APB)
  Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
  related interpretations, and provided the required pro forma disclosures
  prescribed by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
  No. 123), as amended. The exercise price of options is equal to the Company
  share market price on the date of grant.
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                         | Under the modified prospective method of adoption for SFAS No.
  123(R), the compensation cost recognized by the Company beginning in 2006
  includes (a) compensation cost for all equity incentive awards granted prior
  to, but not yet vested as of January 1, 2006, based on the grant-date fair
  value estimated in accordance with the original provisions of SFAS No. 123,
  and (b) compensation cost for all stock-based compensations granted
  subsequent to January 1, 2006, based on the grant-date fair value estimated
  in accordance with the provisions of SFAS No. 123(R). The Company uses the
  straight-line attribution method to recognize stock-based compensation costs
  over the service period of the award.                                                                                                                                                                      

F-12

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------------ | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | N.                                      | Stock-based compensation (cont)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                         | Stock-based compensation recognized in 2006 as a result of the
  adoption of SFAS No. 123(R), as well as pro forma disclosures according to
  the original provisions of SFAS No. 123 for periods prior to the adoption of
  SFAS No. 123(R), use the Black-Scholes option pricing model for estimating
  the fair value of options granted under the Companys equity plans. The
  weighted average assumptions that were used in calculating such values during
  2006, 2005, and 2004, were based on estimates at the date of grant as
  follows:

|                           |  |           |  |  |           |  |         | 
|-------------------------- |  | --------- |  |  | --------- |  | ------- | 
|                           |  | 2 0 0 7   |  |  | 2 0 0 6   |  | 2 0 0 5 | 
|                           |  |           |  |  |           |  |         | 
|                           |  |           |  |  |           |  |         | 
|Risk-free interest rate    |  | 4.75%     |  |  | 5.41%     |  | 3.3%    | 
|Expected
  life of options |  | 3.19 year |  |  | 3.25 year |  | 4 year  | 
|Expected
  volatility      |  | 93%       |  |  | 67%       |  | 96%     | 
|Expected
  dividend yield  |  | None      |  |  | None      |  | None    | 

| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pro
  forma information required under SFAS No. 123(R) for periods prior to fiscal
  year 2006, as if the Company had applied the fair value recognition
  provisions of SFAS No. 123 to options granted is as follows:

|                                                            |  |         |        |  
|----------------------------------------------------------- |  | ------- | ------ | -
|                                                            |  | 2 0 0 5 |       
|                                                            |  |         |       
|                                                            |  |         |        |  
|Pro forma net income:                                       |  |         |        |  
|Net income for the year, as reported                        |  | $       | (4,593 | )
|Deduct  stock-based
  compensation determined under APB-25 |  |         |       |  
|Add - stock-based
  compensation determined under SFAS 123  |  |         | (77    | )
|                                                            |  |         |        |  
|Pro forma net income                                        |  | $       | (4,670 | )
|                                                            |  |         |        |  
|                                                            |  |         |        |  
|Pro forma basic earnings per share                          |  | $       | (0.59  | )
|                                                            |  |         |        |  
|                                                            |  |         |        |  
|Basic earnings per share
  as reported                      |  | $       | (0.60  | )
|                                                            |  |         |        |  
|                                                            |  |         |        |  
|Pro forma diluted earnings per share                        |  | $       | (0.60  | )
|                                                            |  |         |        |  
|                                                            |  |         |        |  
|Diluted earnings per
  share as reported                    |  | $       | (0.59  | )
|                                                            |  |         |        |  

F-13

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------ | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             | O.                                      | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | The
  Company recognizes revenues in accordance with the American Institute of
  Certified Public Accountants (AICPA) Statement of Position 97-2, Software
  Revenue Recognition, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | Revenues
  from software license fees are recognized when persuasive evidence of an arrangement
  exists, the software product covered by written agreement or a purchase order
  signed by the customer has been delivered, the license fees are fixed and
  determinable and collection of the license fees is considered probable. When software arrangements involve multiple elements the
Company
  allocates revenue to each element based on the relative fair values of the
  elements. The Companys determination of fair value of each element in
  multiple element arrangements is based on vendor-specific objective evidence
  (VSOE). The Company limits its assessment of VSOE for each element to the
  price charged when the same element is sold separately.
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | Service
  revenues include consulting services, post-contract customer support and
  training. Consulting revenues are generally recognized on a time and material
  basis. Software maintenance agreements provide technical customer support and
  the right to unspecified upgrades on an if-and-when-available basis.
  Post-contract customer support revenues are recognized ratably over the term
  of the support period (generally one year) and training and other service
  revenues are recognized as the related services are provided. Deferred
  revenues represent mainly amounts received on account of service agreements.                                                                                                                                       
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | The Companys sales are made pursuant to standard
  purchase orders, containing payment terms averaging between 30 - 120 days.
  For some customers with whom the Company has long-standing relationships and
  based on past experience with those customers and the same software products,
  the Company may grant payment terms of not over 180 days. Any payment terms
  that are above 90-120 days must be approved by the Companys Chief Financial
  Officer, prior to signing any purchase order.                                                                                                                                                                                                                                                                         
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | The Companys arrangements do not
  include any refund provisions nor are payments subject to milestones. In
  addition, the Companys arrangements do not contain customer acceptance
  provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             | P.                                      | Research and development costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | Research and development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             | Q.                                      | Advertising costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                         | Advertising costs are charged to expenses, as
  incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-14

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------ | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             | R.                                      | Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | Deferred income taxes are provided for temporary
  differences between the assets and liabilities, as measured in the financial
  statements and for tax purposes, at the tax rates expected to be in effect
  when these differences reverse, in accordance with SFAS No. 109 Accounting
  for Income Taxes (SFAS No. 109).                                                                                                                                                                                                                                                                                                             
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | On January 1, 2007, the Company adopted the
  provisions of FASB interpretation No 48 (FIN 48), Accounting for Uncertainty
  in Income Taxes, an interpretation of SFAS No. 109. As a result of this
  adoption, the Company recognized a charge of $367 thousands to the beginning
  balance of the accumulated deficit on the accompanying consolidated balance
  sheet as of December 31, 2007                                                                                                                                                                                                                                          
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             | S.                                      | Net income (loss) per ordinary share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | Basic and diluted net income (loss) per share
  have been computed in accordance with SFAS No. 128 Earning per Share using
  the weighted average number of ordinary shares outstanding. Basic income
  (loss) per share excludes any dilutive effect of options and warrants.                                                                                                                                                                                                                                                                                                                                                             
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             | T.                                      | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | The Companys primary objective for holding
  derivative financial instruments is to manage mainly currency market risks.
  The Company transacts business in various currencies other than the U.S.
  dollar, primarily the Euro and NIS. The Company has established balance sheet
  and forecasted transaction risk management programs to protect against
  volatility of future cash flows caused by changes in exchange rates. It uses
  currency forward contracts and currency options in these risk management
  programs. These programs reduce, but do not always entirely eliminate, the
  impact of currency exchange movements.
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | In accordance with SFAS No. 133, Accounting for
  Derivative Instruments and Hedging Activities, as amended, the Company
  recognizes all derivative instruments as either assets or liabilities on the
  balance sheet at fair value. Fair values of currency forward contracts and
  currency options are based on quoted market prices or pricing models using
  current market rates. The accounting for gains or losses from changes in fair
  value of a derivative instrument depends on whether it has been designated
  and qualifies as part of a hedging relationship as well as on the type of
  hedging relationship.         
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | The Companys accounting policies for these
  instruments are based on whether they meet the criteria for designation as
  hedging transactions, either as cash flow or fair value hedges. The criteria
  for designating a derivative as a hedge include the instruments
  effectiveness in risk reduction and one-to-one matching for the derivative
  instrument to its underlying transaction. Gains and losses on derivatives
  that are not designated as hedges for accounting purposes are recognized
  currently in earnings, and generally offset changes in the value of assets
  and liabilities.                               
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         | The Companys outstanding derivative instruments
  as of balance sheet date are included in other receivables and other accrued
  liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-15

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------ | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | T.                                      | Derivative financial instruments (cont)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         | Currency forward contracts and currency options,
  which generally expire within 12 months and are used to hedge exposures to
  variability in expected future foreign-denominated cash flows, are designated
  as cash flows hedges. For these derivatives, the effective portion of the
  gain or loss is reported as a component of other comprehensive income in
  stockholders equity and is reclassified into earnings in the same period or
  periods during which the hedged transaction affects earnings, and within the
  same income statement line item.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         | The ineffective portion of the gain or loss on the
  derivative in excess of the cumulative change in the present or future cash
  flows of the hedged item, if any, is recognized in financial income
  (expenses) net during the period of change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         | The carrying amount of foreign currency forward
  contracts and foreign currency options outstanding at December 31, 2007 and
  2006 is $2 and $131, respectively. As of the balance sheet dates, the fair
  value of these contracts approximates their carrying amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | U.                                      | Recently issued accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         | In December 2007, the FASB
  issued FAS No. 141 (revised 2007), Business Combinations, and FAS
  No. 160, Noncontrolling Interests in Consolidated Financial
  Statements-an amendment of ARB No. 51. FAS No. 141 (revised 2007)
  requires an acquirer to measure the identifiable assets acquired, the
  liabilities assumed and any noncontrolling interest in the acquiree at their
  fair values on the acquisition date, with goodwill being the excess value
  over the net identifiable assets acquired. This standard also requires the
  fair value measurement of certain other assets and liabilities related to the
  acquisition such as contingencies and research and development. FAS
  No. 160 clarifies that a noncontrolling interest in a subsidiary should
  be reported as a component of shareholders equity in the consolidated
  financial statements. Consolidated net income should include the net income
  for both the parent and the noncontrolling interest with disclosure of both
  amounts on the consolidated statement of income. The calculation of earnings
  per share will continue to be based on income amounts attributable to the
  parent. The effective date for both Statements is for fiscal years beginning
  after December 15, 2008. The adoption of FAS No. 141 (revised 2007)
  is prospective. The effects on our financial position and consolidated
  results of operations could be significant, but there will be no impact on
  our cash flows. The adoption of FAS No. 160 is prospective. The impact
  to presentation and disclosure are applied retrospectively. The Company
  currently in the process of evaluating the impact, if any, that the adoption
  of FAS No. 141 (revised 2007) and FAS No. 160 will have on our
  financial position, consolidated results of operations and cash flows.
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         | SFAS No. 157, Fair
  Value Measurements - In September 2006, the FASB issued SFAS No. 157, Fair
  Value Measurements (SFAS 157), which defines fair value, establishes a
  framework for measuring fair value and expands disclosures about fair value
  measurements. SFAS 157 applies whenever other accounting standards require or
  permit assets or liabilities to be measured at fair value. Accordingly, it
  does not expand the use of fair value in any new circumstances. Fair value
  under SFAS 157 is defined as the price that would be received to sell an
  asset or paid to transfer a liability in an orderly transaction between
  market participants at the measurement date. This Standard clarifies the
  principle that fair value should be based on the assumptions market
  participants would use when pricing an asset or liability. In support of this
  principle, SFAS 157 establishes a fair value hierarchy that prioritizes the
  information used to develop those assumptions. The fair value hierarchy gives
  the highest priority to quoted prices in active markets and the lowest priority
  to unobservable data, for example, a reporting entitys own data. Under SFAS
  157, fair value measurements would be separately disclosed by level within
  the fair value hierarchy. SFAS 157 is effective for fiscal years beginning
  after November 15, 2006. Accordingly, the Company is to adopt SFAS 157 on January 1, 2007. The adoption of SFAS 157 is not
expected to have a material
  effect on the Companys financial position or results of operations.                                                                                                                                                                                                                                                  

F-16

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------ | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2      | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | U.                                      | Recently issued accounting pronouncements (cont)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                         | In February 2007, the FASB
  issued SFAS No. 159, The Fair Value Option for Financial Assets and
  Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
  companies to choose to measure certain financial instruments and certain
  other items at fair value. The standard requires that unrealized gains and
  losses on items for which the fair value option has been elected be reported
  in earnings. SFAS No. 159 is effective for the Company beginning in the
  first quarter of fiscal year 2008, although earlier adoption is permitted.
  The company is currently evaluating the impact that SFAS No. 159 will
  have on its consolidated financial statements.
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 3      | LONG-TERM INVESTMENTS                  
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                         | A.     Long-term
  investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                         | Comprised as follows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                              |  |              |       |         |   |       | 
|--------------------------------------------- |  | ------------ | ----- | ------- | - | ----- | 
|                                              |  | December 31, |      
|                                              |  |              |      
|                                              |  | 2 0 0 7      |       | 2 0 0 6 |  
|                                              |  |              |       |         |  
|                                              |  |              |       |         |   |       | 
|Marketable securities -
  Corporate bonds (1) |  |              | 1,158 |         | $ | 1,287 | 
|                                              |  |              |       |         |   |       | 
|Investment in affiliated
  companies:         |  |              |       |         |   |       | 
|Microsystem Srl                               |  |              |      |         |   | 748   | 
|Other                                         |  |              |      |         |   |      | 
|                                              |  |              |       |         |   |       | 
|                                              |  |              |      |         |   | 748   | 
|                                              |  |              |       |         |   |       | 
|                                              |  | $            | 1,158 |         | $ | 2,035 | 
|                                              |  |              |       |         |   |       | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Comprised of structured
  bonds, which are debt instruments whose cash flows are linked to the movement
  in interest rates. The structured notes were issued by financial
  institutions. The notes typically contain embedded option components such as
  caps, calls, and floors. Contractual cash flows for principal from such
  structured notes can vary in timing throughout the life of the structured
  notes. Interest income resulting from investment in structured notes is
  accounted for based on the guidance provided in EITF No. 96-12, Recognition
  of Interest Income and Balance Sheet Classification of Structured Notes.
  Under this guidance, the retrospective method is used for recognizing
  interest income.

F-17

---

---

CIMATRON LIMITED

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3      | SHORT-TERM AND LONG-TERM INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | A.     Long-term
  investments (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | In June 2005, the Company
  completed the acquisition of 27.5% of the share capital of Microsystem Srl,
  its Italian distributor, for a consideration of $694. The Company had an
  option (First Call Option) to acquire up to additional 23.5% of Microsystems
  share capital until June 30, 2007, for an additional consideration of
  approximately $600. The Company exercised its option in June 2007. Upon
  exercise of the First Call Option the Company has a second option, at any
  time within a thirty days period (Second Exercise Period) starting at the
  expiration of twelve months from the exercise of the First Call Option to
  acquire up to the remaining 49% of Microsystems share capital, for an
  additional consideration of approximately $1,250. In addition, once the
  Company exercised the First Call Option, the then remaining other
  shareholders of Microsystem have an option to sell to the Company at any time
  during the Second Exercise Period 49% of Microsystems share capital, for a
  consideration of approximately $1,250. In accordance with EITF 00-4 following
  the exercise of the First Call Option and the increase in Cimatrons holding
  in Microsystemto 51%, the Company has consolidated 100% of the results of
  Microsystem starting the third quarter of 2007.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | Microsystem is a leading
  CAD/CAM distributor in Italy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | This acquisition was
  accounted for in accordance with SFAS No. 141 and SFAS No. 142.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | The purchase price was
  allocated on the basis of the estimated fair value of the assets purchased
  and the liabilities assumed. The excess of the purchase over the fair value
  of the net tangible assets acquired was attributed to intangible assets and
  goodwill. The purchase price attributed to intangible assets is being
  amortized over its estimated useful life, which is approximately 6 years. In
  accordance with SFAS No. 141 and SFAS No. 142, the purchase price attributed
  to goodwill is not amortized, but rather is subjected to periodic impairment
  tests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-18

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

The following
table summarizes the fair value of assets acquired and liabilities assumed at
the date of acquisition:

|                              |  |   |        |  
|----------------------------- |  | - | ------ | -
|Cash and cash equivalents     |  |   | 951    |  
|Property and equipment        |  |   | 430    |  
|Other tangible assets         |  |   | 3,940  |  
|Other tangible liabilities    |  |   | (6,218 | )
|                              |  |   |        |  
|Net tangible assets acquired  |  |   | (897   | )
|                              |  |   |        |  
|                              |  |   |        |  
|Intangible assets acquired(1) |  |   | 764    |  
|Goodwill                      |  |   | 1,983  |  
|                              |  |   |        |  
|                              |  | $ | 1,850  |  
|                              |  |   |        |  

(1)
Intangible assets acquired are subject to amortization and include
the following:

|                          |  |  |            |     |                                           |  |     | 
|------------------------- |  |  | ---------- | --- | ----------------------------------------- |  | --- | 
|                          |  |  | Fair value |     | Estimated weighted-
  average useful life | 
|                          |  |  |            |     |                                           |  |     | 
|Customer
  relationship   |  |  |            | 475 |                                           |  | 5   | 
|Distribution
  agreements |  |  |            | 280 |                                           |  | 6   | 
|Backlog                   |  |  |            | 9   |                                           |  | 0.5 | 
|                          |  |  |            |     |                                           |  |     | 
|                          |  |  |            | 764 |                                           |  |     | 
|                          |  |  |            |     |                                           |  |     | 

| |    |                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | As of
  December 31, 2007 and 2006 all the investments in marketable securities are
  classified in accordance with SFAS No. 115 as available-for-sale.   
| |    |                                                                                                                                                           
| |    | Unrealized
  loss on available-for-sale securities of $87 and $7 at December 31, 2007 and
  2006, respectively, were recorded in other comprehensive loss.
| |    |                                                                                                                                                           
| |    | The
  Companys investments consist of:                                                                                                                   
| |    |                                                                                                                                                           
| |    | Aggregate
  maturities of marketable securities are as follows:                                                                                           

|            |  |              |       | 
|----------- |  | ------------ | ----- | 
|            |  | December 31, |      
|            |  |              |      
|            |  | 2 0 0 7      |      
|            |  |              |      
|            |  |              |      
|Seven years |  | $            | 1,158 | 

F-19

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                          
|------------ | -------------------------
|NOTE 4      | TRADE ACCOUNTS RECEIVABLE

|                                         |  |              |        |         |   |        |  
|---------------------------------------- |  | ------------ | ------ | ------- | - | ------ | -
|                                         |  | December 31, |       
|                                         |  |              |       
|                                         |  | 2 0 0 7      |        | 2 0 0 6 |  
|                                         |  |              |        |         |  
|                                         |  |              |        |         |   |        |  
|Accounts
  receivable                    |  | $            | 8,705  |         | $ | 6,473  |  
|Less -
  allowance for doubtful accounts |  |              | (1,397 | )       |   | (1,625 | )
|                                         |  |              |        |         |   |        |  
|                                         |  | $            | 7,308  |         | $ | 4,848  |  
|                                         |  |              |        |         |   |        |  

|             |                                               
|------------ | ----------------------------------------------
|NOTE 5      | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

|                         |  |              |       |         |   |     | 
|------------------------ |  | ------------ | ----- | ------- | - | --- | 
|                         |  | December 31, |      
|                         |  |              |      
|                         |  | 2 0 0 7      |       | 2 0 0 6 |  
|                         |  |              |       |         |  
|                         |  |              |       |         |  
|Prepaid
  expenses       |  | $            | 427   |         | $ | 203 | 
|Deferred tax
  asset     |  |              | 107   |         |   |    | 
|Derivative
  instruments |  |              | 2     |         |   | 131 | 
|Interest
  receivable    |  |              | 13    |         |   | 16  | 
|Other                    |  |              | 709   |         |   | 503 | 
|                         |  |              |       |         |   |     | 
|                         |  | $            | 1,258 |         | $ | 853 | 
|                         |  |              |       |         |   |     | 

|             |                       
|------------ | ----------------------
|NOTE 6      | PROPERTY AND EQUIPMENT

|                                 |  |              |       |         |   |       | 
|-------------------------------- |  | ------------ | ----- | ------- | - | ----- | 
|                                 |  | December 31, |      
|                                 |  |              |      
|                                 |  | 2 0 0 7      |       | 2 0 0 6 |  
|                                 |  |              |       |         |  
|                                 |  |              |       |         |  
|Cost:                            |  |              |       |         |   |       | 
|Computers
  and software         |  | $            | 5,684 |         | $ | 4,374 | 
|Office
  furniture and equipment |  |              | 1,976 |         |   | 964   | 
|Vehicles                         |  |              | 135   |         |   |      | 
|Leasehold
  improvements         |  |              | 580   |         |   | 502   | 
|                                 |  |              |       |         |   |       | 
|                                 |  |              | 8,375 |         |   | 5,840 | 
|                                 |  |              |       |         |   |       | 
|Accumulated depreciation:        |  |              |       |         |   |       | 
|Computers
  and software         |  |              | 4,822 |         |   | 3,687 | 
|Office
  furniture and equipment |  |              | 1,629 |         |   | 751   | 
|Vehicles                         |  |              | 47    |         |   |      | 
|Leasehold
  improvements         |  |              | 540   |         |   | 392   | 
|                                 |  |              |       |         |   |       | 
|                                 |  |              | 7,038 |         |   | 4,830 | 
|                                 |  |              |       |         |   |       | 
|                                 |  |              |       |         |   |       | 
|Property and equipment, net      |  | $            | 1,337 |         | $ | 1,010 | 
|                                 |  |              |       |         |   |       | 

F-20

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                                
|------------ | -------------------------------
|NOTE 7      | SOFTWARE DEVELOPMENT COSTS, NET

|                                         |  |              |     |         |   |     |  
|---------------------------------------- |  | ------------ | --- | ------- | - | --- | -
|                                         |  | December 31, |    
|                                         |  |              |    
|                                         |  | 2 0 0 7      |     | 2 0 0 6 |  
|                                         |  |              |     |         |  
|                                         |  |              |     |         |   |     |  
|Capitalized
  software development costs |  | $            | 193 |         | $ | 193 |  
|Accumulated
  amortization               |  |              | (81 | )       |   | (37 | )
|                                         |  |              |     |         |   |     |  
|                                         |  | $            | 112 |         | $ | 156 |  
|                                         |  |              |     |         |   |     |  

|             |                                       
|------------ | --------------------------------------
|NOTE 8      | ACCRUED EXPENSES AND OTHER LIABILITIES

|                                    |  |              |       |         |   |       | 
|----------------------------------- |  | ------------ | ----- | ------- | - | ----- | 
|                                    |  | December 31, |      
|                                    |  |              |      
|                                    |  | 2 0 0 7      |       | 2 0 0 6 |  
|                                    |  |              |       |         |  
|                                    |  |              |       |         |   |       | 
|Employees
  and related liabilities |  | $            | 2,267 |         | $ | 1,674 | 
|Accrued
  expenses                  |  |              | 2,505 |         |   | 916   | 
|Accrued
  royalties                 |  |              | 2,108 |         |   | 1,341 | 
|Taxes to
  government institutions  |  |              | 884   |         |   | 289   | 
|Others                              |  |              | 1     |         |   | 1     | 
|                                    |  |              |       |         |   |       | 
|                                    |  | $            | 7,765 |         | $ | 4,221 | 
|                                    |  |              |       |         |   |       | 

|             |                                                                                                                                                                                                                                                                                                                                     
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9      | ACCRUED SEVERANCE PAY (DEPOSITS WITH INSURANCE COMPANIES ANDSEVERANCE
  PAY FUNDS)                                                                                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                                     
|             | The
  Companys liability for severance pay is calculated pursuant to Israeli
  severance pay law based on the most recent salary of the employee multiplied
  by the number of years of employment as of the balance sheet date. Employees
  are entitled to one months salary for each year of employment or a portion
  thereof.
|             |                                                                                                                                                                                                                                                                                                                                     
|             | The
  Companys liability for all of its employees is funded by monthly deposits
  with severance pay funds and insurance policies. An accrual is set up for any
  unfunded amount.                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                     
|             | The
  deposited funds include profits accumulated up to the balance sheet date. The
  deposited funds may be withdrawn only upon the fulfillment of the obligation
  pursuant to Israeli severance pay law or labor agreements. The value of the
  deposited funds is based on the cash surrender value of the policies.            

F-21

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------ | -------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10     | CONTINGENT LIABILITIES AND COMMITMENTS
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | A.                                     | In
  consideration of grants by the Chief Scientist of the Ministry of Industry
  and Trade of the Government of Israel (the Chief Scientist), the Company is
  obligated to pay the Chief Scientist, in respect of awarded grants, royalties
  of 3.5% of sales of products developed with funds provided by the Chief
  Scientist, until the dollar-linked amount is equal 100% of the grants
  payments received by the Company plus Libor interest rate (the Libor interest
  rate applies to grants received since January 1999). The Companys contingent
  liability as of December 31, 2007 is approximately $1,410 contingent upon the
  Company generating revenues from sales of products developed with funds
  provided by the Chief Scientist.
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | B.                                     | Regarding
  commitments in respect of the Approved Enterprise, see Note 13a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | C.                                     | In
  consideration of grants received from the Fund for the Encouragement of
  Overseas Marketing of the Israeli Governments Ministry of Industry and Trade
  (the Fund), the Company is obligated to pay the Fund royalties amounting to
  3% to 4% of the incremental exports, up to a maximum of 100% of the grants
  received.                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        | The
  Companys contingent liability as of December 31, 2007 is $558, contingent
  upon the Companys incremental exports.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | D.                                     | The Company
  uses technology in respect of which it is obligated to pay royalties up to an
  amount of $1,412, until
  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | E.                                     | Lease commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        | The premises
  of the Company and its subsidiaries are leased under various operating lease
  agreements, which expire on various dates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        | Rent
  expenses for the years ended December 31, 2007, 2006 and 2005, were
  approximately $1,050, $705 and $627, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        | The Company
  leases its motor vehicles under cancelable operating lease agreements for
  periods through 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        | The minimum
  payment under these operating leases, upon cancellation of these lease
  agreements, amounted to $374 as of December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                        | Future
  minimum lease commitments under operating leases as of December 31, 2007 are
  as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                        |  |  |   |       | 
|----------------------- |  |  | - | ----- | 
|Year ended December 31, |  |  |   |       | 
|                        |  |  |   |       | 
|2008                    |  |  |   | 1,272 | 
|2009                    |  |  |   | 974   | 
|2010                    |  |  |   | 715   | 
|2011                    |  |  |   | 542   | 
|2012 and thereafter     |  |  |   | 559   | 
|                        |  |  |   |       | 
|                        |  |  | $ | 4,062 | 
|                        |  |  |   |       | 

F-22

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------ | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11     | SHAREHOLDERS EQUITY
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | A.                   | Share issuance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | The Companys shares are traded in the United States and are listed
  on the Nasdaq Capital Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | B.                   | Share Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | In April
  1998, the Board of Directors adopted a share option plan (the 1998 Share
  Option Plan) pursuant to which 620,000 Ordinary Shares were reserved for
  issuance upon the exercise of options to be granted to Directors, officers,
  employees and consultants of the Company. The 1998 Share Option Plan is
  administrated by the Board, which designates the optionees and dates of
  grant. The exercise price of an option granted under the 1998 Share Option
  Plan may be no less than 85% of the fair market value of an Ordinary Share,
  as determined by the board on the date that the option is granted. Options
  granted vest over a period determined by the option committee, terminate
  three years after they become exercisable, and are non-assignable except by
  the laws of descent. The board has the authority to amend the terms of option
  grants, provided that any such amendment is in the best interest of the
  grantee.
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | As of
  December 31, 2007, none of these options were outstanding. These options are
  exercisable commencing two years after the date of grant at a rate of 25% per
  year, subject to the continued employment of each employee. The grantee will
  be responsible for all personal tax consequences of the grant and the
  exercise thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | In March
  2000, the board adopted new guidelines for the options to purchase Ordinary
  Shares reserved for issuance under the 1998 Share Option Plan upon the
  exercise of options to be granted to Directors, officers, employees and
  consultants of the Company. Such options are exercisable commencing two years
  after the date of grant at a rate of 50% on the second anniversary of the
  date of grant and 25% in each of the following two years, subject to the continued
  employment of each employee. As of December 31, 2005, options to purchase
  18,750 of such shares were outstanding at a price of $4.50 per share.                                                                                                                                                                                                                                                                                                                          
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | In August
  2003 the Companys Board of Directors approved the grant of options to
  purchase 150,000 of the Companys shares at a price of $2.50 per share to two
  officers in the Company. These options are exercisable commencing one year
  after the date of grant at a rate of 25%-33.3% per year, subject to the
  continued employment of the officers. 37,500 of such options were outstanding
  at December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-23

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------ | --------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11     | SHAREHOLDERS EQUITY (cont)
|             |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             | B.                          | Share Option Plan (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                             | In October
  2004, the Board of Directors adopted an additional share option plan (the
  2004 Share Option Plan) pursuant to which 240,000 Ordinary Shares were
  reserved for issuance upon the exercise of options to be granted to
  directors, officers, employees and consultants of the Company. The exercise
  price of an option granted under the Share Option Plan may be no less than
  95% of the fair market value of an Ordinary Share, as determined by the board
  on the date that the option is granted. The options may be exercised over a
  10-year term unless determined otherwise by the Board. The grantees will be
  responsible for all personal tax consequences of the grant and the exercise
  thereof. In February 2005, 238,500 of such options were granted to employees
  of the Company at an exercise price of $2.20 per share, and in August 2005,
  the board of directors approved the grant of 32,000 of such options at an
  exercise price of $2.00 per share to the Companys Chief Executive Officer.
  214,500 of such options were outstanding at December 31, 2005. In December
  2005 our Board of Directors increased the 2004 Share Option Plan reserve by
  an additional 250,000 shares. The Company intends to grant additional options
  under the 2004 Share Option Plan to various directors, executive officers and
  employees of the Company. In May 2006 an additional 189,000 options were
  granted to Company employees under the 2004 Share Option Plan at an exercise
  price of $1.75-$2.00 and with a term of five years. In August 2007, the
  Company granted an additional 79,000 options to Company employees at an
  exercise price of $2.78 and with a term of five years. As of December 31,
  2007, 443,072 of such options were outstanding. These options are exercisable
  pursuant to a three (3) year vesting schedule as follows: (i) thirty three
  percent (33%) of the shares covered by the options become exercisable on the
  first anniversary of the grant date; and (ii) sixteen and one-half percent
  (16.5%) of the shares covered by the options become exercisable at the end of
  each subsequent six months period over the course of the following two (2)
  years, subject to the continued employment of each employee. The Company
  intends to grant additional options under the 2004 Share Option Plan to
  various of our directors, executive officers and employees.
|             |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                             | At December
  31, 2007 options to purchase 650,416 of Company shares were available for
  grants to Directors, officers, employees and consultants of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-24

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                              |                                                                                                                                                                                                                                      
|------------ | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11     | SHAREHOLDERS EQUITY (Cont.)
|             |                              |                                                                                                                                                                                                                                      
|             | B.                           | Share Option Plan (Cont.)                                                                                                                                                                                                            
|             |                              |                                                                                                                                                                                                                                      
|             |                              | The grantee
  will be responsible for all personal tax consequences of the grant and the
  exercise thereof. The Company intends to grant additional options to various
  Directors, executive officers and employees of the Company.
|             |                              |                                                                                                                                                                                                                                      
|             |                              | A summary of
  the status of the Companys stock option plan as of December 31, 2007, 2006
  and 2005, and changes during the years ending on those dates, is presented
  below:                                                     

|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 |  |   |          |   |   |      | 
|---------------------------------------------------------------- |  | ------------------------- | ------- | ------------------------------- | - | ------- |  | ------------------------------- | ------- | ------ | - | ------------------------------- |  | - | -------- | - | - | ---- | 
|                                                                 |  | Year ended
  December 31, |        
|                                                                 |  |                           |        
|                                                                 |  | 2 0 0 7                   |         | 2 0 0 6                         |   | 2 0 0 5 | 
|                                                                 |  |                           |         |                                 |   |         | 
|                                                                 |  | (in
  thousands)          |        
|                                                                 |  |                           |        
|                                                                 |  | Shares                    |         | Weighted average exercise price |   | Shares  |  | Weighted average exercise price |         | Shares |   | Weighted average exercise price | 
|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 | 
|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 | 
|Outstanding at beginning of year                                 |  |                           | 472,250 |                                 | $ | 2.16    |  |                                 | 375,750 |        | $ | 2.75                            |  |   | 488,250  |   | $ | 3.04 | 
|Granted                                                          |  |                           | 79,000  |                                 | $ | 2.71    |  |                                 | 189,000 |        | $ | 1.82                            |  |   | 270,500  |   | $ | 2.18 | 
|Exercised                                                        |  |                           | (52,512 | )                               | $ | 2.17    |  |                                 |        |        |   |                                |  |   |         |   |   |     | 
|Cancelled                                                        |  |                           | (55,666 | )                               | $ | 2.95    |  |                                 | (92,500 | )      | $ | 2.69                            |  |   | (383,000 | ) | $ | 2.72 | 
|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 |  |   |          |   |   |      | 
|Outstanding at year end                                          |  |                           | 443,072 |                                 | $ | 2.16    |  |                                 | 472,250 |        | $ | 2.16                            |  |   | 375,750  |   | $ | 2.75 | 
|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 |  |   |          |   |   |      | 
|Options exercisable at year end                                  |  |                           | 305,417 |                                 | $ | 2.11    |  |                                 | 158,167 |        | $ | 2.53                            |  |   | 111,250  |   | $ | 4.06 | 
|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 |  |   |          |   |   |      | 
|Weighted average fair value of options
  granted during the year |  | $                         | 1.72    |                                 |   |         |  | $                               | 0.59    |        |   |                                 |  | $ | 0.88     |   |   |      | 
|                                                                 |  |                           |         |                                 |   |         |  |                                 |         |        |   |                                 |  |   |          |   |   |      | 

| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | The
  following table summarizes information about stock options outstanding at
  December 31, 2007:

|                         |  |                                                     |         |                                                       |  |                                 |  |                                                     |      |                                 |  |         |  |  |      | 
|------------------------ |  | --------------------------------------------------- | ------- | ----------------------------------------------------- |  | ------------------------------- |  | --------------------------------------------------- | ---- | ------------------------------- |  | ------- |  |  | ---- | 
|                         |  | Options
  outstanding                               |         | Option
  exercisable                                  | 
|                         |  |                                                     |         |                                                       | 
|Range of exercise prices |  | Number of shares outstanding at December
  31, 2007 |         | Weighted average remaining contractual life
  (years) |  | Weighted average exercise price |  | Number of shares exercisable at December
  31, 2007 |      | Weighted average exercise price | 
|                         |  |                                                     |         |                                                       |  |                                 |  |                                                     |      |                                 | 
|                         |  |                                                     |         |                                                       |  |                                 |  |                                                     |      |                                 |  |         |  |  |      | 
|$1.75 
  $3.00          |  |                                                     | 443,072 |                                                       |  | 7.98                            |  |                                                     | 2.16 |                                 |  | 305,417 |  |  | 2.11 | 
|                         |  |                                                     |         |                                                       |  |                                 |  |                                                     |      |                                 |  |         |  |  |      | 
|                         |  |                                                     |         |                                                       |  |                                 |  |                                                     |      |                                 |  |         |  |  |      | 
|                         |  |                                                     | 443,072 |                                                       |  |                                 |  |                                                     |      |                                 |  | 305,417 |  |  |      | 
|                         |  |                                                     |         |                                                       |  |                                 |  |                                                     |      |                                 |  |         |  |  |      | 

F-25

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------ | ------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12     | INCOME TAXES
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | A.           | The Law for Encouragement of Capital Investments, 1959 (hereafter:
  the law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              | Since 1994,
  the Companys operations have approved enterprise status under the law.
  Reduced tax rates apply to the Companys income from the approved enterprise
  (which is determined in accordance with the increase in the Companys revenue
  during the first year of its having the abovementioned status as compared to
  the year before).                                                                                                                                                                                                                                                                                         
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              | In April
  2001 the Company was granted an approved enterprise status, subject to the
  following terms:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              | Tax
  exemption for 2 years, commencing in the first year the Company generates
  taxable income. For the remainder of the benefit period - 5 years - a reduced
  tax rate of 25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              | The period
  of tax benefits for this approved enterprise will expire in 2015 or earlier,
  depending on whether the Company generates taxable income from this approved
  enterprise.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              | Income derived from sources other than approved enterprise is
  taxable at the ordinary corporate tax rate of 29% in 2007 (regular Company
  Tax). The regular Company Tax rate is to be gradually reduced to 25% until
  2010 (29% in 2007, 27% in 2008 and 26% in 2009).                                                                                                                                                                                                                                                                                                                                                                    
|             |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |              | In the event of a distribution of cash dividends to shareholders of
  earnings subject to the exemption, the Company will be liable to tax at a
  rate of 25%. The Company has not provided deferred taxes on future
  distributions of tax-exempt earnings, as management and the Board of
  Directors have determined not to make any distribution that may result in a
  tax liability for the Company. Accordingly, such earnings have been considered
  to be permanently reinvested. The tax-exempt earnings may be distributed to
  shareholders without subjecting the Company to taxes only upon a complete
  liquidation of the Company.

F-26

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------ | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12     | INCOME TAXES (Cont.)
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | A.                   | The Law for Encouragement of Capital Investments, 1959 (hereafter:
  the law) (cont)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | The tax
  benefits and grants described above are
  subject to fulfillment of the conditions stipulated by the Law for
  Encouragement of Capital Investments, 1959, as amended, the regulations
  promulgated thereunder and the criteria set forth in the certificate of
  approval. The entitlement to the benefits is subject to completion and final
  approval by the Investment Center, such approval being subject to fulfillment
  of all terms of the approved program. In the event of failure by an
  enterprise to comply with these conditions, the tax benefits could be
  cancelled, in whole or in part, and the enterprise would be required to
  refund the amount of cancelled benefits, including interest. The completion
  of the Companys first, second and third approved enterprises has received
  final approval by the Investment Center. 
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | On April 1, 2005, a significant amendment to the Law for Encouragement of Capital Investments,
  1959 (the Investment Law) became
  effective. The Investment Law provides that terms and benefits included in
  any certificate of approval that was granted before the amendment came into
  effect will remain subject to the provisions of the Investment Law as they
  were on the date of such approval. Pursuant to the amendment, the Investment
  Center will continue to grant Approved Enterprise status to qualifying
  investments. The amendment, however, limits the scope of enterprises that may
  be approved by the Investment Center by setting criteria for the approval of
  a facility as an Approved Enterprise, such as provisions generally requiring
  that at least 25% of the Approved Enterprises income will be derived from
  export.
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                      | In February 2007 the Company received a letter from the investment
  center stating that its approved enterprise from April 2001 is about to be
  terminated if the Company does not submit a final performance
  report. The Company has decided
  not to pursue the completion of this investment plan, as it has not had any
  tax benefits from it, and it intends to apply for tax benefits pursuant the
  amended law as described above, if and when relevant                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | B                    | Comprised as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                        |  |                         |       |         |   |         |   |   |        |  
|--------------------------------------- |  | ----------------------- | ----- | ------- | - | ------- | - | - | ------ | -
|                                        |  | Year ended December 31, |      
|                                        |  |                         |      
|                                        |  | 2007                    |       | 2 0 0 6 |   | 2 0 0 5 |  
|                                        |  |                         |       |         |   |         |  
|                                        |  |                         |       |         |   |         |   |   |        |  
|Income
  (loss) before taxes on income: |  |                         |       |         |   |         |   |   |        |  
|Domestic                                |  | $                       | 21    |         | $ | 372     |   | $ | (3,285 | )
|Foreign                                 |  |                         | 2,005 |         |   | 245     |   |   | (1,337 | )
|                                        |  |                         |       |         |   |         |   |   |        |  
|                                        |  |                         | 2,026 |         |   | 617     |   |   | (4,622 | )
|                                        |  |                         |       |         |   |         |   |   |        |  
|                                        |  |                         |       |         |   |         |   |   |        |  
|Current
  taxes                         |  |                         |      |         |   | (27     | ) |   | (2     | )
|                                        |  |                         |       |         |   |         |   |   |        |  
|                                        |  |                         |      |         |   | (27     | ) |   | (2     | )
|                                        |  |                         |       |         |   |         |   |   |        |  

F-27

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                      |                                                                                                                                                                                                                       
|------------ | -------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12     | INCOME TAXES (Cont.)
|             |                      |                                                                                                                                                                                                                       
|             | C.                   | Deferred income taxes                                                                                                                                                                                                 
|             |                      |                                                                                                                                                                                                                       
|             |                      | Deferred
  income taxes reflect the net tax effects of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for income tax purposes.
|             |                      |                                                                                                                                                                                                                       
|             |                      | Significant
  components of the Company and its subsidiaries assets are as follows.                                                                                                                                   

|                               |  |              |        |         |   |        |  
|------------------------------ |  | ------------ | ------ | ------- | - | ------ | -
|                               |  | December 31, |       
|                               |  |              |       
|                               |  | 2 0 0 7      |        | 2 0 0 6 |  
|                               |  |              |        |         |  
|                              
|Deferred tax assets:           |  |              |        |         |   |        |  
|Loss carryforwards             |  | $            | 5,624  |         | $ | 6,135  |  
|Other reserve and allowances   |  |              | 131    |         |   | 277    |  
|                               |  |              |        |         |   |        |  
|Total deferred tax assets      |  |              | 5,755  |         |   | 6,412  |  
|Valuation allowance            |  |              | (5,648 | )       |   | (6,364 | )
|                               |  |              |        |         |   |        |  
|                               |  | $            | 107    |         | $ | 48     |  
|                               |  |              |        |         |   |        |  
|Deferred tax liabilities:      |  |              |        |         |   |        |  
|Intangible assets              |  |              | (247   | )       |   |       |  
|Software development costs     |  |              | (35    | )       |   | (48    | )
|                               |  |              |        |         |   |        |  
|Total deferred tax liabilities |  |              | (282   | )       |   | (48    | )
|                               |  |              |        |         |   |        |  
|                               |  | $            | (175   | )       | $ |       |  
|                               |  |              |        |         |   |        |  

| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  has provided valuation allowances in respect of deferred tax assets resulting
  from net operating loss carry forwards in Israel and for part of its net
  operating loss carry forwards in the US. Management currently believes that
  it is more likely than not that those deferred tax losses will not be
  realized in the foreseeable future.

F-28

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                      |                                                                                                                                                                                                                                                                                                                              
|------------ | -------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12     | INCOME TAXES (Cont.)
|             |                      |                                                                                                                                                                                                                                                                                                                              
|             | D.                   | Under the
  Income Tax Law (Adjustments for Inflation) 1985, income for tax purposes is
  measured in terms of earnings in NIS, adjusted for the changes in the C.P.I.
  Following is a reconciliation of income taxes calculated at the statutory tax
  rate in Israel to the actual income tax in the financial statements:

|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ------- | - | ------- | - | - | ------ | -
|                                                                                                         |  | Year ended December 31, |      
|                                                                                                         |  |                         |      
|                                                                                                         |  | 2007                    |       | 2 0 0 6 |   | 2 0 0 5 |  
|                                                                                                         |  |                         |       |         |   |         |  
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|Net Income (loss) as reported in the
  consolidated statements of operations                             |  | $                       | 2,026 |         | $ | 617     |   | $ | (4,622 | )
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|Income taxes under statutory tax rate                                                                    |  |                         | 528   |         |   | 117     |   |   | (1,571 | )
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|Increase (decrease) in taxes:                                                                            |  |                         |       |         |   |         |   |   |        |  
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|Increase in valuation allowance                                                                          |  |                         | (716  | )       |   | 369     |   |   | 1,439  |  
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|Increase in taxes resulting
  from permanent differences and non deductible expenses                     |  |                         | 43    |         |   | 26      |   |   | 278    |  
|Differences in taxes arising from
  differences between Israeli currency income and dollar income, net * |  |                         | 33    |         |   | (126    | ) |   |       |  
|Other                                                                                                    |  |                         | 112   |         |   | (359    | ) |   | (144   | )
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  
|Income taxes in the statements of
  operations                                                           |  |                         | 0     |         |   | 27      |   |   | 2      |  
|                                                                                                         |  |                         |       |         |   |         |   |   |        |  

| |                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * Resulting
  from the differences between the changes in the Israeli CPI (the basis for
  computation of taxable income of the Company and its Israeli Subsidiary) and
  the exchange rate of Israeli currency relative to the dollar                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                           
| | The Company
  adopted the provisions of FIN 48 on January 1, 2007. As a result of the
  implementation, the Company recognized a $367 increase to reserves for
  uncertain tax positions. This increase was accounted for as an adjustment to
  the beginning balance of the accumulated deficit on the accompanying
  consolidated balance sheet as of December 31, 2007.
| |                                                                                                                                                                                                                                                                                                                                                                           
| | The
  following reconciliation summarizes the total gross unrecognized tax benefits                                                                                                                                                                                                                                                                                       

|                                               |  |                                 |     | 
|---------------------------------------------- |  | ------------------------------- | --- | 
|                                               |  | Year ended 
  December 31, 2007 |    
|                                               |  |                                 |    
|                                               |  |                                 |     | 
|Balance at January 1,
  2007                   |  | $                               | 367 | 
|Gross change tax positions
  of current period |  |                                 |    | 
|Gross change for tax
  positions of prior year |  |                                 |    | 
|Balance at
  December 31, 2007                 |  | $                               | 367 | 
|                                               |  |                                 |     | 

F-29

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                      |                                                                                                                                      
|------------ | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12     | INCOME TAXES (Cont.)
|             |                      |                                                                                                                                      
|             | E.                   | Tax assessments                                                                                                                      
|             |                      |                                                                                                                                      
|             |                      | The Company
  has been issued final tax assessments by the Israeli income tax authorities
  through tax year ended December 31, 2000.
|             |                      |                                                                                                                                      
|             |                      | Certain
  subsidiaries of the Company in Europe received tax assessments through the
  tax year ended December 31, 2004.             

|             |                                   |                                                                                                                                                                                                                                                                                                            
|------------ | --------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13     | TRANSACTIONS WITH RELATED PARTIES
|             |                                   |                                                                                                                                                                                                                                                                                                            
|             | A.                                | In February
  2002, Koonras Technologies Ltd., a subsidiary of Polar Investments Ltd.
  (Koonras) and DBSI Investments Ltd. (DBSI) consummated a transaction with
  Zeevi Computers and Technology Ltd. (ZCT), by which they acquired all of
  Ordinary Shares of the Company previously held by ZCT.
|             |                                   |                                                                                                                                                                                                                                                                                                            
|             | B.                                | The
  following transactions with Koonras and DBSI are included in the financial
  statements:                                                                                                                                                                                                             

| |                   |  |                         |     |         |   |         |  |   |     | 
| | ----------------- |  | ----------------------- | --- | ------- | - | ------- |  | - | --- | 
| |                   |  | Year ended December 31, |    
| |                   |  |                         |    
| |                   |  | 2 0 0 7                 |     | 2 0 0 6 |   | 2 0 0 5 | 
| |                   |  |                         |     |         |   |         | 
| |                   |  |                         |     |         |   |         |  |   |     | 
| | Management
  fees |  | $                       | 400 |         | $ | 318     |  | $ | 349 | 

F-30

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                                        |         
|------------ | -------------------------------------- | --------
|NOTE 14     | SELECTED STATEMENTS OF OPERATIONS DATA
|             |                                        |         
|             | A.                                     | Revenues

| |                                                                          |  |                         |        |         |  |         |   |  |        |  
| | ------------------------------------------------------------------------ |  | ----------------------- | ------ | ------- |  | ------- | - |  | ------ | -
| |                                                                          |  | Year ended December 31, |       
| |                                                                          |  |                         |       
| |                                                                          |  | 2 0 0 7                 |        | 2 0 0 6 |  | 2 0 0 5 |  
| |                                                                          |  |                         |        |         |  |         |  
| |                                                                          |  |                         |        |         |  |         |   |  |        |  
| | Revenue by geographical region:                                          |  |                         |        |         |  |         |   |  |        |  
| | Israel                                                                   |  |                         | 1,171  |         |  | 1,509   |   |  | 1,639  |  
| | Europe                                                                   |  |                         | 18,831 |         |  | 11,120  |   |  | 10,776 |  
| | Far East                                                                 |  |                         | 5,243  |         |  | 5,036   |   |  | 4,624  |  
| | North America                                                            |  |                         | 3,270  |         |  | 3,631   |   |  | 3,715  |  
| | Others                                                                   |  |                         | 125    |         |  | 163     |   |  | 171    |  
| |                                                                          |  |                         |        |         |  |         |   |  |        |  
| |                                                                          |  |                         | 28,640 |         |  | 21,459  |   |  | 20,925 |  
| |                                                                          |  |                         |        |         |  |         |   |  |        |  
| |                                                                          |  |                         |        |         |  |         |   |  |        |  
| | Revenue through major distributors, as a percentage of total
  revenues: |  |                         |        |         |  |         |   |  |        |  
| | Distributor (A)                                                          |  |                         |       |         |  | 10      | % |  | 12     | %
| | Distributor (B)                                                          |  |                         | 7      | %       |  | 11      | % |  | 10     | %

| |    |                 
| | -- | ----------------
| | B. | Cost of revenues

| |                                                         |  |                         |       |         |  |         |   |  |       |  
| | ------------------------------------------------------- |  | ----------------------- | ----- | ------- |  | ------- | - |  | ----- | -
| |                                                         |  | Year ended December 31, |      
| |                                                         |  |                         |      
| |                                                         |  | 2 0 0 7                 |       | 2 0 0 6 |  | 2 0 0 5 |  
| |                                                         |  |                         |       |         |  |         |  
| |                                                         |  |                         |       |         |  |         |   |  |       |  
| | Hardware and software                                   |  |                         | 3,004 |         |  | 1,424   |   |  | 1,442 |  
| | Salaries and employee benefits                          |  |                         | 585   |         |  | 970     |   |  | 1,051 |  
| | Amortization of capitalized software
  development cost |  |                         | 39    |         |  | 39      |   |  | 1,204 |  
| | Royalties to the Chief Scientist                        |  |                         | 825   |         |  | 692     |   |  | 721   |  
| | Depreciation                                            |  |                         | 33    |         |  | 33      |   |  | 24    |  
| | Other                                                   |  |                         | 955   |         |  | 468     |   |  | 504   |  
| |                                                         |  |                         |       |         |  |         |   |  |       |  
| |                                                         |  |                         | 5,441 |         |  | 3,626   |   |  | 4,946 |  
| | Decrease in inventory                                   |  |                         | (1    | )       |  | (3      | ) |  | (11   | )
| |                                                         |  |                         |       |         |  |         |   |  |       |  
| |                                                         |  |                         | 5,440 |         |  | 3,623   |   |  | 4,935 |  
| |                                                         |  |                         |       |         |  |         |   |  |       |  

F-31

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except share and per share data)

|             |                                               |                                             
|------------ | --------------------------------------------- | --------------------------------------------
|NOTE 14     | SELECTED STATEMENTS OF OPERATIONS DATA (CONT)
|             |                                               |                                             
|             | C.                                            | Selling, general and administrative expenses

| |                                     |  |                         |        |         |  |         |  |  |        | 
| | ----------------------------------- |  | ----------------------- | ------ | ------- |  | ------- |  |  | ------ | 
| |                                     |  | Year ended December 31, |       
| |                                     |  |                         |       
| |                                     |  | 2 0 0 7                 |        | 2 0 0 6 |  | 2 0 0 5 | 
| |                                     |  |                         |        |         |  |         | 
| |                                     |  |                         |        |         |  |         |  |  |        | 
| | Marketing costs                     |  |                         | 435    |         |  | 435     |  |  | 417    | 
| | Selling expenses                    |  |                         | 13,512 |         |  | 10,274  |  |  | 11,674 | 
| | General and administrative expenses |  |                         | 3,014  |         |  | 2,482   |  |  | 3,356  | 
| | Depreciation                        |  |                         | 282    |         |  | 171     |  |  | 203    | 
| |                                     |  |                         |        |         |  |         |  |  |        | 
| |                                     |  |                         | 17,243 |         |  | 13,362  |  |  | 15,650 | 
| |                                     |  |                         |        |         |  |         |  |  |        | 

|             |                  
|------------ | -----------------
|NOTE 15     | SUBSEQUENT EVENTS

In January
2008 the Company completed the merger of Gibbs System Inc., developer of
GibbsCAM®, software for programming CNC machine tools, into Cimatron Gibbs LLC,
a wholly owned subsidiary of the Companys US-based subsidiary Cimatron
Technologies, Inc.. Bringing together the CimatronE integrated CAD/CAM suite
for toolmaking and GibbsCAM CAD/CAM solution for production will allow the
merged company to offer a powerful product portfolio for a broader part of the
manufacturing industry In consideration for the transaction, the Company paid
to Mr. William F. Gibbs, founder, Chairman and CEO of Gibbs System, and its
sole shareholder, cash in the amount of approximately $5 million, as well as
1,500,000 newly issued ordinary shares of Cimatron., which represent approximately
16% of its issued and outstanding share capital. In addition, Mr. Gibbs was
nominated to serve as Vice Chairman of the Board of Directors of Cimatron.

SCHEDULE

CIMATRON LIMITED
VALUATION AND QUALIFYING ACCOUNTS

|                                                      |  |                         |       |         |   |         |   |   |       |  
|----------------------------------------------------- |  | ----------------------- | ----- | ------- | - | ------- | - | - | ----- | -
|                                                      |  | Year ended December 31, |      
|                                                      |  |                         |      
|                                                      |  | 2 0 0 7                 |       | 2 0 0 6 |   | 2 0 0 5 |  
|                                                      |  |                         |       |         |   |         |  
|                                                      |  |                         |       |         |   |         |  
|Allowance for doubtful account at beginning
  of year |  | $                       | 1,625 |         | $ | 1,694   |   | $ | 1,317 |  
|Provision                                             |  |                         | 181   |         |   | (69     | ) |   | 421   |  
|Translation adjustments                               |  |                         | (11   | )       |   | 6       |   |   | 14    |  
|Newly consolidated subsidiary                         |  |                         | 206   |         |   | 183     |   |   |      |  
|Accounts
  receivable written off                     |  |                         | (604  | )       |   | (189    | ) |   | (58   | )
|                                                      |  |                         |       |         |   |         |   |   |       |  
|Allowance
  for doubtful accounts at end of year      |  | $                       | 1,397 |         | $ | 1,625   |   | $ | 1,694 |  
|                                                      |  |                         |       |         |   |         |   |   |       |  

F-32

---

---