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|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE
COMMISSION
|WASHINGTON, D.C. 20549            
|                                  
|                                  
|                                  
|FORM 20-F                         

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

OR

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
                                                                   FISCAL YEAR ENDED
DECEMBER 31, 2008
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

OR

|o | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell
company report.............................

For the transition period from
____________ to ______________

Commission file number
000-27974

|
|

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

Israel
(Jurisdiction of
incorporation or organization)

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

Ilan Erez11 Gush Etzion St.,Givat Shmuel 54030,
IsraelTelephone
+972-3-531-2060Facsimile:
+972-3-531-2097
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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

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

# 9,246,876 Ordinary
Shares, par value NIS 0.10 per share



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Indicate by check mark if the
registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.

# o Yes     x No

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

# o Yes     x No

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

# x Yes       o No

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232,405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files).

# o Yes     o No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

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

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

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

o Item 17     x Item 18

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

# o Yes    x No

2

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Table Of Contents

PART I

|         |                                                            |   
|-------- | ---------------------------------------------------------- | --
|
|
|
|
|ITEM 1   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      | 4 
|        
|ITEM 2.  | OFFER STATISTICS AND EXPECTED TIMETABLE                    | 4 
|        
|ITEM 3.  | KEY INFORMATION                                            | 4 
|        
|ITEM 4.  | INFORMATION ON THE COMPANY                                 | 19
|        
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                                  | 35
|        
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS               | 35
|        
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                 | 52
|        
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS          | 63
|        
|ITEM 8.  | FINANCIAL INFORMATION                                      | 67
|        
|ITEM 9.  | THE OFFER AND LISTING                                      | 68
|        
|ITEM 10. | ADDITIONAL INFORMATION                                     | 69
|        
|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 86
|        
|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     | 88

PART II

|          |                                                                        |   
|--------- | ---------------------------------------------------------------------- | --
|
|
|
|
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                        | 88
|         
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS              
|          | AND USE OF PROCEEDS                                                    | 88
|         
|ITEM 15T. | CONTROLS AND PROCEDURES                                                | 88
|         
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                       | 89
|         
|ITEM 16B. | CODE OF ETHICS                                                         | 89
|         
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                 | 90
|         
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES             | 91
|         
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 91
|         
|ITEM 16F. | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                           | 91
|         
|ITEM 16G. | CORPORATE GOVERNANCE                                                   | 92

PART III

|           |                      |   
|---------- | -------------------- | --
|
|
|
|
|ITEM 17.   | FINANCIAL STATEMENTS | 92
|          
|ITEM 18.   | FINANCIAL STATEMENTS | 92
|          
|ITEM 19.   | EXHIBITS             | 92
|          
|SIGNATURES | 92                  

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

Our
 historical  consolidated  financial  statements  are prepared in accordance  with
 generally accepted  accounting  principles in the United  States  ("GAAP") and are
 presented in U.S.  dollars.  The selected historical  consolidated  financial
 information as of December 31, 2007 and 2008 and for each of the three years ended
 December 31,  2006,  2007 and 2008 have been  derived  from,  and should be read in
conjunction  with,  the  consolidated  financial  statements of Cimatron Ltd. and notes
thereto  appearing elsewhere in this annual  report.  The  selected  financial data as
 of  December  31, 2004, 2005 and 2006 and for each of  the years ended  December 31,
2004 and 2005 have been derived from the audited  financial statements of Cimatron Ltd.
not included in this annual report.

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

4

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

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

5

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# Risk Factors

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

# Risks Related to our
Business

We face intensive
competition in our industry.

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

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

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

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

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

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

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

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

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

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

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

6

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

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

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

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

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

We
are subject to the effects of global, economic and market conditions. Many of the
worlds largest economies and financial institutions are currently experiencing a
reduction in economic activity, decline in asset prices, liquidity problems and limited
availability of credit. Prevailing global and U.S. macroeconomic conditions such as
inflation and the weakening of the U.S. dollar in relation to many world currencies which
make it more expensive to import consumer products into the U.S., as well as changes in
microeconomic conditions such as tightening of local credit markets which could negatively
impact the ability of manufacturers to obtain growth and working capital from local
lenders, may negatively impact our enterprise business.To the extent that our business
suffers as a result of such unfavorable economic and market conditions, our operating
results may be materially adversely affected.

7

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The crisis in world
credit markets has had a particularly severe impact on financing in the manufacturing
sector in which many of our customers operate and thereby threatens a continued reduction in
our primary source of revenues.

The
primary consumers for our products and services 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.The manufacturing industry has been particularly hard-hit by the global credit crisis,
as manufacturers have found it very difficult to obtain the financing that they need in
order to make capital expenditures for new hardware to be used in their operations.
Because of the lack of financing for new hardware, manufacturers have had, and may
continue to have, lesser demand for our software products and services, which are
compatible with, and dependent upon, such hardware. This rippling effect has begun to
have, and could continue to have, a material adverse effect on our primary source of
revenues, thereby impacting our operating results and overall financial condition in a
material, negative manner.

One of our shareholders
beneficially owns a substantial amount of our Ordinary Shares and may therefore influence
our affairs.

DBSI Investments Ltd. or DBSI,
beneficially owns approximately  46.6%  of our share capital. Accordingly, subject to
applicable limitations imposed by US securities laws and regulations and the Israeli
Companies Law, DBSI effectively has the ability to control the outcome of most matters
submitted to a vote of our shareholders, including the election of members of our board of
directors and approval of significant corporate transactions (except for transactions with
respect to which DBSI is deemed to possess a personal interest). The concentration of
ownership of our Ordinary Shares by DBSI could delay or prevent proxy contests, mergers,
tender offers, open-market purchase programs or other purchases of our Ordinary Shares
that might otherwise give you the opportunity to realize a premium over the
then-prevailing market price of our Ordinary Shares. This concentration of ownership may
also adversely affect our share price, especially if this shareholder sells substantial
amounts of our Ordinary Shares under its registration rights. See Item 7. Major
Shareholders and Related Party Transactions for additional details.

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

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

8

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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; and
|- | -----------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

9

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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. The results of our operations could be adversely affected by changes in the
financial condition of a Provider, which could occur rapidly, or to other changes in our
current Providers business or marketing strategies. There can be no assurance that
we will retain our current Providers, nor can there be any assurance that, in the event
that we lose any of our Providers, we will be successful in recruiting other highly
professional and technically competent Providers to represent us. Any such changes in our
distribution channels, especially those in the Far East and Europe, could materially
adversely affect our business, operating results and financial condition. Whereas
 most  of Gibbs total revenues in  2008  resulted from sales made by
Gibbs independent distributors, whom we refer to as Resellers, the merger with Gibbs
has increased our reliance on independent distributors. See Item 4 
Information on the Company  Business Overview.

Volatility in oil
prices may significantly impact our customers costs of operations, which could
cause unpredictable sales patterns for us by affecting demand for our products.

Many
of our customers use oil-based products as an integral part of their manufacturing
processes, including as components of their products.  Volatility in the cost
of crude oil, which is subject to many economic and political factors that
are beyond our customers control, has resulted in substantial global
fluctuations in the price of oil-based products in the last couple of
years. These fluctuations have caused and may continue to cause periodic increases or
decreases in the operating expenses of our customers. To the extent that these
customers accordingly increase or decrease their prices, demand for their products may
fall or rise, thereby causing a great deal of variability in their ability and readiness
to purchase our products.  In addition, in the case of a rise in oil prices and an
accompanying rise in our customers expenses, they may respond by placing pressure on
the prices that they are willing to pay for our products.  In that event, our
business and results of operation may be adversely affected.

10

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Following our acquisition
of 100% of MicroSystem, its results of operations will likely have a material impact
on our results of operations.

Following
the exercise of both of our options to increase our holdings in MicroSystem, our Italian
Provider, first to 51% and then to 100%, which increases were consummated in July 2007 and
July 2008, respectively, we have fully consolidated the results of Microsystem (as of the
3rd quarter of 2007). Therefore, Microsystems results of operation,
including revenues, gross margins and operating income, will likely have a material effect
on our results of operation including revenues, gross margins and operating income. The
consolidation of Microsystems financial statements will also increase the impact of
changes in the Euro  dollar exchange rate on our revenues and expenses, as
substantially all of Microsystems revenues and expenses are Euro-denominated.

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

We
incurred a net loss of approximately $4.6 million in 2005. Although we had net income of
$0.5 million in 2006, net income of $1.9 million in 2007, and net income of $0.7 million
in 2008 we incurred a net loss of approximately $0.6 million in the first quarter of 2009,
and we cannot be certain that we will maintain profitability on a quarterly or annual
basis.

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

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

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

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

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

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

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

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

| |  | 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.
| | - | -----------------------------------------

11

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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 that would happen in the future, the price of our Ordinary
Shares will likely decrease again.

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

Although
part of our revenues are denominated and paid in U.S. dollars, the majority are not so
denominated and paid. Therefore inflation and fluctuations in the U.S. dollar exchange
rate have and may continue to have a material effect on our revenue. In addition, a
significant portion of our international sales is denominated in Euros, and in the future
additional sales may be denominated in currencies other than U.S. dollars, thereby
exposing us to gains and losses on non-U.S. currency transactions.  We may choose to
limit this exposure by entering into hedging transactions.  However, hedging
transactions may not prevent exchange-related losses, and our business may be harmed by
exchange rate fluctuations.  Furthermore, as we seek to expand our sales to regions
throughout the world, we might be exposed to risks of customers located in countries
suffering from uncertain economic environments such as high inflation and solvency
problems. Those issues and devaluation in local currencies of our customers relative to
the U.S. dollar where our sales are denominated in U.S. dollars could cause customers to
decrease or cancel orders or default on payment. To the extent that the value of the New
Israeli Shekel increases against the U.S. dollar, our expenses on a U.S. dollar cost
basis increase. We cannot predict any future trends in the rate of devaluation or
appreciation of the NIS against the U.S. dollar. If the U.S. dollar cost of our
operations in Israel continues to increase, our U.S. dollar-measured results of
operations will be adversely affected. If the U.S. dollar cost of our operations in
Israel continues to increase, our dollar-measured results of operations will be adversely
affected. The New Israeli Shekel appreciation (devaluation) in relation to the U.S.
dollar amounted to 8.2%, 9.0% and 1.1% for the years ended December 31, 2006, 2007 and
2008, and (10.2)% for the first quarter of 2009. We are also exposed to the risk that the
rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to
the U.S. dollar or that the timing of this devaluation will lag behind inflation in
Israel. The Israeli rate of inflation (deflation) amounted to (0.1)%, 3.4% and 3.8% for
the years ended December 31, 2006, 2007 and 2008, respectively.

12

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In the first quarter of 2009,
as had been the case prior to 2006 we once again experienced decreases in our revenues
from products. If this trend continues, it will likely adversely affect our gross margins
and profitability.

As
had been the case in 2005, when our revenues from the sale of products decreased relative
to their level in 2004, our product revenues fell by 22% during the first quarter of 2009,
to $7.8 million from $10.0 million during the equivalent quarter of 2008. During 2006,
2007 and 2008, our revenues from the sales of products had increased each year, from
approximately $9.0 million in 2005 to approximately $9.6 million in 2006, $14.3 million in
2007 and $20.1 in 2008. At the same time, revenues from maintenance and services also
increased during the last two years of such three year stretch, increasing to
approximately $20.9 million in 2008 from approximately $14.3 million in 2007 and
approximately $11.8 million in 2006. Our gross margin from most of our products is higher
than our gross margin from services. This is because our cost of services, which includes
expenses of salaries and related benefits of the employees and subcontractors engaged in
providing the services, is relatively higher than our cost of products. If our overall
percentage of revenues comprised by maintenance and service revenues continues to
increase, our gross margins and profitability will likely be adversely affected. In
addition, if our revenues from the sale of products decrease, such decrease may adversely
affect our future maintenance and service revenues, as it may result in a smaller user
base to purchase maintenance and service contracts from us.

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

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

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

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

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

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

We are affected by
volatility in the securities markets.

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

# Risks Related to
Licenses and Intellectual Property

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

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

14

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

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

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

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

# Risks Related to our
Operations in Israel

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

Our
functional currency is the U.S. dollar while a portion of our expenses, principally
salaries and the related personnel expenses, are in new Israeli shekels, or NIS. As a
result, we are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this
devaluation lags behind inflation in Israel. We cannot predict any future trends in the
rate of inflation/ deflation in Israel. If the U.S. dollar cost of our operations in
Israel increases, our U.S. dollar-measured results of operations will be adversely
affected. The Israeli rate of inflation (deflation) amounted to (0.1)%, 3.4% and 3.8% for
the years ended December 31, 2006, 2007 and 2008 respectively.

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

Our
principal executive offices and research and development facilities are located in Israel.
In addition, a portion of our sales is made to customers in Israel. Accordingly, security,
political and economic conditions in Israel may directly affect our business. Over the
past several decades, a number of armed conflicts have occurred between Israel and its
Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could affect adversely our
operations. From October 2000 until recently, terrorist violence in Israel increased
significantly and negotiations between Israel and Palestinian representatives effectively
ceased. In February 2006, Hamas, a radical Islamic organization, won the Palestinian
Parliament elections. In July and August 2006, significant fighting took place between
Israel and Hezbollah in Lebanon, resulting in rockets being fired from Lebanon into
northern Israel. Recently, in December 2008 and January 2009, there was an escalation in
violence between Israel and Hamas, and significant hostilities along Israels border
with the Gaza Strip. Despite the cessation of such escalation, there can be no assurance
that the relative calm that has been achieved will continue. Increased hostilities, future
armed conflicts, political developments in other states in the region, or continued or
increased terrorism could make it more difficult for us to conduct our operations in
Israel, which could increase our costs and adversely affect our financial results.
Furthermore, several countries still restrict business with Israel and Israeli companies.
These restrictive laws and policies may limit our ability to sell our products in those
countries.

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

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

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

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

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

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

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

We
believe that the majority of products that we have sold since January 1, 2005 are not
based on technology developed with funds provided by the OCS and that, accordingly, such
sales should not be subject to the payment of royalties to the OCS. Therefore, the royalty
reports we submitted to the OCS for the period starting January 1, 2005 and thereafter
have reflected significantly reduced royalty obligations in comparison to our royalty
reports for the years prior to 2005. In addition, during the second half of 2005 we
initiated a process with the OCS in an attempt to obtain the agreement of the OCS with our
position and to the cessation of our obligation to pay future royalties. This process is
still ongoing. Although we believe we have strong arguments to support our position, we
have accrued royalty expenses in our financial reports for the periods from January
1st, 2005 to March 31st, 2009 in the amount of $2.7 million, but we
have not paid any royalties associated with the products mentioned above to the OCS. In
light of the above-mentioned facts, we intend to consider our next steps with the OCS and
whether further royalty expenses accruals will be necessary. A determination that we are
in fact obligated to pay royalties in respect of sales after January 1, 2005 could
negatively impact our liquidity and if that determination is made after we cease to accrue
for any such royalties on our financial statements or if the amount that we become
obligated to pay exceeds the amounts for which we have accrued in our financial
statements, such payments would negatively impact our earnings.

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

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

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

# History and Development of the Company

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

In
July 2005 we acquired an initial 27.5% of the shares of Microsystem Srl, our Italian
distributor, for 575,000 Euro. Under the agreement, we also received an option to acquire
up to 100% of Microsystem from Microsystems shareholders and Microsystems
shareholders received an option to require us to purchase 49% of Microsystems share
capital under specific circumstances. In July 2008, we completed the acquisition of 100%
of Microsystems shares. See Item 5. Operating and Financial Review and
Prospects  Overview for additional details regarding the transactions with
Microsystem and the options received both by us and Microsystems shareholders. The
transactions were designed to significantly enhance Microsystems financial position
and balance sheet, and to strengthen our leading position in Italy, one of our key markets
in Western Europe. Under the terms of the initial agreement, Microsystems marketing,
sales, and support groups remained in their current offices throughout Italy,
nevertheless, in the last three years Microsystem went through a comprehensive
restructuring and turnaround.

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

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

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

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# Industry Background

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Business Overview

# Principal Operations,
Products and Developments

Following
our merger with Gibbs System, Inc., we currently have two main product lines 
CimatronE and GibbsCAM:

Cimatron
E

Cimatron E, our CAD/CAM solution for
the tooling and production industries, was initially released in September 2001. We
released our newest major version of the Cimatron E (Version 9.0) in June 2009. Cimatron E
provides comprehensive tools, applications and process-automation solutions for the
tooling and manufacturing industries.

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With Version 9 of Cimatron E,
Cimatron helps toolmakers and manufacturers of complex discrete parts step up to new
levels of productivity, introducing breakthrough improvements such as:

| |  | A
new application for transfer die design
| | - | -----------------------------------------

| |  | A
new die quote generator
| | - | -------------------------

| |  | Greater
mold design automation
| | - | ------------------------------

| |  | A
new application for defining electrode measuring points and probe path
| | - | ------------------------------------------------------------------------

| |  | New
machining strategies for High Speed Machining (HSM) and 5-Axis milling
| | - | --------------------------------------------------------------------------

| |  | New
capabilities for handling Product Manufacturing Information (PMI) throughout the design
and          manufacturing process
| | - | ------------------------------------------------------------------------------------------------------------------------------

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 machining time. The mission critical tasks of splitting the model,
applying engineering changes, and extracting electrodes and inserts are all handled by
Cimatrons Quick Tooling wizard-based applications.

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

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

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The
Cimatron E product family includes the following basic modules:

# Designer Solution

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

# NC Solution

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

# Master Solution

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

# Electrode Solution

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

# Electrode Pro Solution

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

23

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# Student Package

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

# View Only System

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

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

# Mold Design

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

# Die Design

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

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

# Quick Electrode

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

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# ECO Manager

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

# 5 Axes Production

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

# Micro-Milling

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

GibbsCAM®

GibbsCAM,
our CAD/CAM solution for discrete part production manufacturing, was first released in
1993. The current shipping version, GibbsCAM 2009 v9.3, was released in March 2009.
GibbsCAM provides a comprehensive suite of tools, applications and
process-automation/standardization solutions for industrial manufacturers.

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

The GibbsCAM product family includes
the following module options:

# Mill

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

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# Lathe

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

# Solid Import

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

# 2.5D Solids

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

# SolidSurfacer®

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

# Advanced CS

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

# Rotary Mill

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

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# 4-Axis Milling

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

# 5-Axis Simultaneous
Milling

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

# TMS (Tombstone
Management System)

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

# MTM (Multi-Task
Machining)

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

# Wire-EDM

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

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# Machine Simulation

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

# Data Exchange Options

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

# CutDATA

Machining
feeds and speeds database

# Post Processors

GibbsCAM
offers a variety of approaches to generate G-code for machine tools. For users who prefer
to develop their own posts, GibbsCAM offers PostHASTE, a template-based post processing
system along with over 225 post templates. For users who already have a legacy posting
system based on APT-CL, GibbsCAM outputs APT-CL output. GibbsCAM also has a library of
over 8500 post processors for a wide variety of controller and machine tool
configurations. For the ultimate level of support, GibbsCAM also offers high-efficiency,
custom post processors created by a team of expert developers.

# Marketing and
Distribution

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

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

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

Providers

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

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

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

A
typical agreement with a Provider is for a term of two years (subject to rolling two-year
extensions). Our Providers are distributors and our agreements with them enable the
Providers to purchase our products at a discounted price. Certain of our Providers act as
our exclusive distributors in a single country or region. Other than our Provider in
Japan, no Provider accounted for more than 1.1% of our total consolidated revenue for the
year ended December 31, 2008. In July 2005 we acquired 27.5% of our Italian Provider
and an option to purchase its remaining outstanding shares from its stockholders. In July
2007 we exercised our option to increase our holdings in our Italian Provider to 51%, and
in July 2008, we completed the acquisition of such Provider by exercising our option to
acquire the remaining 49% of its stock. These latter two holdings increases changed our
Italian Providers status from an independent provider to a subsidiary.

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There
can be no assurance that all existing relationships with our Providers will be renewed. We
believe that with the exception of our Provider in Japan, the termination of our
relationship with a single Provider would not adversely affect us; however, the
termination of our relationship with several of our Providers at approximately the same
time or with one of our two Providers in Japan which accounted for 4.1% of our total
consolidated revenue in 2008 could adversely affect us. There can be no assurance that, in
the event that we lose any of our Providers, we will be successful in recruiting
replacement professional and technically competent Providers.

Gibbs
Resellers

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

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

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

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

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Gibbs
resellers include eight who comprise the Gibbs Presidents Club. Each of
these eight resellers are independent companies that primarily engage in reselling Gibbs
products and that represent the resellers with the highest total sales of Gibbs products
for the preceding year. Other than the eight Presidents Club resellers, no reseller
accounted for more than 0.8% of Cimatrons total consolidated revenue for the year
ended December 31, 2008. Even among the Presidents Club members themselves,
none accounted for more than 2.1% of Cimatrons total consolidated revenue during
2008.

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

Subsidiaries

Our
strategy over the years has been to increase our direct involvement in certain key markets
in which we felt the Providers were not maximizing the business opportunities, through the
formation or acquisition of marketing and support subsidiaries. In furtherance of this
strategy, we have incorporated subsidiaries in France, Japan, United Kingdom, China, as
well as India, where we formed a subsidiary at the end of 2005 that started commercial
activities during the second quarter of 2006. We have also acquired all of the outstanding
voting interests in Cimatron Technologies, Inc., our North American Provider, and have had
our German subsidiary, Cimatron GmbH, purchase all of the Cimatron-related business of our
German Provider, including, as of February 2009, the hiring of the former key employees of
Gibbs German reseller. During August 2006, we acquired the remaining 69.83% of the
outstanding shares of our Korean Provider following which it became a wholly owned
subsidiary. In January 2005 we announced the formation of Cimatron Guangzhou, a new joint
venture in Guangzhou, China, with SGV, a distributor of our products since 1998. In late
2006 we transferred our business activity in France to an independent provider and
substantially ceased the activity of our French subsidiary. During 2007 we transitioned
our business activity in the United Kingdom from our United Kingdom subsidiary to an
independent Provider with the intent of achieving greater efficiencies in our United
Kingdom business. In July 2005, July 2007 and July 2008, we engaged in a series of
transactions whereby we acquired an initial 27.5%, an additional 23.5%, and the remaining
49% of the outstanding shares of our Italian Provider, thereby transforming it into our
wholly-owned subsidiary. See Item 5. Operating and Financial Review and Prospects
 Overview for additional details regarding the merger with Gibbs and with
respect to the transaction with Microsystem, our Italian Provider and our increase in
holdings thereof.

Customers

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

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In
the years ended December 31, 2008, 2007 and 2006, approximately 58%, 66% and 52%,
respectively, of our revenues were from Europe; approximately 3%, 4%, and 7%,
respectively, of our revenues were from Israel; approximately 12%, 18% and 23%,
respectively, of our revenues were from the Far East; approximately 25%, 11% and 17%,
respectively, of our revenues were from North America; and approximately 2%, 1%, and 1%,
respectively, of our revenues were from other countries.

# Geographical Breakdown
of Our Revenue

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

2008

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

2007

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

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2006

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

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

# Potential Fluctuations
in Operating Results; Seasonality

Potential
Fluctuations in Operating Results

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

Seasonality

We
sell our products to corporations and our sales are therefore subject to the fiscal and
budgeting cycles of these corporations. Accordingly, a large percentage of our sales occur
in the fourth quarter, while sales in the third quarter are traditionally lowest due to
the summer vacation and in the first and second quarters sales are slower than in the
fourth quarter but higher than in the third quarter. Nevertheless, there have been certain
years with a different seasonality pattern, and we cannot guaranty that such a pattern
will hold true in every future year.

# Organizational Structure

As of May 31, 2009, our principal
shareholder, DBSI, holds 4,265,950 shares, representing approximately 46.6% of our
outstanding share capital, and (subject to applicable limitations imposed by US securities
laws and regulations and the Israeli Companies Law) effectively has the ability to control
the outcome of most matters submitted to a vote of our shareholders. Until June 2008,
Koonras Technologies Ltd. (Koonras), held 2,554,360 of our Ordinary Shares. On
June 3, 2008, Koonras sold 854,360 Ordinary Shares to 3Kotek 2 B.V. (Kotek).
See Item 7. Major Shareholders and Related Party Transactions for additional
details.

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

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# Property, Plants and
Equipment

We
do not own any real property. We lease the office premises that we occupy in Givat Shmuel,
Israel from a private commercial property owner pursuant to the terms of a lease agreement
we entered into in February 2003. Until January 2006 we occupied an aggregate of
approximately 2,100 square meters at this facility. As of January 10, 2006, we occupy
approximately 1,750 square meters at this facility. The initial term of this lease expired
on June 30, 2006 and, after we exercised our option to extend the lease for an initial
period of three years, wehave further extended the lease for an additional five
years, through June 30, 2014, and reduced the occupied space to approximately 1,491 square
meters. In 2008, the aggregate annual lease payments for the office premises were
approximately $349,000.

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

The
following table presents a breakdown of our approximate aggregate annual lease payments
for office premises worldwide for the year 2008 (in thousands of U.S. Dollars):

|ENTITY                    | LOCATIONS                                                 | APPROXIMATE ANNUAL
EXPENSE
(in thousands of US$)
|------------------------- | --------------------------------------------------------- | ------------------------------------------------
|
|
|
|
|Headquarters in Israel    | Givat Shmuel                                              | 349                                             
|                         
|Cimatron Gibbs LLC        | Moonpark, California                                      | 311                                             
|                         
|North American subsidiary | Michigan and Illinois (U.S.)*                             | 63                                              
|                         
|German subsidiary         | Ettlingen, Hamm, Nurenberg, Koln and Ismaning             | 253                                             
|                         
|Italy                     | Bologna, Milano, Ancona, Treviso                          | 218                                             
|                         
|Japanese subsidiary       | Tokyo                                                     | 5                                               
|                         
|Chinese subsidiaries      | Beijing, Wuxi, Chengdu, Shanghai Guangzhou, Fujian, Wuhan | 79                                              
|                         
|Korean subsidiary         | Seoul                                                     | 26                                              
|                         
|India subsidiary          | Pune                                                      | 1                                               
|                          |                                                           |                                                 
|                          | Total                                                     | 1,305                                           

*     These offices
are responsible for our selling and marketing activities in Canada as well.

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|Item 4A. |  | Unresolved Staff Comments.
|-------- |  | --------------------------

Not Applicable

|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.

We
have consummated various important acquisitions that have impacted our results of
operations over the past few years. In July 2005 we acquired an initial 27.5% of the
shares of Microsystem Srl, our Italian distributor, for 575,000 Euro. Pursuant to the
exercise of two call options that were granted to us as part of the relevant transactions,
we acquired the remaining 72.5% of Microsystems, in two stages of 23.5% and 49%, in July
2007 and July 2008, respectively, for aggregate consideration of $599,250, and, $1.25
million, respectively. We accounted for the original acquisition under the equity method,
and, accordingly, as of July 1, 2005, we commenced recording our share of
Microsystemss profits or losses in our consolidated financial statements. Following
our exercise of the first call option and the increase in our holding in Microsystem to
51% in July 2007, we fully consolidated the results of Microsystem into our financial
statements. Now that Microsystem is our wholly-owned subsidiary, its results will continue
to remain fully consolidated with those of our parent company.

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

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

35

---

---

In
June 2009, we released our newest major version of Cimatron E (Version 9.0), which enables
toolmakers and manufacturers of complex discrete parts to step up to new levels of
productivity and which introduces breakthrough improvements, as described in greater
detail in Item 4- Business Overview above.

Revenues

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

Cost
of Revenues

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

Software
Development Costs

Costs
for the development of new software products and substantial enhancements to existing
software products are expensed as incurred until technological feasibility has been
established, at which time any additional development costs are capitalized. Based on our
product development process, technological feasibility is established upon completion of a
working model. Any capitalization of software development costs continues up to the time
the software is available for general release to customers. However, during 2004, 2006,
2007 and 2008, costs incurred between the completion of the working model and the point at
which the products were ready for general release were insignificant. Therefore, all
research and development costs incurred in 2004, 2006, 2007 and 2008 have been expensed.
In 2005 we capitalized approximately $0.2 million in connection with the development of
Cimatron E 7.0.

36

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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 2005, 2006, 2007 and 2008 were from customers in Europe.
Since our financial results are reported in U.S. dollars, decreases in the rate of
exchange of non-U.S. dollar currencies in which we make sales relative to the U.S. dollar
will decrease the U.S. dollar-based reported value of those sales. To the extent that
decreases in exchange rates are not offset by a reduction in our costs, they may in the
future materially adversely affect our results of operations.

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 U.S. dollar will devaluate relative to the
NIS, or, if the NIS devaluates relative to the U.S. dollar, that the rate of inflation in
Israel will exceed such rate of devaluation of the NIS relative to the U.S. dollar or that
the timing of such devaluation will lag behind inflation in Israel. Any such U.S. dollar
devaluation or excessive Israeli inflation has the effect of increasing the U.S. dollar
cost of our operations. In 2006, 2007 and 2008, the U.S. dollar devaluated relative to the
NIS, thereby causing an increase in the U.S. dollar cost of our operations. During the
first five months of 2009, the trend has been reversed, as the US Dollar has regained
value relative to the NIS, and Israeli inflation has slowed. However, if the U.S. dollar
cost of our operations in Israel begins to increase once again, our U.S. dollar-measured
results of operations will continue to be adversely affected. Following the merger with
Gibbs, we anticipate an increase in the relative portion of our U.S. dollar based expenses
and revenues as a percentage of our total expenses and revenues. Commencing during the
second quarter of 2008, we began taking cost control measures to counter the effect of the
weakening U.S. dollar on our financial results. These measures mainly involved cost
reductions in Israel and the U.S.

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.

37

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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.

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

Our
sales are made pursuant to standard purchase orders, containing payment terms averaging
between 30  120 days. Our arrangements do not substantially include any refund
provisions nor are payments subject to milestones. In addition, substantially all of our
arrangements do not contain customer acceptance provisions.

Allowance
for Doubtful Accounts

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

38

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# Operating Results

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

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

39

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Revenue

Our
total revenues increased to approximately $41.0 million in 2008 from approximately $28.6
million in 2007 and approximately $21.5 million in 2006. Our revenues from the sale of
products increased to approximately $20.1 million in 2008 from approximately $14.3 million
in 2007 and approximately $9.6 million in 2006. The majority of the increase in the sale
of products in 2008 was attributable to (i) the consolidation of Gibbs which began to be
reflected in our results from the beginning of the year (ii) the consolidation of
Microsystems results, which began to be reflected n our results for the third
quarter of 2007, but which was first reflected on a full year basis in 2008, and (iii) the
Dollar/Euro exchange rates that on average were higher in 2008 than in 2007. As a
percentage of revenues, our revenues from the sale of products were approximately 45% in
2006, approximately 50% in 2007 and approximately 49% in 2008. Our revenues from services
increased in 2008 to approximately $20.9 million from approximately $14.3 million in 2007
and approximately $11.8 million in 2006. This increase was primarily attributable to the
same factors that caused an increase in our products sales over the same period of time.
As a percentage of revenues, our revenues from services inecreased during 2008 to
approximately 51% from approximately 50% in 2007, whereas such percentage in 2007
constituted a decreased from approximately 55% in 2006.

While
in the first and the second quarters of 2008 we had organic revenue growth both from
products and services, this trend did not continue in the third and fourth quarters of
2008 due to the global economic downturn.

As
58% of our 2008 revenue was derived from Europe, changes in the Euro  dollar
exchange rate can significantly influence our revenues. Throughout 2008, the Euro  dollar
exchange rate had an increasing influence on our revenues and results of operation due to
the consolidation of Microsystems financial results with ours, since substantially
all of Microsystems revenues are Euro-denominated.

While
we believe that the trend of migration of European mold, tool, die and fixture makers
operations to low cost labor markets in the Far East, where markets are also
characterized by lower prices and by higher usage of pirated copies of software products,
may continue, we have previously adjusted our European strategy slightly in order to
increasingly focus on penetrating the high end European market, in which such migration
is less prevalent. At the same time, we continue with our sales efforts in China and in
other emerging markets. In addition, following the Gibbs acquisition, we have begun to
introduce the GibbsCAM product line into our legacy Cimatron sales channels in Germany,
Italy, China, South Korea and Israel, and ultimately in all our other sales channels.

40

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Cost
of Revenue

Cost
of revenue increased in 2008 to approximately $7.8 million from approximately $5.4 million
in 2007 and approximately $3.6 million in 2006. The increase in 2008 was mainly due to (i)
the consolidation of Gibbs-related costs starting in the first quarter of 2008 and (ii)
the consolidation of Microsystem-related costs for the full year of 2008 as opposed to
merely for the last two quarters of 2007, while the increase in 2007 relative to 2006 was
primarily due to the consolidation of Microystems results starting in the third
quarter of 2007.

Gross
Profit

Gross
profit, as a percentage of total revenue, was 81.0%, 81.0% and 83.1% in 2008, 2007 and
2006, respectively. While the percentage in 2008 was the same as in 2007, it should be
noted that in 2008, the cost of revenue included $588,000 of non-cash amortization
expense attributable to the amortization of part of the acquired intangible assets of
Gibbs. There was no amortization of these assets in 2007, as the Gibbs merger took place
in January 2008. Accordingly, excluding this amortization, our gross margin in 2008 was
higher than in 2007, mainly due to a different revenue mix, with a lower percentage of
third party hardware products sales and a higher percentage of software and services
sales.

The
decrease in percentage of gross profit, as a percentage of total revenue, in 2007 relative
to 2006 was primarily due to the consolidation of Microystems results starting in
the third quarter of 2007, as a portion of Microsystems product revenues include
hardware sales, which feature lower gross profit margins than software.

Research
and Development, Patents and Licenses, etc.

Research
and development costs primarily consist of salaries and related costs of employees engaged
in ongoing research, design and development activities. Research and development costs
were $6.9 million in 2008, $4.3 million in 2007 and $4.4 million in 2006. The increase in
research and development costs in 2008 was primarily due to consolidation of Gibbs results
from the first quarter of 2008. In 2007 we had maintained the same level of research and
development activity as in 2006.

Selling,
General and Administrative Expenses

Selling expenses consist of costs
relating to promotion, advertising, trade shows and exhibitions, compensation (including
sales commissions), sales support, travel and travel-related expenses and royalties to the
Fund for the Encouragement of Marketing of the Government of Israel, or the Marketing Fund
(when applicable), including all such expenses for our subsidiaries. We did not receive
any grants from the Marketing Fund in the years 2006, 2007 or 2008 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 to DBSI
and Koonras for management services (e) reserves for doubtful debts and (f) amortization
of investment in acquired companies.

41

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Selling,
general and administrative expenses increased to $25.8 million in 2008 from $17.2 million
in 2007 and $13.4 million in 2006. The main reason for the increase in 2008 was the
consolidation of Gibbs results from the first quarter of 2008, and the full year
consolidation of Microsystems results in 2008, as compared to only second half year
consolidation in 2007. In 2008, the general and administrative expenses included $400,000
of non-cash amortization expense stemming from the amortization of part of the acquired
intangible assets of Gibbs and Microsystem, while in 2007 such expenses included only
$95,000 of non-cash amortization expense related to the acquired intangible assets of
Microsystem. The primary reason for the increase in selling, general and administrative
expense in 2007 relative to 2006 was the consolidation of Microystems results
starting in the third quarter of 2007, but it was also attributable to our increasing
selling and marketing expenses aimed at enhancing our sales and marketing efforts in some
selected markets. As our operations in Europe are in Euro, we also faced in 2007 higher
expenses in dollars relative to 2006 terms due to the relative weakness of the US dollar
in comparison to the Euro. Commencing with the third quarter of 2007, the Euro 
dollar exchange rate has had an increasing influence on our revenues and results of
operation due to the consolidation of Microsystems financial results with ours, as
substantially all of Microsystems revenues and expenses are Euro-denominated.

Financial
Income (Expenses), net

Financial
income (expenses), net, consists primarily of interest earned on our cash reserves, gains
(losses) from sale of bonds and funds, as well as interest on trade receivables and tax
rebates and currency translation adjustments between the U.S. dollar exchange rate and
the NIS and Euro exchange rates, imposed on our assets and liabilities. Financial income
(expense), net, was $(0.1) million in 2008 compared to $0.4 million in 2007 and $0.6
million in 2006. The decrease in financial income, net, in 2008 was due primarily to the
fact that in 2008 we had financial expenses as a result of the weakening Euro and Israeli
Shekel against the Dollar, while over the course of all of 2007, we had financial income,
mainly for the opposite reason. Also, during 2008, the interest that we received on our
cash reserves was significantly lower than in 2007, due to the global trend of reduced
interest rates. Moreover, the $6 million aggregate considerations, that we paid in the
merger with Gibbs and the acquisition of the last 49% of Microsystems shares was
funded from our accumulated cash and cash equivalents; therefore, we had a lower
interest-bearing cash balance in 2008 as compared to 2007.

The
decrease in financial income, net in 2007 relative to 2006 was attributable to changes in
currency exchange rates that reduced such income.

Net
Income (Loss)

We
recorded net income of approximately $0.7 million, $1.9 million and $0.5 million in 2008,
2007 and 2006, respectively. We cannot be certain that we will maintain profitability on a
quarterly or annual basis. If the percentage of our overall revenues comprised by service
revenue increases, our gross margins and profitability will likely be adversely affected.
In addition, if our revenues from the sale of products decreases, such decrease may
adversely affect our future service revenues, as it may result in a smaller user base to
purchase service contracts from us. See Item 3  Risk Factors. For a
geographical breakdown of our revenues, please refer to Item 4  Information on
the Company  Geographical Breakdown of our Revenue.

42

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# Effective Corporate Tax
Rate

We and each of our subsidiaries are
subject to corporate taxes in various countries in which we and they operate. In Israel we
received a final tax assessment through the tax year ended December 31, 2006. Generally,
as of January 1, 2009, Israeli companies are subject to corporate tax of 26% on taxable
income and are subject to capital gains tax at a rate of 25% on capital gains derived
after January 1, 2003 (other than capital gains from the sale of listed securities,
which are subject to tax at the current rate of 26%). The corporate tax rate was reduced
in July 2005, from 31% for the 2006 tax year to 29% for the 2007 tax year, 27% for the
2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter.
However, the effective tax rate payable by a company that derives income from an Approved
Enterprise (as discussed below) may be considerably less. We believe that our effective
tax rates in the U.S., Germany, Italy, France, the U.K., China, Japan, India and Korea
would have been approximately 34%, 25%, 31%, 33%, 19%, 35%, 31%, 34% and 27.5%,
respectively, for the year ended December 31, 2008, had we not incurred tax losses in such
countries. We believe that we had tax loss carryforwards in Israel in the aggregate amount
of $4.7 million as of the end of 2008. In addition, as of December 31, 2008, we had
approximately $2.8 million in net operating loss carryforwards in France, $0.5 million in
North America, $0.4 million in the U.K and $0.1 million in Korea. There can be no
assurance that we will be able to use all the above-mentioned tax loss carryforwards at
any time in the future. We expect that if 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 previously granted Approved Enterprise status under the Israeli Law
for the Encouragement of Capital Investments, 1959. Consequently, we were eligible for
certain Israeli tax benefits. Income derived from our Approved Enterprise plan was exempt
from tax for a period of two years, commencing in the first year in which we generated
taxable income from such Approved Enterprise (subsequent to use of all Israeli tax loss
carryforwards), and was subject to a reduced tax rate of 25% for a further five years,
respectively. See Note 13 of the notes to our consolidated financial statements included
elsewhere in this annual report.

# Liquidity and Capital
Resources

We
finance our operations primarily from funds provided by operations and, to a lesser
extent, from accumulated cash and cash generated by the sale of our investments. We
believe that our accumulated cash, in addition to cash generated from operations and
available funds, will be sufficient to meet our cash requirements for working capital and
capital expenditures for at least the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we may sell additional
equity or debt securities or obtain credit facilities. Prior to the closing of the merger
with Gibbs we obtained two credit lines from banks for an aggregate amount of $8 million.
Annual interest rates may vary from Libor + 0.9% to Libor +1.2%. Both credit lines are
secured by negative pledges and certain financial covenants, such as minimum equity and
minimum equity as percentage of total balance sheet assets, maximum financial debt and
maximum financial debt as a percentage of total balance sheet assets, minimum cash
balance, minimum current ratio, minimum EBITDA and maximum ratio between financial debt
and EBITDA. As of March 31, 2009, there was no outstanding amount drawn  thereunder.
Given the current global financial crisis, there is no assurance that if and when we would
need to draw upon these credit lines,  we would be in compliance with the covenants
under these credit lines,  the banks from which we obtained the credit lines would
agree to provide to us any credit without further covenants or guarantees, or that they
would agree to provide us any credit at all.

43

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As
of December 31, 2008, we had $5.7 million in cash and cash equivalents. During 2008, net
cash provided by operating activities was $2.8 million, and was mainly comprised of our
net profit of $0.7 million, decrease in accounts receivable and prepaid expenses of $2.5
million, non-cash use of depreciation and amortization of $1.6 million, partially offset
by decrease in trade payables, accrued expenses and other liabilities of $1.7 million, and
decrease in deferred taxes of $0.4 million.

During
2008, net cash used in investing activities was $5.2 million, and was mainly comprised of
$4.8 million (including expenses) net cash that was used in the merger with Gibbs, $1.3
million (including expenses) of cash that was used in the acquisition of the remaining 49%
of the stock of Microsystem and $0.4 million used for capital expenditures, partially
offset by $1.2 million of proceeds from the sale or redemption of bonds. Our capital
expenditures for 2008 were mostly for the purchase of computers, computer equipment and
other office equipment

During
2008, net cash used in financing activities was $0.8 million, and was mainly comprised of
$0.6 million repayment of short term bank credit, and $0.2 million used pursuant to our
share repurchase program that was announced in June 2008.

As
of December 31, 2008, Microsystem had outstanding a long-term government loan of $0.4
million, of which $0.15 million to be repaid during 2009.

These
activities caused our aggregate amount of cash and cash equivalents to decrease to $5.7
million as of December 31, 2008, as compared to $9 million as of December 31, 2007: our
long-term marketable investments to decrease to $0 million as of December 31, 2008, as
compared to $1.2 million as at December 31, 2007: our short-term credit to be reduced to
$0.2 million as of December 31, 2008, as compared to $0.8 million as at December 31, 2007:
and our long-term credit to be reduced to $0.3 million as of December 31, 2008, as
compared to $0.4 million as at December 31, 2007.

As
of December 31, 2008, our working capital was $3.8 million and our total assets were $33.9
million, compared to $6.1 million and $27.3 million, respectively, as of December 31,
2007. The decrease in working capital resulted mainly from a decrease in cash and cash
equivalents due to the Gibbs merger and the final payment for the Microsystem acquisition,
The change in total assets resulted mainly from the consolidation of Gibbs financial
statements starting in the first quarter of 2008.

Our
trade receivables, net of allowance for doubtful accounts totaled $7.1 million on December
31, 2008, compared to $7.3 million on December 31, 2007. The collection cycle remained
practically unchangedduring 2008 compared to 2007. We believe that, generally, the
quality of receivables remained unchanged and we will continue our efforts to shorten our
collection cycles. Nevertheless, given the current global economic downturn, we cannot
guaranty that collection cycles from one or more of our customers or providers and
resellers will not lengthen relative to the past.

44

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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 and short-term investments are invested in deposits mainly
with major banks in the United States, Europe and Israel. We believe that the financial
institutions holding our cash funds are financially sound. Our accounts receivable are
generated from a large number of customers located in Europe, Asia, the United States and
Israel. We perform ongoing evaluations of our accounts receivable and maintain an
allowance for doubtful accounts that we believe is adequate to cover all anticipated
losses with respect to our accounts.

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

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

The
exchange rate between NIS and the U.S. dollar decreased overall during 2008 but has
increased during the past 8 months (October 2008  May 2009) from a low of NIS
3.464 to the dollar to a high of NIS 4.268 to the dollar (with a current exchange rate in
the approximate range of NIS 3.900 to NIS 4.000 per U.S. dollar). The high and low
exchange rates between the NIS and U.S. dollar during the 6 most recent months, as
published by the Bank of Israel, were as follows:

|MONTH         | LOW (1 U.S. dollar =__ NIS) | HIGH (1 U.S. dollar = __ NIS)
|------------- | --------------------------- | -----------------------------
|
|
|
|
|December 2008 | 3.677                       | 3.981                        
|             
|January 2009  | 3.857                       | 4.065                        
|             
|February 2009 | 4.012                       | 4.191                        
|             
|March 2009    | 3.745                       | 4.245                        
|             
|April 2009    | 3.995                       | 4.268                        
|             
|May 2009      | 3.913                       | 4.251                        

45

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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, 2004 - December 31, 2004 | 4.478 NIS/$1 
|January 1, 2005 - December 31, 2005 | 4.503 NIS/$1 
|January 1, 2006 - December 31, 2006 | 4.466 NIS/$1 
|January 1, 2007 - December 31, 2007 | 4.085 NIS/$1 
|January 1, 2008 - December 31, 2008 | 3.591 NIS/$1 

In
2006, the rate of Israeli inflation was approximately (0.1)% and the U.S dollar devaluated
against the NIS by 8.2%. In 2007, the rate of Israeli inflation was approximately 3.4% and
the U.S dollar devaluated against the NIS by 9.0%. In 2008, the rate of Israeli inflation
was approximately 3.8% and the U.S dollar devaluated against the NIS by 1.1%.

Since
our financial results are reported in dollars, fluctuations in the rates of exchange
between the dollar and non-dollar currencies may have a material effect on our results of
operations. We therefore use currency exchange forward contracts and currency exchange
options to hedge the impact of the variability in the exchange rates on future cash flows
from certain Euro-denominated transactions, as well as certain NIS-denominated expenses.
Our policy is to hedge up to 100% of our Euro denominated future cash flows to protect
against a reduction in reported operating income arising from decreases in the Euro 
U.S. dollar exchange rate and to hedge up to 100% of our NIS denominated expenses to
protect against an increase in reported expenses arising from increases in the U.S. dollar
 NIS exchange rate. However, we may decide not to hedge in accordance with this
policy where, in our judgment, the applicable exchange rate is sufficiently low. The
counter-parties to our forward contracts and currency exchange options are major financial
institutions with high credit ratings. We believe the risk of incurring losses on such
forward contracts and currency exchange options related to credit risks is remote and that
any losses would be immaterial. As of December 31, 2008 we had currency exchange forward
transactions to sell 1.8 million Euro for a total amount of $2.6 million until December
31, 2009, and had currency exchange forward transactions to sell $8.1 million for a total
amount of NIS 31.4 until December 31, 2009. As of May 31, 2009, we had currency exchange
forward transactions to sell 2.8 million Euro for a total amount of $3.92 million until
December 2009, and had currency exchange forward transactions to sell $6.6 million for a
total amount of NIS26.1 million until June, 2010. See Item 11  Quantitative
and Qualitative Disclosure about Market Risk for a description of hedging and other
similar transactions.

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# Research and
development, patents and licenses, etc.

We
conduct our research and development operations primarily in Israel and to a small extent
in Russia. Following the merger with Gibbs in January 2008 we now also have substantial
research and development operations in California. Our research and development efforts
have been financed through internal resources and through plans sponsored by the Chief
Scientist of the Government of Israel, or the OCS. In the years ended December 31, 2006,
2007 and 2008, our gross research and development expenditures were $4.4 million, $4.3
million and $7.1 million, respectively (21%, 15% and 17% of total revenues, respectively).
Prior to 2001, we were granted royalty-bearing grants from the OCS for research and
development activities. Under the provisions of Israeli law in effect until 1996,
royalties of 2%-3% of the revenues derived from the sale of software products developed
under a research and development program funded by the OCS and certain related services
must be paid to the State of Israel. Pursuant to an amendment effected in 1996 effective
with respect to OCS plans funded in or after 1994, royalties generally at the rate of 3%
during the first three years, 4% over the following three years and 5% in or after the
seventh year of the revenues derived in connection with products developed according to
such plans are payable to the State of Israel. The maximum aggregate royalties will not
exceed 100% (for funding prior to 1994, 100% to 150%) of the U.S. dollar-linked value of
the total grants received. Pursuant to an amendment effected in 2000, effective with
respect to OCS plans funded in or after 2000, the royalty rates described above were
updated to 3% during the first three years and 3.5% in or after the fourth year, of the
revenues derived in connection with products developed under such plans. Pursuant to an
amendment effected on January 1, 1999, effective with respect to OCS plans approved in or
after 1999, funds received from the OCS shall bear annual interest at a rate equal to
LIBOR for twelve months. As of December 31, 2008, our contingent liability with respect to
such grants was approximately $1 million, including applicable interest, contingent upon
our generating revenues from sales of products developed with funds provided by the OCS.

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

47

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Although
we believe we have strong arguments to support our position, we have accrued royalty
expenses in the amount of $2.7 million in our financial reports for the periods from
January 1, 2005 through March 31, 2009, but we have not paid to the OCS any royalties
associated with the products mentioned above. In light of the above-mentioned facts, we
continue to evaluate and consider our next steps with the OCS, including without
limitation, whether further royalty expense accruals will be necessary. See Item 3.
Risk Factors  We may be required to pay royalties to the OCS in respect of sales
since January 1, 2005 for a discussion of the risks to us arising from the
possibility that we may be obligated to pay to the OCS the amount we have accrued with
regard to this issue or even more than such amount.

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

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

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

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

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

48

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

In
the years ended December 31, 2006, 2007 and 2008, we paid or accrued royalties to the OCS
in the amount of $0.7 million, $0.8 million and $0.5 million, respectively. We intend to
consider whether further accruals will be necessary in light of the facts described above
concerning our application to the OCS to recognize our claim that we are no longer
obligated to pay royalties on a majority of our sales subsequent to January 1, 2005.

In
addition to the OCS grants, we received grants from the Fund for the Encouragement of
Overseas Marketing of the Israeli Governments Ministry of Industry and Trade, with
respect to which we are obligated to pay royalties amounting to 3% to 4% of the
incremental exports, up to a maximum of 100% of the grants received. Our contingent
liability as of December 31, 2008 with respect to such grants was $0.6 million, contingent
upon our incremental exports.

In
addition, we are currently participating in a four year project of the European Sixth
Research and Technological Development Framework Program, as part of a consortium led by
European companies, with respect to machining of very high precision parts and molds aimed
at mass production of optical lenses. Grants received under this project are not subject
to any future royalty payments. In 2008 and 2007 we recorded in our profit and loss
statements $121,000 and $16,000, respectively, of grants received.

Trend
Information

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

Cash
and Cash Equivalents.The consideration in the merger with Gibbs and the consideration
for our acquisition of the remaining 49% of Microsystem, including related costs, were
funded from accumulated cash and cash equivalents, thereby reducing our cash and cash
equivalents in 2008 by approximately $6.0 million.

Merger
with Gibbs, Acquisition of Microsystem, and Related Effects.As a result of the merger
with Gibbs we have experienced an increase in the following: (i) the Companys
overall expenses and revenues; (ii) relative portion of the U.S. dollar based expenses and
revenues of the Company group; and (iii) geographic diversity due mainly to increase in
sales in the U.S. market. As a result of our completion of our acquisition of Microsystem
and the consolidation of Microsystems results with ours (commencing in the third
quarter of 2007, but first reflected on a full year basis in 2008), we have experienced
(a) a further increase in our overall expenses and revenues and (b) an increase in the
European portion of our revenues and product sales, and related expenses.

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

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

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

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

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

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

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

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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, 2008 was $0.6 million, contingent upon
          our incremental exports.

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

The
following table summarizes our contractual obligations and commercial commitments as of
December 31, 2008:

|Contractual Obligations as of
December 31, 2008 | Payments due by Period
(US$, in thousands)
|----------------------------------------------- | ------------------------------------------
|
|
|
|
|Operating Leases                                |                                           
|Purchase Obligations and                        |                                           
|Commitments (1)                                 |                                           
|Other Long-Term Liabilities                     |                                           
|Total Contractual Cash                          |                                           
|Obligations                                     |                                           

(1)
          Certain obligations to software vendors reflected in the amounts recorded in
          this row assume that we achieve minimum revenue levels. To the extent that our
          revenues are lower than such minimum levels, our obligations will be reduced
          accordingly.

(2)
          Represents a provision for future severance pay obligations.

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

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

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|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 are
as follows:

|Name             | Age | Position                             
|---------------- | --- | -------------------------------------
|
|
|
|
|Yossi Ben Shalom | 54  | Chairman of the Board                
|William F. Gibbs | 55  | Vice Chairman of the Board           
|Barak Dotan      | 41  | Director                             
|Yoel Rosenthal   | 54  | Director                             
|David Golan      | 68  | Director                             
|Eti Livni        | 60  | External Director                    
|Rami Entin       | 58  | External Director                    
|Dan Haran        | 51  | President and Chief Executive Officer
|Ilan Erez        | 41  | Chief Financial 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.

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

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

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

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

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

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

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

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

# Arrangements for the
Election of Directors

DBSI Investments Ltd., our largest
shareholder (holding approximately  46.6%  of our share capital), controls the
outcome of most matters (other than matters with respect to which it is deemed to possess
a personal interest) submitted to a vote of our shareholders, including the election of
members of our board of directors. Koonras and DBSI were parties to an agreement by which,
among other matters, they would each appoint one-half of our directors, not including our
external directors, and vote together at our shareholders meetings. However,
following Koonras sale of 1,700,000 Ordinary Shares to DBSI and 854,360 Ordinary
Shares to Kotek in May 2008 and June 2008, respectively, Koonras is no longer a
shareholder of the Company and such agreement has been terminated.

As
a result of the merger with Gibbs System, Mr. Gibbs was issued 1,500,000 Ordinary Shares,
which represent approximately 16.4% of our outstanding share capital. Additionally,
Mr. Gibbs has been appointed as the vice chairman of our Board of Directors. Under the
merger agreement, we undertook to Mr. Gibbs that he will serve as the vice chairman of our
Board of Directors as long as he continues to hold at least 9% of our issued and
outstanding share capital.

Compensation

During
the year ended December 31, 2008, we paid, in the aggregate, approximately $1.16 million
in direct remuneration to our directors and officers for services provided by them to the
Company in such capacities. Such sum 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 the countries we operate. We
pay each of our external directors, as well as Mr. David Golan and Mr. William F. Gibbs,
an annual fee of approximately $8,000, plus approximately $410 for each meeting of the
board of directors or a committee thereof attended and reimbursement for expenses incurred
in connection with the discharge of responsibilities as a board member, including
attendance at meetings of the board of directors.

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

# Board of Directors

Our
Articles of Association provide for a Board of Directors of not less than two members.
Each director, with the exception of external directors who are elected to serve for 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 both
as a director and as a substitute director.

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

External
Directors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 sheet reports and
recommending their approval before our board or directors. An audit committee must consist
of at least three directors, including all of the external directors of the company. The
chairman of the board of directors, any director employed by or otherwise providing
services to the company, and a controlling shareholder or any relative of a controlling
shareholder, may not be a member of the audit committee.

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

Under
the Nasdaq rules and the Sarbanes-Oxley Act of 2002, 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:

57

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

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

| |  | Recommendation
to the board of directors, if appropriate, that the companys annual audited
financial statements be included in the companys annual report;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Review
of 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 approval of all related-party transactions.
| | - | ------------------------------------------------------

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

Internal
Auditor

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

Compensation
of Executive Officers

In
lieu of appointing a separate Board committee with responsibility for setting appropriate
compensation levels for our executive officers, our Board of Directors as a whole,
including a majority of our independent directors (as determined pursuant to the Nasdaq
rules), serves as the body with authority for establishing such compensation levels. In
setting compensation levels, our Board is guided by the levels of compensation provided to
executives in other companies in our industry and our home country, as adjusted to account
for differences in size and other relevant distinguishing factors.

58

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DirectorsSeverance
Benefits Upon Termination of Employment

Except
for the employment agreement entered into by our subsidiary Cimatron Gibbs LLC with
William Gibbs in his role on behalf of such subsidiary (as described below in Item
7- Major Shareholders and Related Party Transactions  Related Party
Transactions) we have not entered into any service contracts with any members of our
Board of Directors that provide for specific benefits upon termination of employment.
Other than any termination notice provisions under Mr. Gibbs employment contract,
the only severance pay benefits that may be provided are required under Israeli law and
are described below in the section titled Employees.

# 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,            | 2008 | 2007 | 2006
|------------------------------------- | ---- | ---- | ----
|
|
|
|
|Research and Development              |      |      |     
|                                      |      |     
|Marketing, Sales and Customer Support |      |      |     
|                                      |      |     
|Administration Management and         |      |     
|Information Systems                   |      |      |     
|                                      |      |     
|Total                                 |      |      |     
|                                      |      |      |     

As
of May 31, 2009, we employed 298 full-time personnel, of whom 76 (most of whom hold
advanced technical degrees) were employed in research and development, 197 were employed
in marketing, sales and customer support and 25 were employed in various administrative,
information systems and management positions. Of these employees, 83 were employed in
Israeli operations, 5 were employed in Russia, 15 were employed by our original North
American subsidiary, Cimatron Technologies Inc., 64 were employed by Cimatron Gibbs LLC
(the surviving entity in the merger with Gibbs) in North America, 38 were employed by our
German subsidiary, 45 were employed by our Italian subsidiary, 39 were employed by our
Chinese subsidiaries, 1 was employed by our Indian subsidiary and 8 were employed by our
Korean subsidiary. In addition, we employed 9 subcontractors or free-lance personnel
on average during the year 2008, and as of May 31, 2009 we employed 9 subcontractors
personnel.

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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 17.43% of the employees wages (up to a specified amount), of which the
employee contributes approximately 69% and the employer contributes approximately 31%.

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

# Share Ownership

1998
Share Option Plan

In
April 1998, our Board of Directors adopted a share option plan (the 1998 Share
Option Plan) pursuant to which 620,000 Ordinary Shares were reserved for issuance
upon the exercise of options to be granted to our directors, officers, employees and
consultants. The 1998 Share Option Plan is administered by our Board, which designates the
optionees and dates of grant. The exercise price of an option granted under the 1998 Share
Option Plan may be no less than 85% of the fair market value of an Ordinary Share, as
determined by the Board on the date that the option is granted. Options granted vest over
a period determined by the Board, terminate three years after they become exercisable, and
are non-assignable except by the laws of descent. The Board has the authority to amend the
terms of option grants, provided that any such amendment is in the best interest of a
grantee. A grantee will be responsible for all personal tax consequences of a grant and
the exercise thereof. In March 2000, the Board adopted new guidelines for the grant and
exercise of options to purchase Ordinary Shares reserved for issuance under the 1998 Share
Option Plan. In August 2003, the Board of Directors approved the grant of options to
purchase 150,000 of the Companys shares at a price of $2.50 per share to two
officers of the Company. These options are exercisable commencing one year after the date
of grant at a rate of 25% per year, subject to the continued employment of the officers.
As of December 31, 2008, 25,000 such options were outstanding at a price of $2.50 per
share. For additional information relating to the stock options granted by us under the
1998 Share Option Plan, see Note 12(B) to our financial statements included in Item 18.

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As
of May 31, 2009, no options were outstanding under the 1998 Share Option Plan. In
addition, no shares are reserved for future issuances under that plan, as such reserve has
been previously transferred into the 2004 Share Option Plan (as defined below).

2004
Share Option Plan

In
October 2004, our Board of Directors and shareholders adopted the 2004 Share Option and
Restricted Shares Incentive Plan (the 2004 Share Option Plan) pursuant to
which 240,000 Ordinary Shares were reserved for issuance upon the exercise of options to
be granted to our directors, officers, employees and consultants. The 2004 Share Option
Plan is administered by our Board, which designates the optionees and dates of grant. The
exercise price of an option granted under the 2004 Share Option Plan may be no less than
95% of the fair market value of an Ordinary Share, as determined by the Board on the date
that an option is granted. Options granted vest over a period determined by the Board,
terminate ten years from the date of grant, unless otherwise determined by the Board, and
are non-assignable except by the laws of descent. The Board has the authority to amend the
terms of the 2004 Share Option Plan, provided that any such amendment does not adversely
effect any options granted thereunder. In February 2005, 238,500 options were granted to
employees of the Company under the 2004 Share Option Plan at an exercise price of $2.20
per share and with a term of ten years, and in August 2005, our Board of Directors
approved the grant of an additional 32,000 options under the plan, at an exercise price of
$2.00 per share and a term of 10 years, to the Companys Chief Executive Officer. In
December 2005, our Board of Directors increased the 2004 Share Option Plan reserve by an
additional 250,000 shares. In May 2006 an additional 189,000 options were granted to
Company employees under the 2004 Share Option Plan at exercise prices ranging from
$1.75-$2.00 and with a term of five years. During August 2007, the Company granted an
additional 74,000 options to Company employees at an exercise price of $2.78 and with a
term of five years. During January 2008, the Company granted an additional 68,000 options
to Company employees at an exercise price of $2.75 and with a term of five years,
including 2,000 options to William F. Gibbs. All options granted under the 2004 Share
Option Plan are exercisable pursuant to a three (3) year vesting schedule, as follows: (i)
thirty three percent (33%) of the options become exercisable on the first anniversary of
the grant date; and (ii) sixteen and one-half percent (16.5%) of the options become
exercisable at the end of each subsequent six month period over the course of the
following two (2) years, subject to the continued employment of each grantee by the
Company and/or its subsidiaries. Each grantee is responsible for all personal tax
consequences of a grant and the exercise thereof. We intend to grant additional options
under the 2004 Share Option Plan to our various directors, executive officers and
employees.

61

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

At
May 31, 2009 options to purchase 579,916 of our Ordinary Shares were available for grants
to our various directors, officers, employees and consultants under the 2004 Share Option
Plan.

Repurchase
of Our Shares

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

On
June 4, 2008, our Board of Directors authorized the use of up to $1 million of our
available cash to repurchase our Ordinary Shares. Under the repurchase program, share
purchases may be made from time to time at the discretion of management in the open market
or in privately negotiated transactions depending on market conditions, share price,
trading volume and other factors. Such purchases are to be made in accordance with the
requirements of the Securities and Exchange Commission (the SEC). The
repurchase program has no time limit, does not require us to acquire a specific number of
shares, and may be suspended from time to time or discontinued. As of May 31, 2009, we
have repurchased 220,856 of our shares pursuant to this repurchase plan at an average
price of $1.33 per share.

# Beneficial Ownership by
Officers and Directors

Messrs.
          Ben Shalom, Dotan and Rosenthal may each (subject to the disclaimer provided in
          footnote (3) to the table in Item 7 below) may be deemed to have beneficial
          ownership of an aggregate of 4,265,950 of our Ordinary Shares, representing
          46.6% of our issued and outstanding share capital, by virtue of their
          positions with DBSI. As indicated in the table appearing in Item 7 below, Mr.
          William F. Gibbs beneficially holds 1,500,666 or 16.4% of our outstanding
          Ordinary Shares, which include 666 shares issuable upon exercise of options that
          are currently exercisable or will be exercisable within 60 days of June 30,
          2009. As to our remaining Board members, each of David Golan, Eti Livni and Rami
          Entin beneficially holds no Ordinary Shares. Among our executive officers, each
          of Dan Haran, our President and Chief Executive Officer and Ilan Erez, our Chief
          Financial Officer, beneficially holds less than 1.0% of our Ordinary Shares
          (after including shares that are issuable to them upon exercise of options that
          are either currently exercisable or will be exercisable within 60 days of June
          30, 2009). The options held by each of our directors and executive officers are
          subject to the terms (including exercise price and expiration date) described
          above in the description of option grants under our 1998 Share Option Plan and
          2004 Share Option Plan.

The
Ordinary Shares held (or issuable upon exercise of options held) by our directors and
executive officers do not have voting rights that differ from those enjoyed by all holders
of our Ordinary Shares.

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

# Major Shareholders

The following
table sets forth information, as of May 31, 2009, concerning the beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of our Ordinary Shares by (i) any person who
is known to us to own at least 5% of the Ordinary Shares of our Company and (ii) all of
our directors and executive officers as a group. The voting rights of our major
shareholders do not differ from the voting rights of all other holders of our Ordinary
Shares.

|Name and Address                              | Number of
Ordinary Shares | Percent of
Ordinary Shares
|--------------------------------------------- | ------------------------- | --------------------------
|
|
|
|
|DBSI Investments Ltd.                         |                           |                           
|85 Medinat Hayehudim St.                      |                           |                           
|Herzliya, Israel                              |                           |                           
|                                              |                           |                           
|William F. Gibbs                              |                           |                           
|4017 N. Cedarpine Lane                        |                           |                           
|Moonpark, CA 93021                            |                           |                           
|California, U.S                               |                           |                           
|                                              |                           |                           
|3Kotek 2  B.V. Wielewaaleg 1, 4791, PD,       |                           |                           
|Klundert, Netherlands                         |                           |                           
|                                              |                           |                           
|All  directors  and  executive  officers as a |                           |                           
|group (9 persons)                             |                           |                           
|                                              |                           |                           

(1)    
          Includes an aggregate of 1,500,000 Ordinary Shares and 666 options to purchase
          Ordinary Shares beneficially held by William F. Gibbs.

(2)    
          Of such 894,360 Ordinary Shares
reported in this Statement, 854,360 Ordinary Shares are held by Kotek and 40,000 Ordinary
Shares are held by a company wholly owned by Mr. Joel Koschitzki. Messrs. Jaap Stomp and
Mr. Joel Koschitzki are the directors of Kotek and therefore may be deemed to beneficially
own the Ordinary Shares held by Kotek. Messrs. Stomp and Koschitzki disclaim beneficial
ownership of the Ordinary Shares held by Kotek.

(3)    
          Includes an aggregate of 4,265,950
shares beneficially held by DBSI Investments Ltd. (DBSI), which may be
attributable to certain of our directors by virtue of the positions that they hold on the
board of directors of DBSI. All of our directors to whom such share ownership may be
attributable disclaim such beneficial ownership. (Mr. Rosenthal in particular does not
share in the equity ownership of DBSI).

Recent
Significant Changes in the Percentage Ownership of Major Shareholders

On
May 11, 2008, Koonras, a subsidiary of Polar Communications Ltd. and a then-current holder
of approximately 27% of our Ordinary Shares, signed an agreement with DBSI pursuant to
which Koonras was to sell to DBSI 1,700,000 Ordinary Shares (comprising approximately 18%
of our outstanding share capital) at a price per share of $2.80. As a result of the
consummation of such transaction on or about June 26, 2008, Koonras holdings were
reduced to 854,360 Ordinary Shares, representing approximately 9.1% of our share capital
at the time. As a result of its acquisition of shares in such transaction, DBSI currently
holds approximately  46.6%  of our outstanding share capital.

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On
June 3, 2008, Koonras sold its remaining 854,360 Ordinary Shares that it then held to
Kotek, a company incorporated under the laws of the Netherlands,. As a result of the
consummation of such transaction, Koonras is no longer a holder of our capital stock, and
Kotek acquired an approximate 9.1% interest in our share capital.

As
a result of Koonras dispositions of the remaining Ordinary Shares of our stock that
it held, Koonras and DBSI terminated the shareholders agreement to which they had
previously been party. Under the agreement, each of Koonras and DBSI effectively had the
ability to control the outcome of most matters that were submitted to a vote of our
shareholders, including the election of members of our Board of Directors and approval of
significant corporate transactions (subject to applicable limitations imposed by US
securities laws and regulations and the Israeli Companies Law, including with respect to
matters for which either such shareholder was deemed to possess a personal interest), as
each of Koonras and DBSI was entitled to appoint one-half of our directors, not including
our external directors, and each of them had agreed to vote together at our
shareholders meetings.

# Record Holders

As
of June 8, 2009, there were 31 record holders of our Ordinary Shares, of which 17
represented United States record holders owning an aggregate of approximately 47% of our
outstanding Ordinary Shares.

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# Related Party
Transactions

Services Agreement and
Lease Agreement

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

As
of February 21, 2002, in connection with its sale of its equity interest in the Company to
Koonras and DBSI, 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. Following the consummation of the sale of
1,700,000 of our shares from Koonras to DBSI on June 24, 2008, and the related approval of
our shareholders at such time, the management services agreement was assigned in full to
DBSI, which will continue to provide all the services and receive the entire annual fee.
The amount that we paid for services under this agreement totaled 1.706 million NIS in the
year ended December 31, 2008.

Prior
to the merger with Cimatron, Gibbs System, Inc. leased office space in Moonpark,
California from a limited liability corporation controlled by Mr. Gibbs. In connection
with the merger with Gibbs System, Inc. and the assignment of the lease to us in 2008, we
entered into an amendment to the original terms of the lease, pursuant to which the
expiration date for the term of the lease was brought forward from 2020 to December 31,
2012, with an option for us to extend the lease for an additional 5 years. Also a result
of the lease amendment, the rent that we are obligated to payduring the initial term of
the lease is $24,710 per month (in lieu of $22,464 per month).

Registration Rights

In
October 2004, following approval by our Board of Directors, our audit committee and the
requisite majority of our disinterested shareholders, in accordance with the related party
transaction requirements of Israeli law, we entered into a registration rights agreement
with Koonras and DBSI, then our two largest shareholders. Under the agreement, Koonras and
DBSI had the right, subject to various conditions and limitations, to require us to file a
registration statement for the resale of their shares or to include their shares in
certain registration statements that we file. On June 3, 2008, in connection with the sale
of certain of its Ordinary Shares to Kotek, Koonras assigned to Kotek all registration
rights applicable to such shares under the registration rights agreement.

In
January 2008, in connection with the merger agreement with Gibbs System, Inc., we granted
to Mr. Gibbs certain registration rights with respect to the Ordinary Shares issued to him
as part of the mergerconsideration. The grant of such registration rights was approved by
our Board. Pursuant to the registration rights agreement entered into with him, Mr. Gibbs
has the right, subject to various conditions and limitations, to include his shares in
certain registration statements that we file.

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Demand
Registration Rights

Under
the above-described registration rights agreement with DBSI and Kotek (as successor to
Koonras), DBSI and Kotek together, and pro-rata between themselves, are entitled to up to
two demand registrations on Form F-1 (or an equivalent form) promulgated under the
Securities Act at our expense, provided that the anticipated aggregate offering price for
the shares to be registered, net of any underwriting discounts and commissions, exceeds
US$1,000,000.

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

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

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

Piggyback
Registration

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

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

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Employment Agreement with
William F. Gibbs

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

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

# Consolidated Statements
and Other Financial Information

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

Legal Proceedings

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

Dividend Distribution
Policy

Certain
of our enterprises are Approved Enterprises (as defined under the Israeli Law for the
Encouragement of Capital Investments, 1959). 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, we would be subject to tax at a rate
of 25%. In our financial statements, we have not provided an allowance for deferred
taxes on future distributions of tax-exempt earnings, as our management and Board of
Directors have determined not to make any distribution that may result in such tax
liability to the Company. Accordingly, such earnings have been considered to be
permanently reinvested. Our tax-exempt earnings may be distributed to shareholders without
subjecting the Company to taxes only upon a complete liquidation of the Company.

67

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Significant
Changes

Since
the date of our consolidated financial statements included in this annual report, there
has not been a significant change in our Company other than as described in the notes to
such financial statements (and as described immediately below)..

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

In
February 2009, our German subsidiary, Cimatron GmbH, hired the former key employees of
Gibbs German reseller. As part of the agreements entered into, Cimatron GmbH also
undertook to rent the office space that Gibbs German reseller had been utilizing for
a period of five years commencing in February 2009.

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

# Offer and listing details

Our
Ordinary Shares were quoted on the Nasdaq Global Market System (formerly the Nasdaq
National Market) from March 1996 until April 17, 2001, from which time our Ordinary Shares
have been quoted on the Nasdaq Capital Market (formerly the Nasdaq 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
during the indicated fiscal periods:

|Period                                   | High (U.S. $) | Low (U.S. $)
|---------------------------------------- | ------------- | ------------
|
|
|
|
|Six most recent months:                  |               |             
|May 2009                                 |               |             
|April 2009                               |               |             
|March 2009                               |               |             
|February 2009                            |               |             
|January 2009                             |               |             
|December 2008                            |               |             
|                                         |               |             
|Two most recent full financial years and |               |             
|subsequent periods:                      |               |             
|First Quarter 2009                       |               |             
|Fourth Quarter 2008                      |               |             
|Third Quarter 2008                       |               |             
|Second Quarter 2008                      |               |             
|First Quarter 2008                       |               |             
|Forth Quarter 2007                       |               |             
|Third Quarter 2007                       |               |             
|Second Quarter 2007                      |               |             
|First Quarter 2007                       |               |             
|                                         |               |             
|Five most recent years:                  |               |             
|2008                                     |               |             
|2007                                     |               |             
|2006                                     |               |             
|2005                                     |               |             
|2004                                     |               |             

68

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# Markets

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

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

# Memorandum and Articles
of Association

Register

Cimatrons
registration number at the Israeli registrar of companies is 52-004267-2.

# Articles of Association;
Israeli Companies Law

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

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

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

69

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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 our
Board of Directors, upon at least 21 days prior notice to our shareholders. No business
may be commenced in any annual meeting until a quorum of two or more shareholders holding
at least 33% of the voting rights are present in person or by proxy. Shareholders may vote
in person or by proxy, and will be required to prove title to their shares as required by
the Companies Law pursuant to procedures established by our Board of Directors.
Resolutions regarding the following matters must be passed at a general meeting of
shareholders:

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

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

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

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

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

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

| |  | the
exercise of our 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 such powers is
vital for our proper management, as provided in Section 52(a) of the Companies Law.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Our
Articles provide that our Board of Directors may from time to time, at its 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, our Board of Directors may delegate any authority it has to a committee
comprised of members of the Board. Any committee to whom the Boards powers are
delegated 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.

70

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Transactions
with Certain Shareholders

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

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

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

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

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

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

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

71

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

In
addition, a private placement of securities that (i) includes the issuance of twenty
percent or more of the companys outstanding voting rights (prior to such issuance)
in which the consideration, in whole or in part, is not in cash or registered securities
or is not at market value, and as a result of which a person holding five percent of more
of the companys share capital or voting rights will increase or that will cause any
person to become, as a result of the issuance, a holder of more than five percent of the
companys outstanding share capital, or (ii) will cause any person to become, as a
result of the issuance, a controlling shareholder of the company (as defined above),
requires approval by the board of directors and the shareholders of the company. The
regulations under 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, in connection with 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 of an office holder of the company is under a duty
to act with fairness towards the company. The Companies Law does not describe the
substance of this duty, except to state that the remedies generally available upon a
breach of contract will apply also in the event of a breach of the duty to act with
fairness.

Limitation on Ownership
of Securities

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

72

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Mergers and Acquisitions;
Anti-Takeover Provisions

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

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

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

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

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

# Material Contracts

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

73

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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. Since January 10, 2006, we have occupied approximately 1,750 square meters at this
facility. The initial term of the lease was three years, expiring in June 30, 2006,
following which we exercised our option to extend the lease for an additional three years.
Wehave recently further extended the lease for an additional five year period,
through June 30, 2014, and reduced our occupied space to approximately 1,491 square
meters.

# Exchange Controls

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

The
ownership or voting of our Ordinary Shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our Memorandum of Association or Articles or by the laws of the State of Israel.

# Taxation

The
following discussion sets forth the material United States and Israeli tax consequences of
the ownership of Ordinary Shares by a holder that holds our Ordinary Shares as capital
assets.

The
following discussion does not address the tax consequences to holders of Ordinary Shares
to which special tax rules may apply, such as tax-exempt entities, certain insurance
companies, broker-dealers, traders in securities that elect to mark to market, holders
liable for alternative minimum tax, holders that actually or constructively own 10% or
more of our voting stock, holders that hold Ordinary Shares as part of a straddle or a
hedging or conversion transaction or holders whose functional currency is not the U.S.
dollar. This discussion also does not apply to holders who acquired their Ordinary Shares
pursuant to the exercise of employee stock options or otherwise as compensation or through
a tax-qualified retirement plan. This discussion is based on the tax laws of Israel and
the United States, including the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations under the Internal Revenue Code,
published rulings and court decisions, as in effect on the date of this document, as well
as the Convention Between the Government of the United States of America and the
Government of Israel with Respect to Taxes on Income (the U.S.-Israel Tax
Treaty), all of which are subject to change or change in interpretation, possibly
with retroactive effect.

74

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For
purposes of this discussion, a U.S. Holder is any beneficial owner of Ordinary
Shares that is:

a
citizen or resident of the United States;

a
corporation or other entity taxable as a corporation organized under the laws of the
United states or any political subdivision of the United States;

an
estate the  income of which is  subject  to United  States  federal  income  taxation
 without regard to its source; or

a
trust if a court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the authority to
control all substantial decisions of the trust.

This
discussion does not address any aspects of United States taxation other than federal
income taxation. Holders are urged to consult their tax advisors regarding the United
States estate, state and local and the Israeli and other tax consequences of owning and
disposing of Ordinary Shares.

United
States Federal Income Taxation of Owning and Selling Ordinary Shares.

Dividends
and Distributions

U.S.
Holders

Subject
to the passive foreign investment company rules discussed below, U.S. Holders will include
in gross income the gross amount of any dividend paid, before reduction of Israeli
withholding taxes, by us out of current or accumulated earnings and profits, as determined
for Untied States federal income tax purposes, as ordinary income when the dividend is
actually or constructively received by the U.S. Holder. Dividends will be income from
sources outside the United States for foreign tax credit limitation purposes, but
generally will be passive income which is a type of income that is treated
separately from other types of income for foreign tax credit limitation purposes.
Dividends will not be eligible for the dividends-received deduction generally allowed to
United States corporations in respect of dividends received from other United States
corporations. The amount of the dividend distribution included in income of a U.S. Holder
will be the U.S. dollar value of the NIS payments made, determined at the spot NIS/U.S.
dollar rate on the date such dividend distribution is included in the income of the U.S.
Holder, regardless of whether the payment is in fact converted into U.S. dollars.
Generally, any gain or loss resulting from currency exchange fluctuations during the
period from the date the dividend distribution is included in income to the date such
dividend distribution is converted into U.S. dollars will be treated as ordinary income or
loss. Such gain or loss will generally be income from sources within the United States for
foreign tax credit limitation purposes. Distributions in excess of current and accumulated
earnings and profits, as determined for United States federal income tax purposes, will be
treated as a return of capital to the extent of the U.S. Holders basis in the
Ordinary Shares and thereafter as capital gain. We will notify our shareholders of any
distribution in excess of current and accumulated earnings and profits at the time of such
distribution in accordance with the requirements of the Internal Revenue Code.

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Subject
to certain limitations, the Israeli tax withheld in accordance with the U.S.-Israel Tax
Treaty and paid over to Israel will be creditable against the U.S. Holders United
States federal income tax liability. To the extent a refund of the tax withheld is
available to a U.S. Holder under the laws of Israel or under the U.S.-Israel Tax Treaty,
the amount of tax withheld that is refundable will not be eligible for credit against the
U.S. Holders United States federal income tax liability, whether or not the refund
is actually obtained.

For
certain non-corporate U.S. Holders, subject to the discussion below under Passive
Foreign Investment Company Rules (the PFIC discussion), for taxable
years before January 1, 2011, a dividend paid by us to certain shareholders will be taxed
at the preferential tax rates applicable to long-term capital gains if (a) we are a
qualified foreign corporation (as defined below), (b) the U.S. Holder
receiving such dividend is an individual, estate, or trust and (c) such dividend is paid
on our shares that have been held by such U.S. Holder for more than 60 days during the
120-day period beginning 60 days before the ex-dividend date (i.e., the first
date that a purchaser of such Share will not be entitled to receive such dividend).
Generally, we may be considered a qualified foreign corporation (a
QFC) if we are eligible for the benefits of a comprehensive income tax treaty
with the United States which includes an information exchange program that the United
States Internal Revenue Service (the IRS) determines is satisfactory. However,
even we are so eligible, we will not be treated as a QFC if we were a PFIC for the taxable
year during which we paid a dividend or for the preceding taxable year. See the discussion
below as to PFIC status.

Sale
or Exchange of Ordinary Shares

U.S.
Holders

Subject
to the passive foreign investment company rules discussed below, a U.S. Holder that sells
or otherwise disposes of Ordinary Shares generally will recognize capital gain or loss for
United States federal income tax purposes equal to the difference between the U.S. dollar
value of the amount realized on the sale or disposition and the tax basis, determined in
U.S. dollars, in the Ordinary Shares. Capital gain of a non-corporate U.S. Holder is
generally taxed at a maximum rate of 15% if the Ordinary Shares were held for more than
one year. The gain or loss will generally be income or loss from sources within the United
States for foreign tax credit limitation purposes.

Non-U.S.
Holders

A
non-U.S. Holder will not be subject to United States federal income tax on gain recognized
on the sale or other disposition of Ordinary Shares unless (i) the gain is
effectively connected with the non-U.S. Holders conduct of a trade or
business in the United States, and the gain is attributable to a permanent establishment
maintained in the United States (if that is required by an applicable income tax treaty as
a condition for subjecting that non-U.S. Holder to United States taxation on a net income
basis), or (ii) the non-U.S. Holder is an individual and present in the United States for
at least 183 days in the taxable year of the sale and certain other conditions are met. In
such cases, a non-U.S. Holder will be taxed in the same manner as a U.S. Holder. A
corporate non-U.S. Holder may also, under certain circumstances, be subject to an
additional branch profits tax at a 30% rate, or at a lower rate if eligible
for the benefits of an income tax treaty that provides for a lower rate, on
effectively connected gains recognized.

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Passive
Foreign Investment Company Rules

We
believe that our Ordinary Shares should not be treated as stock of a passive foreign
investment company (a PFIC) for United States federal income tax purposes, but
such a conclusion is a factual determination made annually and may be subject to change. A
U.S. Holder may have less advantageous tax consequences upon the sale, exchange or receipt
of dividends with respect to our shares if we are deemed a PFIC, unless such U.S. Holder
makes certain elections which may have additional tax consequences.

Generally,
a non-United States corporation is deemed to be a PFIC if either (i) 75% or more of its
gross income (including the pro rata gross income of any company (United States or
non-United States) in which such corporation is considered to own 25% or more of the stock
by value) for the taxable year is passive income (generally referred to as the
income test) or (ii) 50% or more of the average value of its assets (including
the pro rata value of the assets of any company in which such corporation is considered to
own 25% or more of the stock by value) during the taxable year, measured at the end of
each quarter, produce, or are held for the production of, passive income in the taxable
year (generally referred to as the asset test).

Based
on the active nature of our assets and income, we do not believe that we have been a PFIC
for the tax years through and ending on December 31, 2008, and we do not believe that we
will be deemed a PFIC for the tax year ending December 31, 2009. However, the statutory
provisions, legislative history and administrative pronouncements related to the
application of the asset test leave unanswered a number of questions pertaining to the
application of the PFIC rules. In addition, there are circumstances both in our control
and out of our control that may affect our potential status as a PFIC. For example, sale
of non-passive assets in exchange for passive assets (such as cash) may impact the
percentage of passive assets in applying the assets test. Fluctuation in the market price
of our shares may also impact the application of such test.

While
we will attempt to manage our business so as to avoid PFIC status, to the extent
consistent with our other business goals, we cannot predict whether our business plans
will allow us to avoid PFIC status in the future or whether our business plans will change
in a manner that affects our PFIC determination.

Taxation of U.S. Holders
of PFIC Shares Generally

If
we were deemed to be a PFIC for any taxable year during which a U.S. Holder held our
Ordinary Shares and such holder failed to make certain elections, then the following would
apply to the U.S. Holder:

| |  | gain
recognized by the U.S. Holder upon the disposition of, as well as income recognized upon
receiving excess distributions on, our Ordinary Shares would be taxable as ordinary
income (excess distributions are the portion of any distributions received in
a taxable year in excess of 125% of the average annual distributions received in the
three preceding taxable years, or, if shorter, during the U.S. Holders holding
period for our Ordinary Shares);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | the
U.S. Holder would be required to allocate such excess distribution income and/or
disposition gain ratably over such holders entire holding period for our Ordinary
Shares;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
amount allocated to each year other than the year of the distribution payment or
disposition would be subject to tax at the highest individual or corporate tax rate, as
applicable, in effect for such other year, and an interest charge for the deemed deferral
benefit would be imposed with respect to the resulting tax liability for each such other
year;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. Holder would be required to file an annual return on IRS Form 8621 regarding
distributions received on, and gain recognized on dispositions of, our Ordinary Shares;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
U.S. Holder who acquired our Ordinary Shares upon the death of a U.S. Holder would not
receive a step-up of the income tax basis to the fair market value of such shares.
Instead, such U.S. Holder beneficiary would have a tax basis equal to the decedents
basis, if lower.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

U.S.
          HOLDERS OF OUR ORDINARY SHARES (AND/OR OPTIONS TO ACQUIRE OUR ORDINARY SHARES)
          SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE PFIC RULES, INCLUDING THE
          POSSIBILITY, AND ADVISABILITY OF, AND THE PROCEDURE AND TIMING FOR MAKING
          CERTAIN ELECTIONS THAT MIGHT HELP THEM TO AVOID CERTAIN OF THE ADVERSE
          CONSEQUENCES THAT WOULD RESULT IF WE WERE TO BE DEEMED A PFIC.

Information
Reporting and Backup Withholding

U.S.
          information reporting requirements and backup withholding tax generally will
          apply to payments to some U.S non-corporate holders of Ordinary Shares.
          Information reporting generally will apply to payments of dividends on, and to
          proceeds from the sale or redemption of, Ordinary Shares by a payor within the
          United States to a holder of Ordinary Shares other than an exempt
          recipient, including a corporation and any payee that is not a U.S.
Holder           that provides an appropriate certification.

A
payor within the United States will be required to withhold at the fourth lowest rate of
tax applicable to single individual taxpayers (currently 28%) on any payments of dividends
on, or proceeds from the sale of, Ordinary Shares within the United States to a holder,
other than an exempt recipient, if the holder fails to furnish its correct
taxpayer identification number or otherwise fails to comply with, or establish an
exemption from, backup withholding tax requirements.

78

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# Israeli Taxation

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

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

# General Corporate Tax
Structure

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

# Law for the
Encouragement of Capital Investments, 1959

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# 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 (the OCS), will award
grants of up to 50% of the projects expenditures in return for royalties, usually at
rates between 3% to 5% of sales of products developed with such grants, up to a
dollar-linked amount equal to 100% to 150% of such grants. Grants received under programs
approved after January 1, 1999, are subject to interest at an annual rate of LIBOR for 12
months applicable to dollar deposits, which will accrue annually based on the LIBOR rate
published on the first day of each year.

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

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# Tax Benefits and Grants
for Research and Development

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

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

The
following preferred corporate tax benefits, among others, are available to
Industrial Companies (which we believe we qualify as, as described below)
under the Law for the Encouragement of Industry (Taxes), 1969 (the Industry
Encouragement Law):

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

| | o | Deduction,
for tax purposes, of expenses incurred in connection with certain public securities
issuances over a three-year period in equal amounts.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# Eligibility for Benefits
Under Industry Encouragement Law

Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. Under the law, an Industrial Company is defined
as a company resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans, capital gains,
interest and dividends, is derived from an industrial enterprise owned by it. An
industrial enterprise is defined as an enterprise whose major activity in a given tax year
is industrial production activity.

We
believe that we currently qualify as an Industrial Company within the definition under the
Industry Encouragement Law. No assurance can be given that we will continue to qualify as
an Industrial Company or that the benefits described above will be available in the
future.

# Capital Gains Tax

Israeli
law imposes a capital gains tax on the sale of capital assets by both residents and
non-residents of Israel. The law distinguishes between the Real Gain and the
Inflationary Amount. The Real Gain is the excess of the total capital gain
over the Inflationary Amount, computed on the basis of the increase in the Israeli
Consumer Price Index between the date of purchase and the date of sale. The Inflationary
Amount accumulated prior to December 31, 1993 is taxed at a rate of 10% for residents of
Israel (reduced to no tax for non-residents if calculated according to the exchange rate
of the dollar instead of the Israeli Consumer Price Index (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.

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

# U.S.-Israel Tax Treaty

Pursuant
to 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.

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# Israeli Taxation of
Non-Residents

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

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

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

# Documents on Display

We
are required to file reports and other information with the SEC under the Exchange Act 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.

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This
annual report and the exhibits thereto, are available for inspection and copying at the
public reference facilities of the SEC 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 SEC filing is 1-8201.

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

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

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

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

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

As
of December 31, 2008 we had currency exchange forward transactions to sell 1.8 million
Euro for a total amount of $2.6 million until December 31, 2009, and had currency exchange
forward transactions to sell $8.1 million for a total amount of NIS 31.4 until December
31, 2009. As of May 31, 2009, we had currency exchange forward transactions to sell 2.8
million Euro for a total amount of $3.92 million until December 2009, and had currency
exchange forward transactions to sell $6.6 million for a total amount of NIS26.1 million
until June, 2010.

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, 2008, we had financial assets totaling approximately $5.7
million, comprised of cash and bank deposits, all of which may be considered fixed rate
financial assets. Given the current low interest rates in the financial markets, assuming
a 10% interest rate decrease, the net decrease in our earnings would be negligible,
holding other variables constant.

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In
addition, under the two credit lines that we obtained prior to the closing of our merger
with Gibbs, the annual interest rates on outstanding principal amounts may vary from
Libor + 0.9% to Libor +1.2%. As of May 31, 2009, there were no outstanding amounts drawn
thereunder.

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. Since the beginning of 2000, we have been using financial instruments
to hedge the following foreign currency exposure risks:

Our
Subsidiaries  We operate internationally and our subsidiaries in Germany and
Italy conduct their respective operations in Euros. This exposes us to market risk from
changes in foreign exchange rates to the extent that the functional currency of our
subsidiaries will decline in value as compared to the U.S. dollar, resulting in a foreign
currency exchange rate loss. Assuming an adverse 20% foreign exchange rate fluctuation, we
would experience exchange rate losses of approximately $1,547,000 excluding the effect of
our hedging transactions.

Our
Providers  Commencing on June 1, 2000 we initiated a Euro denominated price list
for all of our Providers in countries whose currency is linked to the Euro. Our revenues
from these Providers are therefore exposed to exchange rate differences between the Euro
and the United States dollar. Assuming an adverse 20% foreign exchange rate fluctuation,
we would experience exchange rate losses from these providers of approximately $202,000
excluding the effect of our hedging transactions.

Expenses
in New Israeli Shekels

The
cost of our Israel operations, as expressed in U.S. dollars, is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is offset on a
lagging basis) by a devaluation of the NIS in relation to the U.S. dollar. The inflation
rate in Israel was 3.8%, 3.4% and (0.1)% in 2008, 2007 and 2006, respectively. The
devaluation (appreciation) of the NIS against the U.S. dollar was (1.1)%, (9.0)% and
(8.2)% in 2008, 2007 and 2006, 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 $0.9 million excluding the effect of our hedging
transactions.

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

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|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.

|Item 15T. |  | 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, 2008.  Based on their evaluation, our principal
executive and principal financial officers concluded that our disclosure controls and
procedures were effective as of December 31, 2008.

(b) Managements
Annual Report on Internal Control Over Financial Reporting  Our management
is responsible for establishing and maintaining adequate internal control over our
financial reporting, as such term is defined in Rule 15(f) under the Exchange Act. Our
internal control over financial reporting system was designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements and even when determined to be effective can only provide reasonable
assurance with respect to financial statements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our
management assessed our internal control over financial reporting as of December 31, 2008.
Our management based its assessment on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, our management has concluded that, as
of December 31, 2008, our internal control over financial reporting is effective.

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Attestation
Report of the Registered Public Accounting Firm This annual report does not
include an attestation report of our registered public accounting firm regarding internal
control over financial reporting. Managements report was not subject to attestation
by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this annual report.

(c) 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 2008, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

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

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

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

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

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 our 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 SEC 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 of ethics to the Chairman of our Audit
Committee; and (v) accountability for adherence to the code of ethics; provided in each
case that the person requesting such waiver provides to our Audit Committee a full
disclosure of the particular circumstances relating to such request. The Chairman of our
Audit Committee will first determine whether a waiver of the relevant requirements of the
code of ethics is required and, if such waiver is required, whether a waiver will be
granted. The person requesting such waiver may be required to agree to certain conditions
before a waiver or a continuing waiver is granted.

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

89

---

---

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

Audit
Fees

The
aggregate fees billed for professional services rendered to us by our principal
accountants for the audit of our financial statements in 2007 and 2008 were $66,000 and
$74,000, respectively.

Audit-Related
Fees

We
incurred no fees for assurance and related services rendered to us by our principal
accountants that were reasonably related to the audit of our financial statements in 2007
and 2008 (aside from the fees included under Audit Fees above).

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 2007 and 2008 were $0 and
$4,000, respectively

All
Other Fees

In
2007 and 2008, the aggregate fees billed for additional professional services rendered to
us by our principal accountants, other than for services described in the above
categories, were $13,000 and $10,000, respectively.

Policy
on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
Accountants

The
Audit Committee of our Board of Directors is responsible for the oversight of our
independent accountants work. The Audit Committees policy is to pre-approve
all audit and non-audit services provided by our independent accountants, Brightman
Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu. These services may include
audit services, audit-related services, tax services and other services, as described
above. Our Audit Committee sets forth the basis for its pre-approval in detail, listing
the particular services or categories of services which are pre-approved, and setting
forth a specific budget for such services. Additional services may be pre-approved by the
Audit Committee on an individual basis. Once services have been pre-approved, our
independent accountants and management then report to the Audit Committee on a periodic
basis regarding the extent of services actually provided in accordance with the applicable
pre-approval, and regarding the fees for the services performed. Such fees for 2007 and
2008 were pre-approved by the Audit Committee in accordance with these procedures.

In
December 2008, our shareholders approved the engagement of Brightman Almagor Zohar &
Co., a member of Deloitte Touche Tohmatsu, as our independent auditors for the fiscal year
ended December 31, 2008 and until the next annual shareholder meeting. Such approval
followed the pre-approval by our Board of Directors and Audit Committee of such engagement
(in the case of the Audit Committee, as described above).

90

---

---

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

Not
applicable

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

# Issuer Purchases of
Equity Securities(1)

|Period         | (a) Total Number
of Shares Purchased | (b) Average
Price Paid Per
Share | (c) Total
Number of
Shares
Purchased as
part of
Publicly
Announced
Plans or
Programs | (d) Maximum
Dollar Value of
Shares that May
Yet Be
Purchased Under
Plans or
Programs
|-------------- | ------------------------------------ | -------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------
|
|
|
|
|January 2008   |                                      |                                  |                                                                                      | 0                                                                                   
|February 2008  |                                      |                                  |                                                                                      | 0                                                                                   
|March 2008     |                                      |                                  |                                                                                      | 0                                                                                   
|April 2008     |                                      |                                  |                                                                                      | 0                                                                                   
|May 2008       |                                      |                                  |                                                                                      | 0                                                                                   
|June 2008      |                                      |                                  |                                                                                      | 31,722                                                                              
|July 2008      |                                      |                                  |                                                                                      | 31,600                                                                              
|August 2008    |                                      |                                  |                                                                                      | 12,700                                                                              
|September 2008 |                                      |                                  |                                                                                      | 2,000                                                                               
|October 2008   |                                      |                                  |                                                                                      | 34,900                                                                              
|November 2008  |                                      |                                  |                                                                                      | 21,400                                                                              
|December 2008  |                                      |                                  |                                                                                      | 13,400                                                                              
|January 2009   |                                      |                                  |                                                                                      | 20,200                                                                              
|February 2009  |                                      |                                  |                                                                                      | 9,934                                                                               
|March 2009     |                                      |                                  |                                                                                      | 4,900                                                                               
|April 2009     |                                      |                                  |                                                                                      | 18,500                                                                              
|May 2009       |                                      |                                  |                                                                                      | 19,600                                                                              

|(1) | On
June 4, 2008 we announced that our Board of Directors had approved the use
               of up to$1 million of our available cash to repurchase our
Ordinary                Shares.  Under therepurchase program, share
purchases may be made                from time to time at the discretion ofmanagement
in the open market or                in privately negotiated transactions depending onmarket conditions,                share price, trading volume and other factors.
Such purchases willbe                made in accordance with the requirements of
the SEC. For a portion of theauthorized repurchase amount, we may enter into a
plan that is compliant with                Rule10b5-1 of the Exchange Act that is
designed to facilitate such                purchases. Therepurchase program has
no time limit, does not require us                to acquire a specific numberof
shares, and may be suspended from time                to time or discontinued.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 16F. |  | Change in Registrants Certifying Accountant.
|--------- |  | ---------------------------------------------

Not
applicable.

91

---

---

|Item 16G. |  | Corporate Governance.
|--------- |  | ---------------------

Nasdaq
Listing Requirements

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

We
have chosen not to comply with Nasdaq Marketplace Rules 5605(e)(2) (requiring companies to
adopt a formal written charter or board resolution addressing the companys
nominations process), 5605(b)(1) (requiring a majority of the board of directors to be
comprised of independent directors) and 5605(b)(2) (requiring regularly scheduled meetings
of a listed companys independent directors). Under Israeli law, the board
nominations process is conducted by the full board of directors. Similarly, under Israeli
law, all matters that are subject to the approval of a companys board of directors
are discussed by the full board of directors. Furthermore, under Israeli law, the board of
directors needs to include external directors (as described in Item 6- Directors,
Senior Management and Employees- Board of Directors- External Directors) but
independent or external directors do not need to comprise a majority of the board. In
addition, we do not intend to comply (if and when the events underlying such rule become
relevant) with the Nasdaq listing requirement for shareholder approval for the
establishment of, and amendments to, stock option or purchase plans (Nasdaq Marketplace
Rule 5635(c)), which matter is not subject to shareholder approval under Israeli law and
practice.

We
have also chosen to follow our home country practice in lieu of compliance with Nasdaq
Marketplace Rule 5605(d), which requires that the compensation of the chief executive
officer and all other executive officers of our company be determined, or recommended to
the board for determination, either by a majority of the independent directors, or by a
compensation committee comprised solely of independent directors. Under the Companies Law,
the compensation of such officers is determined by the full board of directors, and there
is no requirement for a recommendation or determination by independent directors or a
compensation committee. If the chief executive officer or any other executive officer is
also a director, then the Companies Law requires that the terms of compensation of the
officer must be approved by the audit committee, board of directors and shareholders of a
company and that the officer may not be present when the audit committee or board of
directors discusses or acts upon the terms of his or her compensation.

As
a foreign private issuer we are also entitled to follow our home country practice in lieu
of compliance with the Nasdaq rule that requires disclosure of the compensation of our
directors and members of our administrative, supervisory or management bodies. Since under
the Companies Law such disclosure is not required on an individual basis, the compensation
of our executive officers is provided on an aggregate basis.

# PART III

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

Not
Applicable

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

See
pages F-1 through F-25 appended hereto.

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

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

|4.1 |  | Services
 Agreement by and between Cimatron Ltd and DBSI Investments Ltd.  ("DBSI"),  as assigned
         to DBSI by Zeevi Computers and Technology Ltd.**
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

92

---

---

|4.2.2 |  | Second
Call Option Exercise  Notice,  dated July 7, 2008, by and among Cimatron Ltd. and all
other          shareholders of Microsystem Srl.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|4.2.3 |  | Registration
 Rights  Agreement,  dated June 3, 2007, by and among  Cimatron  Ltd.,  3Kotek 2 B.V.
         (as successor in interest to Koonras Technologies Ltd.) and DBSI Investments
Ltd.****
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2.4 |  | Registration
 Rights Agreement,  dated December 31, 2007, by and between Cimatron Ltd. and William
         F. Gibbs.*****
|----- |  | --------------------------------------------------------------------------------------------------------------------------

|4.2.5 |  | Merger
 Agreement  and Plan of  Reorganization,  dated  as of  December  31,  2007,  by and
 among          Cimatron Ltd.,  Cimatron  Technologies,  Inc., Nortamic LLC (name later
changed to Cimatron Gibbs          LLC), Gibbs System, Inc., and William F. Gibbs.******
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2.6 |  | Employment
Agreement, dated as of January 2, 2008, by and between William F. Gibbs and Cimatron
Gibbs LLC (formerly known as Nortamic LLC).*******
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of Cimatron Ltd. Subsidiaries.
|--- |  | -----------------------------------

|12.1 |  | Certificate
 of Chief  Executive  Officer  pursuant to Rule  13a-14(a)/Rule  15d-14(a)  under the
         Exchange Act.
|---- |  | ------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certificate
 of Chief  Financial  Officer  pursuant to Rule  13a-14(a)/Rule  15d-14(a)  under the
         Exchange Act.
|---- |  | ------------------------------------------------------------------------------------------------------------------------

|13 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/Rule
15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|* |  | Incorporated
by reference to Exhibit A to our Proxy Statement for our 2006 Annual General Meeting of
Shareholders, included in our Current Report on Form 6-K, filed with the SEC on November
22, 2006.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|*** |  | Incorporated
by reference to Exhibit 4.2 to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2005, filed with the SEC on June 29, 2006 (File No. 0-27974).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated
by reference to Exhibit 4.2 to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2006, filed with the SEC on June 28, 2007 (File No. 0-27974).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|***** |  | Incorporated
by reference to Exhibit 4.2.3 to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2007, filed with the SEC on June 30, 2008 (File No. 0-27974).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|****** |  | Incorporated
by reference to Exhibit 4.2.4 to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2007, filed with the SEC on June 30, 2008 (File No. 0-27974).
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|******* |  | Incorporated
by reference to Exhibit 4.2.5 to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2007, filed with the SEC on June 30, 2008 (File No. 0-27974).
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

93

---

---

# SIGNATURES

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.

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

Date: June 29,
2009

94

---

---

# CIMATRON LIMITED

# CONSOLIDATED FINANCIAL
STATEMENTS

# TABLE OF CONTENTS

|                                                                                | Page          
|------------------------------------------------------------------------------- | --------------
|
|
|
|
|Report of Independent Registered Public Accounting Firm                         | F - 2         
|                                                                               
|Consolidated Financial Statements:                                             
|                                                                               
|Balance Sheets as of December 31, 2008 and 2007                                 | F - 3 - F - 4 
|                                                                               
|Statements of Operations for the years ended December 31, 2008, 2007 and 2006   | F - 5         
|                                                                               
|Statement of Shareholders' Equity and Comprehensive Income (Loss) for the years
|ended December 31, 2008, 2007 and 2006                                          | F - 6         
|                                                                               
|Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006   | F - 7 - F - 8 
|                                                                               
|Notes to the Consolidated Financial Statements                                  | F - 9 - F - 33



---

---

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

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders ofCimatron Ltd.

We have audited the accompanying
consolidated balance sheets of Cimatron Ltd (the Company) and its subsidiaries
as of December 31, 2008 and 2007 and the related statements of operations,
shareholders equity and comprehensive income (loss) and cash flows for each of the
three years in the period ended December 31, 2008. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We did not audit the financial
statements of certain subsidiary, whose assets constitute approximately 7% of total
consolidated assets at December 31, 2008, and whose revenues constitute approximately 24%
of consolidated total revenues for the year ended December 31, 2008. Those statements
were audited by other auditor, whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for the abovementioned subsidiary, is based
solely on the report of this other auditor.

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

In our opinion, based on our audits
and report of the other auditor, the consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2008 and 2007 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2008 in conformity with U.S. generally accepted accounting principles.

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

Tel-Aviv, IsraelJune 28, 2009

F - 2

---

---

# CIMATRON LIMITED

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

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|Current assets                                                                  |             
|Cash and cash equivalents                                                       |             
|Trade accounts receivable, net of allowance for doubtful accounts of $1,319 and |             
|$1,397 as of December 31, 2008 and 2007 respectively (Note 5)                   |             
|Other accounts receivable and prepaid expenses (Note 6)                         |             
|Inventory                                                                       |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|Long-term investments (Note 4)                                                  |             
|                                                                                |             
|                                                                                |             
|Deposits with insurance companies and severance pay funds (Note 10)             |             
|                                                                                |             
|                                                                                |             
|Property and equipment (Note 7)                                                 |             
|Cost                                                                            |             
|Less - accumulated depreciation                                                 |             
|                                                                                |             
|Property and equipment, net                                                     |             
|                                                                                |             
|                                                                                |             
|Other assets                                                                    |             
|Software development costs, net (Note 8)                                        |             
|Goodwill, net                                                                   |             
|Other Intangible Assets                                                         |             
|                                                                                |             
|Total other assets                                                              |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             

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

F - 3

---

---

# CIMATRON LIMITED

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

|                                                                                  | December 31,
|--------------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                              |             
|                                                                                  |             
|Current liabilities                                                               |             
|Short-term bank credit                                                            |             
|Related parties                                                                   |             
|Trade payables                                                                    |             
|Other liabilities and accrued expenses (Note 9)                                   |             
|Deferred revenues                                                                 |             
|                                                                                  |             
|Total current liabilities                                                         |             
|                                                                                  |             
|                                                                                  |             
|Long-term liabilities                                                             |             
|Accrued severance pay (Note 10)                                                   |             
|Long term loan                                                                    |             
|Deferred tax liability                                                            |             
|                                                                                  |             
|                                                                                  |             
|                                                                                  |             
|                                                                                  |             
|Minority interests                                                                |             
|                                                                                  |             
|                                                                                  |             
|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 - 9,560,698 shares at December 31, 2008 and 8,053,782 at          |             
|December 31, 2007)                                                                |             
|Additional paid-in capital and other capital surplus                              |             
|Accumulated other comprehensive loss:                                             |             
|Foreign currency translation adjustments                                          |             
|Unrealized loss on available for-sale securities                                  |             
|Unrealized gain on derivative instruments                                         |             
|Accumulated deficit                                                               |             
|                                                                                  |             
|                                                                                  |             
|Treasury stock, at cost; 313,822 and 166,100 shares at December 31, 2008 and 2007 |             
|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,
|------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues (Note 15a):                                    |                        
|Products                                                |                        
|Services                                                |                        
|                                                        |                        
|Total                                                   |                        
|                                                        |                        
|                                                        |                        
|Cost of revenues (Note 15b):                            |                        
|Products                                                |                        
|Services                                                |                        
|                                                        |                        
|Total                                                   |                        
|                                                        |                        
|                                                        |                        
|Gross profit                                            |                        
|                                                        |                        
|Research and development expenses, net                  |                        
|Selling, general and administrative expenses (Note 15c) |                        
|                                                        |                        
|                                                        |                        
|Operating income                                        |                        
|                                                        |                        
|Financial income (expenses), net                        |                        
|Other expenses                                          |                        
|                                                        |                        
|                                                        |                        
|Income before income taxes                              |                        
|                                                        |                        
|Income taxes (Note 13)                                  |                        
|                                                        |                        
|                                                        |                        
|Income after income taxes                               |                        
|                                                        |                        
|Company's equity in results of affiliated company       |                        
|                                                        |                        
|Minority interest in results of subsidiary              |                        
|                                                        |                        
|                                                        |                        
|Net Income                                              |                        
|                                                        |                        
|                                                        |                        
|Net Income per share (basic and diluted)                |                        
|                                                        |                        
|                                                        |                        
|Weighted average number of shares outstanding           |                        
|Basic earnings per share                                |                        
|                                                        |                        
|Diluted earnings per share                              |                        
|                                                        |                        

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

F - 5

---

---

# CIMATRON LIMITED

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

|                                                                | Share
capital | Additional
paid-in
capital | Accumulated
other
comprehensive
income (loss) | Retained
earnings
(accumulated
deficit) | Treasury
stock | Comprehensive
income (loss) | Total
shareholders'
equity
|--------------------------------------------------------------- | ------------- | -------------------------- | --------------------------------------------- | --------------------------------------- | -------------- | --------------------------- | --------------------------
|
|
|
|
|Total comprehensive loss                                        |               |                            |                                               |                                         |                |                             |                           
|Balance at January 1, 2006                                      |               |                            |                                               | 264                                     |                |                             | 13,417                    
|                                                                |               |                           
|Changes during the year ended December 31, 2006:                |               |                           
|Net loss                                                        |               |                            |                                               |                                         |                |                             |                           
|Unrealized gain on available-for-sale securities                |               |                            |                                               |                                         |                |                             |                           
|Unrealized loss on derivative instruments                       |               |                            |                                               |                                         |                |                             |                           
|Foreign currency translation adjustment                         |               |                            |                                               |                                         |                |                             |                           
|Stock option compensation                                       |               |                            |                                               |                                         |                |                             | 104                       
|                                                                |               |                            |                                               |                                         |                |                             |                           
|Total comprehensive income                                      |               |                            |                                               |                                         |                |                             |                           
|                                                                |               |                            |                                               |                                         |                |                             |                           
|Balance at December 31, 2006                                    |               |                            |                                               | 264                                     |                |                             | 13,521                    
|                                                                |               |                            |                                               |                                         |                |                             |                           
|                                                                |               |                           
|Changes during the year ended December 31, 2007:                |               |                           
|Net Income                                                      |               |                            |                                               |                                         |                |                             |                           
|Adjustment  for the  cumulative  effect of prior years Adoption |               |                           
|of Interpretation 48                                            |               |                            |                                               |                                         |                |                             |                           
|Unrealized loss on available-for-sale securities                |               |                            |                                               |                                         |                |                             |                           
|Unrealized gain on derivative instruments                       |               |                            |                                               |                                         |                |                             |                           
|Foreign currency translation adjustment                         |               |                            |                                               |                                         |                |                             |                           
|Exercise of stock options                                       |               |                            |                                               | 1                                       |                |                             | 113                       
|Stock option compensation                                       |               |                            |                                               |                                         |                |                             | 120                       
|                                                                |               |                            |                                               |                                         |                |                             |                           
|Total comprehensive income                                      |               |                            |                                               |                                         |                |                             |                           
|                                                                |               |                            |                                               |                                         |                |                             |                           
|Balance at December 31, 2007                                    |               |                            |                                               | 265                                     |                |                             | 13,754                    
|                                                                |               |                            |                                               |                                         |                |                             |                           
|                                                                |               |                           
|Changes during the year ended December 31, 2008:                |               |                           
|Net Income                                                      |               |                            |                                               |                                         |                |                             |                           
|Issuance of shares                                              |               |                            |                                               | 39                                      |                |                             | 4,248                     
|Investment in treasury stock                                    |               |                            |                                               |                                         |                |                             |                           
|Unrealized loss on available-for-sale securities                |               |                            |                                               |                                         |                |                             |                           
|Unrealized gain on derivative instruments                       |               |                            |                                               |                                         |                |                             |                           
|Foreign currency translation adjustment                         |               |                            |                                               |                                         |                |                             |                           
|Exercise of stock options                                       |               |                            |                                               |                                         |                |                             | 14                        
|Stock option compensation                                       |               |                            |                                               |                                         |                |                             | 115                       
|                                                                |               |                            |                                               |                                         |                |                             |                           
|                                                                |               |                           
|Total comprehensive income                                      |               |                            |                                               |                                         |                |                             |                           
|                                                                |               |                            |                                               |                                         |                |                             |                           
|Balance at December 31, 2008                                    |               |                            |                                               | 304                                     |                |                             | 18,131                    
|                                                                |               |                            |                                               |                                         |                |                             |                           

F - 6

---

---

# CIMATRON LIMITED

# CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                 | Year ended December 31,
|---------------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS - OPERATING ACTIVITIES                                |                        
|                                                                 |                        
|Net Income                                                       |                        
|                                                                 |                        
|Adjustments to reconcile net income to net cash                  |                        
|provided by (used in) operating activities:                      |                        
|Depreciation and amortization                                    |                        
|Increase (decrease) in accrued severance pay                     |                        
|Gain from sale of property and equipment, net                    |                        
|stock options compensation                                       |                        
|Loss  from sale and devaluation (revaluation) of bonds and funds |                        
|Company's equity in results of affiliated company                |                        
|Minority interest in results of subsidiary                       |                        
|Deferred taxes, net                                              |                        
|                                                                 |                        
|Changes in assets and liabilities:                               |                        
|Decrease (increase) in accounts receivable and prepaid expenses  |                        
|Decrease in inventory                                            |                        
|Decrease (increase) in deposits with insurance companies         |                        
|and severance pay fund                                           |                        
|Increase in debts to related parties                             |                        
|Increase (decrease) in trade payables, accrued expenses          |                        
|and other liabilities                                            |                        
|                                                                 |                        
|Net cash provided by operating activities                        |                        
|                                                                 |                        
|                                                                 |                        
|CASH FLOWS - INVESTING ACTIVITIES                                |                        
|                                                                 |                        
|Proceeds from sale and redemption of bonds                       |                        
|Purchase of property and equipment                               |                        
|Proceeds from sale of property and equipment                     |                        
|Additional payment for acquisition of subsidiary                 |                        
|Acquisition of subsidiary, net of cash acquired (Appendix A)     |                        
|                                                                 |                        
|Net cash provided by (used in) investing activities              |                        
|                                                                 |                        
|                                                                 |                        
|CASH FLOWS - FINANCING ACTIVITIES                                |                        
|Short-term bank credit                                           |                        
|Long-term bank credit                                            |                        
|Proceeds from issuance of shares upon exercise of options        |                        
|Investment in treasury stock                                     |                        
|                                                                 |                        
|Net cash used in financing activities                            |                        
|                                                                 |                        
|                                                                 |                        
|Effect of exchange rate changes on cash                          |                        
|Net increase (decrease) in cash and cash equivalents             |                        
|Cash and cash equivalents at beginning of year                   |                        
|                                                                 |                        
|Cash and cash equivalents at end of year                         |                        
|                                                                 |                        
|Supplemental information:                                        |                        
|Cash paid during the year for income taxes                       |                        
|                                                                 |                        

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

F - 7

---

---

# CIMATRON LIMITED

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

|                                                             | Year ended December 31,
|------------------------------------------------------------ | -----------------------
|
|
|
|
|Appendix A - Acquisition of subsidiary, net of cash acquired |                        
|                                                             |                        
|Working capital - excluding cash                             |                        
|Goodwill                                                     |                        
|Other intangible assets                                      |                        
|Property and equipment                                       |                        
|Tax asset                                                    |                        
|Investment                                                   |                        
|                                                             |                        
|                                                             |                        
|                                                             |                        
|Issuance of shares                                           |                        
|                                                             |                        
|                                                             |                        
|                                                             |                        
|Appendix B - Non-cash transactions                           |                        
|                                                             |                        
|Purchase of property on credit                               |                        
|                                                             |                        

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

F - 8

---

---

# CIMATRON LIMITED

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

|NOTE 1 |  | GENERAL
|------ | - | -------

| | Cimatron
Ltd. (the Compamy) designs, develops, manufactures, markets and supports a
family of CAD/CAM software solutions for mold, tool and die makers as well as
manufacturers of discrete parts. The Cimatron product line includes the CimatronE and
GibbsCAM brands with solutions for mold design, die design, electrodes design, 2.5 to 5
axes milling, wire EDM, turn, Mill-turn, rotary milling, multi-task machining, and
tombstone machining. Cimatrons subsidiaries and distribution network serve and
support customers in the automotive, aerospace, medical, consumer plastics, electronics,
and other industries in over 40 countries worldwide.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES
|------ | - | -------------------------------

| | The
 financial  statements  are prepared in  conformity  with U.S.  generally  accepted
 accounting  principles               ("GAAP").
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | A. | Use
of estimates in preparation of financial statements
| | -- | -------------------------------------------------------

| | The
preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions in determining the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Financial
statements in U.S. dollars
| | -- | ------------------------------------

| | The
reporting currency of the Company is the U.S. dollar (the dollar).
| | ------------------------------------------------------------------------

| | The
dollar is the functional currency of the Company and its subsidiaries in the United
States and Canada. Transactions and balances originally denominated in dollars are
presented at their original amounts. Non-dollar transactions and balances are remeasured
into dollars in accordance with the principles set forth in Statement of Financial
Accounting Standards (SFAS) No. 52 Foreign Currency Translation (SFAS
No. 52). All exchange gains and losses from remeasurement of monetary balance sheet
items resulting from transactions in non-dollar currencies are recorded in the statement
of operations as they arise.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of certain subsidiaries whose functional currency is other than the
dollar are translated into dollars in accordance with the principles set forth in SFAS
No. 52. Assets and liabilities have been translated at year-end exchange rates; results
of operations have been translated at average exchange rates. The translation adjustments
have been reported as a separate component of shareholders equity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the financial statements of the Company and all
of its subsidiaries. All significant intercompany transactions and balances have been
eliminated.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | D. | Cash
and cash equivalents
| | -- | -------------------------

| | Cash
equivalents consist of short-term, highly liquid investments that are readily convertible
into cash with original maturities of three months or less.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Marketable
debt securities
| | -- | --------------------------

| | The
Company accounts for its investments in marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities(SFAS
115).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
determines the appropriate classification of the Companys investments in marketable
debt securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities for which the Company does not have the intent or
ability to hold to maturity are classified as available-for-sale.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007 all marketable debt securities were designated as available-for-sale
and accordingly were stated at fair value, with the unrealized gains and losses reported
in shareholders equity under accumulated other comprehensive income (loss).
Realized gains and losses on sales of investments, as determined on a specific
identification basis, were included in the consolidated statement of operations.As
of December 31, 2008 the Company had no investment in marketable debt securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
financial instruments of the Company consist mainly of cash and cash equivalents,
short-term investments, current accounts receivable, accounts payable and long-term
liabilities. In view of their nature, the fair value of the financial instruments
included in working capital of the Company is usually identical or close to their
carrying amounts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Concentrations
of credit risk
| | -- | -----------------------------

| | Financial
instruments which potentially subject the Company to concentration of credit risk consist
principally of cash and cash equivalents, and accounts receivable. The Companys
cash and cash equivalents are invested primarily in deposits with major banks worldwide.
Management believes that the financial institutions that hold the Companys
investments are financially sound, and accordingly, minimal credit risk exists with
respect to these investments. The Companys trade receivables are derived from sales
to customers located primarily in the U.S., Europe, Asia and Israel. The allowance for
doubtful accounts is provided with respect to all balances deemed doubtful of collection.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | The
allowance for doubtful accounts is computed on the specific identification basis for
accounts, the collection of which, in managements estimation, is doubtful.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | I. | Inventory
| | -- | ---------

| | Inventory
is presented at the lower of cost or market. Cost is determined by the first in,
first out method.
| | --------------------------------------------------------------------------------------------------------------

| | J. | Property
and equipment
| | -- | ----------------------

| | Property
and equipment are stated at cost. Depreciation is computed using the straight-line method,
over the estimated useful life of assets, as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                |              
| | ------------------------------ | -------------
|
|
|
|
| | Computers and software         | 3 years      
| | Office furniture and equipment | 5- 16.5 years

| | Leasehold
improvements are amortized over the shorter of the life of the respective lease or the
service life of the improvements.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | K. | Impairment
of long-lived assets
| | -- | -------------------------------

| | The
Company regularly reviews whether facts and circumstances exist which indicate that the
carrying amount of assets may not be recoverable. The Company assesses the recoverability
of the carrying amount of its long-lived assets based on expected undiscounted cash
flows. If an assets carrying amount is determined to be not recoverable, the
Company recognizes an impairment loss based upon the difference between the carrying
amount and the fair value of such asset, in accordance with SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Software
development costs
| | -- | --------------------------

| | The
Company capitalizes software development costs in accordance with SFAS No. 86 Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed (SFAS
No. 86). Capitalization of software development costs begins upon the establishment
of technological feasibility, and continues up to the time the software is available for
general release to customers. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors including, but not limited to,
anticipated future gross product revenue, estimated economic life and changes in software
and hardware technology.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on the Companys product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company between
completion of the working models and the point at which the products are ready for
general release has been insignificant. Therefore, all research and development costs
have been expensed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | M. | Acquisition-related
intangible assets
| | -- | -------------------------------------

| | The
Company accounts for its business combinations in accordance with SFAS No. 141 Business
Combinations (SFAS 141) and the related acquired intangible assets and
goodwill in accordance with SFAS No. 142 Goodwill and Other Intangible Assets (SFAS
142). SFAS 141 specifies the accounting for business combinations and the criteria
for recognizing and reporting intangible assets apart from goodwill.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Acquisition-related
intangible assets result from the Companys acquisitions of businesses accounted for
under the purchase method and consist of the values of identifiable intangible assets
including developed software products, established workforce and trade names, as well as
goodwill. Goodwill is the amount by which the acquisition cost exceeds the fair values of
identifiable acquired net assets on the date of purchase. Acquisition-related intangible
assets are reported at cost, net of accumulated amortization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Stock-based
compensation
| | -- | ------------------------

| | Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)). SFAS No. 123(R) requires employee
share-based equity awards to be accounted for under the fair value method. Accordingly,
stock-based compensation is measured at the grant date, based on the fair value of the
award. Prior to January 1, 2006, the Company accounted for stock-based equity awards
granted using the intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25),
and related interpretations, and provided the required pro forma disclosures prescribed
by SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123),
as amended.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the modified prospective method of adoption for SFAS No. 123(R), the compensation cost
recognized by the Company beginning in 2006 includes (a) compensation cost for all equity
incentive awards granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of SFAS No.
123, and (b) compensation cost for all stock-based compensation awards granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The Company uses the straight-line attribution method to
recognize stock-based compensation costs over the service period of an award.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | N. | Stock-based
compensation (cont)
| | -- | -------------------------------

| | Stock-based
compensation recognized in 2006 as a result of the adoption of SFAS No. 123(R), as well
as pro forma disclosures according to the original provisions of SFAS No. 123 for periods
prior to the adoption of SFAS No. 123(R), use the Black-Scholes option pricing model for
estimating the fair value of options granted under the Companys equity plans. The
weighted average assumptions that were used in calculating such values during 2008, 2007,
and 2006 were based on estimates at the date of grant as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | 2 0 0 8 | 2 0 0 7 | 2 0 0 6
| | ------------------------ | ------- | ------- | -------
|
|
|
|
| | Risk-free interest rate  |         |         |        
| | Expected life of options |         |         |        
| | Expected volatility      |         |         |        
| | Expected dividend yield  |         |         |        

F - 13

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | O. | Revenue
recognition
| | -- | -------------------

| | The
Company recognizes revenues in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position 97-2, Software Revenue
Recognition, as amended.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Service
revenues include consulting services, post-contract customer support and training.
Consulting revenues are generally recognized on a time and material basis. Software
maintenance agreements provide technical customer support and the right to unspecified
upgrades on an if-and-when-available basis. Post-contract customer support revenues are
recognized ratably over the term of the support period (generally one year) and training
and other service revenues are recognized as the related services are provided. Deferred
revenues represent mainly amounts received on account of service agreements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys sales are made pursuant to standard purchase orders, containing payment
terms averaging between 30  120 days. The Companys arrangements do not
substantially include any refund provisions nor are payments subject to milestones. In
addition, the Companys arrangements do not substantially contain customer
acceptance provisions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Research
and development costs
| | -- | ------------------------------

| | Research
and development costs are expensed as incurred.
| | --------------------------------------------------------

F - 14

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | Q. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
income taxes are provided for temporary differences between the assets and liabilities,
as measured in the financial statements and for tax purposes, at the tax rates expected
to be in effect when these differences reverse, in accordance with SFAS No. 109 Accounting
for Income Taxes (SFAS No. 109).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2007, the Company adopted the provisions of FASB interpretation No 48 (FIN
48), Accounting for Uncertainty in Income Taxes, an interpretation of
SFAS No. 109. As a result of this adoption, the Company recognized a charge of $367 to
the beginning balance of the accumulated deficit on the accompanying consolidated balance
sheet as of December 31, 2007
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | Net
income (loss) per ordinary share
| | -- | ------------------------------------

| | Basic
and diluted net income (loss) per share have been computed in accordance with SFAS No.
128 Earning per Share using the weighted average number of ordinary shares
outstanding. Basic income (loss) per share excludes any dilutive effect of options and
warrants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | Derivative
financial instruments
| | -- | --------------------------------

| | The
Companys primary objective for holding derivative financial instruments is to
manage mainly currency market risks. The Company transacts business in various currencies
other than the U.S. dollar, primarily the Euro and New Israeli Shekel (the NIS).
The Company has established balance sheet and forecasted transaction risk management
programs to protect against volatility of future cash flows caused by changes in exchange
rates. It uses currency forward contracts and currency options in these risk management
programs. These programs reduce, but do not always entirely eliminate, the impact of
currency exchange movements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, the Company recognizes all derivative instruments as either
assets or liabilities on the balance sheet at fair value. Fair values of currency forward
contracts and currency options are based on quoted market prices or pricing models using
current market rates. The accounting for gains or losses from changes in fair value of a
derivative instrument depends on whether it has been designated and qualifies as part of
a hedging relationship as well as on the type of hedging relationship.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys accounting policies for these instruments are based on whether they meet
the criteria for designation as hedging transactions, either as cash flow or fair value
hedges. The criteria for designating a derivative as a hedge include the instruments
effectiveness in risk reduction and one-to-one matching for the derivative instrument to
its underlying transaction. Gains and losses on derivatives that are not designated as
hedges for accounting purposes are recognized currently in earnings, and generally offset
changes in the value of assets and liabilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys outstanding derivative instruments as of balance sheet dates are included
in other receivables and other accrued liabilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | S. | Derivative
financial instruments (cont.)
| | -- | ----------------------------------------

| | Currency
forward contracts and currency options, which generally expire within 12 months and are
used to hedge exposures to variability in expected future foreign-denominated cash flows,
are designated as cash flows hedges. For these derivatives, the effective portion of the
gain or loss is reported as a component of other comprehensive income in stockholders equity
and is reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings, and within the same income statement line item.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
ineffective portion of the gain or loss on the derivative in excess of the cumulative
change in the present or future cash flows of the hedged item, if any, is recognized in
financial income (expenses) net during the period of change.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amount of foreign currency forward contracts and foreign currency options
outstanding at December 31, 2008 and 2007 is $314 and $2, respectively. As of the balance
sheet dates, the fair value of these contracts approximates their carrying amount.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Recently
issued accounting pronouncements
| | -- | -----------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (FAS
141R). FAS 141R provides revised guidance on how acquirers recognize and measure
the consideration, identifiable assets acquired, liabilities assumed, contingencies,
non-controlling interests and goodwill acquired in a business combination, and expands
disclosure requirements surrounding the nature and financial effects of business
combinations. Key changes include: acquired in-process research and development will no
longer be expensed on acquisition, but capitalized and assessed for impairment where
relevant and amortized over its useful life; acquisition costs will be expensed as
incurred; restructuring costs will generally be expensed in periods after the acquisition
date; the consideration in shares is to be valued at closing date; and in the event that
a deferred tax valuation allowance relating to a business acquisition, including from
prior years, is subsequently reduced, the adjustment will be recognized in the statement
of income. Early adoption is not permitted. As applicable to the Company, this statement
will be effective, on a prospective basis, as of the year beginning January 1, 2009. The
Company believes that the initial adoption of FAS 141R will not have a material impact on
its consolidated financial statements. However, if the Company consummates business
combinations after the adoption of FAS 141R, this could significantly impact the
consolidated financial statements as compared to prior acquisitions which were accounted
for under existing GAAP requirements, due to the changes described above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008 the FASB issued FASB Staff Position (FSP) SFAS 142-3, Determination
of the Useful Life of Intangible Assets. FSP SFAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142. This new staff position is
intended to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the fair
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

# CIMATRON LIMITED

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

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | T. | Recently
issued accounting pronouncements (cont.)
| | -- | -------------------------------------------------

| | value
of the asset under SFAS 141(R). FSP SFAS 142-3 is effective for fiscal years beginning
after December 15, 2008, which means that it will be effective for the Company
starting January 1, 2009. The Company believes that the initial adoption of FSP SFAS
142-3 will not have a material impact on its consolidated financial statements. However,
if the Company consummates business combinations after the adoption of FSP SFAS 142-3,
this could significantly impact the consolidated financial statements as compared to
prior acquisitions which were accounted for under existing GAAP requirements, due to the
changes described above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (SFAS No. 161) as an amendment
to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 161 requires that objectives for using derivative instruments be disclosed in
terms of underlying risk and accounting designation. The fair value of derivative
instruments and their gains and losses will need to be presented in tabular format in
order to present a more complete picture of the effects of using derivative instruments.
SFAS No. 161 is effective for financial statements issued for fiscal years beginning
after November 15, 2008. The Company does not believe that the adoption of SFAS No. 161
will have a significant impact on its consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

# CIMATRON LIMITED

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

|NOTE 3 |  | ACQUISITIONS
|------ | - | ------------

| | In
January 2008 the Company completed the merger of Gibbs System Inc., developer of GibbsCAM®,
software for programming CNC machine tools, into Cimatron Gibbs LLC, a wholly owned
subsidiary of the Companys US-based subsidiary Cimatron Technologies, Inc. As
consideration in the transaction, the Company paid cash in the amount of approximately $5
million, as well as 1,500,000 newly issued ordinary shares of Cimatron, which represented
approximately 16% of its issued and outstanding share capital immediately following the
consummation of the merger.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
merger was accounted for in accordance with SFAS No. 141 and SFAS No. 142, and the
financial results of Gibbs have been included in the Companys financial statements
beginning on the merger date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
purchase price has been allocated on the basis of the estimated fair value of the assets
purchased and the liabilities assumed. The excess of the purchase price over the fair
value of the net tangible assets acquired has been attributed to intangible assets and
goodwill. The purchase price attributed to intangible assets is being amortized over its
estimated useful life, which is 5-7 years. In accordance with SFAS No. 141 and SFAS No.
142, the purchase price attributed to goodwill is not amortized, but rather is subject to
periodic impairment tests.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                               | 
| | ----------------------------- | 
|
|
|
|
| | Cash and cash equivalents     | 
| | Property and equipment        | 
| | Other tangible assets         | 
| | Other tangible liabilities    | 
| |                               | 
| | Net tangible assets acquired  | 
| |                               | 
| | Intangible assets acquired(1) | 
| | Goodwill                      | 
| |                               | 
| | Total purchase price          | 
| |                               | 

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

| |                 | Fair value | Estimated
weighted-average
useful life
| | --------------- | ---------- | --------------------------------------
|
|
|
|
| | Core technology |            |                                       
| | Brand name      |            |                                       
| |                 |            |                                       
| |                 |            |                                       
| |                 |            |                                       

F - 18

---

---

# CIMATRON LIMITED

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

|NOTE 3 |  | ACQUISITIONS (cont.)
|------ | - | --------------------

| | In
June 2005, the Company completed the acquisition of 27.5% of the share capital of
Microsystem Srl, a leading distributor of the Companys CAD/CAM products in Italy,
for a consideration of $694. The Company had an option (the First Call Option)
to acquire up to additional 23.5% of Microsystems share capital until June 30,
2007, for an additional consideration of approximately $600. The Company exercised its
option in June 2007. Upon exercise of the First Call Option the Company had a second
option (hereinafter, the Second Option), at any time within a thirty day
period (the Second Exercise Period) starting at the expiration of twelve
months from the exercise of the First Call Option to acquire up to the remaining 49% of
Microsystems share capital, for additional consideration of approximately $1,250.
In addition, once the Company exercised the First Call Option, the then-remaining other
shareholders of Microsystem had an option to sell to the Company at any time during the
Second Exercise Period the remaining 49% of Microsystems share capital, for
consideration of approximately $1,250. The Company exercised its Second Option in July
2008. In accordance with EITF 00-4, following the exercise of the First Call Option and
the increase in Cimatrons holding in Microsystem to 51%, the Company has
consolidated 100% of the results of Microsystem starting with the third quarter of 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
acquisition was accounted for in accordance with SFAS No. 141 and SFAS No. 142. The
purchase price was allocated on the basis of the estimated fair value of the assets
purchased and the liabilities assumed. The excess of the purchase price over the fair
value of the net tangible assets acquired was attributed to intangible assets and
goodwill. The purchase price attributed to intangible assets is being amortized over its
estimated useful life, which is approximately 6 years. In accordance with SFAS No. 141
and SFAS No. 142, the purchase price attributed to goodwill is not amortized, but rather
is subject to periodic impairment tests.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                               | 
| | ----------------------------- | 
|
|
|
|
| | Cash and cash equivalents     | 
| | Property and equipment        | 
| | Other tangible assets         | 
| | Other tangible liabilities    | 
| |                               | 
| | Net tangible assets acquired  | 
| |                               | 
| | Intangible assets acquired(1) | 
| | Goodwill                      | 
| |                               | 
| | Total purchase price          | 
| |                               | 

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

| |                         | Fair value | Estimated
weighted-average
useful life
| | ----------------------- | ---------- | --------------------------------------
|
|
|
|
| | Customer relationship   |            |                                       
| | Distribution agreements |            |                                       
| | Backlog                 |            |                                       
| |                         |            |                                       
| |                         |            |                                       
| |                         |            |                                       

F - 19

---

---

# CIMATRON LIMITED

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

|NOTE 4 |  | LONG-TERM INVESTMENTS
|------ | - | ---------------------

| | A. | Long-term
investments
| | -- | ---------------------

| | The
Companys long-term investments are comprised as follows
| | ------------------------------------------------------------

| |                                             | December 31,
| | ------------------------------------------- | ------------
|
|
|
|
| | Marketable securities - Corporate bonds (1) |             
| |                                             |             

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

| | B.       
As of December 31, 2007 all of the Companys investments in marketable
securities are classified in accordance with SFAS No. 115 as
available-for-sale.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unrealized
loss on available-for-sale securities of $ 0 and $87 at December 31, 2008 and 2007,
respectively, were recorded in other comprehensive loss.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Aggregate
maturities of marketable securities are as follows:
| | -------------------------------------------------------------

| |             | December 31,
| | ----------- | ------------
|
|
|
|
| | Seven years |             

|NOTE 5 |  | TRADE ACCOUNTS RECEIVABLE
|------ | - | -------------------------

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

F - 20

---

---

# CIMATRON LIMITED

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

|NOTE 6 |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------ | - | ----------------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Prepaid expenses        |             
| | Deferred tax asset      |             
| | Derivative instruments  |             
| | Government institutions |             
| | Interest receivable     |             
| | Other                   |             
| |                         |             
| |                         |             
| |                         |             

|NOTE 7 |  | PROPERTY AND EQUIPMENT
|------ | - | ----------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | 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 8 |  | SOFTWARE DEVELOPMENT COSTS, NET
|------ | - | -------------------------------

| |                                        | December 31,
| | -------------------------------------- | ------------
|
|
|
|
| | Capitalized software development costs |             
| | Accumulated amortization               |             
| |                                        |             
| |                                        |             
| |                                        |             

F - 21

---

---

# CIMATRON LIMITED

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

|NOTE 9 |  | ACCRUED EXPENSES AND OTHER LIABILITIES
|------ | - | --------------------------------------

| |                                   | December 31,
| | --------------------------------- | ------------
|
|
|
|
| | Employees and related liabilities |             
| | Accrued expenses                  |             
| | Accrued royalties                 |             
| | Taxes to government institutions  |             
| | Deferred tax liability            |             
| | Others                            |             
| |                                   |             
| |                                   |             
| |                                   |             

|NOTE 10 |  | ACCRUED SEVERANCE PAY (DEPOSITS WITH INSURANCE COMPANIES ANDSEVERANCE PAY FUNDS)
|------- | - | --------------------------------------------------------------------------------

| | The
Companys liability for severance pay is calculated pursuant to Israeli severance
pay law based on the most recent salary of the employee multiplied by the number of years
of employment as of the balance sheet date. Employees are entitled to one months
salary for each year of employment or a portion thereof.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys liability for all of its employees is funded by monthly deposits with
severance pay funds and insurance policies. An accrual is set up for any unfunded amount.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The value of the deposited funds is based on the
cash surrender value of the policies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

# 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 3.5% of sales of products developed with funds
provided by the                Chief Scientist, until the dollar-linked amount of such
royalty payments is                equal to 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 to the Chief Scientist in respect of                such grants as of December
31, 2008 is approximately $1,003, 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 Companys approved enterprises, see
               Note 13.A.
| | -- | -----------------------------------------------------------------------------------------------------

| | 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 Companys incremental exports,
up to a maximum                of 100% of the grants received.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys contingent liability to the Fund as of December 31, 2008 is $558,
contingent upon the Companys incremental exports.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | D. | The
Company uses technology in respect of which it is obligated to pay royalties
               to third parties up to an amount of $1,280, until December 31, 2013.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2008, 2007 and 2006, were approximately $1,097,
$1,050, and $705, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------

| | The
Company leases its motor vehicles under cancelable operating lease agreements for periods
through 2008. The minimum payment under these operating leases, that would be due upon
the cancellation thereof, amounted to $1,527 as of December 31, 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum lease commitments under the Companys operating leases as of December 31,
2008 are as follows:
| | -------------------------------------------------------------------------------------------------------------

| | Year ended December 31, | 
| | ----------------------- | 
|
|
|
|
| |                         | 
| | 2009                    | 
| | 2010                    | 
| | 2011                    | 
| | 2012                    | 
| | 2013 and thereafter     | 
| |                         | 
| |                         | 
| |                         | 

F - 23

---

---

# CIMATRON LIMITED

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

|NOTE 12 |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | A. | Share
Trading Market
| | -- | --------------------

| | The
Companys shares are traded in the United States and are listed on the Nasdaq
Capital Market.
| | -------------------------------------------------------------------------------------------------

| | B. | Share
Option Plans
| | -- | ------------------

| | In
April 1998, the Companys Board of Directors adopted a stock option plan (the 1998
Share Option Plan) pursuant to which 620,000 of the Companys 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
administered by the Companys Board, which designates the optionees and dates of
grant thereunder. The exercise price of an option granted under the 1998 Share Option
Plan may be no less than 85% of the fair market value of an Ordinary Share, as determined
by the Board on the date that the option is granted. Options granted vest over a period
determined by the Board, terminate three years after they become exercisable, and are
non-assignable except by the laws of descent. The Board has the authority to amend the
terms of option grants, provided that any such amendment is in the best interest of the
grantee.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2000, the Board adopted new guidelines for the options to purchase Ordinary Shares
reserved for issuance under the 1998 Share Option Plan. Options granted thereunder were
henceforth to be 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/grantee.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2003 the Board 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 under the 1998 Share
Option Plan.. These options became 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. 25,000 of such options were outstanding at December 31, 2008, at an exercise
price of $2.50 per share. As of December 31, 2008, no other options were outstanding
under the 1998 Share Option Plan. In addition, no shares are reserved for future
issuances under that plan, as such reserve has been previously transferred into the 2004
Share Option Plan (as defined below).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

# CIMATRON LIMITED

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

|NOTE 12 |  | SHAREHOLDERS EQUITY (cont.)
|------- | - | ----------------------------

|B. | Share
Option Plans (cont.)
|-- | --------------------------

| | In
October 2004, the Companys Board of Directors adopted an additional share option
plan (the 2004 Share Option Plan) pursuant to which 240,000 Ordinary Shares
were reserved for issuance upon the exercise of options to be granted to directors,
officers, employees and consultants of the Company. The exercise price of an option
granted under the 2004 Share Option Plan may be no less than 95% of the fair market value
of an Ordinary Share, as determined by the Board on the date that an option is granted.
An option granted under the 2004 Share Option Plan may be exercised over a 10-year term
unless otherwise determined by the Board. A grantee is responsible for all personal tax
consequences of a grant and the exercise thereof.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2005, 238,500 options, with an exercise price of $2.20 per share, were granted
under the 2004 Share Option Plan to employees of the Company, and in August 2005, the
Board of Directors approved the grant of an additional 32,000 options, with an exercise
price of $2.00 per share, to a Companys employee, under such plan. 154,572 options
from such grants were outstanding at December 31, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, our Board of Directors increased the 2004 Share Option Plan share reserve
by an additional 250,000 shares.
| | ----------------------------------------------------------------------------------------------------------------------------

| | In
May 2006 an additional 189,000 options, with exercise prices of $1.75-$2.00 and with
terms of five years, were granted to Company employees under the 2004 Share Option Plan,
and in August 2007, an additional 79,000 options, with an exercise price of $2.78 and
with a term of five years, were granted to Company employees under such plan. As of
December 31, 2008, 240,084 options from such grants were outstanding.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2008, the Company granted an additional 66,000 options, with an exercise price of
$2.75 and a term of five years, to Company employees, and in April 2008, an additional
2,000 options, ,also with an exercise price of $2.75 and a term of five years, were
granted to a Company employee under the 2004 Share Option Plan. As of December 31, 2008,
an aggregate of 49,500 options from such grants were outstanding.Such
options become exercisable pursuant to a three (3) year vesting schedule, as follows: (i)
thirty three percent (33%) of the options become exercisable on the first anniversary of
the grant date; and (ii) sixteen and one-half percent (16.5%) of the options become
exercisable at the end of each subsequent six month period over the course of the
following two (2) years, subject to the continued employment of each employee/grantee.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2007, the Companys Board of Directors approved the transfer of a pool of
618,500 unallocated options from the 1998 Share Option Plan to the 2004 Share Option Plan
for future grants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company intends to grant additional options under the 2004 Share Option Plan to various
of its directors, executive officers and employees. At December 31, 2008 options to
purchase 579,916 of the Companys Ordinary Shares were available under the 2004
Share Option Plan for grants to Directors, officers, employees and consultants of the
Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

# CIMATRON LIMITED

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

|NOTE 12 |  | SHAREHOLDERS EQUITY (cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (cont.)
| | -- | --------------------------

| | A
summary of the status of the Companys stock option plan (both the 1998 Share Option
Plan and the 2004 Share Option Plan) as of December 31, 2008, 2007 and 2006, and changes
during the years ending on those dates, is presented below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | Year ended December 31,
|--------------------------- | -----------------------
|
|
|
|
|Outstanding at beginning    |                        
|of year                     |                        
|Granted                     |                        
|Exercised                   |                        
|Cancelled                   |                        
|                            |                        
|Outstanding at year end     |                        
|                            |                        
|Options exercisable at      |                        
|year end                    |                        
|                            |                        
|Weighted average fair value |                        
|of options granted during   |                        
|the year                    |                        
|                            |                        

| | The
following table summarizes information about stock options outstanding at December 31,
2008:
| | ------------------------------------------------------------------------------------------------

|              | Options outstanding | Option exercisable
|------------- | ------------------- | ------------------
|
|
|
|
|$1.75 - $2.78 |                     |                   
|              |                     |                   

F - 26

---

---

# CIMATRON LIMITED

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

|NOTE 12 |  | SHAREHOLDERS' EQUITY (cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (cont.)
| | -- | --------------------------

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

|              | Options outstanding | Options exercisable
|------------- | ------------------- | -------------------
|
|
|
|$1.75 - $2.78 |                     |                    
|              |                     |                    

|NOTE 13 |  | INCOME TAXES
|------- | - | ------------

| | A. | The
Law for Encouragement of Capital Investments, 1959
| | -- | ------------------------------------------------------

| | Commencing
in 1994, the Company's  operations were granted  "approved  enterprise"  status under the
Law                      for Encouragement of Capital  Investments,  1959 (the
"Investment  Law")..  Reduced tax rates applied to                      the Company's
income from the approved  enterprise  (which was determined based upon the increase in
the                      Company's  revenue  during the first year of its having the
 above-mentioned  status as  compared to the                      year before).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April  2001 the  Company  was  granted  "approved  enterprise"  status  with  respect  to
 additional                      operations (the Company's fourth approved enterprise),
subject to the following terms:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Tax
 exemption  for 2 years,  commencing  in the first year in which the  Company  generated
 taxable  income from its                               approved enterprise.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For
the remainder of the benefit period - 5 years - a reduced tax rate of 25%.
| | - | ------------------------------------------------------------------------------

| | The
period of tax  benefits  for the  Company's  approved  enterprise  was to expire in 2015
or earlier,                      depending on when and whether the Company was to
generate  taxable  income from its approved  enterprise                      operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
 derived from sources other than an "approved  enterprise"  is taxable at the ordinary
 corporate                      tax rate of 27% in 2008  ("regular  Company  Tax").  The
 regular  Company  Tax rate is to be  gradually                      reduced to 25% by
2010 (27% in 2008, 26% in 2009 and 25% in 2010).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of a distribution  of cash dividends to  shareholders  of earnings  subject to
the approved                      enterprise  exemption,  the  Company  will be  liable
 for tax at a rate  of 25% on such  earnings.  The                      Company has not
provided deferred taxes on future  distributions of tax-exempt  earnings,  as management
                     and the  Board of  Directors  have  determined  not to make any
 distribution  that may  result in a tax                      liability  for  the
 Company.  Accordingly,  such  earnings  have  been  considered  to  be  permanently
                     reinvested.  The tax-exempt  earnings may be distributed to
shareholders  without subjecting the Company                      to taxes only upon a
complete liquidation of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

# CIMATRON LIMITED

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

|NOTE 13 |  | INCOME TAXES (cont.)
|------- | - | --------------------

| | A. | The
Law for Encouragement of Capital Investments, 1959 (cont.)
| | -- | --------------------------------------------------------------

| | The
tax benefits and grants  described above are subject to fulfillment of the conditions
 stipulated in                      the Investment Law, the regulations  promulgated
 thereunder and the criteria set forth in the Company's                      certificate
 of approval  (for its  approved  enterprise  status).  The  entitlement  to the benefits
is                      subject to  completion  and final  approval by the Israel
 Investment  Center (a  division of  ,Israel's                      Ministry of
 Industry,  Trade and Labor) (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  have
received  final                      approval from the Investment Center.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April  1,  2005,  a  significant  amendment  to the  Investment  Law  became  effective.
 Despite  the                     amendment,  any terms and benefits  included in any
 certificate  of approval that was granted before the                     amendment came
into effect will remain  subject to the provisions of the Investment  Law, as in effect
on                     the date of such  approval.  Pursuant to the  amendment,  the
 Investment  Center will  continue to grant                     approved  enterprise
 status to  qualifying  investments.  The  amendment,  however,  limits the scope of
                    enterprises  that may be approved by the  Investment  Center by
setting  criteria  for the  approval of a                     facility  as an approved
 enterprise,  such as  provisions  generally  requiring  that at least 25% of an
                    approved enterprise's income will be derived from export.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February  2007 the Company  received a letter from the  Investment  Center  stating  that
its approved                     enterprise  status that had been granted in April 2001
was going to be terminated  shortly if the Company                     did not submit a
final performance report with respect to the relevant approved  enterprise.  The Company
                    has decided not to pursue the completion of its investment plan
related to such approved  enterprise,  as                     it had not had any tax
 benefits  from it,  and it  intends  to apply for tax  benefits  pursuant  to the
                    amended Investment Law as described above, if and when relevant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Current
income taxes.
| | -- | ---------------------

| | The
Company's  current income tax liability in 2008, 2007 and 2006,  based on its income in
such years, is                     presented in the following table:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       | Year
ended December 31,
| | ------------------------------------- | -----------------------
|
|
|
|
| | Income (loss) before taxes on income: |                        
| | Domestic (Israel)                     |                        
| | Foreign                               |                        
| |                                       |                        
| |                                       |                        
| |                                       |                        
| |                                       |                        
| | Deferred taxes                        |                        
| | Current taxes                         |                        
| |                                       |                        
| |                                       |                        
| |                                       |                        

F - 28

---

---

# CIMATRON LIMITED

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

|NOTE 13 |  | INCOME TAXES (cont.)
|------- | - | --------------------

| | C. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
components of the deferred tax assets and liabilities of the Company and its subsidiaries
are as follows.
| | ---------------------------------------------------------------------------------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Deferred tax assets:           |             
| | Loss carryforwards             |             
| | Deferred revenues              |             
| | Other reserve and allowances   |             
| |                                |             
| | Total deferred tax assets      |             
| | Valuation allowance            |             
| |                                |             
| |                                |             
| |                                |             
| | Deferred tax liabilities:      |             
| | Intangible assets              |             
| | Software development costs     |             
| |                                |             
| | Total deferred tax liabilities |             
| |                                |             
| |                                |             
| |                                |             

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

F - 29

---

---

# 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 Israeli Consumer Price Index (the CPI). The following
table                presents a reconciliation of the Companys income taxes
calculated at the                statutory tax rate in Israel to the actual income tax
reported in the                Companys financial statements:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                               | Year ended December 31,
| | --------------------------------------------- | -----------------------
|
|
|
|
| | Income before income taxes as reported        |                        
| | in the consolidated statements of operations  |                        
| |                                               |                        
| | Income taxes under statutory tax rate         |                        
| |                                               |                        
| | Increase (decrease) in taxes:                 |                        
| |                                               |                        
| | Increase (decrease) in valuation allowance    |                        
| | Increase in taxes resulting from permanent    |                        
| | differences and non deductible expenses       |                        
| | Differences in taxes arising from differences |                        
| | between Israeli currency income and dollar    |                        
| | income, net *                                 |                        
| | Other                                         |                        
| |                                               |                        
| | Income taxes in the statements                |                        
| | of operations                                 |                        
| |                                               |                        

| | * | Differences
between Israeli currency income and dollar income are based on changes in the Israeli CPI
(the basis for computation of taxable income in Israel) and the exchange rate of Israeli
currency relative to the dollar.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of its
implementation, the Company recognized a $367 increase to reserves for uncertain tax
positions. This increase was accounted for as an adjustment to the beginning balance of
the accumulated deficit on the accompanying consolidated balance sheet as of December 31,
2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following reconciliation summarizes the Companys total gross unrecognized tax
benefits:
| | --------------------------------------------------------------------------------------------

| |                                              | Year ended
December 31, 2008
| | -------------------------------------------- | ----------------------------
|
|
|
|
| | Balance at January 1, 2008                   |                             
| | Gross change tax positions of current period |                             
| | Gross change for tax positions of prior year |                             
| |                                              |                             
| | Balance at December 31, 2008                 |                             
| |                                              |                             

F - 30

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---

# CIMATRON LIMITED

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

|NOTE 13 |  | INCOME TAXES (cont.)
|------- | - | --------------------

| | E. | Tax
assessments
| | -- | ---------------

| | The
Company has been issued final tax assessments by the Israeli income tax authorities
through the tax year ended December 31, 2006. Certain subsidiaries of the Company in
Europe received tax assessments through the tax year ended December 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 the Ordinary Shares of
the                Company previously held by ZCT. Following the consummation of the sale
of                1,700,000 Ordinary Shares from Koonras to DBSI on June 24, 2008, and
the related                approval by Cimatrons shareholders at such time, DBSI
alone will continue                to provide to the Company all of the management
services that were previously                provided to the Company by Koonras and DBSI,
and will receive the entire annual                management fee.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
following transactions between the Company, on the one hand, and Koonras
               and/or DBSI (significant shareholders of the Company), on the other hand,
are                reflected in the Companys financial statements:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                 | Year ended December 31,
| | --------------- | -----------------------
|
|
|
|
| | Management fees |                        

F - 31

---

---

# 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
| | -- | --------

| | A
breakdown of the Companys revenues by geographical region and based upon
distribution of the Companys products by major distributors is provided below for
the years 2008, 2007 and 2006:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                        | Year ended December 31,
| | ------------------------------------------------------ | -----------------------
|
|
|
|
| | Revenue by geographical region:                        |                        
| | Israel                                                 |                        
| | Germany                                                |                        
| | Italy                                                  |                        
| | Rest of Europe                                         |                        
| | Far East                                               |                        
| | USA                                                    |                        
| | Rest of North America                                  |                        
| | Others                                                 |                        
| |                                                        |                        
| |                                                        |                        
| |                                                        |                        
| |                                                        |                        
| | Revenue through major distributors, as a percentage of |                        
| | total revenues:                                        |                        
| | Distributor (A)                                        |                        
| | Distributor (B)                                        |                        

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

| |                                         | Year ended December 31,
| | --------------------------------------- | -----------------------
|
|
|
|
| | Hardware and software                   |                        
| | Salaries and employee benefits          |                        
| | Amortization of capitalized software    |                        
| | development cost                        |                        
| | Royalties to the Chief Scientist        |                        
| | Amortization of other intangible assets |                        
| | Depreciation                            |                        
| | Other                                   |                        
| |                                         |                        
| |                                         |                        
| | Decrease (increase) in inventory        |                        
| |                                         |                        
| |                                         |                        
| |                                         |                        

F - 32

---

---

# CIMATRON LIMITED

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

|NOTE 15 |  | SELECTED STATEMENTS OF OPERATIONS DATA (cont.)
|------- | - | ----------------------------------------------

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

| |                                         | Year ended December 31,
| | --------------------------------------- | -----------------------
|
|
|
|
| | Marketing costs                         |                        
| | Selling expenses                        |                        
| | General and administrative expenses     |                        
| | Amortization of other intangible assets |                        
| | Depreciation                            |                        
| |                                         |                        
| |                                         |                        
| |                                         |                        

# SCHEDULE

# CIMATRON LIMITED
VALUATION AND
QUALIFYING ACCOUNTS

|                                                     | Year ended December 31,
|---------------------------------------------------- | -----------------------
|
|
|
|
|Allowance for doubtful accounts at beginning of year |                        
|Provision                                            |                        
|Translation adjustments                              |                        
|Newly consolidated subsidiary                        |                        
|Accounts receivable written off                      |                        
|                                                     |                        
|Allowance for doubtful accounts at end of year       |                        
|                                                     |                        

F - 33

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