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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

________________________

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003Commission File No. 1-8201

________________________

CIMATRON LTD.(Exact name of Registrant as specified in its charter and translation of Registrants name into English)

________________________

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, nominal value 0.10 New Israeli Shekel per share(Title of Class)Securities for which there is a reporting obligation pursuant
  to Section 15(d) of the Act:None(Title of Class)

________________________

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

8,001,270 Ordinary Shares

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: Yes|X|No|_|

Indicate
  by check mark which financial statements the registrant has elected to follow:

Item 17 |_|Item
  18 |X|



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1


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We have prepared
  our consolidated financial statements in United States dollars and in accordance
  with accounting principles generally accepted in the United States. As applicable
  to our consolidated financial statements for all fiscal periods for which financial
  data is presented herein, such accounting principles are substantially identical
  in all material respects to accounting principles generally accepted in Israel.
  All references herein to dollars or $ are to United States dollars, and
  all references to Shekels or NIS are to New Israeli Shekels.

*********



2


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|                                                                                            |   
|------------------------------------------------------------------------------------------- | --
|PART
      I                                                                                |   
|                                                                                            |   
|ITEM 1. IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                         |   
|Not applicable                                                                              | 4 
|ITEM
      2. OFFER STATISTICS AND EXPECTED TIMETABLE                                       |   
|Not
      applicable                                                                        | 4 
|ITEM 3. KEY INFORMATION                                                                     | 4 
|ITEM
      4. INFORMATION ON THE COMPANY                                                    | 13
|ITEM 5. OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS                                  | 25
|ITEM
      6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 38
|ITEM 7. MAJOR SHAREHOLDERS
      AND RELATED PARTY TRANSACTIONS                             | 47
|ITEM
      8. FINANCIAL INFORMATION                                                         | 49
|ITEM 9. THE OFFER
      AND LISTING                                                         | 50
|ITEM
      10. ADDITIONAL INFORMATION                                                       | 51
|ITEM 11. QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 63
|ITEM
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 64
|                                                                                            |   
|PART
      II                                                                               |   
|                                                                                            |   
|ITEM 13. DEFAULTS,
      DIVIDEND AVERAGES AND DELINQUENCIES                                | 64
|ITEM 14. MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 64
|ITEM 15. CONTROLS
      AND PROCEDURES                                                      | 65
|ITEM
      16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 65
|ITEM 16B. CODE
      OF ETHICS                                                              | 65
|ITEM
      16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 66
|ITEM 16D. EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  |   
|Not applicable                                                                              | 66
|ITEM 16E. REPURCHASE
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     | 66
|                                                                                            |   
|PART
      III                                                                              |   
|                                                                                            |   
|ITEM 17. FINANCIAL
      STATEMENTS                                                         |   
|Not applicable                                                                              | 66
|ITEM 18. FINANCIAL
      STATEMENTS                                                         | 66
|ITEM 19. EXHIBITS                                                                           | 67
|                                                                                            |   
|SIGNATURES                                                                                  | 68



3


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PART I

Item 1.     Identity
  of Directors, Senior Management and Advisers

Not Applicable

Item 2.     Offer
  Statistics and Expected Timetable

Not Applicable

Item 3.     Key
  Information

Selected Financial Data

The following
  selected financial statement of income data for the years ended December 31,
  2001, 2002 and 2003, and the balance sheet data as of December 31, 2001, 2002
  and 2003 are derived from the financial statements set forth elsewhere in this
  Report. The selected financial statements of income data for the years ended
  December 31, 1999 and 2000 and the selected balance sheet data as of December
  31, 1999, and 2000, are derived from other audited financial statements not
  included in this report. The audited financial statements have been prepared
  in accordance with accounting principles generally accepted in the United States,
  or U.S. GAAP. The financial statements for the years ended December 31, 1999,
  2000 and 2001 were audited by BDO, Ziv & Haft, independent auditors, and
  the annual financial statements for 2002 and 2003 were audited by Brightman
  Almagor & Co., a member of Deloitte Touche Tohmatsu, independent auditors.
  All of the financial data set forth below should be read in conjunction with
  Item 5 - Operating and Financial Review and Prospects and the audited financial
  statements and notes thereto (together, the Financial Statements) and other
  financial information included elsewhere in this annual report.

|                                                    |  | December
        31,                                 |  
|--------------------------------------------------- |  | ---------------------------------------------------- | -
|                                                    |  | 1999                                                 |  
|Statement
      of Income Data:                     |  | (In
        thousands of US$, except per share data) |  
|Revenue:                                            |  |                                                      |  
|                                                    |  |                                                      |  
|Products                                            |  | 16,108                                               |  
|Services                                            |  | 9,217                                                |  
|                                                    |  |                                                      |  
|Total                                               |  | 25,325                                               |  
|                                                    |  |                                                      |  
|Cost of revenue:                                    |  |                                                      |  
|Products                                            |  | 4,065                                                | *
|Services                                            |  | 2,471                                                |  
|                                                    |  |                                                      |  
|Total                                               |  | 6,536                                                |  
|                                                    |  |                                                      |  
|Gross profit                                        |  | 18,789                                               |  
|Research and development
      costs, net           |  | 4,174                                                | *
|Restructuring Costs                                 |  |                                                     |  
|Selling, general
      and administrative expenses  |  | 15,272                                               | *
|                                                    |  |                                                      |  
|Operating loss                                      |  | (657                                                 | )
|Financial Income
      (expenses), net              |  | 305                                                  |  
|                                                    |  |                                                      |  
|Other income (Expenses)                             |  | 41                                                   |  
|                                                    |  |                                                      |  
|Income (loss) before
      taxes                    |  | (311                                                 | )
|Taxes on income                                     |  | (225                                                 | )
|                                                    |  |                                                      |  
|Net income (loss)                                   |  | (536                                                 | )
|                                                    |  |                                                      |  
|Net income (loss)
      per share                   |  | (0.07                                                | )
|Weighted average
      number of shares outstanding |  | 7,960                                                |  

* Re-classified* * Less than $ 0.01



|4
|-

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|                                                              |  | December
        31,          | 
|------------------------------------------------------------- |  | ----------------------------- | 
|                                                              |  | 1999                          | 
|                                                              |  | (In
        thousands of US$) | 
|Balance
      Sheet Data:                                     |  |                               | 
|Cash and cash equivalents                                     |  | 4,261                         | 
|Short-term Investments                                        |  | 7,070                         | 
|                                                              |  |                               | 
|Total cash, cash
      equivalents and short-term investments |  | 11,331                        | 
|Working capital                                               |  | 14,614                        | 
|Total assets                                                  |  | 31,048                        | 
|Total liabilities                                             |  | 7,670                         | 
|Shareholders
      equity                                    |  | 23,378                        | 

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, statement or projections include the
  risks and uncertainties relating to our business described below.

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 offering, which have limited or no modeling
  capability,while the high end of the market, including our Cimatron
  E and its predecessor, the Cimatron IT, consists of integrated CAD/CAM systems.
  Many high end market products are roughly similar to our Cimatron E and IT products.



|5
|-

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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 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;
- our hardware platform support;
- 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 its predecessor product, the Cimatron IT, 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 one family of products.

Sales and
  services related to the Cimatron E product family, including its predecessor,
  the Cimatron IT, have accounted for substantially all of our revenue. If sales
  of the Cimatron E family were to decline, or fail to continue 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.

Two of our shareholders beneficially
  own a substantial amount of our ordinary shares and may therefore influence
  our affairs.

In February
  2002, two private holding companies, Koonras Technologies Ltd., or Koonras,
  a subsidiary of Polar Investments Ltd., and DBSI Investments Ltd., or 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 166,100 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 owns approximately 32.15% of our ordinary shares. Koonras and DBSI
  together are expected to continue to effectively have 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. Koonras and DSBI have entered into an agreement by which,
  among other matters, they will each appoint one half of our directors, not including
  our outside directors, and vote together at our shareholders meetings.
  The concentration of ownership of our Ordinary Shares by Koonras and 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.



6


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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;
- 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;
- difficulties in managing overseas subsidiaries
    and international operations; and
- regional natural calamities, such as the outbreak
    of the S.A.R.S. virus, which materially affected sales efforts in certain
    markets in Asia in 2003.

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.

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 raising 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.

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 addition, our Providers in
  Italy and Japan each accounted for more than 5% of our revenues in 2003. 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. See Item 4 - Information on the Company - Business
  Overview.



7


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We have a recent history of annual
  and quarterly losses and cannot assure you that we will return to profitability
  on an annual basis or remain profitable on a quarterly basis in the future.

We incurred
  net losses of approximately $5.7 million and $0.3 million in 2001 and 2003,
  respectively. In addition, we incurred net losses during the third quarter of
  2002 and the first and third quarter of 2003. In 2002 we had net income of $10,000
  and in the first quarter of 2004 we had net income of $10,000. We cannot be
  certain that we will return to profitability on an annual basis or remain profitable
  on a quarterly 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;
- 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.



8


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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 this happens
  in the future, the price of our ordinary shares will likely decrease again.

Recently, we have witnessed an increase
  in our revenues from services and a decrease in our revenues from products.
  If this trend continues, it may adversely affect our gross margins and profitability.

Our revenues
  from the sale of products decreased to approximately $10.5 million in 2003 from
  approximately $11.2 million in 2002 and approximately $12.4 million in 2001.
  Our revenues from services increased in 2003 to approximately $11.2 million
  from approximately $10.5 million, a decrease from approximately $10.6 million
  2001. Our gross margin from products is higher than our gross margin from services,
  since our cost of services, which includes expenses of salaries and related
  benefits of the employees engaged in providing the services, is relatively higher
  than our cost of products. If this trend continues, our gross margins and profitability
  may be adversely affected.

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.

The market
  for CAD/CAM products is rapidly evolving. This makes it difficult to predict
  demand and 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.



9


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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, including Israel and Europe. 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 in Israel where competition for qualified personnel
  is intense. 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.

Under current Israeli law, 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 most of our employees in Israel and we
  intend to enter into non-competition with the rest of our employees. 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. Under current Israeli law, 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.
  For example, Israeli courts have recently required employers seeking to enforce
  non-compete undertakings of a former employee to demonstrate that the competitive
  activities of the former employee will harm one of a limited number of material
  interests of the employer which have been recognized by the courts, such as
  the secrecy of a companys confidential commercial information or its intellectual
  property. If we cannot demonstrate that harm would be caused to us, we may be
  unable to prevent our competitors from benefiting from the expertise of our
  former employees.

If our new management team is unable
  to fully transition into their respective new positions, our operations will
  be adversely affected.

Many of our
  senior executives have joined us within the past year. For instance, our Chief
  Executive Officer, Chief Operating Officer and VP Quality Management were appointed in 2003, and
  our Chief Financial Officer and VP Research and Development joined us during
  2004. If this new senior management team is unable to transition into their
  respective positions, our operations will be adversely affected.



|10
|--

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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. 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 make 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. If we acquire or invest in another company, we could have difficulty
  assimilating that companys personnel, operations, technology or products
  and service offerings into our own. The key personnel of the acquired company
  may decide not to work for us. These difficulties could disrupt our ongoing
  business, distract our management and employees, increase our expenses and adversely
  affect our results of operations. In addition, we may incur indebtedness or
  issue equity securities to pay for any future acquisitions. The issuance of
  equity securities could be dilutive to our existing shareholders.

Risks Related to Licenses and Intellectual
  Property

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

To date, most
  of the software relating to the Cimatron E, Cimatron IT and the Quick 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. For example, certain of the modules that we offer along
  with our Cimatron E and Cimatron IT are licensed from third-party developers.
  In addition, we utilize software tools and engines that we acquire from Spatial
  Corp., a subsidiary of Dassault Systems, for the representation of three dimensional
  objects and surfaces in order to expedite the continued development of our new
  Cimatron Eproduct family.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.

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 and China, where the main competition
  we face is 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.



|11
|--

---

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. This would
  have the effect of increasing the U.S. dollar cost of our operations. We cannot
  predict any future trends in the rate of inflation/ deflation in Israel or the
  rate of devaluation of the NIS against the U.S. dollar. If the U.S. dollar cost
  of our operations in Israel increases, our U.S. dollar-measured results of operations
  will be adversely affected.

Conditions in Israel may affect our
  operations.

Our principal
  offices and facilities are located in Israel and a small portion of our sales
  are made to customers in Israel. Accordingly, political, economic and military
  conditions in Israel may directly affect our business. Since the establishment
  of the State of Israel in 1948, 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
  adversely affect our operations. Since September 2000, terrorist violence in
  Israel has increased significantly and negotiations between Israel and Palestinian
  representatives have effectively ceased. Ongoing and revived hostilities or
  other factors related to Israel could harm our operations and research and development
  efforts and decrease our sales. 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.



12


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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 four 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.

We benefit from tax benefits, the
  termination of which could affect our operations.

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

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

We are incorporated
  in Israel. Many of our executive officers and directors are nonresidents of the
  United States, and a substantial portion of our assets and the assets of these
  persons are located outside the United States. Therefore, it may be difficult
  to enforce a judgment obtained in the United States against us or any of those
  persons. It may also be difficult to enforce civil liabilities under United
  States federal securities laws in actions originally instituted in Israel.

Item 4.     Information
  on the Company

History anddevelopment 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. 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 with
  comprehensive, cost-effective CAD/CAM solutions that streamline manufacturing
  cycles, enable collaboration with outside vendors and shorten delivery time.



|13
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In August
  2003 we appointed a new Chief Executive Officer, Zvika Naggan and a new VP Quality
  Management. In addition, a number of our other senior executives have joined
  us within the past year. For instance, our VP Marketing and Chief Operating
  Officer joined us in the second half of 2003 and our Chief Financial Officer
  and VP Research and Development joined us during 2004.

Our full name
  is Cimatron Ltd. and we 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 athttp://www.cimatron.comwww.cimatron.com.
  Our U.S. agent is CT Corporation System, with an address at 3 Winners Circle,
  Albany, NY 12205.

Our capital
  expenditures for 2003 amounted to approximately $540,000 and were mostly for
  the purchase of computers, computer equipment and other office equipment.

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.



|14
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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
  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.

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 industry;
- the level of our product breadth and integration;
- our hardware platform support;
- 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.



15


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Business Overview

Principal Operations, Products and Developments

Cimatron
  E

Cimatron E,
  our current generation of CAD/CAM solutions for the tooling industry, was initially
  released in September 2001. Since its release, it has achieved rapid market
  acceptance and to date we have successfully sold copies of the product worldwide.
  We released our newest version of the Cimatron E (Version 5.1) in April 2004.
  This product provides comprehensive tools, applications and process-automation
  solutions for the tooling industry. Cimatron E is designed with the tooling
  industry in mind, where all stages involved in the tooling process are supported
  by applications that perform at new levels of speed and flexibility.

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.



|16
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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.

The Cimatron E product family includes
  the following basic modules:

Drafting Solution

Provides users with full drawing capabilities.
  This base system includes sketching and drafting and enables display and verification
  of 3D model geometry. Drafting Solution includes SAT, PFM STL and one* DI optional
  module. The Drafting Solution supports only read capabilities of all supported
  DI modules. This system is upgradeable to Designer Solution by adding the Drafting2Designer
  (D2D) upgrade option.

Designer Solution

Provides users with full 3D design capabilities.
  Designer Solution includes 3D wireframe, surfaces and parametric solid hybrid
  modeler, enabling assembly support. Designer Solution includes SAT, STL, PFM
  and one* DI optional module. The system includes QuickSplit and fully associative
  drafting solution and is upgradeable to Master Solution by adding the Designer2Master
  (D2M) upgrade option.

NC Solution

CAM-only solution. This base solution offers complete
  and comprehensive milling, simulation and verification capabilities. This base
  system produces toolpaths of the imported model and supports up to 2.5X milling
  capabilities, link to NC solutions and toolpath management routines. The base
  system includes CAD design and modification capabilities, 3X simulator and verifier,
  IMS-Run and GPP_RUN capabilities, SAT, PFM and one* DI optional module. The
  system is upgradeable to Master Solution by adding the NC2Master (N2M) upgrade
  option.



17


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Master Solution

Master Solution provides the infrastructure that
  links all design and manufacturing modules. The system includes a 3D wireframe,
  surfaces and parametric solid hybrid modeler, QuickSplit, associative drafting,
  link to NC solutions, and contains the toolpath management routines. This base
  solution produces toolpaths and supports up to 2.5X milling capabilities. The
  base system includes 3X simulator and verifier, GPP_RUN capabilities, SAT, STL,
  PFM and one* DI optional module.

Student Package

This is a limited Cimatron package for academic
  use. This package exposes most of our capabilities, and enables execution of
  a full mold design process, yet is limited to non-industrial applications. The
  system includes a 3D wireframe, surfaces and parametric solid hybrid modeler,
  MoldDesign, QuickDrill, QuickSplit, QuickCompare, QuickElectrode, associative
  drafting, link to NC solutions, and contains the toolpath management routines.
  This package supports up to 3X milling capabilities and includes 3X simulator
  and verifier, and MoldDesign application andRead
  Onlyfor IGES; DXF; DWG; SAT; STL, STEP; PTC Neutral
  and VDA. The package is protected via software mechanism and does not require
  a plug.

View Only

Provides the infrastructure that links all design
  and manufacturing modules. The system includes a 3D wireframe, surfaces and
  parametric solid hybrid modeler, QuickSplit, QuickElectrode; associative drafting
  and link to NC solutions. This base solution supports viewing of 2.5X -5X milling
  procedures and includes 3X simulator and verifier. The system supports Reading
  all leading standard formats: IGES, DXF, DWG, SAT, STL, STEP, PTC Neutral, VDA
  and PFM

In addition
  to these basic modules, we offer 36 optional modules for a wide variety of additional
  applications that allow customers to purchase those components most helpful
  for their businesses and grant customers greater control over the rate of investment
  in our products.

Cimatron
  IT

Cimatron IT,
  which preceded Cimatron E, is a family of integrated software tools for mechanical
  engineering and manufacturing automation that is designed to provide a complete
  solution for the unique needs of the manufacturing segment of the CAD/CAM market,
  especially those of mold, tool, die and fixture makers. Cimatron IT contains
  design for manufacturing and NC programming capabilities, along with advanced
  conceptual design abilities. It is designed to enable users in this market segment
  to substantially reduce their time to market. Based on our data-to-steel philosophy,
  Cimatron IT provides advanced data interface, design for manufacturing and NC
  machining tools which enable users to translate complex part designs into finished
  molds, tools, dies and fixtures in a timely manner.

Depending
  on the basic system configuration and optional modules selected, the suggested
  retail price of each of Cimatron E and Cimatron IT module ranges from approximately
  $4,000 to approximately $30,000. The average price per seat is between $15,000
  and $18,000.



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QuickNC

First released
  in March 2002, with its most recent version launched in March 2003, QuickNC
  is a CAM package focusing on shop floor manufacturing operations. This software
  allows NC operators to calculate toolpaths just once, minimizing the need for
  a simulator. This enables final cutting strategy decisions to be made before
  actual toolpath calculation, while intelligent decision-making is based on graphical
  in-process feedback. Coupled with absolute reliability, machining efficiency
  and top-level surface quality, QuickNC provides rapid tool-path calculation
  time, knowledge of stock remaining, and adaptive feed control. The software
  enables live communication via the Internet, where both parties can operate
  and discuss the full NC process in real-time. QuickNC is intuitive and simple,
  with only a minimum number of required parameters needed to define the NC process,
  and full training can be completed in a few hours.

QuickConcept

QuickConcept
  is a preliminary design and review package that allows tool designers and their
  suppliers to hold virtual review meetings over the Internet in real-time. Multiple
  users can connect to each other to section, label, dimension and identify points
  of interest and problem areas of any given tool.

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 segment 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.

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

We distribute
  our products to end-users in approximately 35countries in five continents
  through certain of our subsidiaries (in the United States, the United Kingdom,
  Canada, Germany, China and France), directly in Israeland through
  a network of 28independent Providers. Between us, our subsidiaries
  and our Providers, our family of products is currently supported at over 8,500
  customer sites with more than 17,000 installations.

Until
  recently, our sales structure was based on the direct supervision of our VP
  Sales over all sales operations. However, our new senior management has restructured
  our sales operations as a result of which we have divided our sales organization
  on a regional basis. In each region we appointed a vice president in charge
  of sales in such region. We expect such changes to result in a more efficient
  sales structure.



19


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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. Providers assume overall responsibility for the integrity
  of each end-user customers CAD/CAM system in their respective territories,
  including selection, installation, training and maintenance. Providers are 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 Provider sites. Our relationship with our Providers is further enhanced
  by an annual international conference that we organize, regional workshops and
  cooperative exhibitions, and participation in local user meetings. We have also
  established and currently run Cimatron International Training and Support Centers
  in specific regions of the world in cooperation with our Providers and local
  universities to train users in the use of our products.

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 Providers in Italy and Japan, no Provider accounted for more than 5%
  of our total revenue for the year ended December 31, 2003.

There can
  be no assurance that all existing relationships with our Providers will be renewed.
  We believe that with the exception of our Providers in Italy and Japan, the
  termination of our relationship with a single Provider would not harm us materially;
  however, the termination of our relationship with several of our Providers at
  approximately the same time or with any of our Providers in either Italy or
  Japan could seriously harm 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.



|20
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Subsidiaries

In 1996, we
  adopted a strategy of increasing 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, in September 1996, we acquired all of the outstanding
  voting interests in Cimatron Technologies, Inc., our North American Provider.
  In addition, between August and October 1997, we entered into a series of agreements
  with our German Provider, pursuant to which our German Provider transferred
  all of its Cimatron-related business, including goodwill, assets and employees
  (with the exception of distribution rights), in certain regions of Southern
  Germany, to our German subsidiary, Cimatron GmbH, and in December 1997, we also
  formed a subsidiary in France, Cimatron Sarl. More recently, we established
  a Japanese subsidiary that commenced operations in March 2001; a United Kingdom
  subsidiary that commenced operations in August 2002; and a Chinese subsidiary
  which was formed in December 2002. In December 2002, we also entered into a
  joint venture in Korea with a third party in which we held 30% as of December
  31, 2003. Since we started increasing our direct involvement in certain key
  markets through our subsidiaries, we have witnessed an improvement in sales
  conducted by such subsidiaries, and we expect to increase this marketing channel.

Marketing
  Representatives

In 1998 we
  funded the formation and operations of a marketing office in India, and in February
  2001 we opened a marketing office in South Korea. The purpose of these offices
  is to assist our local Providers in educating the market on our products. In
  2003, we closed our marketing office in China, as the office became redundant
  due to the opening of our new subsidiary there.

Dependency on Patents and Licenses

To date, most
  of the software relating to the Cimatron E, Cimatron IT and the Quick family
  of products has been developed internally by our reseach 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. For example, certain of the modules that we offer along
  with our Cimatron E and Cimatron IT are licensed from third-party developers.
  In addition, we utilize software tools and engines that we acquire from Spatial
  Corp., a subsidiary of Dassault Systems, for the representation of three dimensional
  objects and surfaces in order to expedite the continued development of our new
  Cimatron Eproduct family.See Item 3 - Risk Factors -
  We rely, to a certain extent, on third parties software. If we lose that
  software, our business could be materially adversely affected.

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 approximately 35 countries worldwide.



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In the years
  ended December 31, 2003, 2002 and 2001, approximately 56%, 54% and 47%, respectively,
  of our revenues were from Europe; approximately 10%, 11% and 16%, respectively,
  of our revenues were from Israel; approximately 20%, 23% and 21%, respectively,
  of our revenues were from the Far East; approximately 13%, 12% and 15%, respectively,
  of our revenues were from North America; and approximately 0.5%, 0% and 1%,
  respectively, of our revenues were from other countries.

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):

|                          |  |          |  |         |          |  |        |  |         |  
|------------------------- |  | -------- |  | ------- | -------- |  | ------ |  | ------- | -
|Year
      2003           |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|Geographical
      Region |  | Products |  |         | Services | 
|                          |  |          |  |         |          | 
|                          |  | Amount   |  | Percent |          |  | Amount |  | Percent |  
|                          |  |          |  |         |          |  |        |  |         |  
|Europe                    |  | 5,394    |  | 51.6    | %        |  | 6,809  |  | 61.0    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Israel                    |  | 756      |  | 7.2     | %        |  | 1,328  |  | 11.9    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Far East                  |  | 3,028    |  | 29.0    | %        |  | 1,366  |  | 12.2    | %
|                          |  |          |  |         |          |  |        |  |         |  
|North America             |  | 1,240    |  | 11.9    | %        |  | 1,568  |  | 14.0    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Other                     |  | 30       |  | 0.3     | %        |  | 90     |  | 0.8     | %
|                          |  |          |  |         |          |  |        |  |         |  
|Total                     |  | 10,448   |  | 100     | %        |  | 11,161 |  | 100     | %
|                          |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|Year
      2002           |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|Geographical
      Region |  | Products |  |         | Services | 
|                          |  |          |  |         |          | 
|                          |  | Amount   |  | Percent |          |  | Amount |  | Percent |  
|                          |  |          |  |         |          |  |        |  |         |  
|Europe                    |  | 5,933    |  | 53.2    | %        |  | 5,715  |  | 54.5    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Israel                    |  | 734      |  | 6.6     | %        |  | 1,610  |  | 15.4    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Far East                  |  | 3,340    |  | 30.0    | %        |  | 1,570  |  | 15.0    | %
|                          |  |          |  |         |          |  |        |  |         |  
|North America             |  | 1,104    |  | 9.9     | %        |  | 1,495  |  | 14.3    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Other                     |  | 39       |  | 0.3     | %        |  | 88     |  | 0.8     | %
|                          |  |          |  |         |          |  |        |  |         |  
|Total                     |  | 11,150   |  | 100     | %        |  | 10,478 |  | 100     | %
|                          |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  



|22
|--

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|                          |  |          |  |         |          |  |        |  |         |  
|------------------------- |  | -------- |  | ------- | -------- |  | ------ |  | ------- | -
|Year
      2001           |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|                          |  |          |  |         |          |  |        |  |         |  
|Geographical
      Region |  | Products |  |         | Services | 
|                          |  |          |  |         |          | 
|                          |  | Amount   |  | Percent |          |  | Amount |  | Percent |  
|                          |  |          |  |         |          |  |        |  |         |  
|Europe                    |  | 7,105    |  | 53.1    | %        |  | 3,599  |  | 37.6    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Israel                    |  | 1,060    |  | 7.9     | %        |  | 2,592  |  | 27.1    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Far East                  |  | 3,449    |  | 25.8    | %        |  | 1,459  |  | 15.2    | %
|                          |  |          |  |         |          |  |        |  |         |  
|North America             |  | 1,600    |  | 12.0    | %        |  | 1,831  |  | 19.1    | %
|                          |  |          |  |         |          |  |        |  |         |  
|Other                     |  | 166      |  | 1.2     | %        |  | 93     |  | 1.0     | %
|                          |  |          |  |         |          |  |        |  |         |  
|Total                     |  | 13,380   |  | 100     | %        |  | 9,574  |  | 100     | %
|                          |  |          |  |         |          |  |        |  |         |  

Other than
  our Provider agreements and certain maintenance contracts with customers in
  Israel, we currently have no 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 which 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 first quarter are relatively
  slower.

Organizational Structure

Each of our
  principal shareholders, Koonras and DBSI, holds 2,573,820 shares, representing
  approximately 32.15% of our outstanding share capital. Koonras and DSBI have
  entered into an agreement, by which a number of their shares equal to, or greater
  than, 25.05% of our issued and outstanding share capital cannot be sold by either
  party without first offering such holding to the other party. Additionally,
  under such agreement, in the event that the selling partys offer is refused,
  the other party shall then have the right to participate, pro-rata, with the
  selling party in the sale of his shares to a third party. Additionally, Koonras
  and DSBI have agreed that they will each appoint half of our directors, not
  including our outside directors required to be appointed under Israeli law and
  independent directors required to be appointed under the Nasdaq listing qualifications,
  and that they will vote together at our shareholders meetings.



|23
|--

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

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. We occupy an aggregate
  of approximately 2,000 square meters at this facility. In 2003, the aggregate
  annual lease payments for the office premises were approximately $230,000. The
  term of this lease ends during February 2006 and wehave an option to
  extend the lease for an additional three years.

The following
  table represents a breakdown of our approximate aggregate annual lease payments
  for office premises worldwide for the year 2003 (in thousands of U.S. Dollars):

|                                |  |                                                    |       |                               |  | 
|------------------------------- |  | -------------------------------------------------- | ----- | ----------------------------- |  | 
|                                |  |                                                    |       | APPROXIMATE                  
|ENTITY                          |  | LOCATIONS                                          |       | ANNUAL
        EXPENSE       
|                                |  |                                                    |       | (in
        thousands of US$)
|                                |  |                                                    |       |                              
|Headquarters
      in Israel    |  | Givat
      Shmuel                                 |       | 230                          
|                                |  |                                                    |       |                              
|North
      American subsidiary |  | Michigan
      and Illinois (U.S.)*                |       | 142                          
|                                |  |                                                    |       |                              
|German
      subsidiary         |  | Ettlingen,
      Hamm, Nurenberg,Koln and Ismaning |       | 237                          
|                                |  |                                                    |       |                              
|French
      subsidiary         |  | Oyonnax                                            |       | 22                           
|                                |  |                                                    |       |                              
|UK
      subsidiary             |  | Huddersfield                                       |       | 19                           
|                                |  |                                                    |       |                              
|Japanese
      subsidiary       |  | Tokyo                                              |       | 36                           
|                                |  |                                                    |       |                              
|                                |  | Beijing                                            |       | 36                           
|Chinese
      subsidiary        |  | Woxi                                               |       |                              
|                                |  | Chengdu                                            |       |                              
|                                |  |                                                    |       |                              
|South
      Korean affiliate    |  | Seoul                                              |       | 12                           
|                                |  |                                                    |       |                              
|                                |  |                                                    | Total | 734                          

*We
  closed our marketing office in Ontario, Canada in 2002 and our marketing efforts
  in Canada continue through our U.S. offices.



24


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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.

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. Most of our sales are for an amount in the range of $15,000 to $18,000.
  Accordingly, 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 pursuant to maintenance contracts
  which either provide for annual maintenance fees or for the payment of maintenance
  fees upon the provision of upgrades to our products. 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
  revenue consists of five major components: (a) the cost of our Israel-based
  operations, which include primarily salaries (mostly for research and development
  personnel) and facilities costs, (b) hardware costs in Israel, Germany, France
  and the U.K. (c) royalties payable to third parties for third party software,
  (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 2002 and 2003 costs incurred between the completion
  of the working model and the point at which the products are ready for general
  release have been insignificant. Therefore, all research and development costs
  incurred in 2002 and 2003 have been expensed.



25


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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 2002 and 2003 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. In 2001 and the first quarter
  of 2002, decreases in Euro - U.S. dollar exchange rates adversely affected our
  results of operation. However, during the last three quarters of 2002 and in
  2003 our results of operations benefited from the increase in the Euro - U.S.
  dollar exchange rates during these periods. 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.

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 2001 and
  2002, the rate of devaluation of the NIS against the U.S. dollar exceeded the
  rate of inflation. In 2003, there was on one hand a devaluation of the U.S.
  dollar against the NIS and on the other hand a deflation. If the U.S. dollar
  cost of our operations in Israel increases, our U.S. dollar-measured results
  of operations will be adversely affected.

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.



26


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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.

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.

We have no significant expenditures
  relating to either warranties or post-contract customer support bundled with
  the initial sale of the software license and, therefore, no provision in respect
  thereof is included in our financial statements.

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.



|27
|--

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Capitalized Software Development
  Costs

We capitalize software development
  costs in accordance with SFAS No. 86, subsequent to the establishment of technological
  feasibility and up to the time the software is available for general release
  to customers. Our policy on capitalized software development costs determines
  the timing of our recognition of certain development costs. In addition, this
  policy determines whether the cost is classified as a development expense or
  cost of revenues. We are required to use professional judgment in determining
  whether development costs meet the criteria for immediate expense or capitalization.
  Our judgment refers primarily to the establishment of technological feasibility
  and to on-going assessment of the recoverability of cost capitalized. We do
  that by considering certain external factors such as anticipated future gross
  product revenue, estimated economic life and changes in software and hardware
  technology.

Operating Results

|                                                      |  | December
        31,                                |  
|----------------------------------------------------- |  | --------------------------------------------------- | -
|                                                      |  |                                                     |  
|                                                      |  | 2001                                                |  
|                                                      |  |                                                     |  
|                                                      |  | In
        thousands of US$ (except per share data) |  
|Statement
      of Income Data:                       |  |                                                     |  
|Revenue:                                              |  |                                                     |  
|                                                      |  |                                                     |  
|Products                                              |  | 12,371                                              |  
|Services                                              |  | 10,583                                              |  
|                                                      |  |                                                     |  
|Total                                                 |  | 22,954                                              |  
|                                                      |  |                                                     |  
|Cost of revenue:                                      |  |                                                     |  
|Products                                              |  | 4,920                                               | *
|Services                                              |  | 2,394                                               |  
|                                                      |  |                                                     |  
|Total                                                 |  | 7,314                                               |  
|                                                      |  |                                                     |  
|Gross profit                                          |  | 15,640                                              |  
|                                                      |  |                                                     |  
|Research and development
      costs                  |  | 7,626                                               | *
|Restructuring Costs                                   |  | 250                                                 |  
|Selling, general
      and administrative expenses    |  | 12,711                                              | *
|                                                      |  |                                                     |  
|Operating loss                                        |  | (4,947                                              | )
|Financial income
      (Expenses), net                |  | (467                                                | )
|Other income (Expenses)                               |  | (81                                                 | )
|                                                      |  |                                                     |  
|Income (Loss) before
      taxes                      |  | (5,495                                              | )
|Taxes on income                                       |  | (163                                                | )
|                                                      |  |                                                     |  
|Net income (Loss)                                     |  | (5,658                                              | )
|                                                      |  |                                                     |  
|Net income (Loss)
      per share (basic and diluted) |  | (0.71                                               | )
|                                                      |  |                                                     |  
|Weighted average
      number of shares outstanding   |  | 8,001                                               |  
|                                                      |  |                                                     |  

* Re-Classified
  * * Less than $0.01



28


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|                                                              |  |                             |  |        |  |        | 
|------------------------------------------------------------- |  | --------------------------- |  | ------ |  | ------ | 
|                                                              |  | December
        31,        | 
|                                                              |  |                             | 
|                                                              |  | 2001                        |  | 2002   |  | 2003   | 
|                                                              |  |                             |  |        |  |        | 
|                                                              |  | In
        thousands of US$ | 
|Balance
      Sheet Data:                                     |  |                             |  |        |  |        | 
|Revenue:                                                      |  |                             |  |        |  |        | 
|Cash and cash equivalents                                     |  | 4,534                       |  | 4,077  |  | 3,124  | 
|Short-term Investments                                        |  | 4,440                       |  | 4,017  |  | 6,358  | 
|                                                              |  |                             |  |        |  |        | 
|Total cash, cash
      equivalents and short-term investments |  | 8,974                       |  | 8,094  |  | 9,482  | 
|Working capital                                               |  | 10,840                      |  | 10,861 |  | 10,639 | 
|Total assets                                                  |  | 22,855                      |  | 21,371 |  | 22,386 | 
|Total liabilities                                             |  | 8,313                       |  | 7,212  |  | 8,865  | 
|Shareholders
      equity                                    |  | 14,542                      |  | 14,159 |  | 13,521 | 

Revenue

Our total
  revenue remained approximately $21.6 million in 2003 as in 2002, when it decreased
  from approximately $23.0 million in 2001, a decrease of approximately 6%. Our
  revenues from the sale of products decreased to approximately $10.5 million
  in 2003 from approximately $11.2 million in 2002 and approximately $12.4 million
  in 2001. The decrease in the sale of products in 2003 was due to (a) decreased
  demand for consumer products resulting from the recession in the U.S. and other
  global markets, which caused decreased activity and consumer products manufacturers,
  including our customers, (b) mold, tool, die and fixture makers migrating their
  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, and (c) the outbreak of the SARS virus in China in 2003, which had
  a material adverse impact on our marketing and sales activity there in part
  of 2003. The decrease in revenue in 2002 was primarily due to reduced opportunities
  for new sales of products in the Israeli market due to the recession in Israel
  and to our holding a relatively large share of the Israeli CAD/CAM market, which
  is a mature market. As a percentage of revenues, our revenues from the sale
  of products decreased from approximately 53.9% in 2001 to approximately 51.6%
  in 2002 and approximately 45.4% in 2003. Our revenues from services increased
  in 2003 to approximately $11.2 million from approximately $10.5 million, which
  represented a decrease from approximately $10.6 million 2001. The decrease in
  service revenues in 2002 was due to certain customers of our Cimatron IT products
  not transitioning to our Cimatron E product, which was introduced in the third
  quarter of 2001. The increase in service revenue in 2003 resulted primarily
  from exchange rate fluctuations (i.e., a devaluation of the U.S. dollar against
  the Euro, which is the currency used in a majority of our sales).As
  a percentage of revenues, our revenues from services increased from approximately
  46.1% in 2001 to approximately 48.4% in 2002 and approximately 51.6% in 2003.
  If the trend of increased revenues from services and reduced revenues from products
  continues, our gross margins and profitability may be adversely affected.See Item 3  Risk Factors  Recently, we have witnessed an increased
  in our revenues from services and a decrease in our revenues from products.
  If this trend continues, it may adversely affect our gross margins and profitability.

For a geographical
  breakdown of our revenue, please refer to Item 4 Information on the Company
   Geographical Breakdown of our Revenue.



|29
|--

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Cost of Revenue

Cost of revenue
  decreased in 2003 to $4.6 million from $5.0 million in 2002 (a decrease of 8%),
  which was a decrease from $7.3 million in 2001 (a decrease of 33%). The decrease
  in the cost of revenue for the year 2003 was primarily due to (a) the decrease
  in the sales of products in 2003 and (b) decreases in salary expenses. The decreases
  in salary expenses were due to reductions in employees and increases in our
  effective U.S. dollar  NIS exchange rate resulting from the level at which
  we hedged NIS denominated expenses under currency forward contracts at the end
  of 2002, resulting in lower dollar costs. The decrease in the cost of revenue
  for the year 2002 was primarily due to (a) a decrease in salary and employee
  benefits and (b) the non-recurrence of a one-time write off in 2001 of $886,000
  against modules for Cimatron E that were determined by us to be non-saleable.

Gross Profit

Gross profits,
  as a percentage of total revenue, was 78.7%, 76.8% and 68% in 2003, 2002 and
  2001, respectively.

Research
  and Development, Patents and Licenses, etc.

Research and
  development costs primarily consist of salaries and related costs ofemployees engaged in ongoing research, design and development activities. Research
  and development costs were $5.2 million in 2003, $5.6 million in 2002 and $7.6
  million in 2001. The decreases in 2003 (7%) and in 2002 (26%) were due to a
  continued reduction in salaries and personnel. The decrease in 2003 was also
  due to increases in our effective U.S. dollar  NIS exchange rate resulting
  from the level at which we hedged NIS denominated expenses under currency forward
  contracts at the end of 2002, resulting in lower dollar costs.

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 2001, 2002 or 2003 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
  ZCT in January and February 2002 and to DBSI and Koonras from March 2002 onwards
  and (e) reserves for doubtful debts.

In 2003, selling,
  general and administrative expenses increased by 6% from $11.7 million in 2002
  to $12.6 million, which increase was due to (a) the relatively high Euro 
  U.S. dollar exchange rate throughout 2003, which resulted in increase selling
  expenses consisting of the salaries of the personnel of our European subsidiaries,
  (b) the expenses we incurred in connection with a full year of operations of
  our U.K. and Chinese subsidiaries, both of which we opened in 2002 and (c) expenses
  we incurred in connection with severance payments to our former chief executive
  officer. In 2002, selling, general and administrative expenses decreased from
  $12.7 million in 2001 to $11.7 million, a decrease of 8%. This decrease was
  primarily due to a reduction in salaries and employee benefits.



|30
|--

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Financial Income (Expenses)

Financial
  income (expenses) consists primarily of interest earned on our cash reserves,
  gains (losses) from sale of bonds and funds, as well as interest on tax rebates
  and currency translation adjustments between the U.S. dollar exchange rate imposed
  on our assets and liabilities. Financial income was $369,000 in 2003, a decrease
  of 14% compared to financial income of $428,000 in 2002, and financial expenses
  of $467,000 in 2001. The decrease in financial income in 2003 was due primarily
  to our not selling any bonds held by us, as opposed to 2002, in which we gained
  $359,000 from such sales. The increase in the year 2002 was primarily due to
  (a) the gain from the sale of bonds, a part of which was recorded in our financial
  statements for the previous year under other comprehensive income; and (b) the
  revaluation of the Euro in relation to the U.S. dollar.

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. We believe that our effective tax rate in Israel would
  have been approximately 21% for the year ended December 31, 2003, had we not
  incurred tax losses in Israel. We believe that our effective tax rates in the
  U.S., Germany, France, the U.K. and Japan would have been approximately 34%,
  42%, 34%, 30% and 36%, respectively, for the year ended December 31, 2003, had
  we not incurred tax losses in such countries. We believe that we had tax loss
  carryforwards in Israel in the aggregate amount of $2,330,000 as of the end
  of 2003. In addition, as of December 31, 2003, we had approximately $6,900,000
  in net operating loss carryforwards in North America, $1,200,000 in Germany,
  $2,400,000 in France and $480,000 in the U.K. 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.

We have been
  granted an Approved Enterprise status under the Israeli Law for the Encouragement
  of Capital Investments, 1959 continuously since 1994. The current status term
  will expire in the earlier of seven years after we begin to generate income
  subject to preferable taxation under the Approved Enterprise status and 2015.
  Consequently, we are eligible for certain Israeli tax benefits. Income derived
  from our Approved Enterprise plans is exempt from tax for a period of either
  two or four years, commencing in the first year in which we generate taxable
  income from such Approved Enterprise, and is subject to a reduced tax rate of
  25% for a further five or three years, respectively. See Note 13 of the notes
  to our consolidated financial statements included elsewhere in this annual report.



31


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Liquidity and Capital Resources for 2003

During 2003
  we generated (i) $10,125,000 from sales of software licenses, (ii) $323,000
  from sales of hardware, (iii) $9,082,000 from software and hardware maintenance
  fees, (iv) $725,000 from service bureau activities (in Israel), (v) $1,354,000
  from other services related to the software, (vi) $642,000 million from proceeds
  from the maturity of bonds and mutual funds and (vii) $44,000 from the sale
  of property and equipment. In addition, we received a loan in the amount of
  $500,000 from a Swiss bank, which is secured by a deposit in the amount of $500,000.
  The interest payable on the loan is 2.5% per annum, and the interest payable
  on the deposit is 10% per annum, resulting in a finance income of approximately
  $37,500 per annum.

During 2003,
  we invested $3.1 million in bonds, $0.6 million in the purchase of property
  and equipment and $0.03 million in treasury stock, and we generated $1.5 million
  in operating activities. These transactions caused our aggregate amount of cash
  and cash equivalents to be $3.1 million as of December 31, 2003 as compared
  to $4.0 million as of December 31, 2002, and our short-term investments to be
  $6.4 million as of December 31, 2003 as compared to $4 million as of December
  31, 2002. We fund our operations primarily from operating income.

As of December
  31, 2003, our cash and cash equivalents and short-term investments totaled $9,482,000,
  compared to $8,094,000 as of December 31, 2002. This inrease was primarily the
  result of cash generated by operations. As of December 31, 2003, our working
  capital was $10,639,000 and our total assets were $22,386,000, compared to $10,861,000
  and $21,371,000, respectively, as of December 31, 2002. The change in total
  assets resulted from increases in short-term investment, property and equipment
  and severance pay funds, off set by a decrease in cash equivalents, accounts
  receivable and other assets (due to an amortization of software development
  costs).

Our trade
  receivables, net of allowance for doubtful accounts on December 31, 2003 totaled
  $5,725,000, compared to $6,337,000 on December 31, 2002. The collection cycle
  has shortenedduring 2003 compared to 2002 due to improvement in the
  collection methods. We believe that, generally, the quality of receivables remained
  unchanged and we will continue our efforts to shorten the collection cycle.

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.



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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.

Impact of
  Tax Assessments

On December
  31, 2002 the Israeli Tax Authority issued us tax assessments for the years 1998
  to 2000. We reached a settlement agreement with the Tax Authority in the second
  quarter of 2004. Under the settlement, we will pay the Israeli Tax Authority
  a total of approximately $120,000 to settle all assessments. As a result of
  previous provisions we made, in 2004 we will only make a one-time provision
  for income tax in the amount of approximately $11,000 in connection with the
  settlement of these assessments.

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

For many years
  prior to 1986, the Israeli economy was characterized by high rates of inflation
  and devaluation of the Israeli currency against the U.S. dollar and other currencies.
  However, since the institution by the Israeli government of an economic recovery
  program in 1985, inflation, while continuing, has been significantly reduced
  and until recently the rate of devaluation has substantially diminished. Since
  the majority of our revenues are denominated and paid in U.S. dollars, we believe
  that inflation and fluctuations in the U.S. dollar exchange rate have no material
  effect on our revenue. Inflation and U.S. dollar exchange rate fluctuations,
  however, have some effect on our expenses and, as a result, on our net income/loss.
  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 the past six months
  from a low of NIS 4.352 to the dollar to a high of NIS 4.634 to the dollar.
  The high and low exchange rates between the NIS and U.S. dollar during the six
  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
      2003 |  | 4.352                     |  | 4.441                      
|                    |  |                           |  |                            
|January
      2004  |  | 4.371                     |  | 4.483                      
|                    |  |                           |  |                            
|February
      2004 |  | 4.437                     |  | 4.493                      
|                    |  |                           |  |                            
|March
      2004    |  | 4.483                     |  | 4.535                      
|                    |  |                           |  |                            
|April
      2004    |  | 4.515                     |  | 4.599                      
|                    |  |                           |  |                            
|May
      2004      |  | 4.555                     |  | 4.634                      
|                    |  |                           |  |                            



33


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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, 1999 - December 31, 1999 | 4.154
      NIS/$1 
|                                          |                    
|January
      1, 2000 - December 31, 2000 | 4.067
      NIS/$1 
|                                          |                    
|January
      1, 2001 - December 31, 2001 | 4.219
      NIS/$1 
|                                          |                    
|January
      1, 2002 - December 31, 2002 | 4.738
      NIS/$1 
|                                          |                    
|January
      1, 2003 - December 31, 2003 | 4.548
      NIS/$1 
|                                          |                    

In 1999 the
  rate of inflation was approximately 1.3% and the rate of devaluation was -0.3%
  . In 2000, the rate of inflation was approximately 0% and the devaluation rate
  was -2.7% . During 2001, the NIS was devalued against the dollar by 9.3% . As
  a result of the differential between the rate of inflation and the rate of devaluation
  of the NIS, we experienced increases and decreases in the costs of our Israel
  operations, as expressed in U.S. dollars, in 2001, but they did not materially
  affect our results of operations in such periods. In 2002 the rate of inflation
  was 6.5% and the rate of devaluation of the NIS against the dollar was 7.27%
  . In 2003, there was on the one hand a devaluation of the U.S. dollar against
  the NIS and on the other hand a deflation.

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
  to hedge the impact of the variability in the exchange rates on accounts receivable
  and future cash flows from certain Euro-denominated transactions as well as
  certain NIS-denominated expenses. Our policy is to hedge 60% to 80% of our Euro
  denominated accounts receivables to protect against a reduction in reported
  revenues arising from decreases in the Euro  U.S. dollar exchange rate
  and to hedge 60% to 80% of our NIS denominated expenses to protect against an
  increase in reported expenses arising from increases in the U.S. dollar 
  NIS exchange rate. The counter-parties to our forward contracts are major financial
  institutions with high credit ratings. We believe the risk of incurring losses
  on such forward contracts related to credit risks is remote and that any losses
  would be immaterial. As of December 31, 2003, we had forward contracts to sell
  up to $4.5 million for a total amount of NIS 21.6 million that were scheduled
  to mature prior to June 30, 2004. See Item 11 - Quantitative and Qualitative
  Disclosure about Market Risk for a description of hedging and other similar
  transactions.



34


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Research and development, patents, licenses,
  etc.

We conduct
  our research and development operations in Israel. Our research and development efforts have been financed through
  internal resources and through plans sponsored by the Chief Scientist of the
  Government of Israel. In the years ended December 31, 2001, 2002 and 2003, our
  gross research and development expenditures were $7,626,000, $5,562,000 and
  $5,210,000, respectively (33%, 26% and 24% of total revenues, respectively).
  Prior to 2001, we were granted royalty-bearing grants from the Chief Scientist
  of the Government of Israel 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 Chief Scientist and certain related services must be paid
  to the State of Israel. Pursuant to an amendment effected in 1996 effective
  with respect to Chief Scientist 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 Chief Scientist
  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 Chief Scientist plans approved in or after 1999, funds received from the
  Chief Scientist shall bear annual interest at a rate equal to LIBOR for twelve
  months. As of December 31, 2003, the Companys contingent liability with
  respect to such grants was $3,822,000, contingent upon the Company generating
  revenues from sales of products developed with funds provided by the Chief Scientist.

The Government
  of Israel does not own proprietary rights in the technology developed using
  its funding and there is no restriction on the export of the products manufactured
  using the technology. Certain restrictions with respect to the technology do
  apply, however, including the obligation to manufacture the product based on
  such technology in Israel and to obtain the Chief Scientists consent for
  the transfer of the technology to a third party. If the Chief Scientist consents
  to the manufacture of the products outside Israel, applicable regulations would
  require the payment of increased royalties, ranging from 120% up to 300% of
  the amount of the Chief Scientist grant, depending on the percentage of foreign
  manufacture. These restrictions continue even if we have paid the full amount
  of royalties payable in respect of the grants. In 2002, the law relating to
  the Chief Scientist was amended to, among other things, enable companies applying
  for grants from the Chief Scientist to seek prior approval for conducting manufacturing
  activities outside of Israel without being subject to increased royalties. However,
  this amendment will not apply to any of our existing grants. In addition, the
  amendment provides that one of the factors to be taken into consideration by
  the Chief Scientist in deciding whether to approve a grant application is the
  percentage of the manufacturing of the relevant product that will be conducted
  outside of Israel. Accordingly, should we seek additional grants from the Chief
  Scientist in connection with which we also seek prior approval for manufacturing
  products outside of Israel, we may not receive such grant or may receive a grant
  in an amount that is less than the amount we sought.

35


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Based upon
  the aggregate participation payments received to date, we expect that we will
  continue to pay royalties to the Chief Scientist on sales of our products and
  related services for the foreseeable future. In the years ended December 31,
  2001, 2002 and 2003, we paid or accrued royalties to the Chief Scientist in
  the amount of $579,000, $578,000 and $668,000, respectively. From time to time
  provisions of Israeli law relating to the terms of the Chief Scientist participation
  were amended and may be further amended in the future. In addition, the Chief
  Scientist budget was subject to reductions and such reductions may affect the
  availability of funds for chief scientist participation in the future. Such
  amendments or reductions in budgets could have a material adverse effect on
  our business, financial condition and results of operations.

In addition
  to the Chief Scientist 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. The Companys contingent liability as of December 31, 2003 with
  respect to such grants was $563,000, contingent upon the Companys incremental
  exports.

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:

Migration
  to Far East.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 there manufacturing activities.
  We anticipate that this migration will continue and have expanded our operations
  in Asia, including in China, in order to increase our share of those growing
  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 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)
  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, along with the
  economic downturn since 2001, have caused revenues of companies 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.



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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

1.     With
  respect to our contingent liability relating to payment of royalties to the
  Chief Scientist, 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, 2003 was $563,000, contingent upon our incremental exports.

3.     Following
  December 31, 2003, the Company entered into forward transactions (i) to sell
  an aggregate of $2,200,000 and buy an aggregate of NIS 10,252,000, (ii) to sell
  an aggregate of EURO 2,732,000 and buy an aggregateb of $3,200,000, and (iii)
  to sell an aggregate of EURO 800,000 and buy an aggregate of NIS 4,385,000.

F.     TABULAR
  DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following
  table summarizes our contractual obligations and commercial commitments as of
  December 31, 2003:

|                                                               |       |                                                 |                 |                 |                     |      
|-------------------------------------------------------------- | ----- | ----------------------------------------------- | --------------- | --------------- | ------------------- | -----
|Contractual Obligations
      as
         of December 31, 2003 |       | Payments due by Period
      (US$ in thousands)
|                                                               |       |                                                 |                 |                 |                    
|                                                               | Total | Less than
      1 Year                          | 1-3
      Years | 4-5
      Years | After 5
      Years
|                                                               |       |                                                 |                 |                 |                     |      
|Operating Leases                                               |       | $  2,721                                        | $  1,169        | $  1,552        | 0                   | 0    
|                                                               |       |                                                 |                 |                 |                     |      
|Purchase Obligations and Commitments                           |       | $  1,831                                        | $  379          | $  1,194        | $  233              | $  25
|                                                               |       |                                                 |                 |                 |                     |      
|Other Long-Term Liabilities                                    |       | $  3,447(1)                                     | 0               | 0               | 0                   | 0    
|                                                               |       |                                                 |                 |                 |                     |      
|Total Contractual Cash Obligations                             |       | $  7,999                                        | $  1,548        | $  2,746        | $  233              | $  25
|                                                               |       |                                                 |                 |                 |                     |      

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



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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 EMI 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.

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         |  | 49  |  | Chairman
      of the Board                                 
|                         |  |     |  |                                                             
|Rimon Ben-Shaoul         |  | 59  |  | Director                                                    
|                         |  |     |  |                                                             
|Barak Dotan              |  | 36  |  | Director                                                    
|                         |  |     |  |                                                             
|Kenny Lalo               |  | 46  |  | Director                                                    
|                         |  |     |  |                                                             
|David Golan              |  | 63  |  | Director                                                    
|                         |  |     |  |                                                             
|Ofra Brown               |  | 50  |  | Outside
      Director                                      
|                         |  |     |  |                                                             
|Ophira Rosolio-Aharonson |  | 54  |  | Outside
      Director                                      
|                         |  |     |  |                                                             
|Zvika Naggan             |  | 45  |  | President
      and Chief Executive Officer                 
|                         |  |     |  |                                                             
|Arie Feldman             |  | 58  |  | Chief
      Technology Officer                              
|                         |  |     |  |                                                             
|Eli Gendler              |  | 36  |  | Vice
      President of Finance and Chief Financial Officer 
|                         |  |     |  |                                                             
|Danny Haran              |  | 46  |  | Vice
      President of Marketing and ChiefOperating Officer
|                         |  |     |  |                                                             

Yossi Ben Shalomis 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.





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Rimon Ben-Shaoulhas served since February 2001 as Co-Chairman,
  President and Chief Executive Officer of Koonras Technologies Ltd. and as a
  Chairman or member of the boards of various companies of the Polar Investments
  Group. From June 1997 to February 2001 he served as President and Chief Executive
  Officer of Clal Industries and Investments Ltd. and served as a member of the
  board of Clal (Israel) Ltd. and on the board of several of its subsidiaries.
  From 1985 to June 1997, he served as President and Chief Executive Officer of
  Clal Insurance Company Ltd., as a member of its board and as Chairman or a member
  of the board of several of its subsidiaries. Mr. Ben-Shaoul holds a bachelors
  degree in economics and a masters degree in business administration from
  Tel Aviv University.

Barak Dotanis 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.

Kenny Lalohas served since 2001 as Vice President of Koonras Technologies Ltd. and as
  a member of the board of several of its affiliates. Mr. Lalo has acted in the
  capacity of of-counsel to the law firm of Eitan, Pearl, Latzer & Cohen-Zedek
  since 2001. From 1993 to 2001, he served as general counsel and later as Vice
  President of Clal Industries and Investments Ltd. and as a member of the board
  of several of its affiliates. From 1986 to 1992, Mr. Lalo was an attorney in
  Maryland, USA. Mr. Lalo holds an LL.B. from Tel Aviv University, an M.C.L. from
  Georgetown University and a masters degree in business administration
  from Northwestern University, Chicago.

David Golanhas 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 Zeevi Holdings Ltd. From 1992 to March 1997, he was Executive Vice President of Zeevi Holdings. 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.

Ofra Browncurrently serves as the Chief Financial Officer of VIZRT Ltd., a public company
  traded on the German Stock Exchange in Frankfurt, Germany. Ms. Brown also serves on the board of directors of Investec Underwriting and Consulting (Israel) Ltd. From 1999
  to 2001, Ms. Brown served as the Chief Financial Officer of BVR Technologies
  Ltd., a company publicly traded on the NASDAQ. From 1978 through 1998 Ms. Brown
  served as the Credit Manager for Electronic and Hi-Tech Industries  Industrial
  Development Bank of Israel Ltd. Ms. Brown holds a bachelors degree in
  economics from Tel Aviv University and a masters degree in business administration
  from City University of Seattle.



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Ophira Rosolio-Aharonsoncurrently
  serves as the Chief Executive Officer of Seagull Tech Ventures Ltd., and serves
  as an active executive director at several private hi-tech companies and publicly
  traded companies on NASDAQ, EASDAQ and the Tel Aviv Stock Exchange. From 1990
  to 1999, Ms. Rosolio-Aharonson served as the Chief Executive Officer of Seagull
  Tech, Inc. and Terra Computers Inc. From 1980 through 1989, Ms. Rosolio-Aharonson
  held several senior positions at Clal Ltd., a company publicly traded on the
  Tel Aviv Stock Exchange, Israel, including director, Chief Executive Officer,
  Chief Operations Officer and Vice President of Sales and Marketing of Clal Ltd.s
  subsidiaries. Ms. Rosolio-Aharonson holds a bachelor of science degree in applied
  mathematics and physics from the Technion, Israel Institute of Technology (the Technion) and a masters degree in business administration from Tel Aviv
  University.

Zvika Nagganhas been our President and Chief Executive Officer since August 2003. Mr. Naggan
  was employed by Evergreen, an Israel-based venture capital firm, where he was
  CEO in Residence. He previously held the position of Vice President and General
  Manager of the Intelligent Networks Division of Comverse (NASDAQ: CMVT). Prior
  thereto, he was the Chief Information Officer, Vice President Customer Support,
  and held other senior management positions with Comverse. Mr. Naggan holds a
  bachelor of science degree in industrial engineering from the Technion and a
  master of business administration degree from Tel Aviv University.

Arie Feldmanfounded Cimatron in 1982 and currently serves
  as the ChiefTechnology Officer of
  the Company. From 1977-1981, he served as group leader of Mechanical Design
  Applications at Gerber Systems Technology Inc. From 1971-1977, he headed the
  Numerical Design department at Israel Aircraft Industries (IAI) where he developed
  IAIs internal CAD/CAM system. Mr. Feldman holds a bachelor of science
  degree in aeronautical engineering from the Technion, and a master of science
  degree in computer science and a master of business administration degree, both
  from the Rensselaer Polytechnic Institute, Troy, New York.

Eli Gendlerjoined the Company in early 2004 as Vice President
  of Finance and Chief Financial Officer after many years in the finance divisions
  of Israeli-based international hi-tech companies. Prior to joining Cimatron,
  Mr. Gendler was the CFO of IFN Systems and Workplace IQ, both software developers.
  He holds a masters degree in law (LL.M.) from Bar Ilan University and
  a bachelors degree in accounting and economics from Tel Aviv University,
  and is a Certified Public Accountant in Israel.

Danny Haranjoined 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.



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Arrangements for the election of Directors

Koonras Technologies
  Ltd. and DBSI Investments Ltd., our two largest shareholders (each holding 32.15%
  of our share capital), control 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 have entered into an agreement by which, among other matters,
  they will each appoint one half of our directors, not including our outside
  directors, and vote together at our shareholders meetings.

Compensation

During the year ended December 31, 2003, we paid, in the aggregate,
  approximately $958,000 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. In addition, we have set aside or accrued approximately $152,000 to provide pension,
  retirement or similar benefits to our directors and executive officers in connection with the services provided by them to the Company
  during 2003.

Board of
  Directors

Our Articles
  of Association provide for a Board of not less than two members. Each director,
  with the exception of outside 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.



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Outside Directors

The Israeli
  Companies Law, which took effect on February 1, 2000 (the Companies Law),
  requires Israeli companies with shares that have been offered to the public
  in or outside of Israel to appoint two outside directors.

No person
  may be appointed as an outside 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 outside 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 outside 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 outside director or may otherwise interfere with the
  persons ability to serve as an outside director. If, at the time outside
  directors are to be appointed, all current members of the board of directors
  are of the same gender, then at least one outside director must be of the other
  gender.

Outside 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 outside director is three years and may be extended for an additional
  three years. Outside directors may be removed only by the same percentage of
  shareholders as is required for their election, or by a court, and then only
  if the outside directors cease to meet the statutory qualifications for their
  appointment or if they violate their duty of loyalty to the company. Each committee
  of a companys board of directors must include at least one outside director.
  Our outside directors are Ofra Brown and Ophira Rosolio-Aharonson, who will
  complete their term in April 2005, in accordance with Israeli law.

An outside
  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 outside director.

In
  addition, pursuant to the listing requirements of the NASDAQ SmallCap Market,
  we are required to have at least two independent directors on our board of directors.
  Ms. Brown and Ms. Rosolio-Aharonson qualify both as independent directors under
  the NASDAQ SmallCap Market requirements and as outside directors under the Companies
  Law.



42


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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 the outside 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.

We are also
  required by the NASDAQ SmallCap Market to establish an audit committee, a majority
  of whose members is independent of management. Our two independent directors
  serve on the audit committee of the board of directors.

Under the
  NASDAQ rules each member of the audit committee must be able to read and understand
  fundamental financial statements, including a companys balance sheet,
  income statement and cash flow statement; and the audit committee must have
  at least one member with past employment experience in finance or accounting,
  requisite professional certification in accounting, or any other comparable
  experience or background which results in the individuals financial sophistication,
  including being or having been a chief executive officer, chief financial officer
  or other senior officer with financial oversight responsibilities. The members
  of our audit committee comply with such requirements.

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;



|43
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- 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;
- 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. Kenny Lalo and Ms. Ofra Brown were serving as
  members of our audit committee, with Ms. Ophira Rosolio-Aharonson serving as
  chairperson 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. Dr. Naftali Freed serves as our internal auditor.

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,                        | 2003 | 2002 | 2001
|                                                        |      |      |     
|Research and
      Development                          | 84   | 80   | 85  
|                                                        |      |      |     
|Marketing, Sales
      andCustomer Support              | 109  | 132  | 124 
|                                                        |      |      |     
|Administration
      Management and Information Systems | 22   | 10   | 10  
|                                                        |      |      |     
|Total                                                   | 215  | 222  | 219 
|                                                        |      |      |     



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As of May
  31, 2004, we employed 216 full-time personnel, of whom 80 (most of whom hold
  advanced technical degrees) were employed in research and development, 123 were
  employed in marketing, sales and customer support and 13 were employed in various
  administrative, information systems and management positions. Of these employees,
  124 were employed in Israel operations, 17 were employed by our North American
  subsidiary, 44 were employed by our German subsidiary, 5 were employed by our
  French subsidiary, 3 were employed by our Japanese subsidiary, 4 were employed
  by our British subsidiary, 18 were employed by our Chinese subsidiary, and one
  was employed by our Indian subsidiary. In addition, we employed 22 part-time
  persons on average during the year 2003 and as of May 31, 2004 we employed 20
  part-time persons.

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%.

A general
  practice that we follow, although not legally required, is the contribution
  of funds on behalf of most of its 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. We decide whether each employee is entitled to participate in
  the plan, and each employee who agrees to participate contributes an amount
  equal to 5% of his salary and the employer contributes between 13.3% and 15.8%
  of his salary.





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Share Ownership

1996 Share
  Option Plan

In
  January 1996, the Board adopted a share option plan (the 1996 Share Option
  Plan) pursuant to which 316,000 Ordinary Shares were reserved for issuance
  upon the exercise of options to be granted to our directors, officers, employees
  and consultants. The 1996 Share Option Plan is administered by a committee of
  the Board, which designates the optionees and dates of grant. The exercise price
  of an option granted under the 1996 Share Option Plan may be no less than 85%
  of the fair market value of an Ordinary Share, as determined by that committee
  on the date that the option is granted. The options are for a 10-year term and
  are non-assignable except by the laws of descent. The option committee has the
  authority to amend the terms of option grants, provided that any such amendment
  is in the best interest of the grantee. In March and April 2000, options to
  purchase 39,750 shares were exercised. As of May 31, 2004, options to purchase
  29,500 of such shares were outstanding. All of these options were originally
  granted with an exercise price of $8.00 per share. In January 1998, the board
  of directors amended the exercise price of such options to $5.00 per share.
  These outstanding options are, subject to the continued employment of each employee,
  exercisable commencing two years after the date of grant at a rate of 25% per
  year. The grantee is responsible for all personal tax consequences of the grant
  and the exercise thereof.

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 a committee of
  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 that committee
  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 option committee 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 May 31, 2004, options to purchase
  102,500of such shares were outstanding at a price of $4.00 per share
  under the 1998 Share Option Plan.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 October
  1999, the option committee approved the grant of options to purchase 160,000
  of the Companys shares at a price of $2.00 per share to the former president
  and CEO of the Company. These options are exercisable commencing one year after
  the date of grant at a rate of 33.3% per year, subject to the continued employment
  of the former president CEO. All such options were outstanding as of May 31,
  2004. On January 13, 2002, ZCT sold all of its holdings in the Company and upon
  such transaction all the unvested options that were granted to the former president
  and CEO of the Company immediately vested and became exerciseable.

In March 2000,
  the option committee adopted new guidelines for the options to purchase Ordinary
  Shares reserved for issuance under each of the 1996 Share Option Plan and the
  1998 Share Option Plan upon the exercise of options to be granted to our directors,
  officers, employees and consultants. As a result of the new guidelines, as of
  May 31, 2004, options to purchase 128,000 of such shares were outstanding at
  a price of $4.50 per share and options to purchase 160,000 of such shares were
  outstanding at a price of $2.00 per share.



46


---

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 the grantee.

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%-33.3% per year, subject to the continued employment
  of the officers. All of such options were outstanding as of May 31, 2004.

As of May
  31, 2004, options to purchase 476,250 of our ordinary shares were available
  for grants to our directors, officers, employees and consultants.

For additional
  information relating to the stock options granted by us under the 1996 Share
  Option Plan and the 1998 Share Option Plan, see Note 12(B) to our financial
  statements included in Item 18.

Repurchase
  of Our Shares

Pursuant to
  a decision of our board of directors in September 2002, we repurchased 159,600
  of our shares, which constitutes 1.99% of our issued share capital. We purchased
  these shares in the open market between September 2002 and through February
  2003 at the average price of $0.95 per share. We also repurchased 50,000 shares
  in 1999, of which 43,500 were distributed to employees and management, and the
  remaining 6,500 shares were held by a trustee. On December 31, 2002 these 6,500
  were transferred to us by the trustee. During 2003, we repurchased 26,000 shares
  at an average price of $1.04 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.

Beneficial Ownership by Officers and
  Directors

Messrs. Ben
  Shalom, Ben Shaoul, Dotan and Lalo may be deemed to have beneficial ownership
  of an aggregate of 5,147,640 of our shares, representing 64.3% of our issued
  and outstanding capital share, by virtue of their positions with Koonras and
  DBSI and the voting agreement between Koonras and DBSI described elsewhere in
  this report.

Item 7.Major Shareholders and Related Party Transactions

Major Shareholders

The following table sets forth information, as of May 31, 2004, 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.



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|                                                             |  |                       |  |                  | 
|------------------------------------------------------------ |  | --------------------- |  | ---------------- | 
|                                                             |  | Number of             |  | Percent of       | 
|Name and Address                                             |  | Ordinary
      Shares |  | Ordinary Shares1 | 
|Koonras Technologies Ltd.                                    |  | 2,573,820             |  | 32.15%           | 
|21 Haarbaah St.                                            |  |                       |  |                  | 
|Tel-Aviv, Israel                                             |  |                       |  |                  | 
|DBSI Investments Ltd.                                        |  | 2,573,820             |  | 32.15%           | 
|85 Medinat Hayehudim St.                                     |  |                       |  |                  | 
|Herzliya, Israel                                             |  |                       |  |                  | 
|Arie Feldman                                                 |  | 630,000               |  | 7.9%             | 
|30 Asher Barash St.                                          |  |                       |  |                  | 
|Herzliya, Israel                                             |  |                       |  |                  | 
|All directors and executive officers as a group (11 persons) |  | 5,777,640 (1)         |  | 72.2%            | 
|                                                             |  |                       |  |                  | 

|(1) | Includes an aggregate of 5,147,640 shares beneficially held
      by Koonras and DBSI, by virtue of the positions held by certain of our directors on the board of directors of Koonras and DBSI,
      as to which such individuals disclaim beneficial ownership.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Record Holders

As of May
  31, 2004, there were 29 record holders of our ordinary shares, of which 14 represented
  United States record holders owning an aggregate of approximately 28% of our
  outstanding ordinary shares.

Related Party Transactions

Services Agreement and Lease Agreement

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. For the period of January
  1, 2002, through February 21, 2002 we paid ZCT an aggregate of $230,000 for
  such services and for rent payments for such months.



---



|48
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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 will continue 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).

In addition,
  pursuant to a lease agreement with ZCT, we leased officespace from ZCT until the end of January 2003. The total amounts paid by us to
  ZCT pursuant to this lease agreement were approximately $230,000, $376,000 and
  $377,000, in 2003, 2002 and 2001, respectively.

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 Cimatron, claiming that
  Cimatron caused four employees of the plaintiff located in Russia to terminate
  their employment with the plaintiff and join Cimatron. During a period of two
  years (until March 2003), the plaintiff provided certain services to Cimatron.
  The four employees were among several employees who provided such services to
  Cimatron. The plaintiff claimed, among other things, that the four employees
  are restricted from working for any competitor of the plaintiff for a period
  of three years following termination of their employment with the plaintiff.
  The plaintiff requested the District Court in Tel Aviv, Israel to grant an injunction
  and a permanent order that would prevent Cimatron from hiring the four employees.
  On June 2, 2004, the court rejected the plaintiffs request for an injunction.
  A date for a hearing with respect to the request for a permanent order has not
  yet been set. Cimatron believes that there is no merit to the claim and intends
  to oppose it vigorously.

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.



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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.

Item 9.TheOffer and Listing

Offer and listing details

Our ordinary
  shares were quoted on the NASDAQ National Market System from March 1996 until
  April 17, 2001, from which time our ordinary shares have been traded on the
  National SmallCap 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 (on each of
  the National and SmallCap Markets as applicable) during the indicated fiscal
  quarters:

|                                                                   |                       |                     |  | 
|------------------------------------------------------------------ | --------------------- | ------------------- |  | 
|Period                                                             | High
        (U.S. $) | Low (U.S.
      $ )
|                                                                   |                       |                    
|Six
      most recent months:                                      |                       |                    
|                                                                   |                       |                    
|May
      2004                                                     | 2.35                  | 2.06               
|                                                                   |                       |                    
|April
      2004                                                   | 2.6                   | 2.19               
|                                                                   |                       |                    
|March
      2004                                                   | 2.7                   | 2.05               
|                                                                   |                       |                    
|February
      2004                                                | 2.74                  | 2.55               
|                                                                   |                       |                    
|January
      2004                                                 | 2.76                  | 2.5                
|                                                                   |                       |                    
|December
      2003                                                | 2.48                  | 1.85               
|                                                                   |                       |                    
|                                                                   |                       |                     |  | 
|Two
      most recent full financial years and subsequent periods: |                       |                    
|                                                                   |                       |                    
|First
      Quarter 2004                                           | 2.76                  | 2.05               
|                                                                   |                       |                    
|Fourth
      Quarter 2003                                          | 2.48                  | 1.85               
|                                                                   |                       |                    
|Third
      Quarter 2003                                           | 2.48                  | 1.2                
|                                                                   |                       |                    
|Second
      Quarter 2003                                          | 1.29                  | 0.9                
|                                                                   |                       |                    
|First
      Quarter 2003                                           | 1.01                  | 0.88               
|                                                                   |                       |                    
|Fourth
      Quarter 2002                                          | 1.1                   | 0.78               
|                                                                   |                       |                    
|Third
      Quarter 2002                                           | 1                     | 0.7                
|                                                                   |                       |                    
|Second
      Quarter 2002                                          | 1.23                  | 0.8                
|                                                                   |                       |                    
|First
      Quarter 2002                                           | 1.49                  | 0.82               
|                                                                   |                       |                    
|                                                                   |                       |                     |  | 
|Five
      most recent years:                                      |                       |                    
|                                                                   |                       |                    
|2003                                                               | 2.48                  | 0.88               
|                                                                   |                       |                    
|2002                                                               | 1.49                  | 0.7                
|                                                                   |                       |                    
|2001                                                               | 1.63                  | 0.51               
|                                                                   |                       |                    
|2000                                                               | 7.00                  | 1.03               
|                                                                   |                       |                    
|1999                                                               | 3.69                  | 1.43               
|                                                                   |                       |                    



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Markets

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

Item 10.Additional Information

Memorandum and Articles of Association

Articles of Association; Israel Companies
  Law

In February
  2000 the Companys Ordinance (New Version)-1983 was replaced by the Companies
  Law. Since our Articles were approved before the enactment of the Companies
  Law, they are not always consistent with the provisions of the new law. In all
  instances in which the Companies Law changes or amends provisions in the Companies
  Ordinance, and as such, our Articles are not consistent with the Companies Law,
  the provisions of the Companies Law shall prevail unless specifically stated
  otherwise in the Companies Law. Similarly, in all places that our Articles refer
  to a section of the Companies Ordinance that has been replaced by the Companies
  Law, the Articles shall be understood to be referring to the relevant Section
  of the Companies Law.

Our shareholders
  approved our Articles of Association in March of 1996. 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 75% of those who vote is required. The shareholders rights may not
  be modified in any other way unless otherwise expressly provided in the terms
  of issuance of the shares.

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 until a quorum of two or more shareholders holding
  at least one third 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:



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- amendments to our Articles (other than modifications
    of shareholders rights as mentioned above);
- 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 officiating 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.

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.



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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 board
  of directors and the audit committee. 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.

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, 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.



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In addition,
  a private placement of securities that will increase the relative holdings of
  a shareholder that holds five percent or more of the companys outstanding
  share capital, assuming the exercise of all of the securities convertible into
  shares held by that person, 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, 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. The Companies Law requires that specified types of transactions,
  actions and arrangements be approved as provided for in a companys articles
  of association and in some circumstances by the audit committee, by the board
  of directors and by the shareholders. The vote required by the audit committee
  and the board of directors for approval of these matters, in each case, is a
  majority of the disinterested directors participating in a duly convened meeting.

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.

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 75% 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.



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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 70 days have passed from the time that a request
  for the approval of the merger has been filed with the Israeli Registrar of
  Companies. This request 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 50%
  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 service agreement and lease agreement described in Item 6 - Major Shareholders
  and Related Party Transactions  Related Party Transactions and our current
  lease agreement described below, all of the contracts that we have entered into
  over the past two years have been in the ordinary course of our business.

In February
  2003, we leased from a private commercial property owner the same office space
  that we had previously leased from ZCT, under a new lease agreement. The term
  of the new lease is three years, and we have an option to extend the lease for
  an additional three years.



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Exchange Controls

The Israeli
  Currency Control Law - 1978, imposes certain limitations concerning foreign
  currency transactions and transactions between Israeli and non-Israeli residents,
  which limitations may be regulated or waived by the Controller of Foreign Exchange
  at the Bank of Israel, through general and special permits. In May 1998,
  a new general permit was issued pursuant to which substantially all transactions
  in foreign currency are permitted. There are currently no Israeli currency control
  restrictions on remittances of dividends on our ordinary shares or the proceeds
  from the sale of our shares provided all taxes were paid or withheld; however,
  legislation remains in effect pursuant to which currency controls can be imposed
  by administrative action at any time. Any dividends or other distributions paid
  in respect of ordinary shares and any amounts payable upon the dissolution,
  liquidation or winding up of the affairs of the Company, as well as the proceeds
  of any sale in Israel of the Companys securities to an Israeli resident
  are freely repatriable into non-Israeli currencies at the rate of exchange prevailing
  at the time of conversion, provided that Israeli income tax has been paid on
  (or withheld from) such payments. Non-residents
  of Israel may freely hold and trade our securities. Neither our articles of
  association nor the laws of the State of Israel restrict in any way the ownership
  or voting of our ordinary shares by non-residents, except that such restrictions
  may exist with respect to citizens of countries that are in a state of war with
  Israel.

Taxation

The following
  is a summary of some 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

Israeli companies are generally subject to company tax at the rate
  of 36% of taxable income. However, the effective tax rate payable by a company that derives income from an Approved Enterprise (as further
  discussed below) may be considerably less. 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.

Law for the Encouragement of Capital
  Investments, 1959

Certain of
  our operations have been granted Approved Enterprise status under the Law for
  the Encouragement of Capital Investments, 1959, as amended (referred to as the
  Investment Law).



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The Investment
  Law provides that a capital investment in eligible facilities may, upon application
  to the Investment Center of the Ministry of Industry and Trade of the State
  of Israel (referred to as the Investment Center), be designated as an Approved
  Enterprise. Each certificate of approval for an Approved Enterprise relates
  to a specific investment program delineated both by its financial scope, including
  its capital sources, and by its physical characteristics, e.g., the equipment
  to be purchased and utilized pursuant to the program. The tax benefits derived
  from any such certificate of approval relate only to taxable income attributable
  to the specific Approved Enterprise.

Taxable income
  of a company derived from an Approved Enterprise is subject to company tax at
  the rate of up to 25% (rather than 36% as stated above) for a period of time
  termed the benefit period. The benefit period is a period of 7 years commencing
  with the year in which the Approved Enterprise first generated taxable income.
  The benefit period is in any event limited to 12 years from the commencement
  of production or 14 years from the date of approval, whichever is earlier. Under
  certain circumstances (as further detailed below), the benefits period may extend
  to a maximum of ten years from the commencement of the benefit period. Notwithstanding
  the foregoing, taxable income of a company located in certain geographic locations,
  derived from an Approved Enterprise approved after January 1, 1997, is tax exempt
  for the first two years of the benefit period and is taxed at a rate of 25%
  or lower for the remainder of the benefit period. A company which operates under
  more than one approval or that has capital investments which are only partly
  approved (such a company being designated as a Mixed Enterprise), its effective
  Company Tax rate is the result of a weighted combination of the various applicable
  rates.

A company
  that qualifies as a Foreign Investors Company is entitled to further
  reductions in the tax rate normally applicable to Approved Enterprises. Such
  benefits will be granted only to enterprises that sought approval no later than
  December 31, 2002. Subject to certain conditions, a Foreign Investors
  Company is a company which has more than 25% of its combined shareholders
  investment in share capital (in terms of rights to profits, voting and the appointment
  of directors) and in long term shareholders loans made by persons who
  are not residents of Israel. The percentage owned by nonresidents of Israel
  for any tax year will be determined by the lowest percentage of any of the above
  rights held by nonresidents during that year. Such a company will pay company
  tax at reduced rates for an extended ten-year (rather than the otherwise applicable
  seven-year) period and is exempt from any other tax on the income from its Approved
  Enterprise:

The table below reflects the tax rates applicable to companies with foreign investments as set forth below:

|                                    |  |                        | 
|----------------------------------- |  | ---------------------- | 
|                                    |  | Company
      Tax Rate | 
|                                    |  |                        | 
|Over 25% but
      less than 49%    |  | 25%                    | 
|                                    |  |                        | 
|49% or more but
      less than 74% |  | 20%                    | 
|                                    |  |                        | 
|74% or more but
      less than 90% |  | 15%                    | 
|                                    |  |                        | 
|90% or more                         |  | 10%                    | 



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Should our
  foreign shareholders exceed 25%, future Approved Enterprises might qualify for
  reduced tax rates for an additional three years, after the seven years mentioned
  above. However, there can be no assurance that we will attain approval for additional
  Approved Enterprises or that the provisions of this Law will be extended without
  change or that the above-mentioned shareholding proportion will be reached for
  each subsequent year.

In addition,
  a company owning an Approved Enterprise may elect (as we have) to forego certain
  Government grants extended to Approved Enterprises in return for an alternative
  package of tax benefits (the Alternative Package). Under the Alternative
  Package, a companys undistributed income derived from an Approved Enterprise
  will be exempt from Company Tax for a period of between two and ten years, depending
  in part on the geographic location of the Approved Enterprise within Israel,
  and such company will be eligible for the regular tax benefits under the Investment
  Law for the remainder of the Benefits Period if any.

A company,
  such as ours, that has elected the Alternative Package and that subsequently
  pays a dividend out of income derived from the Approved Enterprise(s) during
  the tax exemption period will be subject to deferred company tax in respect
  of the amount distributed (including the company tax thereon) at the rate which
  would have been applicable had such company not elected the Alternative Package.
  This rate is generally 10% to 25%, depending on the extent to which non-Israeli
  shareholders hold such companys shares.

The dividend
  recipient is taxed at the reduced rate applicable to dividends from Approved
  Enterprises (generally, 15% as compared to 25%), if the dividend is distributed
  during the tax benefit period or within 12 years after this period. However,
  the limitation does not apply if the company qualifies as a foreign investors
  company. In the event, however, that the company also qualifies as a Foreign
  Investors Company, there is no such time limit. This tax must be withheld
  by such company at source, regardless of whether the dividend is converted into
  foreign currency.

Subject to
  certain provisions concerning income subject to the Alternative Package, all
  dividends are considered to be attributable to the entire enterprise and the
  effective tax rate on the dividend is the result of a weighted combination of
  the various applicable tax rates. However, such company is not obliged to distribute
  exempt retained profits under the Alternative Package, and such company may
  generally decide from which years profits to declare dividends.

The Investment
  Law also provides that an Approved Enterprise is entitled to accelerated depreciation
  on its property and equipment that are included in an approved investment program.
  We have not utilized this benefit.



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Each application to the Investment Center is reviewed separately,
  and a decision as to whether or not to approve such application is based, among other things, on the then prevailing criteria set forth
  in the Investment Law, on the specific objectives of the applicant company set forth in such application and on certain financial criteria
  of the applicant company. Accordingly, there can be no assurance that any such application will be approved. In addition, the benefits
  available to an Approved Enterprise are conditional upon the fulfillment of certain conditions stipulated in the Investment Law and
  its regulations and the criteria set forth in the certificate of approval, as described above. In the event that these conditions are
  violated, in whole or in part, a company with an Approved Enterprise would be required to refund the amount of tax benefits, with the
  addition of the Israeli CPI linkage differences and interest. See note 13 of our financial statements.

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 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.

The terms
  of these grants prohibit the manufacture outside of Israel without the prior
  consent of the Research Committee. Such approval, if granted, is generally subject
  to an increase in the total amount to be repaid to the Office of the Chief Scientist
  to between 120% and 300% of the amount granted, depending on the extent of the
  manufacturing to be conducted outside of Israel. A recent amendment to the Research
  Law has provided that the restriction on manufacturing outside of Israel shall
  not apply to the extent that plans to so manufacture were declared when applying
  for funding.

The Research
  Law also provides that know-how from the research and development, which is
  used to produce the product, may not be transferred to Israeli third parties
  without the approval of the Research Committee, and may not be transferred to
  non-Israeli third parties at all. A recent amendment to the Research Law has
  stressed, that it is not just transfer of know-how that is prohibited, but also
  transfer of any rights in such know-how. Such restriction does not apply to
  exports from Israel of products developed with such technologies. Approval of
  the transfer may be granted only if the transferee abides by all of the provisions
  of the Research Law and regulations promulgated thereunder, including the restrictions
  on the transfer of know-how and the obligation to pay royalties.

There can be no assurance that the consents
  described above, if requested, will be granted.



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Tax Benefits and Grants for Research
  and Development

Israeli tax
  law allows, under certain conditions, a tax deduction in the year incurred for
  expenditures (including capital expenditures) in scientific research and development
  projects if the expenditures are approved by the relevant Israeli Government
  Ministry (determined by the field of research) and the research and development
  is for the promotion of the enterprise and is carried out by or on behalf of
  the company seeking such deduction. Expenditures not so approved are deductible
  over a three-year period. However, expenditures made out of proceeds made available
  to us through government grants are not deductible according to Israeli law.

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.

Taxation under Inflationary Conditions

The Income
  Tax Law (Inflationary Adjustments), 1985 (the Inflationary Adjustments Law)
  is intended to neutralize the erosion of capital investments in business and
  to prevent tax benefits resulting from deduction of inflationary expenses. This
  law applies a supplementary set of inflationary adjustments to the normal taxable
  profits computed under regular historical cost principles. We are taxed under
  this law, although the application of certain of the provisions of this law
  was suspended for the tax years 2000 and 2001 because of the nil rate of inflation
  in those years.

Under the
  Inflationary Adjustments Law, results for tax purposes are measured in real
  terms, in accordance with the changes in the consumer price index. In addition,
  subject to certain limitations, depreciation of fixed assets and losses carried
  forward are adjusted for inflation on the basis of changes in the consumer price
  index.

The salient
  features of the Inflationary Adjustments Law can be described generally as follows:

A special
  tax adjustment for the preservation of equity whereby certain corporate assets
  are classified broadly into Fixed (inflation resistant) Assets and Non-Fixed
  (soft) Assets. Where a companys equity, as defined in such law, exceeds
  the depreciated cost of Fixed Assets, a deduction from taxable income that takes
  into account the effect of the applicable annual rate of inflation on such excess
  is allowed (up to a ceiling of 70% of taxable income in any single tax year,
  with the unused portion permitted to be carried forward on a linked basis to
  the following year, to be deducted from any taxable income, and any excess deduction
  in that year will be considered a business loss). If the depreciated cost of
  Fixed Assets exceeds a companys equity, then such excess multiplied by
  the applicable annual rate of inflation is added to taxable income.



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The law also
  provides for the full taxation of gains from the sale of certain traded securities,
  which would otherwise be taxed at a reduced rate when derived by certain categories
  of corporate taxpayers.

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.

As a result
  of the recent tax reform legislation in Israel, gains from the sale of our ordinary
  shares derived from January 1, 2003 and thereafter will in general be liable
  to capital gains tax of up to 15%. This will be the case so long as our securities
  remain listed for trading on a designated foreign stock market such as the NASDAQ.
  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. These provisions dealing with capital
  gains are not applicable to an persons whose gains from selling or otherwise
  disposing of our ordinary shares are deemed to be business income or whose taxable
  income is determined pursuant to the Israeli Income Tax Law (Inflation Adjustments),
  1985; the latter law would not normally be applicable to non-resident shareholders
  who have no business activity in Israel.

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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 are subject to income
  tax on income accrued or derived from sources in Israel or received in Israel.
  Such sources of income include passive income such as dividends, royalties and
  interest, as well as active income from services rendered in Israel. On distributions
  of dividends other than bonus shares (stock dividends), income tax at the rate
  of 25% is withheld at source, unless a different rate is provided in a treaty
  between Israel and the shareholders country of residence. For example,
  the tax rate would be 12.5% if the non-resident were a company which holds at
  least 10% of our voting power pursuant to the U.S.-Israel Tax Treaty, except
  for dividends generated by an Approved Enterprise from which tax is withheld
  at the rate of 15%.

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.



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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.

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, 2003, we had financial assets totaling approximately
  $9.5 million. Fixed rate financial assets, comprised of debt securities, totaled
  approximately $3.1 million. For the year 2003 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. Variable rate financial assets totaled approximately $6.4
  million. The net decrease in our earnings for the next year from our variable
  rate financial assets resulting from a 10% interest rate decrease would be approximately
  $38,000, holding other variables constant. Assuming an interest rate increase
  of 10%, the fair value of our marketable debt securities would be reduced by
  approximately $180,000.

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 France 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
  $217,000.



|63
|--

---

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 $1,020,000.

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 -1.9%, 6.5% and 1.4% in 2003, 2002
  and 2001, respectively. The devaluation of the NIS against the U.S. dollar was
  -7.5%, 7.3% and 9.3% in 2003, 2002 and 2001, 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 $770,000.

A significant
  portion of our expenditures is employee compensation-related.Salaries are paid in NIS and are adjusted for changes in the CPI through (i)
  annual salary increases during the first quarter of the year and (ii) bi-annual
  partial adjustments. This increases salary expenses in U.S. dollar terms. The
  devaluation / revaluation 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

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.



|64
|--

---

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, 2003. Based on their evaluation,
  our principal executive and principal financial officers concluded that our
  disclosure controls and procedures were effective as of December 31, 2003.

(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 2003, 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 Ofra Brown qualifies to serve as our audit
  committee financial expert.

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 National Market.

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.



65


---

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 2002 and 2003 were $134,000
  and $116,000, 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 2002 and 2003 were $27,000 and $27,000, respectively.
  The services provided to us by our principal accountants in both 2002 and 2003 related to the preparation and filing of our tax returns
  with income tax authorities.

All Other
  Fees

We did not
  receive from our principal accountants any other products or services, other
  than the services disclosed above, in 2002 and 2003.

Audit Committee
  Approval

On December 24, 2003 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, 2003. Such
  approval followed the approval by our board of directors and audit committee of such engagement.

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

Item 16E.     REPURCHASE
  OF EQUITY SECURITIES BY THE ISSUER AND AFFLIATEDPURCHASERS During
  2003, we repurchased 26,000 shares at an average price of $1.04 per share.

PART III

Item 17.     Financial
  Statements

Not Applicable

Item 18.     Financial
  Statements

See page F-1 through F-26.



|66
|--

---

Item 19.Exhibits

|1.1  | 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.*
|     |                                                                                                                                                     
|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)                                                              
|     |                                                                                                                                                     
|13.1 | Certification of Chief Executive Officer pursuant
      to 18 U.S.C. Section 1350                                                                   
|     |                                                                                                                                                     
|13.2 | Certification of Chief Financial Officer pursuant
      to 18 U.S.C. Section 1350                                                                   
|     |                                                                                                                                                     
|14.1 | Consent of Independent Public Accountants.                                                                                                          
|     |                                                                                                                                                     
|14.2 | Consent of Independent Public Accountants.                                                                                                          

---

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



67


---

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 29th day of June, 2004.





CIMATRON LTD.





| | By: /s/ Zvika Naggan                          
| | ----------------------------------------------
| | ___________________________________________   
| | Name:  Zvika Naggan                           
| | Title:   President and Chief Executive Officer



|68
|--

---

CIMATRON LIMITED

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                                                                             |  |         
|------------------------------------------------------------------------------------------------------------ |  | --------
|                                                                                                             |  | Page    
|Report of Independent
      Public Accountants                                                               |  | F-2     
|Report of Independent
      Auditors to the Shareholders of Cimatron Limited                                 |  | F-3     
|                                                                                                             |  |         
|Consolidated
      Financial Statements:                                                                     |  |         
|Balance Sheetsas of December 31, 2003 and 2002                                                               |  | F-4     
|Statements of
      Operationsfor the years ended December
      31, 2003, 2002 and 2001                     |  | F-5     
|Statement of
      Changes in Shareholders Equityfor
      the years ended December 31, 2003, 2002 and 2001 |  | F-6     
|Statements of
      Cash Flowsfor the years ended December
      31, 2003, 2002 and 2001                     |  | F-7     
|                                                                                                            
|Notes to the
      Consolidated Financial Statements                                                         |  | F-8F-26

---

REPORT OF INDEPENDENT PUBLIC
  ACCOUNTANTS

To the Shareholders ofCimatron Limited

We have audited the accompanying consolidated balance sheets of Cimatron Limited and subsidiaries (the Company) as of December 31, 2003 and 2002 and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the two years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We did not audit the financial statements of consolidated subsidiaries, whose assets constitute approximately 14% of total consolidated assets at December 31, 2003 and 2002, and whose revenues constitute approximately 46%
and 45% of consolidated total revenues for the years ended December 31, 2003 and 2002, respectively. Those financial statements were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to
amounts included for those companies, is based solely on the reports of such other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December
31, 2003 and 2002 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2003 in conformity with U.S. generally accepted accounting principles.

Brightman Almagor & Co.Certified Public AccountantsA member firm of Deloitte Touche Tohmatsu

Tel-Aviv, IsraelFebruary 17, 2004



F-2


---



REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF CIMATRON LIMITED

We have audited the consolidated statements of operations of
  Cimatron Limited (the "Company") , changes in shareholders' equity
  and cash flows for the year ended December 31, 2001. These financial statements
  are the responsibility of the Company's Board of Directors and management. Our
  responsibility is to express an opinion on these financial statements based
  on our audit.

We did not audit the financial statements of consolidated subsidiaries,
  whose revenues included in consolidation constitute approximately 43% of total
  consolidated revenues for the year ended December 31, 2001. The financial statements
  of those companies were audited by other auditors, whose reports have been furnished
  to us, and our opinion, insofar as it relates to amounts included for those
  companies, is based solely on the reports of the other auditors.

We conducted our audit in accordance with the standards of the
  Public Company Accounting Oversight Board (United States). Those standards require
  that we plan and perform the audit to obtain reasonable assurance about whether
  the financial statements are free of material misstatement. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by the Board of Directors and
  management, as well as evaluating the overall financial statement presentation.
  We believe that our audit and the reports of other auditors provide a fair basis
  for our opinion.

In our opinion, based on our audit and the reports of the other
  auditors, the consolidated financial statements referred to above present fairly,
  in all material respects, the results of operations, changes in shareholders'
  equity and cash flows of the Company on a consolidated basis for the year ended
  December 31, 2001 in conformity with generally accepted accounting principles
  in United States.



| | /S/ BDO Ziv Haft                   
| | -----------------------------------
| | Certified Public Accountants (Isr.)
| | BDO Member Firm                    

Tel-Aviv, Israel
  February 24, 2002



F-3


CIMATRON LIMITED

CONSOLIDATED BALANCE SHEETS(in thousands, except share data)

|****                                                                                                            | **December 31,**
|--------------------------------------------------------------------------------------------------------------- | ----------------
|                                                                                                                |                 
|****                                                                                                            | **2003**        
|                                                                                                                |                 
|**ASSETS**                                                                                                      |                 
|                                                                                                                |                 
|**Current
        assets**                                                                                      |                 
|Cash
        and cash equivalents                                                                               | $               
|Short-term investments (Note 3)                                                                                 |                 
|Trade
        accounts receivable (Note 4)                                                                      |                 
|Other accounts receivable and prepaid expenses (Note
        5)                                                 |                 
|Inventory                                                                                                       |                 
|                                                                                                                |                 
|Total
        current assets                                                                                    |                 
|                                                                                                                |                 
|                                                                                                                |                 
|**Deposits
        with insurance companies and severance pay fund** (Note 10)                                  |                 
|                                                                                                                |                 
|**Property
        and equipment** (Note 6)                                                                     |                 
|Cost                                                                                                            |                 
|Less
        - accumulated depreciation                                                                         |                 
|                                                                                                                |                 
|Property
        and equipment, net                                                                             |                 
|                                                                                                                |                 
|                                                                                                                |                 
|**Investment
        in affiliate**                                                                             |                 
|                                                                                                                |                 
|**Other
        assets**                                                                                        |                 
|Software
        development costs, net (Note 7)                                                                |                 
|Goodwill,
        net (Note 8)                                                                                  |                 
|                                                                                                                |                 
|Total
        other assets                                                                                      |                 
|                                                                                                                |                 
|Total
        assets                                                                                            | $               
|                                                                                                                |                 
|**LIABILITIES
        AND SHAREHOLDERS’ EQUITY**                                                                |                 
|                                                                                                                |                 
|**Current
        liabilities**                                                                                 |                 
|Short-term
        bank credit                                                                                  | $               
|Related
        parties                                                                                         |                 
|Trade
        payables                                                                                          |                 
|Other
        liabilities and accrued expenses (Note 9)                                                         |                 
|                                                                                                                |                 
|Total
        current liabilities                                                                               |                 
|                                                                                                                |                 
|**Long-term
        liabilities**                                                                               |                 
|Accrued
        severance pay (Note 10)                                                                         |                 
|                                                                                                                |                 
|**Contingent
        liabilities and commitments** (Note 11)                                                    |                 
|                                                                                                                |                 
|**Shareholders’
        equity**                                                                                |                 
|Share
        capital (Note 12):                                                                                |                 
|Ordinary
        shares of NIS  0.10 par value (Authorized - 19,950,000                                         |                 
|shares,
        issued and outstanding - 8,001,270 shares                                                       |                 
|at
        December 31, 2003 and 2002)                                                                          |                 
|Additional
        paid-in capital                                                                              |                 
|Accumulated
        other comprehensive income (loss):                                                          |                 
|Foreign
        currency translation adjustments                                                                |                 
|Unrealized
        gain (loss) on available for-sale securities                                                 |                 
|Unrealized
        gain on derivative instruments                                                               |                 
|Retained
        earnings                                                                                       |                 
|                                                                                                                |                 
|                                                                                                                |                 
|Treasury
        stock, at cost; 166,100 and 140,100 shares at December 31, 2003 and 2002,
        respectively |                 
|                                                                                                                |                 
|Total
        shareholders’ equity                                                                              |                 
|                                                                                                                |                 
|                                                                                                                |                 
|Total
        liabilities and shareholders’ equity                                                              | $               
|                                                                                                                |                 

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,**
|------------------------------------------------------------------------------------ | ---------------------------
|                                                                                     |                            
|                                                                                     | **2003**                   
|                                                                                     |                            
|Revenues (Note
        15a):                                                         |                            
|Products                                                                             | $                          
|Services                                                                             |                            
|                                                                                     |                            
|Total                                                                                |                            
|                                                                                     |                            
|                                                                                     |                            
|Cost of revenues
        (Note 15b):                                                 |                            
|Products                                                                             |                            
|Services                                                                             |                            
|                                                                                     |                            
|Total                                                                                |                            
|                                                                                     |                            
|Gross
        profit                                                                 |                            
|                                                                                     |                            
|Research and
        development costs                                               |                            
|Restructuring
        costs                                                          |                            
|Selling, general
        and administrative expenses                                 |                            
|(Note 15c)                                                                           |                            
|                                                                                     |                            
|Operating
        loss                                                               |                            
|                                                                                     |                            
|Financial income
        (expenses), net                                             |                            
|Other income
        (expenses)                                                      |                            
|                                                                                     |                            
|Income
        (loss) before taxes on income                                         |                            
|                                                                                     |                            
|Taxes on income
        (Note 13)                                                    |                            
|                                                                                     |                            
|                                                                                     |                            
|Net
        income (loss)                                                            | $                          
|                                                                                     |                            
|                                                                                     |                            
|Net income (loss)
        per share (basic and diluted)                              | $                          
|                                                                                     |                            
|                                                                                     |                            
|Weighted average
        number of shares outstanding 
          (basic and diluted) |                            
|                                                                                     |                            
|(*) Less than
        $0.01.                                                         |                            

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



|F-5
|---

---

CIMATRONLIMITED

STATEMENTOFCHANGESINSHAREHOLDERSEQUITY(inthousands)

|                                                         |  | **Share
        capital** |  | **Additional
        paid-in
        capital** |  | **Other
        capital
        surplus** |  | **Accumulated
        other
        comprehensive
        income (loss)** |  | **Retained
        earnings
          (accumulated  
        deficit)** |  | ****
      ****
      **Treasury
        stock** |  | **Comprehensive  
        income (loss)** |  | **Total
        shareholders
        equity**
|-------------------------------------------------------- |  | ------------------------- |  | ---------------------------------------------- |  | ----------------------------------------- |  | ------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | ------------------------------------------------ |  | ----------------------------------------- |  | ----------------------------------------------
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|Balance
        at January 1, 2001                       |  | $ 264                     |  | $ 13,417                                       |  | $ 9,957                                   |  | $  
        (19)                                                          |  | $ (3,729)                                                               |  | $                                               |  |                                           |  | $ 19,890                                      
|**Changes during the year ended December 31, 2001 :**    |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|Net loss                                                 |  |                           |  |                                                |  |                                           |  |                                                                           |  | (5,658)                                                                 |  |                                                  |  | (5,658)                                   |  | (5,658)                                       
|Unrealized
        gain on available-for-sale securities |  |                           |  |                                                |  |                                           |  | 360                                                                       |  |                                                                         |  |                                                  |  | 360                                       |  | 360                                           
|Unrealized loss on derivative instruments                |  |                           |  |                                                |  |                                           |  | (50)                                                                      |  |                                                                         |  |                                                  |  | (50)                                      |  | (50)                                          
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|**Total comprehensive loss**                             |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  | $  (5,348)                                |  |                                               
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|****Balance at December 31,
        2001                 |  | 264                       |  | 13,417                                         |  | 9,957                                     |  | 291                                                                       |  | (9,387)                                                                 |  |                                                 |  |                                           |  | 14,542                                        
|**Changes during the year ended December 31, 2002:**     |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|Net
        income                                       |  |                           |  |                                                |  |                                           |  |                                                                           |  | 10                                                                      |  |                                                  |  | 10                                        |  | 10                                            
|Unrealized loss on available-for-sale securities         |  |                           |  |                                                |  |                                           |  | (288)                                                                     |  |                                                                         |  |                                                  |  | (288)                                     |  | (288)                                         
|Unrealized
        gain on derivative instruments        |  |                           |  |                                                |  |                                           |  | 104                                                                       |  |                                                                         |  |                                                  |  | 104                                       |  | 104                                           
|Foreign currency translation adjustment                  |  |                           |  |                                                |  |                                           |  | (77)                                                                      |  |                                                                         |  |                                                  |  | (77)                                      |  | (77)                                          
|Transfer
        of capital surplus to retained earnings |  |                           |  |                                                |  | (9,957)                                   |  |                                                                           |  | 9,957                                                                   |  |                                                  |  |                                           |  |                                              
|Investment in treasury stock                             |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  | (132)                                            |  |                                           |  | (132)                                         
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|**Total
        comprehensive loss**                     |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  | $    (251)                                |  |                                               
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|Balance
        at December 31, 2002                     |  | 264                       |  | 13,417                                         |  |                                          |  | 30                                                                        |  | 580                                                                     |  | (132)                                            |  |                                           |  | 14,159                                        
|**Changes during the year ended December 31, 2003:**     |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|Net
        loss                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  | (301)                                                                   |  |                                                  |  | (301)                                     |  | (301)                                         
|Unrealized loss on available-for-sale securities         |  |                           |  |                                                |  |                                           |  | (97)                                                                      |  |                                                                         |  |                                                  |  | (97)                                      |  | (97)                                          
|Unrealized
        gain on derivative instruments        |  |                           |  |                                                |  |                                           |  | 120                                                                       |  |                                                                         |  |                                                  |  | 120                                       |  | 120                                           
|Foreign currency translation adjustment                  |  |                           |  |                                                |  |                                           |  | (333)                                                                     |  |                                                                         |  |                                                  |  | (333)                                     |  | (333)                                         
|Investment
        in treasury stock                     |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  | (27)                                             |  |                                           |  | (27)                                          
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|**Total
        comprehensive loss**                     |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  | $    (611)                                |  |                                               
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               
|Balance
        at December 31, 2003                     |  | $ 264                     |  | $ 13,417                                       |  | $                                        |  | $ (280)                                                                   |  | $    279                                                                |  | $ 
        (159)                                 |  |                                           |  | $ 13,521                                      
|                                                         |  |                           |  |                                                |  |                                           |  |                                                                           |  |                                                                         |  |                                                  |  |                                           |  |                                               

Theaccompanyingnotes are anintegralpart of thefinancialstatements.

F-6

---

CIMATRON LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

|                                                                                                                  | **Year ended December 31,**
|----------------------------------------------------------------------------------------------------------------- | ---------------------------
|                                                                                                                  |                            
|                                                                                                                  | **2003**                   
|                                                                                                                  |                            
|**CASH
        FLOWS  OPERATING ACTIVITIES**                                                                     |                            
|                                                                                                                  |                            
|Net
        income (loss)                                                                                         | $     (301)                
|****                                                                                                              |                            
|**Adjustments
        to reconcile net income (loss) to net cash****provided by (used in) operating activities:** |                            
|Depreciation
        and amortization                                                                             | 859                        
|Increase
        (decrease) in accrued severance pay                                                              | 473                        
|Loss
        (gain) from sale of property and equipment, net                                                      | (2)                        
|Loss
        (gain) from sale of bonds and funds and devaluation of funds                                         | 58                         
|****                                                                                                              |                            
|**Changes
        in assets and liabilities:**                                                                    |                            
|Decrease
        in accounts receivable and prepaid expenses                                                      | 855                        
|Decrease
        in inventory                                                                                     | 19                         
|Decrease
        (increase) in deposits with insurance companies                                                  |                            
|and
        severance pay fund                                                                                    | (407)                      
|Increase
        (decrease) in debts to related parties                                                           | 13                         
|Increase
        (decrease) in trade payables, accrued expenses                                                   |                            
|and
        other liabilities                                                                                     | (115)                      
|                                                                                                                  |                            
|**Net
        cash provided by (used in) operating activities**                                                   | 1,452                      
|                                                                                                                  |                            
|****                                                                                                              |                            
|**CASH
        FLOWS  INVESTING ACTIVITIES**                                                                     |                            
|Investment
        in bonds                                                                                       | (3,138)                    
|Proceeds
        from redemption of bonds                                                                         | 642                        
|Proceeds
        from sale of funds                                                                               |                           
|Purchase
        of property and equipment                                                                        | (538)                      
|Proceeds
        from sale of property and equipment                                                              | 44                         
|Investment
        in affiliate                                                                                   | 43                         
|                                                                                                                  |                            
|**Net
        cash provided by (used in) investing activities**                                                   | (2,947)                    
|                                                                                                                  |                            
|                                                                                                                  |                            
|**CASH
        FLOWS  FINANCING ACTIVITIES**                                                                     |                            
|Short-term
        bank credit                                                                                    | 500                        
|Investment
        in treasury stock                                                                              | (27)                       
|                                                                                                                  |                            
|**Net
        cash provided by (used in) financing activities**                                                   | 473                        
|                                                                                                                  |                            
|                                                                                                                  |                            
|Net increase
        (decrease) in cash and cash equivalents                                                      | (1,022)                    
|Effect of exchange
        rate changes on cash                                                                   | 69                         
|Cash and cash
        equivalents at beginning of year                                                            | 4,077                      
|                                                                                                                  |                            
|**Cash
        and cash equivalents at end of year**                                                              | $    3,124                 
|                                                                                                                  |                            
|Supplemental
        information:                                                                                 |                            
|Cash paid during
        the year for income taxes                                                                | $        
        25       
|                                                                                                                  |                            
|**Appendix A - Non-cash transactions**                                                                            |                            
|                                                                                                                  |                            
|Purchase of property
        on credit                                                                            | $        
        28       
|                                                                                                                  |                            

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

F-7

---

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 line of products
        through distributors and through its subsidiaries located in different
        countries.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 2 - | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | The financial statements are
        prepared in accordance with accounting principles generally accepted (GAAP)
        in the United States of America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



F-8


---

CIMATRON LIMITED

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

|NOTE 2 - | SIGNIFICANT ACCOUNTING POLICIES
      (Cont.)
|-------- | ---------------------------------------------
|         |                                              
|         | E.                                           
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         | F.                                           
|         |                                              
|         |                                              
|         | G.                                           
|         |                                              
|         |                                              
|         | H.                                           
|         |                                              
|         |                                              
|         | I.                                           
|         |                                              
|         |                                              
|         | J.                                           
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         |                                              

F-9

---

CIMATRON LIMITED

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

|NOTE 2 - | SIGNIFICANT ACCOUNTING POLICIES
      (Cont.)
|-------- | ---------------------------------------------
|         |                                              
|         | K.                                           
|         |                                              
|         |                                              
|         | L.                                           
|         |                                              
|         |                                              
|         |                                              
|         |                                              
|         | M.                                           
|         |                                              



F-10


---

CIMATRON LIMITED

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

|NOTE 2 - | SIGNIFICANT ACCOUNTING POLICIES
      (Cont.)
|-------- | ---------------------------------------------
|         |                                              
|         | M.                                           
|         |                                              





|****                                              | **Year ended****December 31,**
|------------------------------------------------- | ------------------------------
|****                                              | **2001**                      
|                                                  |                               
|                                                  |                               
|Net loss                                          | $                             
|Goodwill amortization                             |                               
|                                                  |                               
|                                                  |                               
|Adjusted net loss                                 | $                             
|                                                  |                               
|                                                  |                               
|Reported basic and diluted
        loss per share | $                             
|Goodwill amortization                             |                               
|                                                  |                               
|                                                  |                               
|                                                  | $                             
|                                                  |                               

| |    | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company accounts for employee
        stock-based compensation in accordance with Accounting Principles Board
        Opinion No. 25, Accounting for Stock Issued to Employees (APB
        No. 25) and in accordance with FASB Interpretation No. 44. Pursuant
        to these accounting pronouncements, the Company records compensation for
        stock options granted to employees over the vesting period of the options
        based on the difference, if any, between the exercise price of the options
        and the market price of the underlying shares at that date.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Deferred compensation is amortized
      to compensation expense over the vesting period of the options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





|F-11
|----

---

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.)                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Had compensation cost for the Companys
      option plans been determined on the basis of the fair value at the grant
      dates in accordance with the provisions of SFAS No. 123 Accounting for
      Stock-Based Compensation, as amended by SFAS No. 148 Accounting for Stock-Based
      compensation (SFAS No. 148), the Companys pro forma net
      loss and pro forma basic and diluted net loss per share would have been
      as follows:



|****                                                           | **Year ended December 31,**
|-------------------------------------------------------------- | ---------------------------
|                                                               |                            
|****                                                           | **2003**                   
|                                                               |                            
|**Pro forma
        net income (loss):**                       |                            
|Net income (loss)
        for the year, as reported            | $                          
|Deduct - stock-based
      compensation under APB 25           |                            
|Add - stock-based
      compensation determined under SFAS 123 |                            
|                                                               |                            
|                                                               | $                          
|                                                               |                            
|**Pro forma
        basic and dilutedloss per share:**         |                            
|As reported                                                    | $                          
|                                                               |                            
|                                                               |                            
|Pro forma                                                      | $                          
|                                                               |                            
|                                                               |                            
|(*) Less than
        $0.01.                                   |                            

> Data in respect of the stock option plans
>     For proposes of estimating fair value in accordance
>       with SFAS No. 123, the Company utilized the Black-Scholes option-pricing
>       model. The following assumptions were used for grants in 2003: a dividend
>       yield of 0.0%; weighted average expected volatility of 96%; weighted average
>       risk-free interest rates of 3.3%; and weighted average expected lives of
>       4 years. No grants were made in 2002 and 2001.
>     Because additional option grants are expected
>       to be made each year, and due to the factors described above, the above
>       proforma disclosures are not necessarily representative of proforma effects
>       of reported net income for future years.
>   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.



|F-12
|----

---

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
>     (Cont.)
>   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.
>     The Company has no significant expenditures
>       relating to either warranties or post-contract customer support bundled
>       with the initial sale of the software license and, therefore, no provision
>       in respect thereof is included in the financial statements.
>   P.      Research and
>     development costs
>   Research and development costs are expensed
>       as incurred.
>   Q.      Advertising
>     costs
>   Advertising costs are charged to expenses,
>       as incurred.
>   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).
>   S.      Basic and
>     diluted earnings (loss) per share
>   The Company calculates basic and diluted
>       earning/loss per share in accordance with the provisions of FAS No. 128,
>       Earnings per Share (SFAS No. 128). Basic earnings/loss per
>       share includes no dilution and is computed by dividing income/loss available
>       to common shareholders by the weighted average number of common shares outstanding
>       for the period. Diluted earnings/loss per share reflect, in periods in which
>       they have a dilutive effect, the effect of common shares issuable upon exercise
>       of stock options.
>     The potential common shares which would arise
>       from the exercise of stock options are excluded from calculation of diluted
>       loss per share since their effect is anti-dilutive. Therefore, the amounts
>       reported for basic and diluted loss per share are the same.
>     The weighted average number of such option is
>       approximately 0, 520,000 and 547,000 for 2003, 2002 and 2001, respectively.



|F-13
|----

---

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
>   The Company uses derivative instruments to manage
>       interest, currency and certain equity market risks.
>     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
>       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.
>     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 change.
>     The amount of foreign currency forward contracts
>       outstanding at December 31, 2003 and 2002 is $9,800 and $7,400, respectively.
>       As of the balance sheet dates, the fair values of these contracts approximates
>       their carrying amount.



F-14


---

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 standards
>   In January 2003, the FASB issued Interpretation
>       No. 46 (FIN 46), Consolidation of Variable Interest Entities,
>       an interpretation of ARB 51. The primary objectives of this interpretation
>       are to provide guidance on the identification of entities for which control
>       is achieved through means other than through voting rights (variable
>       interest entities) and how to determine when and which business enterprise
>       (the primary beneficiary) should consolidate the variable interest
>       entity. This new model for consolidation applies to an entity in which either
>       (i) the equity investors (if any) do not have a controlling financial interest;
>       or (ii) the equity investment at risk is insufficient to finance that entitys
>       activities without receiving additional subordinated financial support from
>       other parties. In addition, FIN 46 requires that the primary beneficiary,
>       as well as all other enterprises with a significant variable interest in
>       a variable interest entity, make additional disclosures. Certain disclosure
>       requirements of FIN 46 were effective for financial statements issued after
>       January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December
>       2003), Consolidation of Variable Interest Entities (FIN 46-R)
>       to address certain FIN 46 implementation issues. The effective dates and
>       impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities
>       (SPEs) created prior to February 1, 2003. The company must apply
>       either the provisions of FIN 46 or early adopt the provisions of FIN 46-R
>       at the end of the first interim or annual reporting period ending after
>       December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The
>       company is required to adopt FIN 46-R at the end of the first interim or
>       annual reporting period ending after March 15, 2004. (iii) All entities,
>       regardless of whether an SPE, that were created subsequent to January 31,
>       2003. The provisions of FIN 46 were applicable for variable interests in
>       entities obtained after January 31, 2003. The adoption of the provisions
>       applicable to SPEs and all other variable interests obtained after January
>       31, 2003 did not have a material impact on the companys consolidated
>       financial position, consolidated results of operations, or liquidity.
>     In April 2003, the FASB issued SFAS No. 149,
>       Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.
>       SFAS No. 149 amends and clarifies accounting for derivative instruments,
>       including certain derivative instruments embedded in other contracts, and
>       for hedging activities under SFAS No. 133. In particular, this Statement
>       clarifies under what circumstances a contract with an initial net investment
>       meets the characteristic of a derivative. It also clarifies when a derivative
>       contains a financing component that warrants special reporting in the statement
>       of cash flows. SFAS No. 149 is generally effective for contracts entered
>       into or modified after June 30, 2003 and did not have a material impact
>       on the Companys financial statements.
>     In May 2003, the FASB issued SFAS No. 150, Accounting
>       for Certain Financial Instruments with Characteristics of both Liabilities
>       and Equity. SFAS No. 150 establishes standards for how a company classifies
>       and measures certain financial instruments with characteristics of both
>       liabilities and equity. It requires that an issuer classify certain financial
>       instruments as a liability (or as an asset in some circumstances). SFAS
>       No. 150 is effective for financial instruments entered into or modified
>       after May 31, 2003, and otherwise is effective at the beginning of the first
>       interim period beginning after June 15, 2003. The adoption of SFAS No. 150
>       did not have an impact on the Companys financial statements.
>   V.      Reclassification
>   Certain figures from prior years have been reclassified
>       in order to conform to the 2003 presentation.



F-15


---

CIMATRON LIMITED

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

****

**NOTE 3 - SHORT-TERM INVESTMENTS**

| | **A.** | Comprised as follows:
| | ------ | ---------------------



|****                                                    | **December
        31,**
|------------------------------------------------------- | ------------------------
|                                                        |                         
|****                                                    | **2003**                
|                                                        |                         
|Trading marketable securities
        - Corporate bonds | $                       
|                                                        |                         

****

| | **B.** | As of December 31, 2003 and 2002 all the investments are
      classified in accordance with SFAS No. 115 as available-for-sale.                                      
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                       
| | **C.** | Unrealized loss on available-for-sale securities of $97
      and $288 at December 31, 2003 and 2002, respectively, were recorded in other
      comprehensive income.
| |        |                                                                                                                                                                       
| | **D.** | Aggregate maturities of marketable securities are as follows:                                                                                                         



|****              | **December 31,**
|----------------- | ----------------
|****              | **2003**        
|                  |                 
|Within one year   | $               
|One to five years |                 
|Six to ten years  |                 
|                  |                 
|                  | $               
|                  |                 

******NOTE 4
  - ACCOUNTS RECEIVABLE - TRADE**

|****                                           | **December
        31,**
|---------------------------------------------- | ------------------------
|                                               |                         
|****                                           | **2003**                
|                                               |                         
|Accounts receivable                            | $                       
|Less - allowance for doubtful
        accounts |                         
|                                               |                         
|                                               | $                       
|                                               |                         

**NOTE 5 - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES**

|****                                   | **December
        31,**
|-------------------------------------- | ------------------------
|                                       |                         
|****                                   | **2003**                
|                                       |                         
|Prepaid expenses                       | $                       
|Derivative instruments                 |                         
|Advances to suppliers                  |                         
|Interest receivable and
        others |                         
|Others                                 |                         
|                                       |                         
|                                       | $                       
|                                       |                         

F-16

---

CIMATRON LIMITED

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



******NOTE 6 - PROPERTY AND EQUIPMENT******

|****                            | **December
        31,**
|------------------------------- | ------------------------
|                                |                         
|****                            | **2003**                
|                                |                         
|**Cost:**                       |                         
|Computers and software          | $                       
|Office furniture and equipment  |                         
|Vehicles                        |                         
|Leasehold improvements          |                         
|                                |                         
|                                |                         
|                                |                         
|**Accumulated depreciation:**   |                         
|Computers and software          |                         
|Office furniture and equipment  |                         
|Vehicles                        |                         
|Leasehold improvements          |                         
|                                |                         
|                                |                         
|                                |                         
|                                |                         
|**Property and equipment, net** | $                       
|                                |                         

**NOTE 7 - SOFTWARE DEVELOPMENT COSTS, NET**

|****                                   | **December
        31,**
|-------------------------------------- | ------------------------
|                                       |                         
|****                                   | **2003**                
|                                       |                         
|Capitalized software development costs | $                       
|Government grants                      |                         
|Accumulated amortization (*)           |                         
|                                       |                         
|                                       | $                       
|                                       |                         

|(*) | All capitalized modules are amortized over six years.                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | At the end of 2001, the Companys management reviewed
      the modules for impairment and reached the conclusion that some of the modules
      are not saleable. Accordingly, the Company recorded a write off of $886
      in 2001.
|    | Amortization expenses for the years ended December 31,
      2003 , 2002 and 2001, were $402, $401 and $2,021, respectively, and were
      charged to operations.                                                                     

F-17

---

CIMATRON LIMITED

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



**NOTE 8 - GOODWILL, NET**

|****                     | **December
        31,**
|------------------------ | ------------------------
|                         |                         
|****                     | **2003**                
|                         |                         
|Original amounts         | $                       
|Accumulated amortization |                         
|                         |                         
|                         | $                       
|                         |                         

**NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES**

|****                              | **December
        31,**
|--------------------------------- | ------------------------
|                                  |                         
|****                              | **2003**                
|                                  |                         
|Employees and related liabilities | $                       
|Derivative instruments            |                         
|Accrued expenses                  |                         
|Accrued royalties                 |                         
|Taxes to government institutions  |                         
|Others                            |                         
|                                  |                         
|                                  | $                       
|                                  |                         

**NOTE 10 - ACCRUED SEVERANCE PAY (DEPOSITS WITH INSURANCE
  COMPANIES AND A
                     
  SEVERANCE PAY FUND)**

> 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-18

---

CIMATRON LIMITED

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



**NOTE 11 - 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% to 4% 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, 2003 is approximately $3,822, 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, 2003 is $563, contingent upon the Companys incremental exports.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | **D.** | The Company acquired technology in respect of which it
      is obligated to pay royalties up to an amount of $1,831, beginning in 2004
      and until 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | **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, 2003 , 2002
      and 2001, were approximately $722, $752 and $756, 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 $124 as of December
      31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |        | Future minimum lease commitments under operating leases
      as of December 31, 2003 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|****                                | ****   
|----------------------------------- | -------
|**Year
        ended December 31,** |        
|2004                                | $ 1,169
|2005                                | 898    
|2006                                | 521    
|2007                                | 133    
|                                    |        
|                                    | $ 2,721
|                                    |        

| | **F.** | **Tax assessments**                                                                                                                                                                                                                                                                                                                   
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        | On December 31, 2002 the Israeli tax authorities issued
      to the Company tax assessments for the years 1998 to 2000. The Company estimates
      that there will be no material tax liability for the years in question.
      The Company has recorded in previous years a provision in the amount of
      $110 for this matter.

F-19

---

CIMATRON LIMITED

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



**NOTE 12 -SHAREHOLDERS EQUITY******

| | **A.** | **Share issuance**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        | The Companys shares are traded in the United States
      and are listed on the Nasdaq National Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | **B.** | **Share Option Plan**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |        | In January 1996, the Companys Board of Directors
      adopted a share option plan (the Share Option Plan) pursuant
      to which 316,000 Ordinary Shares were reserved for issuance upon the exercise
      of options to be granted to Directors, officers, employees and consultants
      of the Company. The Share Option Plan is administrated by a committee of
      the Board, which designates the optionees and dates of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |        | The exercise price of an option granted under the Share
      Option Plan may be no less than 85% of the fair market value of an Ordinary
      Share, as determined by that committee on the date that the option is granted.
      The options are for a 10-year term and are non-assignable except by the
      laws of descent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | The option committee has the authority to amend the terms
      of option grants, provided that any such amendment is in the best interest
      of the grantee. In March and April 2000, options to purchase 39,750 shares
      were exercised. As of December 31, 2003 , options to purchase 45,500 of
      such shares were outstanding. All of these options were originally granted
      with an exercise price of $8.00 per share. In January, 1998, the Board of
      Directors amended the exercise price of such options to $5.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | These outstanding options are, subject to the continued
      employment of each employee, exercisable commencing two years after the
      date of grant at a rate of 25% per year. The grantee is responsible for
      all personal tax consequences of the grant and the exercise thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | 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 Directors, officers, employees and consultants
      of the Company. The 1998 Share Option Plan is administrated by a committee
      of 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
      that committee 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 option committee 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, 2003 , options to purchase 131,500 of
      such shares were outstanding at a price of $4.00 per share under the 1998
      Share Option Plan. 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. The Company intends to grant additional
      options under the 1998 Share Option Plan to various Directors, executive
      officers and employees of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-20

---

CIMATRON LIMITED

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



**NOTE 12 - SHAREHOLDERS EQUITY (Cont.)**

> ******B. Share
>       Option Plan (Cont.)**
>     In October 1999, the option committee approved the grant
>       of o ptions to purchase 160,000 of the Companys shares at a price
>       of $2.00 per share to former president and CEO of the Company. These options
>       are exercisable commencing one year after the date of grant at a rate of
>       33.3% per year, subject to the continued employment of the CEO. All such
>       options were outstanding at December 31, 2003 . In January 13, 2002 Zeevi
>       Computers and Technology Ltd (ZCT) (the holding company) sold all its shareholdings
>       in the Company (see Note 14), upon such transaction all the unvested options
>       that were granted to the president and CEO of the Company immediately vested
>       and become exercisable.
>     In March 2000, the option committee adopted new guidelines
>       for the options to purchase Ordinary Shares reserved for issuance under
>       each of the 1996 Share Option Plan and 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, 2003 ,
>       options to purchase 148,000 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 o ptions 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.
>       All such options were outstanding at December 31, 2003 .
>     At December 31, 2003 options to purchase 411,250 of Company
>       shares were available for grants to Directors, officers, employees and consultants
>       of the Company.
>     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.

F-21

---

CIMATRON LIMITED

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



**NOTE 12 - SHAREHOLDERS EQUITY (Cont.)******

| | **B.** | **Share Option Plan (Cont.)**                                                                                                                                                          
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        | A summary of the status of the Companys stock option
      plan as of December 31, 2003 , 2002 and 2001, and changes during the years
      ending on those dates, is presented below:

|****                                     | **Year ended December 31,**
|---------------------------------------- | ---------------------------
|                                         |                            
|****                                     | **2003**                   
|                                         |                            
|****                                     | **(in thousands)**         
|                                         |                            
|****                                     | **Shares**                 
|                                         |                            
|Outstanding at beginning
        of year | 520,000                    
|Granted                                  | 150,000                    
|Exercised                                |                           
|Cancelled                                | (35,000)                   
|                                         |                            
|Outstanding at year end                  | 635,000                    
|                                         |                            
|Options exercisable at
        year end  | 473,160                    
|                                         |                            
|Weighted average fair
        value      |                            
|of options granted during                |                            
|the year                                 | $1.11                      
|                                         |                            

> The following table summarizes information about stock
>       options outstanding at December 31, 2003 :

|****                         | **Options outstanding** | ****                                                                                          | **Option
      exercisable**
|---------------------------- | ----------------------- | --------------------------------------------------------------------------------------------- | ----------------------------
|                             |                         |                                                                                               |                             
|**Range of exercise prices** |                         | **Number
        of
        shares
        outstanding at
        December 31,
        2003** |                             
|                             |                         |                                                                                               |                             
|$2.00 to $3.00               |                         | 310,000                                                                                       |                             
|$3.01 to $4.00               |                         | 131,500                                                                                       |                             
|$4.01 to $5.00               |                         | 193,500                                                                                       |                             
|                             |                         |                                                                                               |                             
|                             |                         | 635,000                                                                                       |                             
|                             |                         |                                                                                               |                             

F-22

---

CIMATRON LIMITED

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



**NOTE 13 - 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. The following 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):                                                                                                                                                                                                                                                                                                                                                                                
| |        | Tax exemption for 4 years, commencing in the first year
      the Company generates taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |        | For the remainder of the benefit period - 3 years - a reduced
      tax rate of 25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | Income earned prior to 1994 is subject to regular tax rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | The period of tax benefits for the first approved enterprise
      described above expired in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | In 1996, the Company was granted a second approved
      enterprise status, subject to the same terms as the first plan. The
      period of tax benefits for this approved enterprise expired in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | In 1997, the Company was granted a third approved
      enterprise status. The benefits under the third plan are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | 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
      expired in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | In 1998, the Company was granted a fourth approved
      enterprise status subject to the same terms as the third plan. The
      period of tax benefits for this approved enterprise will expire in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | In April 2001 the Company was granted a fifth "approved
      enterprise" status, subject to the same terms as the third plan. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | 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.                                                                                 
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-23

---

CIMATRON LIMITED

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



**NOTE 13 - INCOME TAXES (Cont.)**

> **B.** Comprised
>     as follows:

|                                              | **Year
        ended December 31,**
|--------------------------------------------- | -----------------------------------
|                                              |                                    
|                                              | **2003**                           
|                                              |                                    
|Income (loss) before taxes
        on income: |                                    
|Israel                                        | $                                  
|Non-Israeli                                   |                                    
|                                              |                                    
|                                              | $                                  
|                                              |                                    
|                                              |                                    
|                                              |                                    
|Current taxes                                 | $                                  
|Tax in respect of prior
        years         |                                    
|                                              |                                    
|                                              | $                                  
|                                              |                                    

> **C.** **** Deferred tax assets (liabilities), consist of the following:

|                                                    | **December
        31,**
|--------------------------------------------------- | ------------------------
|                                                    |                         
|                                                    | **2003**                
|                                                    |                         
|Deferred tax assets:                                |                         
|Loss carryforwards                                  | $                       
|Other cumulative temporary
        differences, net |                         
|                                                    |                         
|                                                    |                         
|Less - valuation allowance                          |                         
|                                                    |                         
|                                                    |                         
|Deferred tax liabilities:                           |                         
|Software development costs                          |                         
|                                                    |                         
|                                                    | $                       
|                                                    |                         

> In accordance with SFAS No. 109, deferred tax assets are
>       to be recognized for the anticipated tax benefits associated with net operating
>       loss carryforwards, and deductible temporary differences, unless it is more
>       likely than not that some or all of the deferred tax assets will not be
>       realized. The adjustment is made through a valuation allowance.
>     Since the realization of the net operating loss carryforwards
>       and deductible temporary differences of the Company and the subsidiaries
>       is less than likely, a valuation allowance has been established for the
>       amounts of the related tax benefits.

F-24

---

CIMATRON LIMITED

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



**NOTE 13 - 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 in come taxes calculated at the statutory corporate rate in Israel to
      the actual income tax expense in the financial statements:
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                           | **Year
        ended December 31,**
|-------------------------------------------------------------------------- | -----------------------------------
|                                                                           |                                    
|                                                                           | **2003**                           
|                                                                           |                                    
|Theoretical tax expense (benefit) (*)                                      | $                                  
|Increase (decrease) in taxes:                                              |                                    
|Disallowed deductions, net                                                 |                                    
|Tax in respect of prior year                                               |                                    
|Carryforward losses for which valuation
        allowance was not provided |                                    
|Other                                                                      |                                    
|                                                                           |                                    
|**Taxes on income in the statements
        of operations**                | $                                  
|                                                                           |                                    
|(*) Applicable tax rate                                                    |                                    
|                                                                           |                                    

| | **E.** | The Company has final tax assessments up to 1997.                                                                                                                              
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                                
| | **F.** | As of December 31, 2003 , the Company has approximately
      $2,330 of Israeli net operating loss carryforwards. The Israeli loss carryforwards
      have no expiration date.
| |        |                                                                                                                                                                                
| |        | Tax loss carryforwards of a U.S. subsidiary totaling $6,941expires
      between 2007 and 2023.                                                                                

**NOTE 14 - 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 companies affiliated
        with ZCT (in 2002 until February 22, 2002 ), Koonras and DBSI are included
        in the financial statements:                                                                                                                                                       

|                                                                              | **Year ended December 31,**
|----------------------------------------------------------------------------- | ---------------------------
|                                                                              |                            
|                                                                              | **2003**                   
|                                                                              |                            
|Reimbursement of ZCT for joint
        rental, maintenance and other expenses | $                         
|Management fees to Koonras
        and DBSI                                   | $ 359                      

F-25

---

CIMATRON LIMITED

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



**NOTE 15 - SELECTED STATEMENTS OF OPERATIONS DATA**

> **A.      Revenues**

|                                                                               | **Year
        ended December 31,**
|------------------------------------------------------------------------------ | -----------------------------------
|                                                                               |                                    
|                                                                               | **2003**                           
|                                                                               |                                    
|Revenue by geographical region:                                                |                                    
|Israel                                                                         | $                                  
|Europe (1)                                                                     |                                    
|Far East (2)                                                                   |                                    
|North America                                                                  |                                    
|Others                                                                         |                                    
|                                                                               |                                    
|                                                                               | $                                  
|                                                                               |                                    
|(1) Includes:                                                                  |                                    
|Italy                                                                          | $                                  
|Germany                                                                        | $                                  
|(2) Includes:                                                                  |                                    
|Japan                                                                          | $                                  
|                                                                               |                                    
|Revenue through major distributors,
        as a percentage of total revenues: |                                    
|Distributor (A)                                                                |                                    
|Distributor (B)                                                                |                                    



> **B.      Cost of revenues**

|                                                              | **Year
        ended December 31,**
|------------------------------------------------------------- | -----------------------------------
|                                                              |                                    
|                                                              | **2003**                           
|                                                              |                                    
|Hardware and software                                         | $                                  
|Salaries and employee benefits                                |                                    
|Amortization of capitalized
        software development cost |                                    
|Royalties to the chief scientist                              |                                    
|Depreciation                                                  |                                    
|Other                                                         |                                    
|                                                              |                                    
|                                                              |                                    
|Decrease in inventory                                         |                                    
|                                                              |                                    
|                                                              | $                                  
|                                                              |                                    

> ******C.      Selling,
>     general and administrative expenses**

|                                            | **Year
        ended December 31,**
|------------------------------------------- | -----------------------------------
|                                            |                                    
|                                            | **2003**                           
|                                            |                                    
|Marketing costs                             | $                                  
|Selling expenses                            |                                    
|General and administrative
        expenses |                                    
|Depreciation                                |                                    
|                                            |                                    
|                                            | $                                  
|                                            |                                    

> ****Advertising expenses
>     for the years ended December 31, 2003 , 2002 and 2001 were approximately $195,
>     $164 and $257, respectively.

F-26

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---



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Independent Auditor's Report
  to the Shareholder of Cimatron GmbH

We have reviewed the accompanying balance sheet
  of "Cimatron GmbH" (the "Company") as of December 31,
  2003 and the related statements of income, changes in shareholder's equity
  and cash flows for the twelve month period then ended. 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 limited
  review as of December 31, 2003.

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

In our opinion the financial statements referred
  to above present fairly, in all material respects, the financial position of
  Cimatron GmbH as of December 31, 2003 and the results of its operations and
  its cash flows for the period then ended in conformity with generally accepted
  accounting principles in the United States.

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Without qualifying our opinion above, we draw attention
  to the company's net equity position. The company is overindebted based
  on book values in the amount of 1.410.478,00 (US-$1.782.209,49).
  To avoid filing for insolvency procedures the parent company expressed a letter
  of subordination in the amount of 1.600.000. The parent company agreed
  that from their receivables as at December 31, 2003 a partial amount of 1.600.000
  shall rank behind all other creditors of Cimatron GmbH. Any portion of a claim
  so subordinated shall only be paid out of a surplus from future profits, a future
  liquidation surplus or, after overcoming the crisis, a net worth exceeding the
  other debts. However, the explanation provided shows that it is not impossible
  that the business operations will be maintained in the longer term. As a consequence,
  the accounting principles applied are based on the assumption that the company
  will be able to continue as a going concern.

Wiesbaden/Germany, February 6, 2004

| | Grant Thornton GmbH
      Wirtschaftsprüfungsgesellschaft
| | ---------------------------------------------------------
| |                                                          
| | /s/ A. Groß
      A. Groß
      Wirtschaftsprüferin      



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