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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,
2002          Commission File
No. 1-8201

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

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Israel(Jurisdiction
of incorporation or organization)

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

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Securities registered
or to be registered pursuant to Section 12(b) of the Act:NoneSecurities registered or to be registered
pursuant to Section 12(g) of the Act:Ordinary Shares, nominal value 0.10 New Israeli Shekel per share(Title of Class)Securities for which there is a
reporting obligation pursuant to Section 15(d) offothe Act:

None(Title of
Class)

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Indicate the number of outstanding shares of
each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report: 8,001,270

Ordinary Shares

Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:       Yes
x
No
o

Indicate
by check mark which financial statements the registrant has elected to follow:                                                                                                                                     Item
17o         Item 18x

1

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This
annual report on Form 20-F includes certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934.  The use of the words project, expect,
may, plan or intend, or words of similar import, identifies a
statement as forward-looking.  There
can be no assurance, however, that actual results will not differ materially
from our expectations or projections. 
Factors that could cause actual results to differ from our expectations
or projections include the risks and uncertainties relating to our business
described in this annual report in Item 3 Risk Factors.

*********

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

*********

2

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|PART I   |                                                              |                                                                                          
|-------- | ------------------------------------------------------------ | -----------------------------------------------------------------------------------------
|         |                                                              |                                                                                          
|ITEM 1.  | IDENTITY OF
  DIRECTORS, SENIOR MANAGEMENT AND ADVISORS      | 5                                                                                        
|         |                                                              |                                                                                          
|ITEM 2.  | OFFER
  STATISTICS AND EXPECTED TIMETABLE                    | 5                                                                                        
|         |                                                              |                                                                                          
|ITEM 3.  | KEY
  INFORMATION                                            | 5                                                                                        
|         |                                                              | SELECTED
  FINANCIAL DATA                                                                
|         |                                                              | RISK FACTORS                                                                             
|         |                                                              | SPECIFIC
  RISKS RELATED TO THE FAB 2 PROJECT                                            
|         |                                                              | GENERAL
  RISKS AFFECTING OUR BUSINESS                                                   
|         |                                                              | RISKS
  RELATED TO OUR ORDINARY SHARES                                                   
|         |                                                              | RISKS
  RELATED TO OUR OPERATIONS IN ISRAEL                                              
|         |                                                              |                                                                                          
|ITEM 4.  | INFORMATION
  ON THE COMPANY                                 | 12                                                                                       
|         |                                                              | HISTORY AND
  DEVELOPMENT OF THE COMPANY                                                 
|         |                                                              | BUSINESS
  OVERVIEW                                                                      
|         |                                                              | PROPRIETARY
  RIGHTS                                                                     
|         |                                                              | PROPERTY,
  PLANTS AND EQUIPMENT                                                         
|         |                                                              |                                                                                          
|ITEM 5.  | OPERATING
  AND FINANCIAL REVIEW AND PROSPECTS               | 25                                                                                       
|         |                                                              | CRITICAL ACCOUNTING POLICY                                                               
|         |                                                              | SELECTED
  FINANCIAL DATA                                                                
|         |                                                              | OVERVIEW AND
  TREND INFORMATION                                                         
|         |                                                              | MANAGEMENTS
  DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS
|         |                                                              | LIQUIDITY
  AND CAPITAL RESOURCES                                                        
|         |                                                              | IMPACT OF
  INFLATION AND CURRENCY FLUCTUATIONS                                          
|         |                                                              |                                                                                          
|ITEM 6.  | DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES                 | 31                                                                                       
|         |                                                              | DIRECTORS
  AND SENIOR MANAGEMENT                                                        
|         |                                                              | COMPENSATION                                                                             
|         |                                                              | BOARD
  PRACTICES                                                                        
|         |                                                              | EMPLOYEES                                                                                
|         |                                                              | SHARE
  OWNERSHIP                                                                        
|         |                                                              |                                                                                          
|ITEM 7.  | MAJOR
  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS          | 39                                                                                       
|         |                                                              | MAJOR
  SHAREHOLDERS                                                                     
|         |                                                              | RELATED
  PARTY TRANSACTIONS                                                             
|         |                                                              |                                                                                          
|ITEM 8.  | FINANCIAL
  INFORMATION                                      | 41                                                                                       
|         |                                                              |                                                                                          
|ITEM 9.  | THE OFFER
  AND LISTING                                      | 41                                                                                       
|         |                                                              | MARKETS AND
  SHARE PRICE HISTORY                                                        
|         |                                                              |                                                                                          
|ITEM 10. | ADDITIONAL INFORMATION                                       | 42                                                                                       
|         |                                                              | ARTICLES OF
  ASSOCIATION; ISRAEL COMPANIES LAW                                          
|         |                                                              | MATERIAL
  CONTRACTS                                                                     
|         |                                                              | EXCHANGE
  CONTROLS                                                                      
|         |                                                              | TAXATION                                                                                 
|         |                                                              | DOCUMENTS ON
  DISPLAY                                                                   
|         |                                                              |                                                                                          
|ITEM 11. | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 53                                                                                       
|         |                                                              | INTEREST
  RATES                                                                         
|         |                                                              | FOREIGN
  EXCHANGE RISK                                                                  
|         |                                                              |                                                                                          
|ITEM 12. | DESCRIPTION
  OF SECURITIES OTHER THAN EQUITY SECURITIES     | 54                                                                                       

3

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|PART II  |                                                                                 
|-------- | --------------------------------------------------------------------------------
|         |                                                                                 
|ITEM 13. | DEFAULTS,
  DIVIDEND AVERAGES AND DELINQUENCIES                                 
|ITEM 14. | MATERIAL
  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
  AND USE OF PROCEEDS
|ITEM 15. | CONTROLS AND
  PROCEDURES                                                       
|ITEM 16. | [RESERVED]                                                                      
|         |                                                                                 
|PART III |                                                                                 
|         |                                                                                 
|ITEM 17. | FINANCIAL
  STATEMENTS                                                          
|ITEM 18. | FINANCIAL
  STATEMENTS                                                          
|ITEM 19. | EXHIBITS                                                                        

4

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PART I

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

Selected
Financial Data

The
following selected financial statement of income data for the years ended
December 31, 2000, 2001 and 2002, and the balance sheet data as of
December 31, 2001 and 2002 are derived from the financial statements set forth
elsewhere in this Report.  The selected
financial statements of income data for the years ended December 31, 1998 and
1999 and the selected balance sheet data as of December 31, 1998, 1999 and
2000, are derived from other audited financial statements not included in this
report.  The audited financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP).    The financial statements for the years
ended December 31, 1998, 1999, 2000 and 2001 were audited by BDO, Ziv &
Haft, independent auditors, and the annual financial statements for 2002 were
audited by Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu,
independent auditors.  All of the
financial data set forth below should be read in conjunction with Item 5.
Operating and Financial Review and Prospects and the audited financial
statements and notes thereto (together, the Financial Statements) and other
financial information included elsewhere in this annual report.

|                                                          |                       | December 31,                                   |        
|--------------------------------------------------------- | --------------------- | ---------------------------------------------- | -------
|                                                          |                       | 1998                                           |        
|                                                          |                       | (In thousands of US$, except per share
  data) |        
|Statement of Income Data:                                 |                       |                                                |        
|Revenue:                                                  |                       |                                                |        
|                                                          | Products              |                                                |        
|                                                          | Services              |                                                |        
|                                                          |                       |                                                |        
|                                                          | Total                 |                                                |        
|                                                         
|Cost of
  revenue:                                        |                       |                                                |        
|                                                          | Products              |                                                |        
|                                                          | Services              |                                                |        
|                                                          |                       |                                                |        
|                                                          | Total                 |                                                |        
|                                                          |                       |                                                |        
|Gross profit                                              |                       |                                                | 19,329 
|Research
  and development costs, net                     |                       |                                                | 4.203* 
|                                                          | Restructuring
  Costs |                                                |        
|Selling,
  general and   administrative expenses          |                       |                                                | 14,444*
|                                                          |                       |                                                |        
|Operating
  income (loss)                                 |                       |                                                | 682    
|Financial
  Income (expenses),  net                       |                       |                                                | 819    
|Other income
  (Expenses)                                 |                       |                                                | 8      
|                                                          |                       |                                                |        
|Income
  (loss) before taxes                              |                       |                                                | 1,509  
|Taxes on
  income                                         |                       |                                                | (490   
|                                                          |                       |                                                |        
|Net income
  (loss)                                       |                       |                                                | 1,019  
|                                                          |                       |                                                |        
|Net income
  (loss) per share                             |                       |                                                | 0.13   
|Weighted
  average number of shares outstanding           |                       |                                                | 7,950  
|                                                         
|*
  Re-classified                                         |                       |                                                |        
|* * Less
  than $0.01                                     |                       |                                                |        
|                                                          |                       | 1998                                           |        
|                                                          |                       | (In thousands of US$)                          |        
|                                                          | Balance Sheet Data    |                                                |        
|Cash and
  cash equivalents                               |                       |                                                | 3,855  
|Short-term
  Investments                                  |                       |                                                | 10,115 
|                                                          |                       |                                                |        
|Total cash,
  cash equivalents and short-term investments |                       |                                                | 13,970 
|Working
  capital                                         |                       |                                                | 15,662 
|Total assets                                              |                       |                                                | 33,284 
|Total
  liabilities                                       |                       |                                                | 9,370  
|Shareholders
  equity                                    |                       |                                                | 23,914 
|                                                          |                       |                                                |        

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

Risks Related to our Business

We face intensive
competition in our industry.

The CAD/CAM
software industry, characterized by rapid advances in technology and changing
customer requirements, is highly competitive. We design, develop,
manufacture, market and support a family of modular, high performance fully
integrated computer-aided design/computer aided manufacturing (CAD/CAM)
software products. 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 programming systems offering, unlike the Cimatron E and IT
systems, only limited or no modeling capability,while the high end of the market consists of integrated
CAD/CAM systems roughly similar to the Cimatron E and IT products.

We face
competition from numerous companies in all of our products, and 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 one major single competitor or group of competitors. The principal
factors permitting our products to compete successfully against our
competitors products are:

6

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| | the
  compatibility of our products with other software applications and existing
  and emerging industry standards;      
|- | --------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                           
| | our ongoing
  product and feature development;                                                                            
|  |                                                                                                                           
| | the offering
  of unique innovative products to the tooling industry;                                                     
|  |                                                                                                                           
| | the level of
  our product breadth and integration;                                                                       
|  |                                                                                                                           
| | our hardware
  platform support;                                                                                          
|  |                                                                                                                           
| | the
  technical expertise and support that we provide;                                                                    
|  |                                                                                                                           
| | the
  flexibility  of our products;                                                                                       
|  |                                                                                                                           
| | the
  reputation we maintain among our Providers (as defined below); and                                                  
|  |                                                                                                                           
| | the overall
  price and total cost of ownership of our products combined with the high-end
  capabilities of our products.

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

We are heavily reliant on the sale of one
family of products.

Sales and
services related to the Cimatron E product family including its predecessor
Cimatron IT, have accounted for substantially all of our revenue.  While we have recently introduced additional
products, we anticipate that sales of our Cimatron E product line will continue
to account for a majority of our revenue. If sales of the Cimatron E family
were to decline, or fail to continue to grow, or the profit margin on such
products were to decrease significantly any time before the completion of the
transition period, our business, financial condition and results of operations
would be materially and adversely affected. 
See Item 4, Business Overview for a description of the Cimatron E family of
products.

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

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 for
approximately $9,900,000, all of our Ordinary Shares previously held by ZCT,
representing 64.3% of our share capital.1
Following this transaction each of Koonras and DBSI, beneficially owns an
aggregate of approximately 32.15% of our ordinary shares.1 Koonras and DBSI
together, are expected to continue to effectively have the ability to elect the
members of our board of directors. Koonras and DSBI have entered into an
agreement by which, among other matters, they will each appoint half of our
directors, not including our outside directors, and vote together at our
shareholders meetings.

7

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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. 
International sales are subject to a number of risks, including the
following:

| | agreements
  may be difficult to enforce through a foreign companys legal system;                                                                                                                            
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | foreign
  countries could impose additional withholding taxes or other further tax or
  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 (i.e.: the decline in the U.S. markets reduced product demand from
  2001 and through the first half of 2003);
| | the
  protection of intellectual property in foreign countries may be limited or
  more difficult to enforce; and                                                                                             
| | the outbreak
  of the "SARS" or S.A.R.S, virus that has affect sales efforts in certain markets in
  Asia.                                                                                                    

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 and future prospects.

We are affected by
volatility in the securities markets

Due to the
continuing downturn in the world economy, the securities markets have recently
experienced volatility that has particularly affected the securities of many
high-technology companies, including companies that have a significant presence
in Israel.  This volatility has often
been unrelated to the operating performance of these companies. Such companies
may experience difficulties in raising additional financing required to
effectively operate and grow their businesses.   Such failure and the
volatility of the securities markets in
general may affect our financial results.

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8

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We have been and may continue to be negatively
affected by the aftermath of September 11 events

On
September 11, 2001, the United States was subject to terrorist attacks at the
World Trade Center buildings in New York City and at the Pentagon in Washington,
D.C.  In response to these terrorist
attacks, a United States-led coalition of nations commenced a series of
retaliatory military strikes in Afghanistan upon strategic installations of the
Taliban regime.  On March 17, 2003, a
coalition of countries led by the United States and the United Kingdom,
commenced a large-scale operation in Iraq with the purpose of removing the
Iraqi regime led by Saddam Hussein. 
While this coalition has succeeded in removing the Iraqi regime,
uncertainty still remains with respect to the possible effects of the
occupation of Iraq by coalition forces on the security and stability of the
region. These events have had, and we expect will continue in the foreseeable
future to have, an adverse effect on the global economy, and could result in a
disruption of our business or that of our customers.

We are affected by
the worldwide downturn in industries based on technology.

The
volatility in the securities markets discussed above and its effect on
high-technology companies may have a ripple effect on our performance. While
these developments have not materially affected us in the past, we have been
feeling the effects of the downturn that began in 2001.We can give no assurance that our results
will not be affected if any of the companies or distributors we work with
consolidate, merge or initiate bankruptcy or liquidation proceedings.  In addition, the current state of this
market causes many of the business transactions we have entered into or propose
to enter into to move slowly, and the current uncertainty in the market
generally makes doing business at the present time more complicated.

We are reliant upon
independent distributors (Providers) to market and support our products.

We rely on
independent distributors, whom we call Providers, to market, sell, service and
support our products worldwide.  While
we have exclusive relationships with most of our Providers, there can be no
assurance that these Providers will give a high priority to the marketing and
support of our companys products.  The
results of our operations could be materially adversely affected by changes in
the financial condition of a Provider, which could occur rapidly, or to other
changes in the Providers current business or marketing strategies.  There can be no assurance that we will
retain our current Providers, nor can there be any assurance that, in the event
that we lose any of our Providers, we will be successful in recruiting other
highly professional and technically competent Providers to represent us.  Any such changes in our distribution
channels, especially those in the Far East and Europe, could materially
adversely affect our business, operating results and financial condition.  See Item 4: Business Overview.

9

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Corporate governance
scandals and new legislation could increase the cost of our operations.

As
a result of recent corporate governance scandals and the legislative and
litigation environment resulting from those scandals, the costs of being a
public company in general are expected to increase in the near future.
New legislation, such as the recently enacted Sarbanes-Oxley Act of 2002, will
have the effect of increasing the burdens and potential liabilities of being a
public reporting company. This and other proposed legislation may increase the
fees of our professional advisors and our insurance premiums.

Risks Related to Licenses and Intellectual
Property

We rely, to a
certain extent, on third parties  research and development.

Our
research and development organization is responsible for developing new
technologies, exploring new directions and applications of core technologies,
incorporating new technologies into products and expanding the ability of our
products to operate on or with various vendor platforms and operating systems.
To date, most of the software relating to the Cimatron E, Cimatron IT and the
Quick family of products has been developed internally by our employees. To
accelerate our product development and improve our time to market, we also
review opportunities to acquire or license products or technologies from third
parties.  For example, certain of the
modules that we offer along with our Cimatron E and IT are licensed from
third-party developers.  In addition, we
acquire tools and engines to expedite the development of our new generation
family of CAD/CAM products, Cimatron E and license modules that have been
incorporated in Cimatron E from third parties.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.

We may not be
successful in protecting our intellectual proprietary technology, and may be
subject to litigation to determine the scope of proprietary rights of others.

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
Taiwan and China, where the main competition we face is from pirate copies of
our products. 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.

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 to date; however, there can be no assurance that
third-party claims alleging infringement 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.

10

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Risks Related to our Operations in Israel

Conditions in Israel
may affect our operations.

We are
incorporated under the laws of, and our principal offices and facilities are
located in, the State of Israel. 
Although a substantial portion of our sales is currently made to
customers outside Israel, we are nonetheless influenced by the political and
military conditions affecting Israel.

Ever since
its establishment as a State in 1948, a state of hostility with the Arab
countries in the region has always existed in Israel.  This state of hostility has varied in degree and intensity over
time. There has been a significant increase in violence since September 2000
which has continued with varying levels of severity into 2003, and negotiations
between Israel and Palestinian representatives has ceased.  Since late September 2000, there has been a
significant increase in hostilities and unrest as between Israel, the
Palestinian Authority and certain terrorist groups operating within the
Palestinian Authority. While this development has not had a material impact on
our business,we can give no
assurance that it will not have such an effect in the future. The political and security situation
in Israel may result in certain parties with whom we have contracts claiming
that they are not obligated to perform their commitments under those agreements
pursuant to force majeure provisions. 
Any hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could adversely affect
our operations and could make it more difficult for us to raise capital in the
future. In the recent past several countries have threatened to boycott Israeli
products. While no country with which we do a material amount of business has
yet to implement such a boycott, in the event that a significant number
countries implement such a boycott this could have a material adverse effect on
our business. Furthermore, our main facilities are located in Israel, which is
currently experiencing civil unrest, terrorist activity and military action.
Since we do not have a detailed disaster recovery plan that would allow us to
quickly resume business activity, we could experience serious disruptions if
acts associated with this conflict result in any serious damage to our
facilities. Our business interruption insurance may not adequately compensate
us for losses that may occur and any losses or damages incurred by us could
have a material adverse effect on our business. We cannot give any
assurance that security and political conditions will not have such an effect
in the future. Any future armed conflicts or political instability in the
region would likely negatively affect business conditions and harm our results
of operations

Furthermore,
all non-exempt male adult permanent residents of Israel under the age of 48 are
obligated to perform military reserve duty and may be called to active duty under
emergency circumstances.  At various
times over the last three 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.

11

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

A
number of our enterprises are eligible for tax benefits under The Law of
Encouragement for Capital Investments, and one or more of our enterprises has
been approved for such benefits subject to its meeting certain standards (see
Item 10: Taxation, and Note 13a of our Financial Statements).  Failure to meet the required standards to
receive such tax benefits could have a material adverse effect on our business,
results of operations and financial condition. 
In addition, we intend to apply to have certain of our future
enterprises approved for such tax benefits, if available.   If there should be any change in the law
annulling such tax benefits in the future, it could have an adverse effect on
our business.

Israeli courts may
not enforce judgments rendered outside of Israel.

Service
of process upon directors and officers of the Company and the Israeli experts
named herein, all of whom reside outside the United States, may be difficult to
effect within the United States. 
Furthermore, since the majority of our assets are located outside the
United States, any judgment obtained against us in the United States may not be
enforceable within the United States. 
We have been informed by our legal counsel in Israel, Yigal Arnon &
Co., that there is doubt as to the enforceability of civil liabilities under
United States securities laws in original actions instituted in
Israel.  However, subject to certain
time limitations, Israeli courts may enforce United States final executory
judgments for liquidated amounts in civil matters obtained after due trial
before a court of competent jurisdiction (according to the rules of private
international law currently prevailing in Israel) which enforces similar
Israeli judgments, provided that: (i) due service of process has been effected;
(ii) such judgments or the enforcement thereof are not contrary to the law,
public policy, security or sovereignty of the State of Israel; (iii) such
judgments were not obtained by fraud and do not conflict with any other valid
judgment in the same matter between the same parties; and (iv) an action
between the same parties in the same matter is not pending in any Israeli court
at the time the lawsuit is instituted in the foreign court.  We have irrevocably appointed CT Corporation
System as our agent to receive service of process in any action against us in
any federal or state court sitting in New York County, within State of New York
arising out of the Offering made hereby or any purchase or sale of securities
in connection therewith.  Foreign
judgments enforced by Israeli courts generally will be payable in Israeli
currency.

|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, at an attractive price/performance
ratio. These attributes have made our CAD/CAM products especially popular in
the manufacturing segment of the CAD/CAM market, particularly among mold, tool,
die and fixture makers.  We have
employed a strategy of focusing our research and development efforts on
providing complete design through manufacturing solutions to the specific needs
of this market segment. We are committed to providing mold, tool, die and
fixture makers with comprehensive, cost-effective CAD/CAM solutions that
streamline manufacturing cycles, enable collaboration with outside vendors and
shorten delivery time.

12

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Our
full name is Cimatron Ltd. and we incorporated under Israeli law in
1982. Our corporate headquarters are located at 11 Gush Etzion Street, Givat
Shmuel, Israel.  Our telephone number is
972-3-531-2121 and our web site is located at www.cimatron.com.

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 (NC) codes which 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 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.

13

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

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

Business Overview

Principal Operations, Products and
Developments

Cimatron E

Cimatron E
is our new generation of CAD/CAM solutions for the tooling industry.  Since the release of Cimatron E (Version
3.0) in September 2001 the Cimatron E solution has achieved rapid market
acceptance and to date we have successfully sold copies of the product
worldwide.  We released our newest
version of the Cimatron E (Version 4.2) in February 2003.  This product provides comprehensive tools,
applications and process-automation solutions for the tooling industry.
Cimatron E is a revolutionary CAD/CAM environment designed with the tooling
industry in mind, where all stages involved in the tooling process are
supported by applications that perform at new levels of speed and flexibility.

Cimatron E
encompasses a set of easy-to-use 3D design tools with unsurpassed power. 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 smoothly integrates tools to split part geometry, find and
implement changes, create electrodes and inserts, and detail tooling
components. During manufacturing, Cimatron E easily implements 2.5 to 5 axis
toolpaths using high-speed machining knowledge of stock remaining and templates
to drastically reduce programming and machine time. The mission critical tasks
of splitting the model, applying engineering changes, and extracting electrodes
and inserts are all handled by Cimatrons Quick Tooling wizard-based
applications.

14

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Cimatron
E integrates a suite of powerful tools for a broad range of design, drafting
and modeling capabilities, including wireframe, surface and parametric
solids, as well as assembly management and NC programming. 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.

Cimatron E offers the following solutions and
modules:

BASE MODULES

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

15

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

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

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

Student PackageThis is a limited package for academic use. This
package exposes most of our capabilities, and enables execution of a full mold
design process, yet is limited to non-industrial applications.

OPTIONAL MODULES

|QuickDrill | QuickDrill
  is a 2.5-axis application for automation of the drilling process that
  identifies and sorts holes and assigns drill-cycles and cutting tools.  QuickDrill creates a table of holes and
  drill toolpaths (in case NC Solution exists).
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                                                                                                                                                                                                                                                     
|3X-MILL    | 3X-MILL is a
  basic 3-axis milling application that supports toolpath generation functions,
  including: pocket, profile, go and drill. 
  3X-MILL also supports various surface milling functions and 4-5 axis
  positioning.                     
|           |                                                                                                                                                                                                                                                     
|4X-CONT    | 4X-CONT is a
  full 4-axis milling application that includes 4-axis continuous and 5-axis
  positioning, as well as 4-axis contouring functions.  This module supports the milling of
  surfaces using either tool tip or tool side.                
|           |                                                                                                                                                                                                                                                     
|5X-CONT    | 5X-CONT is a
  full 4- and 5-axis milling application, which includes 4- and 5-axis
  continuous, as well as 4-5-axis contouring functions.  This module supports the of surfaces using
  either tool tip or tool side.                             

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|5X-
  SIMULATOR | The
  5X-SIMULATOR is an enhancement of the Cimatron 3X-Simulator an is used to
  support up to 5X milling simulation of verification.                                                                                                                                                                                                               
|--------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |                                                                                                                                                                                                                                                                                                                                                      
|IMS-Config      | IMS-Config
  enables the modification of a Post Processor to suit specific user needs.                                                                                                                                                                                                                                                               
|                |                                                                                                                                                                                                                                                                                                                                                      
|WIRE 2X         | WIRE 2X is a
  2-axis Wire-EDM application.                                                                                                                                                                                                                                                                                                          
|                |                                                                                                                                                                                                                                                                                                                                                      
|WIRE 4X         | WIRE 4X  is a 4-axis Wire-EDM application.                                                                                                                                                                                                                                                                                                           
|                |                                                                                                                                                                                                                                                                                                                                                      
|MoldDesign      | MoldDesign
  is an application based on 3D solid technologies, automating the mold base
  and component design process, and offering an innovative parametric and fully
  associate approach to the mold housing design process.  The application includes one optional catalog
  from the list of available catalogs.                               
|                |                                                                                                                                                                                                                                                                                                                                                      
|QuickCompare    | QuickCompare
  contains interactive tools that automatically compare two geometry sets to
  identify engineering changes. 
  QuickCompare marks the difference and changes, and saves the results
  in different file levels.                                                                                                                        
|                |                                                                                                                                                                                                                                                                                                                                                      
|QuickElectrode  | QuickElectrode
  is an EDM electrode design package used for automating the electrode process.
  QuickElectrode is used for burn area selection, electrode design, management,
  documentation and manufacturing.                                                                                                                                    
|                |                                                                                                                                                                                                                                                                                                                                                      
|QuickSplit      | QuickSplit
  contains interactive tools that automatically separate the original mode into
  core, cavity, insets and sliders, generates parting lines, and enables the
  export of the designed mold parts into mold assemblies.  QuickSplit also supplies tools to shorten
  parting surfaces design time, and supplies draft angle analysis tools.
|                |                                                                                                                                                                                                                                                                                                                                                      
|CATIA           | CATIA is a
  Read/Write utility used to handle CATIA version 3 and 4 file formats.  The CATIA utility is an independent
  utility that does not require a CATIA license and automatically recognizes
  the CATIA native file.  CATIA  enables the reading of 3D geometry only.                                                                       
|                |                                                                                                                                                                                                                                                                                                                                                      
|RD-CATIA        | RD-CATIA is
  a Read utility used to handle CATIA version 3 and 4 file formats.  The RD-CATIA utility is an independent
  utility that does not require a CATIA license and automatically recognizes
  the CATIA native file.  RD-CATIA
  enables the reading of 3D geometry only.                                                                   
|                |                                                                                                                                                                                                                                                                                                                                                      
|RD-UG           | Read utility
  to handle Unigraphics file format. 
  The Cimatron RD-UG utility is an independent utility that does not
  require a UG license and automatically recognizes the UG native file. RD-UG
  enables reading of 3D geometry only.                                                                                                         

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|PARASOLID        | This is our
  Read/Write utility used to handle PARASOLID file format.                                                                                                                                                  
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |                                                                                                                                                                                                                         
|RD-
  PARASOLID  | RD-PARASOLID
  is a Read utility used to handle PARASOLID file format.                                                                                                                                                  
|                 |                                                                                                                                                                                                                         
|IGES E           | IGES E is a
  Read/Write utility used to handle IGES file format.                                                                                                                                                       
|                 |                                                                                                                                                                                                                         
|DWG              | DWG is a Read/Write utility used to handle DWG file format.                                                                                                                                                             
|                 |                                                                                                                                                                                                                         
|DXF              | DXF is
  aRead/Write utility used to handle DXF file format.                                                                                                                                                            
|                 |                                                                                                                                                                                                                         
|RD-PTC           | This is our
  Read utility used to handle thePro/Engineer neutral file format. The RD-PTC
  utility is an independent utility that does not require a Pro/Engineer
  license.                                           
|                 |                                                                                                                                                                                                                         
|STEP E           | STEP E is a
  Read/Write utility used to handle STEP AP203 and AP214 formats.                                                                                                                                           
|                 |                                                                                                                                                                                                                         
|STL              | STL is
  aRead/Write utility that is used to handle STL file format.                                                                                                                                                    
|                 |                                                                                                                                                                                                                         
|Magics STL
  FIX | Magics STL
  FIX produces output of a model in STL format, based on exporting STL files
  directly from Cimatron E and invoking our Cimatron Magics STL FIX for
  enhanced interpretation and manipulation of STL files.
|                 |                                                                                                                                                                                                                         
|VDA E            | VDA E is a
  Read/Write utility used to handle VDA file format.                                                                                                                                                         
|                 |                                                                                                                                                                                                                         
|VRML             | VRML is a Write utility that exports Cimatron E geometry into VRML format.                                                                                                                                              
|                 |                                                                                                                                                                                                                         
|Standard-DI      | Standard-DI
  is a Comprehensive Data Interface Package, including DI modules: DWG, DXF,
  IGES E, RD-PTC, STL, RD-STEP E, and VDA E.                                                                                   

We
rely on third party license agreements to produce many of the modules for which
we pay third party royalties.  Most of
the license agreements are long term or for an indefinite period of time.  None of these license agreements are
material to our business, and should one of these agreements terminate we will
be able to replace it with another license agreement.

Cimatron
IT

Cimatron
IT, which preceded Cimatron E, is a family of integrated software tools for
mechanical engineering and manufacturing automation that is designed to provide
a complete solution for the unique needs of the manufacturing segment of the
CAD/CAM market, especially those of mold, tool, die and fixture makers.
Cimatron IT contains design for manufacturing and NC programming capabilities,
along with advanced conceptual design abilities. It is designed to enable users
in this market segment to substantially reduce their time to market.  Based on our data-to-steel philosophy,
Cimatron IT provides advanced data interface, design for manufacturing and NC
machining tools which enable users to translate complex part designs into
finished molds, tools, dies and fixtures in a timely manner. In the third
quarter of 2002 we introduced Cimatron IT Version 13.0.  This version included a number of new
applications to address specific needs of our target market and is designed to
simplify the tooling process, shorten production turnaround times and
ultimately reduce costs.

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

QuickNC

First released in March 2002, with its most recent version 3.1 launched
in March 2003, QuickNC is our revolutionary CAM package with cutting-edge
preview technology that saves over 75% in tool manufacturing process planning
time.  This software allows NC operators
to calculate toolpaths just once, minimizing the need for a simulator.  This results in final cutting strategy
decisions made before actual toolpath calculation, while intelligent decision-making
is based on graphical in-process feedback. 
Coupled with absolute reliability, machining efficiency and top-level
surface quality, QuickNC provides rapid toolpath calculation time, knowledge of
stock remaining, and adaptive feed control. 
The software enables live communication via the Internet, where both
parties can operate and discuss the full NC process in real-time.  QuickNC is intuitive and simple, with only a
minimum number of required parameters needed to define the NC process, and full
training can be completed in a few hours.

QuickConcept

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

Marketing and Distribution

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

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

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We
distribute our products to end-users in approximately 30countries in five continents through
certain of our subsidiaries (in the United States, the United Kingdom, Canada,
Germany, China and France), directly in Israeland through a network of 25independent Providers. During 2002 we
increased our network to include Providers in Poland and Mexico, and additional
providers in Japan and Korea. Between us, our subsidiaries and our Providers,
our family of products is currently supported at over 9,000 customer sites with
more than 17,000 seats.

Providers

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

We furnish
our Providers with technical guidance and marketing and sales resources.
Providers regularly visit our Israeli headquarters, while our employees from
various departments visit Provider sites. Our relationship with our Providers
is further enhanced by an annual International Conference that we organize,
regional workshops and cooperative exhibitions, and participation in local user
meetings. We have also established and currently run Cimatron International
Training and Support Centers in specific regions of the world in cooperation
with our Providers and local universities to train users in the use of our
products.

Providers
serve as an integral part of our marketing and service network around the
world. They give our products a local feel by (i) offering technical
support in the end-users native language; (ii) being available to attend
to customer needs during local business hours; (iii) translating our
manuals, product and marketing literature into the local language; and
(iv) 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 between our company and a Provider is for a term of two years
(subject to rolling two-year extensions) and enables the Provider to purchase
our products at a discounted price. Certain of our Providers act as our
exclusive distributor in a single country or region. Other than our Providers
in Italy and Japan, no Provider accounted for more than 5% of our total revenue
for the year ended December 31, 2002.

There
can be no assurance that all existing relationships with our Providers will be
renewed. We believe that with the exception of our Providers in Italy and
Japan, the termination of a single Provider would not seriously harm us;
however, the termination or loss of several of our Providers at approximately
the same time or the termination of our Provider in either Italy or Japan could
seriously harm us. There can be no assurance that, in the event that we lose
any of our Providers, we will be successful in recruiting replacement professional
and technically competent Providers.

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Subsidiaries

In 1996, we
adopted a strategy of increasing our direct involvement in certain key markets
in which we felt the Providers were not maximizing the business opportunities,
through the formation or acquisition of marketing and support subsidiaries. In
furtherance of this strategy, in September 1996, we acquired all of the
outstanding voting interests in Cimatron Technologies, Inc., our North American
Provider.  In addition, between August
and October 1997, we entered into a series of agreements with our German
Provider, pursuant to which our German Provider transferred all of its
Cimatron-related business, including goodwill, assets and employees (with the
exception of distribution rights), in certain regions of Southern Germany, to
our German subsidiary, Cimatron GmbH, and in December 1997, we also formed a
subsidiary in France, Cimatron Sarl. More recently, we opened a Japanese
subsidiary Cimatron Japan K.K.  that commenced operations in March 2001; a
United Kingdom subsidiary  Cimatron UK Ltd. which commenced operations in
August 2002; and a Chinese subsidiary  Cimatron (Beijing) Technology Co. Ltd 
formed in December 2002.  In December
2002 we also formed a joint venture in Korea with JY Solutec Co., Ltd. in which
we hold 30% (at the end of 2002 10%) of the shares of Korea Cimatron
Technologies Co. Ltd.

Marketing
Representatives

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

Customers

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

In
the years ended December 31, 2002, 2001 and 2000 approximately 54%, 47%
and 50%, respectively, of our revenues were from Europe; approximately 11%, 16%
and 15%, respectively, of our revenues were from Israel; approximately 23%, 21%
and 15%, respectively, of our revenues were from the Far East; approximately
12%, 15% and 19%, respectively, of our revenues were from North America; and
approximately 0%, 1% and 1%, respectively, of our revenues were from other
countries.

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Geographical
Breakdown of Our Revenue

The
following tables represent a geographical breakdown of our revenues from products
and services from the last 3 years (in thousands of U.S. Dollars):

Year
2002

|Geographical Region |  | Products |        | Services
|------------------- |  | -------- | ------ | --------
|                    |  |          |        |         
|                    |  | Amount   |        | Percent 
|                    |  |          |        |         
|Europe              |  |          | 5,933  |         
|Israel              |  |          | 734    |         
|Far East            |  |          | 3,340  |         
|North
  America     |  |          | 1,104  |         
|Other               |  |          | 39     |         
|Total               |  |          | 11,150 |         

Year
2001

|Geographical Region |  | Products |        | Services
|------------------- |  | -------- | ------ | --------
|                    |  |          |        |         
|                    |  | Amount   |        | Percent 
|                    |  |          |        |         
|Europe              |  |          | 7,105  |         
|Israel              |  |          | 1,060  |         
|Far East            |  |          | 3,449  |         
|North
  America     |  |          | 1,600  |         
|Other               |  |          | 166    |         
|Total               |  |          | 13,380 |         

Year
2000

|Geographical Region |  | Products |        | Services
|------------------- |  | -------- | ------ | --------
|                    |  |          |        |         
|                    |  | Amount   |        | Percent 
|                    |  |          |        |         
|Europe              |  |          | 8,167  |         
|Israel              |  |          | 1,459  |         
|Far East            |  |          | 2,508  |         
|North
  America     |  |          | 3,016  |         
|Other               |  |          | 150    |         
|Total               |  |          | 15,300 |         

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Other
than our Provider agreements and certain maintenance contracts with
customers in Israel, we currently have no long-term contracts with any customer
and sales are generally made pursuant to purchase orders received from
distributors. As described and explained in Item 3, due to the magnitude of our
international sales, we are subject to the normal risks of conducting business
internationally.

Potential
Fluctuations in Operating Results; Seasonality

Annual
and quarterly fluctuations in the results of our operations may be caused by
the timing and composition of orders from our customers and distribution
channels.  Our revenue during a
particular year has tended to be concentrated more heavily during the last
quarter of the year, making annual results more difficult to predict until the
end of such year.  Our future results
also may be affected by a number of factors, including our ability to continue
to develop, introduce and deliver new and enhanced products on a timely basis,
to offer new products at competitive prices and to anticipate customer
demands.  Our results may also be
affected by currency exchange rate fluctuations and economic conditions in the
geographical areas in which we operate. 
In addition, we experience from time to time significant fluctuations in
quarterly operating results due to a variety of factors, including delays in
introduction, market acceptance of new products or product enhancements.  Products are generally shipped as orders are
received and, consequently, quarterly sales and operating results depend
primarily on the volume and timing of orders received during the quarter, which
are difficult to forecast.  There can be
no assurance that sales or profitability in any particular quarter will not be
lower than those of the preceding quarters, including comparable quarters.  Our expense levels are based in part on our
expectations for future revenue.  If
revenue levels are below expectations, operating results are likely to be
adversely affected. There is a direct relationship between falls in sales and a
decrease in our net income.  All of the
foregoing may result in unanticipated quarterly earnings shortfalls or
losses.  Due to all the foregoing, we
believe that period-to-period comparisons of our results of operations in any
given year are not necessarily meaningful and should not be relied upon as
indications of future performance.

23

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Organizational Structure

In
February, 2002 Koonras, together with DBSI, completed the transaction with our
former principle shareholder ZCT, for the purchase of all of our Ordinary
Shares owned by ZCT for an aggregate sum of US $9.9 million, representing
approximately 64.3% of our outstanding share capital. Following the
completion of the transaction, each of Koonras and DBSI hold 2,573,820 shares,
compromising approximately 32.15% of our outstanding share capital, and
representing in the aggregate, 64.3% of the outstanding share capital of the
Company.1 Koonras and DSBI have entered
into an agreement, by which a number of their shares equal to, or greater than,
25.05% of our issued and outstanding share capital1 cannot be sold by either
party without first offering such holding to the other party. Additionally,
under such agreement, in the event that the selling partys offer is refused,
the other party shall then have the right to participate, pro-rata, with the
selling party in the sale of his shares to a third party. Additionally, Koonras
and DSBI have agreed that they will each appoint half of our directors, not
including our outside directors, and that they will vote together at our
shareholders meetings.

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 new lease agreement which
we entered into in February 2003. We occupy an aggregate of approximately 2,006
square meters at this facility. In 2002 the aggregate annual lease payments for
the office premises, under our previous lease with ZCT was approximately
$376,000.

The
following table represents a breakdown of our approximate aggregate annual
lease payments for office premises worldwide for the year 2002 (in thousands of
U.S. Dollars)

|ENTITY                        |  |  | LOCATIONS                                        |  | APPROXIMATE

  ANNUAL EXPENSE
|----------------------------- |  |  | ------------------------------------------------ |  | -----------------------------
|                              |  |  |                                                  |  | (in thousands of US$)        
|                              |  |  |                                                  |  |                              
|Headquarters
  in Israel      |  |  | Givat Shmuel
  (Israel)                          |  |                              
|                             
|North
  American
  subsidiary |  |  | Michigan
  & Illinois (USA*)                     |  |                              
|                             
|German
  subsidiary           |  |  | Ettlingen,
  Munich, Hamm &
  Chemnitz (Germany) |  |                              
|                             
|French
  subsidiary           |  |  | Oyonnax
  (France)                               |  |                              
|                             
|UK
  subsidiary               |  |  | Manchester
  (UK)                                |  |                              
|                             
|Japanese
  subsidiary         |  |  | Tokyo
  (Japan)                                  |  |                              
|                             
|Chinese
  subsidiary          |  |  | Beijing
  (China) Wuki (China)                   |  |                              
|                              |  |  |                                                  |  |                              
|                              |  |  | Total                                            |  |                              

---

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

**We commenced
operations from these offices in 2003.

24

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Item 5.     Operating and Financial Review and
Prospects

The
following selected consolidated financial statement of income data for the year
ending on December 31, 2002 and the balance sheet date as of December 31, 2002
are derived from the financial statements set forth elsewhere in this annual
report that have been audited by Brightman Almagor & Co. a member of
Deloitte Touche Tohmatsu, independent auditors. The following selected
consolidated financial statement of income data for the years ended December
31, 2001 and 2000, and the balance sheet data as of December 31, 2001 are
derived from the financial statements set forth elsewhere in this annual report
that have been audited by BDO, Ziv & Haft, independent auditors.  The selected balance sheet data as of
December 31, 2000 is derived from other financial statements, which are not
included in this annual report, that have been audited by BDO, Ziv & Haft,
independent auditors. These financial statements have been prepared in accordance
with US GAAP.  The selected consolidated
financial statements set forth below should be read in conjunction with and are
qualified by our consolidated financial statements, the notes thereto and the
financial information included elsewhere in this annual report.

Critical Accounting Policies

Our
financial statements are prepared in accordance with generally accepted
accounting principles (GAAP) in United States.

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.

Revenue
Recognition

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

25

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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.

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.

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

Operating Results

|                                                      |          | December31,                                    
|----------------------------------------------------- | -------- | -----------------------------------------------
|                                                      |          |                                                
|                                                      |          | 2000                                           
|                                                      |          |                                                
|                                                      |          | In thousands of US$
  (except per share amount)
|Statement of Income Data:                             |          |                                                
|Revenue:                                              |          |                                                
|                                                      | Products |                                                
|                                                      | Services |                                                
|                                                      |          |                                                
|                                                      | Total    |                                                
|Cost of
  revenue:                                    |          |                                                
|                                                      | Products |                                                
|                                                      | Services |                                                
|                                                      |          |                                                
|                                                      | Total    |                                                
|                                                      |          |                                                
|Gross profit                                          |          |                                                
|Research and
  development costs, net                 |          |                                                
|Restructuring
  Costs                                 |          |                                                
|Selling,
  general and administrative
  expenses      |          |                                                
|                                                      |          |                                                
|Operating
  loss                                      |          |                                                
|Financial
  income (Expenses), net                    |          |                                                
|Other income
  (expenses)                             |          |                                                
|                                                      |          |                                                
|Loss before
  taxes                                   |          |                                                
|Taxes on
  income                                     |          |                                                
|                                                      |          |                                                
|Net loss                                              |          |                                                
|                                                      |          |                                                
|Net loss per
  share                                  |          |                                                
|Weighted
  average number of shares
      outstanding |          |                                                
|                                                      |          |                                                

*
Re-Classified             *
* Less than $0.01

26

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|                                                              |  | 2000                |        | 2001 |  | 2002
|------------------------------------------------------------- |  | ------------------- | ------ | ---- |  | ----
|                                                              |  |                     |        |      |  |     
|                                                              |  | In thousands of US$
|Balance Sheet Data                                            |  |                     |        |      |  |     
|Cash and
  cash equivalents                                   |  |                     | 3,218  |      |  |     
|Short-term
  Investments                                      |  |                     | 6,500  |      |  |     
|                                                              |  |                     |        |      |  |     
|Total cash,
  cash equivalents and short-    term investments |  |                     | 9,718  |      |  |     
|Working
  capital                                             |  |                     | 13,167 |      |  |     
|Total assets                                                  |  |                     | 27,770 |      |  |     
|Total
  liabilities                                           |  |                     | 7,880  |      |  |     
|Shareholders
  equity                                        |  |                     | 19,890 |      |  |     

Revenue

Revenue
includes revenue from: (i) sales of software licenses; (ii) sales of hardware;
(iii) software and hardware maintenance fees; (iv) service bureau activities
(in Israel); and (v) other services related to the software.  Our total revenue decreased to
approximately  $21.6 million in 2002
from approximately $23.0 million in 2001, a decrease of approximately 6%.  This decrease follows a previous decrease in
total revenue from $25.1 million in 2000, a decrease of approximately 8% in
comparison with 2001. The decrease in revenue in 2002 is primarily due to the
recession in Israel. The decrease in revenue in 2001 was primarily due to (a)
the general state of recession in the world markets, and (b) the effects of the
aftermath of the events of September 11, 2001, and (c) the process of replacing
Cimatron IT with Cimatron E as our flagship product.

For
a geographical breakdown of our revenue, please refer to Item 4 Customers 
Geographical Breakdown of our Revenue, which is incorporated herein by
reference.

Cost
of Revenue

Cost
of revenue consists of four major components: (i) the cost of our
Israel-based operations; (ii) hardware costs in Israel, Germany and
France; (iii) international software cost of revenue (including packaging,
freight and manual preparations); (iv) royalties payable to third parties
(as more fully set forth below) (v) royalties payable to the Office of the
Chief Scientist (OCS); and (vi) amortization of capitalized software
development costs. Cost of revenue was $5 million in 2002, $7.3 million in 2001
and  $7.1 million in 2000, a decrease of
31% and an increase of 2% respectively. 
The decrease in the cost of revenue for the year 2002 was primarily due
to (a) a decrease in salary and employee benefits, and (b) a one-time write off
in 2001 of $886,000 against modules for Cimatron E that were determined by us
to be non-saleable (See Note 7 of the Financial Statements). The increase in
the cost of revenue for the year 2001 was primarily due to a one-time write off
in 2001 (which mentioned above and which was offset by (a) a decrease in
service bureau activities, and (b) a widening of our profit margin effected by
improving profit efficiency. Gross profit as a percentage of total revenue, was
76.8 %, 68% and 71.5% in 2002, 2001, and 2000 respectively.

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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 $5.6 million in 2002, $7.6 million in 2001,
and $8.3 million in 2000.  The decrease
in 2002 and 2001 was due to a continued reduction in salaries and personnel.

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 (the Marketing Fund), including all
such expenses for our subsidiaries. We did not receive any grants from the
Marketing Fund in the years 2000, 2001, or 2002 and do not expect to receive
any such grants in the future. General and administrative expenses consist of:
(i) compensation costs for administration, finance and general management
personnel; (ii) office maintenance and administrative costs; (iii) rent;
(iv) fees paid for management services to ZCT in January and February 2002
and to DBSI and Koonras from March 2002 onwards; and (v) reserves for doubtful
debts.

In
2002, selling, general and administrative expenses decreased to $11.7 million,
a decrease of 8% from 2001.  This
decrease was primarily due to a reduction in salaries and employee benefits.
Such expenses decreased to $12.7 million in 2001 from $13.6 million in 2000, a
decrease of 6.5%. This decrease was primarily due to a reduction in our
marketing costs and a decrease in our personnel.

Financial Income (Expenses)

Financial
income (Expenses) consists primarily of interest earned on our cash reserves,
gains (losses) from sale of bonds and funds, as well as interest on tax rebates
and currency translation adjustments between the U.S. dollar exchange rate
imposed on our assets and liabilities. 
Financial income was $428,000 in 2002, and expenses were $467,000 in
2001, and an income of $219,000 in 2000. The increase in the year 2002 was
primarily due to (a) the gain from the sale of funds, a part of which was
recorded in our financial statements for the previous year under other
comprehensive income; and (b) the revaluation of the EURO in relation to the
U.S. dollar.  The decrease in the year
2001 was primarily due to (i) an unrealized gain on available for sale
securities which were recorded under other comprehensive income in the
Financials (see Note 5c of the Financials), and (ii) realized losses from the
sale of securities.

Liquidity
and Capital Resources

During
2002 we generated $4 million from proceeds from the sale of bonds and funds and
$0.09 million from the sale of property and equipment.  We invested $3.5 million in bonds, $0.35
million in the purchase of property and equipment, $.04 million in our Korean
joint venture, $0.13 million in treasury stock and we used  $0.6 million in operating activities.  These transactions caused our aggregate
amount of cash and cash equivalents to be $4.1 million in the year 2002 as
opposed to $4.53 million in the year 2001, and our short-term investments to be
$4 million in 2002 as opposed to $4.44 million in 2001.

28

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We
believe that our accumulated cash, in addition to cash generated from
operations and available funds, will be sufficient to meet our cash
requirements for working capital and capital expenditures for at least the next
12 months. Thereafter, if cash generated from operations is insufficient to satisfy
our liquidity requirements, we may sell additional equity or debt securities or
obtain credit facilities.

Impact
of Tax Assessments

On
December 31, 2002 the Israeli tax authorities issued us tax assessments for the
years 1998 to 2000.  These tax assessments claim that we are required to
pay taxes in the amount of approximately $465,000 and that our carry forward
tax losses should be reduced by approximately $206,000. We believe that the
claims made by the tax authorities are without merit.  We filed an appeal
in respect of these assessments within the period prescribed under Israeli law.
We believe that ultimately, we will not suffer a material tax liability for the
years in question. We have recorded a provision in an amount of $37,000 in the
financial statements for this matter.

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

For
many years prior to 1986, the Israeli economy was characterized by high rates
of inflation and devaluation of the Israeli currency against the U.S. dollar
and other currencies.  However, since
the institution by the Israeli government of an economic recovery program in
1985, inflation, while continuing, has been significantly reduced and until
recently the rate of devaluation has substantially diminished.  Since the majority of our revenues are
denominated and paid in U.S. dollars, we believe that inflation and
fluctuations in the U.S. dollar exchange rate have no material effect on our
revenue. Inflation and U.S. dollar exchange rate fluctuations, however, have
some effect on our expenses and, as a result, on our net income/loss.  The cost of our Israel operations, as
expressed in U.S. dollars, is influenced by the extent to which any increase in
the rate of inflation in Israel is not offset (or is offset on a lagging basis)
by a devaluation of the NIS in relation to the U.S. dollar.

The exchange rate between NIS and
the U.S. dollar has fluctuated during the past six months from a low of NIS
4.373 to the dollar to a high of NIS 
4.924 to the dollar.  The high
and low exchange rates between the NIS and U.S. dollar during the six most
recent months, as published by the Bank of Israel, were as follows:

|MONTH           | LOW 1 U.S. dollar = | HIGH 1 U.S. dollar =
|--------------- | ------------------- | --------------------
|December
  2002 | 4.632               | 4.791               
|January 2003    | 4.769               | 4.898               
|February
  2003 | 4.810               | 4.924               
|March 2003      | 4.687               | 4.858               
|April 2003      | 4.521               | 4.671               
|May 2003        | 4.373               | 4.577               

29

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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,
  1998 - December 31, 1998 | 3.810 NIS/$1 
|January 1,
  1999 - December 31, 1999 | 4.154 NIS/$1 
|January 1,
  2000 - December 31, 2000 | 4.067 NIS/$1 
|January 1,
  2001 - December 31, 2001 | 4.219 NIS/$1 
|January 1,
  2002 - December 31, 2002 | 4.738 NIS/$1 

In  1998, the rate of devaluation of the NIS
against the U. S. Dollar  exceeded the
rate of inflation, a reversal from prior years. This was not the case in 1999,
when the rate of inflation was approximately 1.3% and the rate of devaluation
was -0.3%.  In 2000, the rate of
inflation was approximately 0% and the devaluation rate was -2.7%. During 2001,
the NIS was devalued against the dollar by 9.3%.  As a result of the differential between the rate of inflation and
the rate of devaluation of the NIS, we experienced increases and decreases in
the costs of our Israel operations, as expressed in U.S. dollars, in 2001, but
they did not materially affect our results of operations in such periods. In
2002 the rate of inflation was 6.5% and the rate of devaluation of the NIS
against the dollar was 7.27%.

We
are engaged in hedging and other transactions intended to manage part of the
risks relating to foreign currency exchange rate or interest rate
fluctuations.  We may continue to
undertake such transactions in the future, if management determines that it is
necessary to offset such risks.

Trend
Information

We
place a heavy emphasis on international sales of our product.  As a result, we are susceptible to losses
due to the current worldwide slowdown in technology-based companies and to
economical slowdowns in various parts of the world.  The slowdown in the US economy since 2001 and the continued
recession in the Japanese markets, particularly in the automotive industry,
have adversely affected our sales revenues. 
In addition, an increase in the competitiveness in the market in which
we operate has caused us to continue to reduce our prices.  If we need to continually reduce our product
price due to market pressures, our sales revenue may be negatively affected.

At
the end of the third quarter of 2001, we launched our new product, Cimatron E,
which has been described above in Item 4: Principal Operations, Product and
Development.   The product is in the
process of replacing Cimatron IT and now constitutes a majority of our sales.

30

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Another
trend in our business is that we tend to complete most of our sales in
the second and ­­fourth quarters of the year thus causing reported financial
information on a quarterly basis to be non-indicative of future operating
results or the accurate financial condition of the company. (See Item 4
above).

Item 6.     Directors,
Senior Management and Employees

Directors and Senior Management

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

|Name                       |  | Age |  | Position                                                 
|-------------------------- |  | --- |  | ---------------------------------------------------------
|                           |  |     |  |                                                          
|Rimon Ben-Shaoul           |  | 58  |  | Chairman of
  the Board                                  
|Yossi Ben
  Shalom         |  | 48  |  | Director                                                 
|Barak Dotan                |  | 35  |  | Director                                                 
|Kenny Lalo                 |  | 45  |  | Director                                                 
|David Golan                |  | 62  |  | Director                                                 
|Ofra Brown                 |  | 49  |  | Outside
  Director                                       
|Ophira
  Rosolio-Aharonson |  | 53  |  | Outside
  Director                                       
|Nitzan Sapir               |  | 46  |  | President
  and Chief Executive Officer                  
|Alon ZelZion               |  | 51  |  | Executive
  Vice President of Marketing                  
|Micha Ronen                |  | 39  |  | Vice
  President of Finance and Chief
  Financial Officer
|Natan Mosak                |  | 46  |  | Vice
  President of Sales                                
|Shimon
  Friedman          |  | 52  |  | Vice
  President of Research and Development             
|Shmuel Saban               |  | 41  |  | Manager,
  Israel Division                               

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

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

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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.

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

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

Ofra Brown currently
serves as the Chief Financial Officer of VIZRT Ltd., a public company traded on
the Neuer Markt in Frankfurt and on the board of directors of Nexus Telocation
Systems Ltd., a public company traded on the NASDAQ, Orev Technologies (1977)
Ltd. and Investec Underwriting and Consulting (Israel) Ltd. From 1999 to 2001,
Ms. Brown served as the Chief Financial Officer of BVR Technologies Ltd., a
company publicly traded on the NASDAQ. 
From 1978 through 1998 Ms. Brown served as the Credit Manager for
Electronic and Hi-Tech Industries  Industrial Development Bank of Israel
Ltd.  Ms. Brown holds a bachelors
degree in economics from Tel Aviv University, Israel and a masters degree in
business administration from City University of Seattle, USA.

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

32

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Nitzan Sapir has been our President and Chief Executive Officer since January 1,
2000.  From 1998 through 1999, Mr. Sapir
served as Senior Marketing and Sales Manager of Amdocs Ltd. From 1994 through
1998, Mr. Sapir served as Chief Executive Officer of RDC Ltd. and AP Ltd.,
members of the Computer Direct Group. 
From 1987 through 1994, Mr. Sapir served as Senior Marketing and Sales
Manager at Digital (Israel). Mr. Sapir holds a Bachelor of Science degree in
industrial engineering from the Technion, Israel Institute of Technology, and a
masters degree in business administration from Tel Aviv University.

Alon Zelzion has
been our Vice President Marketing since November 2002. Mr. Zelzion brings 23
years of marketing, business development and management experience to Cimatron
and has held key positions in several companies including Tadiran, Adacom, CAPE
Systems, ScanVec and Vsoft, and up until recently, managed Solidimension, a
developer of a unique 3D printer. Mr. Zelzion holds a B.Sc. in Electronic and
Computer Engineering from California State Polytechnic University and an M.Sc.
in Engineering from California State University.

Micha Ronen has been
our Vice President Finance and Chief Financial Officer since April 2000.  Prior to joining our company he was Chief
Financial Officer of Shilav Group where he was employed from 1995 through March
2000. From 1992 to 1995 Mr. Ronen was Chief Financial Officer of Sheff Agencies
Ltd.  Mr. Ronen holds a bachelors
degree in mathematics and accounting and a masters degree in business
administration from Tel Aviv University. Mr. Ronen is a certified public
accountant in Israel.

Natan Mosak has been
our Vice President of Sales since January 1998. He served in various positions
in our company, including Vice President Sales of the Americas, and Marketing
and Sales Manager of our Israeli operations. From 1987 to 1989 he was employed
by Hor-Tal, a leading industrial equipment distributor in Israel as a Marketing
Manager. From 1983 to 1987 he was employed by Telkoor, where he headed an
engineering development group of military projects. Mr. Mosak holds a bachelor
of science degree in mechanical engineering from Tel-Aviv University and a
masters degree in business administration from Tel-Aviv University.

Shimon Friedman has
been our Vice President of Research and Development since the middle of 2000.
Prior to that he served in various positions in our company, including Director
of CAD/CAM Infrastructure, Project Manager, Director of Product Research and
Development and Project Leader. From 1993 to 1995 he was employed by Amdocs
Inc., where he served as a Project Leader. From 1982 to 1986 he served as a
Senior Systems Analyst for TERA Corporation. From 1981 to 1982 he was a
visiting Professor at the University of California in the Mathematics
Department. Mr. Friedman has a bachelors degree in mathematics and statistics
from Tel-Aviv University, a masters degree in statistics from Tel-Aviv
University and a Ph.D. in statistics from the University of California.

33

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Shmuel Saban has
been the Manager of our Israel Division since July 1996. Between 1984 and 1996
Mr. Saban filled a number of positions within our research and development
division as well as in our Israel Sales Division. Mr. Saban is an engineering
technician.

Compensation

During
the year ended December 31, 2002, we paid in the aggregate approximately
$819,000 in direct remuneration to our directors and officers as a group who
served in the capacity of director or executive officer during such year (including the additional monthly sum paid to Mr.
David Eoker. See paragraph below). The above does not include amounts expended
by us for automobiles made available to our officers, expenses (including
business travel, professional and business association dues and expenses) reimbursed
to officers and other fringe benefits commonly reimbursed or paid by companies
in Israel.  In addition, we have set
aside or accrued approximately $114,000 to provide pension, retirement or
similar benefits to our Directors, officers and employees.

In
July 2002, our shareholders approved the monthly payment of $3,665 plus Value
Added Tax to Mr. David Golan, one of our directors. The payments are for
consultancy services provided to us, and were approved to be paid over a period
of 36 months commencing April 2002.

Board Practices

Board
of Directors

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

Substitute Directors

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

The
term of appointment of a substitute director may be for one meeting of the
board of directors or for a specified period or until notice is given of the
cancellation of the appointment.  Any
substitute director will have all of the rights and obligations of the director
appointing him or her, except the power to appoint a substitute, unless the
instrument appointing him 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.

34

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Outside Directors

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

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

| |  | an
  employment relationship;                                           
| | - | ------------------------------------------------------------------------
| |  | a business
  or professional relationship maintained on a regular basis;
| |  | control; and                                                            
| |  | service as
  an office holder.                                          

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

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

| |  | the majority
  of shares voted at the meeting, including at least one-third of the shares
  held by non-controlling shareholders voted at the meeting, vote in favor of
  election of the director; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the total
  number of shares held by non-controlling shareholders voted against the
  election of the director does not exceed one percent of the aggregate voting
  rights in the company.           

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

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

35

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

Audit
Committee

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

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

Internal
Auditor

Under the
new Companies Law, the board of directors must appoint an internal auditor,
nominated by the audit committee.  The
role of the internal auditor is to examine, among other matters, whether the
companys actions comply with the law and orderly business procedure.  Under the new Companies Law, the internal
auditor may be an employee of the company but not an office holder (as defined
below), or an affiliate, or a relative of an office holder or affiliate, and he
may not be the companys independent accountant or its representative.  Dr. Naftali Freed serves as our Internal
Auditor.

As
of the date of this annual report, Messrs. Yossi Ben-Shalom, Kenny Lalo, and
Ms. Ofra Brown were serving as members of our audit committee with Ms. Ophira
Rosolio-Aharonson serving as chairperson of our audit committee.

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,            |  | 2002 |     | 2001 |  | 2000
|------------------------------------- |  | ---- | --- | ---- |  | ----
|                                      |  |      |     |      |  |     
|Research and Development
  (decrease) |  |      | 80  |      |  |     
|Marketing, Sales and                  |  |      | 132 |      |  |     
|Customer Support (increase)           |  |      |     |      |  |     
|Administration and
  Management       |  |      | 10  |      |  |     
|Total (increase)                      |  |      | 222 |      |  |     

36

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As of
May 31, 2003, we employed 217 full-time personnel, of whom 79 (most of
whom hold advanced technical degrees) were employed in research and
development, 26 were employed in marketing, 3 employees were employed in our
representative offices in the world, 16 were employed in Israel operations, 15
were employed by our North American subsidiary, 42 were employed by our German
subsidiary, 5 were employed by our French subsidiary, 2 were employed by our
Japanese subsidiary, 5 were employed by our British subsidiary, 16 were
employed by our Chinese subsidiary, and 8 were employed in various
administrative, information systems and management positions.  In addition, we employed 27 part-time
persons on average during the year 2002 and through May 31, 2003 we employed 22
part-time persons.

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

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

A general
practice that we follow, although not legally required, is the contribution of
funds on behalf of most of its employees to a fund known as Managers
Insurance. This fund provides a combination of savings plan, insurance and
severance pay benefits to the employee, giving the employee payments upon
retirement or death and securing the severance pay, if legally entitled, upon
termination of employment. We decide whether each employee is entitled to
participate in the plan, and each employee who agrees to participate
contributes an amount equal to 5% of his salary and the employer contributes
between 13.3% and 15.8% of his salary.

37

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Share
Ownership

1996
Share Option Plan

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

1998
Share Option Plan

In April
1998, the board of directors adopted an additional share option plan (the 1998
Share Option Plan) pursuant to which 620,000 Ordinary Shares were reserved for
issuance upon the exercise of options to be granted to our Directors, officers,
employees and consultants. The 1998 Share Option Plan is administered by a
committee of the Board, which designates the optionees and dates of grant. The
exercise price of an option granted under the Share Option Plan may be no less
than 85% of the fair market value of an Ordinary Share, as determined by that
committee on the date that the option is granted. Options granted vest over a
period determined by the option committee, terminate three years after they
become exercisable, and are non-assignable except by the laws of descent. The
option committee has the authority to amend the terms of option grants,
provided that any such amendment is in the best interest of the grantee.
As of May 31, 2003, options to purchase 131,500 of such shares were
outstanding at a price of $4.00 per share under the 1998 Share Option Plan.These options are
exercisable commencing two years after the date of grant at a rate of 25% per
year, subject to the continued employment of each employee. The grantee will be
responsible for all personal tax consequences of the grant and the exercise
thereof.

In March
2000, the option committee adopted new guidelines for the options to purchase
Ordinary Shares reserved for issuance under each of the 1996 Share Option Plan
and the 1998 Share Option Plan upon the exercise of options to be granted to
our Directors, officers, employees and consultants. As a result of the new
guidelines, as of May 31, 2003, options to purchase 153,000 of such shares were
outstanding at a price of $4.50 per share, options to purchase 160,000 of such
shares were outstanding at a price of $2.00 per share and options to purchase
406,250 of such shares were available for grants to our Directors, officers,
employees and consultants.The options with an exercise
price of $4.50 are exercisable commencing two years after the date of grant at
a rate of 50% on the second anniversary of the date of grant and 25% in each of
the following two years, subject to the continued employmentof
each employee. The 160,000 options with an exercise price of $2.00 that were
granted to Mr. Nitzan Sapir in October 1999, were exercisable as of one year
after the date of commencement of Mr. Sapirs employment (which was January 1,
2000), at a rate of 33.33% per year, subject to the continued employment of Mr.
Sapir, and expire on January 1, 2010. However, pursuant to the change of
control provisions contained in his employment agreement, all of Mr. Nitzan
Sapirs options vested immediately following the acquisition of 5,147,640
shares in the Company from ZCT by Koonras and DBSI. The grantee will be
responsible for all personal tax consequences of the grant and the exercise
thereof. We intend to grant additional options to our various Directors,
executive officers and employees.

38

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Other
than Nitzan Sapir who holds 2,300 shares in addition to the options as
discussed above, Shimon Friedman, Shmuel Saban and Natan Mosak are the only
officers in possession of shares in our company.  All three of them hold, in the aggregate, less than 1% of
the companys shares.

Repurchase
of Our Shares

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

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

Major
Shareholders

The
following table sets forth information, as of May 31, 2003, concerning the
beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934) of ordinary shares by any person who is known to own at least 5%
of the ordinary shares of our company. 
The voting rights of our major shareholders do not differ from the
voting rights of holders of all our ordinary shares.

39

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|Name and Address                                                      |  | Number of
  Ordinary  Shares |  | Percent of
  Ordinary Shares1
|--------------------------------------------------------------------- |  | ---------------------------- |  | -----------------------------
|                                                                      |  |                              |  |                              
|Koonras
  Technologies Ltd.
  21 Haarbaah St.
  Tel-Aviv, Israel    |  | 2,573,820                    |  | 32.15%                       
|DBSI
  Investments Ltd.
  85 Medinat Hayehudim St.
  Herzliya, Israel |  | 2,573,820                    |  | 32.15%                       
|Arie Feldman
  30 Asher Barash St.
  Herzliya, Israel                 |  | 630,000                      |  | 7.9%                         

Risk
factor Two of our shareholders beneficially own a substantial amount of our
ordinary shares and may therefore, influence our affairs, is hereby
incorporated by reference.

Related Party Transactions

Services Agreement

Until
February 2002, our former principle shareholder ZCT pursuant to an agreement,
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 (See Note 14 to the
Financial Statements). 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
requested of ZCT with the other subsidiaries of ZCT that also requested such
services from ZCT.  From January 1, 1999
until December 31, 2001 we paid ZCT a fixed price of NIS 1,560,000 per year for
these services. For the Period of January 1, 2002 through February 21, 2002 we
paid ZCT an aggregate of NIS 230,000.

As
of February 21, 2002 ZCT agreed to assign all rights and obligations thereunder
to Koonras and DBSI.   An assignment of
this agreement to Koonras and DBSI was approved by our shareholders on July 11,
2002. From February 21, 2002 through December 31, 2002 we paid Koonras and DBSI
an aggregate of a of NIS 1,343,500 for these services. Koonras and DBSI will
continue to provide these services for an annual fee of NIS 1,560,000 (linked
to the Israeli Consumer Price Index as of July 2002).

---

40

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In
addition, pursuant to a lease with our former principle shareholder ZCT, we
leased office space from ZCT until the end of January 2003.  The total amount paid by us to ZCT pursuant
to this agreement was approximately $376,000, $377,000, and $394,000, in 2002,
2001 and 2000, respectively.

On account
of the above services and lease agreement, we paid ZCT $794,000, $1,152,00, and
$1,285,000, respectively, for the years ended December 31, 2002, 2001 and
2000.

For
information regarding our current lease agreement, see Item 10 Material
Contracts.

Item 8.     Financial
Information

Consolidated Statements and Other Financial
Information

Our
consolidated financial statements and other financial information are incorporated
herein by reference to pages F-1 through F-28.

Legal Proceedings

We are not
a party to any material litigation, either in Israel or abroad, and are not
aware of any pending or threatened litigation that would have a material
adverse effect on our company or our business operations.

Dividend
Distribution Policy

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

Significant Changes

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

Item 9.The Offer and Listing

Offer and Listing details

41

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

|Period                | High (U.S.
  $) | Low (U.S. $)
|--------------------- | --------------- | ------------
|May 2003              | 1.2             | 0.95        
|April 2003            | 1               | 0.9         
|March 2003            | 1               | 0.9         
|February
  2003       | 1.01            | 0.9         
|January 2003          | 1               | 0.88        
|December
  2002       | 1.1             | 0.86        
|November
  2002       | 0.90            | 0.78        
|Fourth
  Quarter 2002 | 1.1             | 0.78        
|Third
  Quarter 2002  | 1               | 0.7         
|Second
  Quarter 2002 | 1.23            | 0.8         
|First
  Quarter 2002  | 1.49            | 0.82        
|Fourth
  Quarter 2001 | 1.17            | 0.51        
|Third
  Quarter 2001  | 0.8             | 0.58        
|Second Quarter
  2001 | 0.95            | 0.74        
|First
  Quarter 2001  | 1.63            | 0.75        
|Fourth
  Quarter 2000 | 2.2812          | 1.0312      
|Third
  Quarter 2000  | 3.0             | 2.1562      
|Second
  Quarter 2000 | 4.125           | 1.8125      
|First
  Quarter 2000  | 7.0             | 3.0         
|1999                  | 3.69            | 1.4375      
|1998                  | 2.25            | 1           

Markets

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

Item 10.     Additional
Information

Memorandum and Articles of Association

Articles of Association; Israel Companies Law

42

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

Our
shareholders approved our Articles of Association in March of 1996. Our
objective as stated in our Articles and in our Memorandum of Association is to
engage in any lawful activity.

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

Holders of
Ordinary Shares have one vote per share, and are entitled to participate
equally in the payment of dividends and share distributions and, in the event
of our liquidation, in the distribution of assets after satisfaction of
liabilities to creditors. Our Articles may be amended by a resolution carried
at a General Meeting by 75% of those who vote is required. The shareholders
rights may not be modified in any other way unless otherwise expressly provided
in the terms of issuance of the shares.

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

| | amendments
  to our Articles (other than modifications of shareholders rights as mentioned
  above);                                                                                                                                                                        
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | appointment
  or termination of our auditors;                                                                                                                                                                                                                               
| | appointment
  and dismissal of directors;                                                                                                                                                                                                                                   
| | approval of
  acts and transactions requiring general meeting approval under the Israeli
  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 Israeli Companies Law;                                                                                                                                                                                                       
| | the exercise
  of the board of directors powers by a general meeting, if the board of
  directors is unable to exercise its powers and the exercise of any of its
  powers is vital for our proper management, as provided in section 52(a) of
  the Israeli Companies Law.

43

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A
special meeting of our shareholders shall be convened by the board, at the
request of any two directors or one quarter of the officiating directors, or by
request of one or more shareholders holding at least 5% of our issued
share capital and 1% of the voting rights, or by request of one or more
shareholders holding at least 5% of the voting rights.  Shareholders requesting a special meeting
must submit their proposed resolution(s) with their request.  Within 21 days of receipt of the request,
the board must convene a special meeting and send out notices setting forth the
date, time and place of the meeting. 
Such notice must be given at least 21 days, but not more than 35 days,
prior to the special meeting.

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

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

The
Israeli Companies Law

The
Israeli 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 Israeli
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
Israeli 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.

44

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

| | all of the directors shall be permitted to vote on the matter and
  attend the meeting in which the matter is considered; and
|- | -----------------------------------------------------------------------------------------------------------------------------
| | the matter requires approval of the shareholders at a general
  meeting.                                                     

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

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

In
addition, a private placement of securities that will increase the relative
holdings of a shareholder that holds five percent or more of the companys
outstanding share capital, assuming the exercise of all of the securities
convertible into shares held by that person, or that will cause any person to
become, as a result of the issuance, a holder of more than five percent of the
companys outstanding share capital, requires approval by the board of
directors and the shareholders of the company. 
The regulations to the Israeli 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 Israeli Companies Law, a shareholder has a duty to act in good faith
towards the company and other shareholders and refrain from abusing his power
in the company, including, among other things, voting in the general meeting of
shareholders on the following matters:

| | any amendment to the Articles of Association;                                 
|- | ------------------------------------------------------------------------------
| | an increase of the companys authorized share capital;                        
| | a merger; or                                                                  
| | approval of interested party transactions that require shareholder
  approval.

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In
addition, any controlling shareholder, any shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder who has the power to appoint or prevent the appointment office
holder in the company is under a duty to act with fairness towards the
company.  The Israeli Companies Law does
not describe the substance of this duty. The Israeli Companies Law requires
that specified types of transactions, actions and arrangements be approved as
provided for in a companys articles of association and in some circumstances
by the audit committee, by the board of directors and by the shareholders. The
vote required by the audit committee and the board of directors for approval of
these matters, in each case, is a majority of the disinterested directors
participating in a duly convened meeting.

Material Contracts

Other than
our services agreement described in Item 4: Property, Plants and Equipment
and our current lease agreement, described below, all of the contracts that we
have entered into over the past 2 years have been in the ordinary course of our
business.

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

Exchange Controls

The Israeli
Currency Control Law- 1978, imposes certain limitations concerning foreign
currency transactions and transactions between Israeli and non-Israeli
residents, which limitations may be regulated or waived by the Controller of
Foreign Exchange at the Bank of Israel, through general and special
permits.  In May 1998, a new general
permit was issued pursuant to which substantially all transactions in foreign
currency are permitted.  Any dividends
or other distributions paid in respect of ordinary shares and any amounts payable
upon the dissolution, liquidation or winding up of the affairs of the Company,
as well as the proceeds of any sale in Israel of the Companys securities to an
Israeli resident are freely repatriable into non-Israeli currencies at the rate
of exchange prevailing at the time of conversion, provided that Israeli income
tax has been paid on (or withheld from) such payments.

Taxation

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

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

General Corporate Tax Structure

Israeli
companies are generally subject to company tax at the rate of 36% of taxable
income. However, the effective tax rate payable by a company that derives
income from an Approved Enterprise (as further discussed below) may be
considerably less.  Under the Income Tax
Law (Adjustment for Inflation) 1985, income for tax purposes is measured in
terms of earnings in NIS adjusted for the increase in the Israeli Consumer
Price Index.  The difference between the
annual changes in the Israeli Consumer Price Index and in the NIS/U.S. Dollar
exchange rates causes a difference between taxable income and the income
reflected in our financial statements. 
See note 13d of our financial statements.

Law for the Encouragement of Capital
Investments, 1959

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

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

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

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

For a company with foreign investment of:

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

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

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

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

48

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

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

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

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

Law for the Encouragement of Industrial
Research and Development, 1984

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

49

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

The
Research Law also provides that know-how from the research and development,
which is used to produce the product, may not be transferred to Israeli third parties
without the approval of the Research Committee, and may not be transferred to
non-Israeli third parties at all. A recent amendment to the Research Law has
stressed, that it is not just transfer of know-how that is prohibited, but also
transfer of any rights in such know-how. 
Such restriction does not apply to exports from Israel of products
developed with such technologies. Approval of the transfer may be granted only
if the transferee abides by all of the provisions of the Research Law and
regulations promulgated thereunder, including the restrictions on the transfer
of know-how and the obligation to pay royalties.
There can be no assurance that the consents described above, if
requested, will be granted.

Tax Benefits and Grants for Research and Development

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

Law for the Encouragement of Industry
(Taxes), 1969

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

| | Deduction of
  purchases of know-how and patents over eight years for tax purposes.                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deduction,
  for tax purposes, of expenses incurred in connection with certain public
  securities issuances.                                                                  
| | Accelerated
  depreciation rates on both equipment and buildings.                                                                                                              
| | The right to
  elect, under specified conditions, to file a consolidated tax return with
  additional related Israeli industrial companies and an industrial holding
  company.

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Taxation under Inflationary Conditions

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

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

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

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

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

Capital Gains Tax

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

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

U.S.Israel Tax Treaty

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

Taxation of Non-Residents

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

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Documents
on Display

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

You may
review a copy of our filings with the SEC, including any exhibits and schedules,
at the SECs public reference facilities in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may also obtain copies of such materials from the
Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.  While as a foreign private issuer we are now
required to file our annual report through the SECs EDGAR system.  Additionally, since November 2002 we have
been required to file our periodic reports through the SECs EDGAR system.
Consequently both our periodic and annual reports are available on the SECs
Web site. You may read and copy any reports, statements or other information
that we file with the SEC at the SEC facilities listed above. These SEC filings
are also available to the public from commercial document retrieval services.

Any
statement in this annual report about any of our contracts or other documents
is not necessarily complete. If the contract or document is filed as an exhibit
to the registration statement, the contract or document is deemed to modify the
description contained in this annual report. We urge you to review the exhibits
themselves for a complete description of the contract or document.

Item 11.     Quantitative
and Qualitative Disclosures About Market Risks

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, 2002, we had financial assets totaling approximately $8.1
million.  Fixed rate financial assets, comprised
of debt securities, totaled approximately $4 million. For the year 2002 we have
classified all of our marketable debt securities as available for sale
securities which exposes the consolidated statement of operations or balance
sheets to fluctuations in interest rates. Variable rate financial assets
totaled approximately $4.1 million. The net decrease in our earnings for the
next year from its variable rate financial assets resulting from a 10% interest
rate decrease would be approximately $10,000, holding other variables constant.
Assuming an interest rate increase of 10%; the fair value of our marketable
debt securities would be reduced by approximately $400,000.

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Equity
price risk -We have ceased to invest in regular and high
yield funds as we did prior to 2002; therefore we are no longer susceptible to
market risks which affect these types of funds.

Currency
Exchange Rate Risks

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

Our
Subsidiaries - We operate internationally and our
subsidiaries in Germany and France conduct their respective operations in
Euros. This exposes us to market risk from changes in foreign exchange rates to
the extent that the functional currency of our subsidiaries will decline in
value as compared to the U.S. dollar, resulting in a foreign currency exchange
rate loss. Assuming an adverse 20% foreign exchange rate fluctuation, we would
experience exchange rate losses of approximately $392,000.

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 $777,000.

Expenses
in New Israel 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 6.5%, 1.4%, and 0% in 2002,
2001, and 2000, respectively.  At the
same time, the devaluation of the NIS against the U.S. dollar was 7.3%, 9.3%,
and  -2.7% in 2002, 2001, and 2000,
respectively. Assuming a 10% devaluation of the US Dollar against the NIS, and
assuming a maximum deviation of 1% in inflation, we would experience exchange
rate losses of approximately $809,000.

A
significant portion of our expenditures is employee compensation-related.
Salaries are paid in NIS and are adjusted for changes in the CPI through
(i) annual salary increases during the first quarter of the year and
(ii) bi-annual partial adjustments. This increases salary expenses in U.S.
dollar terms. The devaluation / revaluation of the NIS against the U.S. dollar
decreases / increases employee compensation expenditures as expressed in
dollars proportionally. Some of our other NIS-based expenses are either
currently adjusted to U.S. dollars or are adjusted to the CPI.

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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
15.     Controls and Procedures

An
evaluation was performed under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, which was completed within 90 days
of the filing date of this annual report, our chief executive officer and chief
financial officer, concluded that our disclosure controls and procedures were
effective though we are constantly engaged in the process of improving these
controls and procedures. There have been no significant changes in our
disclosure controls or in other factors that could significantly affect
disclosure controls subsequent to the date of the evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Item
16.     [Reserved]

PART III

Item 17.     Financial
Statements

Not Applicable

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Item
18.     Financial Statements

See page F-1 through F-28.

|Item 19. | Exhibits                                                                                             
|-------- | -----------------------------------------------------------------------------------------------------
|         |                                                                                                      
|1.1      | Articles of Association of Cimatron Ltd.*                                                            
|         |                                                                                                      
|4.1      | Lease Agreement with ZCT for premises in Givat Shmuel, Israel*.                                      
|         |                                                                                                      
|4.2      | Services Agreement with ZCT*, **.                                                                    
|         |                                                                                                      
|8.1      | List of subsidiaries.                                                                                
|         |                                                                                                      
|12.1     | Certification by Chief Executive Officer pursuant to section 906 of
  the Sarbanes-Oxley Act of 2002.
|         |                                                                                                      
|12.2     | Certification by Chief Financial Officer pursuant to section 906 of
  the Sarbanes-Oxley Act of 2002.
|         |                                                                                                      
|12.3     | Consent of Brightman Almagor & Co., a member of Deloitte & Touche Tohmatsu.                          

---

|*  | Incorporated by reference from our Registration Statement on Form
  F-1, File No.  333-1484, as amended,
  filed with the Commission on February 16, 1996.       
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                  
|** | As assigned by ZCT to Koonras and DBSI in February, 2002 and approved
  by our shareholders as more fully set forth in Item 7, Interested Party
  Transactions.

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this annual report on its behalf in the City of Givat Shmuel, State of Israel,
on this 26th day of June 2003.

| | CIMATRON LTD. |    
| | ------------- | ---
| |               |    
| |               | By:
| |               |    
| |               |    
| |               |    

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CERTIFICATIONS

I, Nitzan Sapir, certify that:

1.     I have reviewed this annual report on
Form 20-F of Cimatron Ltd.;

2.     Based on my knowledge, this annual
report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.     Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4.     The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:

| | a)   designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                          
| | b)   evaluated
  the effectiveness of the registrants disclosure controls and procedures as
  of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |                                                                                                                                                                                                                                                                                                          
| | c)   presented
  in this annual report our conclusions about the effectiveness of the
  disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;                                                                                                                          

5.     The
registrants other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):

| | a)   all
  significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrants ability to record, process,
  summarize and report financial data and have identified for the registrants
  auditors any material weaknesses in internal controls; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                            
| | b)   any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and                                                                                                                                            

6.     The registrants other certifying
officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

58

---

---

| | June 26th, 2003        
| | -----------------------
| | /S/     NITZAN
  SAPIR 
| |                        
| | Nitzan Sapir           
| | Chief Executive Officer

59

---

---

CERTIFICATIONS

I, Micha Ronen, certify that:

1.     I have reviewed this annual report on
Form 20-F of Cimatron Ltd.;

2.     Based on my knowledge, this annual
report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.     Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
annual report;

4.     The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:

| | a)   designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                          
| | b)   evaluated
  the effectiveness of the registrants disclosure controls and procedures as
  of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |                                                                                                                                                                                                                                                                                                          
| | c)   presented
  in this annual report our conclusions about the effectiveness of the
  disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;                                                                                                                          

5.     The registrants other certifying
officers and I have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):

| | a)   all
  significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrants ability to record, process,
  summarize and report financial data and have identified for the registrants
  auditors any material weaknesses in internal controls; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                            
| | b)   any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and                                                                                                                                            

6.     The registrants other certifying
officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

60

---

---

| | June
  26th, 2003      
| | -----------------------
| | /S/   MICHA RONEN      
| |                        
| | Micha Ronen            
| | Chief Financial Officer

61

---

---

EXHIBIT 8.1

Subsidiaries

|ENTITY                                  |  | PLACE OF
  INCORPORATION
|--------------------------------------- |  | ------------------------
|                                        |  |                         
|Cimatron
  Technologies, Inc            |  | USA                     
|                                        |  |                         
|Cimatron
  GmbH                         |  | Germany                 
|                                        |  |                         
|Cimatron
  Sarl                         |  | France                  
|                                        |  |                         
|Cimatron UK
  Ltd.                      |  | United
  Kingdom        
|                                        |  |                         
|Cimatron
  Japan K.K.                   |  | Japan                   
|                                        |  |                         
|Cimatron
  (Beijing) Technology Co. LTD |  | China                   
|                                        |  |                         
|Korea
  Cimatron Technologies Co. LTD.* |  | Korea                   

*We hold only 30% of the shares of this joint
venture which we formed in Korea together with JY Solutec Co., LTD.

62

---

---

EXHIBIT 12.1

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Cimatron Ltd. (the Company) on Form 20-F
for the year ended December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Micha Ronen, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C.section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:

| | 1. | the Report
  fully complies with the requirements of section 13(a) of the Securities
  Exchange Act of 1934; and                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                         
| | 2. | the
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company.

|                | /S/ NITZAN
  SAPIR      
|--------------- | ------------------------
|                | Nitzan Sapir            
|June 26,
  2003 | Chief
  Executive Office

63

---

---

EXHIBIT 12.2

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Cimatron Ltd. (the Company) on Form 20-F
for the year ended December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Micha Ronen, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C.section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:

| | 1. | the Report
  fully complies with the requirements of section 13(a) of the Securities
  Exchange Act of 1934; and                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                         
| | 2. | the
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company.

|                | /S/ MICHA
  RONEN        
|--------------- | -------------------------
|                | Micha Ronen              
|June 26,
  2003 | Chief
  Financial Officer

64

---

---

---

---

CIMATRON LIMITED

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                                                                            | Page
|----------------------------------------------------------------------------------------------------------- | ----
|                                                                                                            |     
|Report of Independent Public
  Accountants                                                                  | 2   
|                                                                                                            |     
|Consolidated Financial
  Statements:                                                                        |     
|Balance Sheets as of December 31, 2002 and
  2001                                                           | 3   
|Statements of Operations for the years ended December
  31, 2002, 2001 and 2000                             | 4   
|Statements of Changes in
  Shareholders Equity for the years ended December 31, 2002,
       2001 and 2000 | 5   
|Statements of Cash Flows for the years ended December
  31, 2002, 2001 and 2000                             | 6-7 
|                                                                                                            |     
|Notes to the Consolidated Financial
  Statements                                                            | 8-28

---

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO: THE SHAREHOLDERS
OF CIMATRON LIMITED

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

We did not audit the financial statements of
consolidated subsidiaries, which statements reflect total assets and revenues
constituting 14% and 45% respectively, of the related consolidated totals.
Those financial statements were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts
included for those companies, is based solely on the reports of such other
auditors.

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

In our opinion, based on our audit and the
reports of the other auditors, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
United States of America.

Brightman Almagor & Co.
Certified Public Accountants 
A member of Deloitte Touche Tohmatsu

Tel-Aviv, Israel

February 24, 2003

2

---

---

---

---

CIMATRON LIMITED

CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                                      |                                                                                                                                                      | December 31, |       
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      | 2002         |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | ASSETS                                                                                                                                               |              |       
|                                                                      |                                                                                                                                                      |              |       
|CURRENT ASSETS:                                                       |                                                                                                                                                      |              |       
|                                                                      | Cash and cash equivalents                                                                                                                            |              | $     
|                                                                      | Accounts receivable - trade (Note 3)                                                                                                                 |              |       
|                                                                      | Other accounts receivable and prepaid
  expenses (Note 4)                                                                                            |              |       
|                                                                      | Short term investments (Note 5)                                                                                                                      |              |       
|                                                                      | Inventory                                                                                                                                            |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | Total current assets                                                                                                                                 |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|DEPOSITS WITH INSURANCE COMPANIES AND 
  SEVERANCE PAY FUND (Note 10) |                                                                                                                                                      |              | 2,638 
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|PROPERTY AND EQUIPMENT (Note 6):                                      |                                                                                                                                                      |              |       
|                                                                      | Cost                                                                                                                                                 |              |       
|                                                                      | Less - accumulated depreciation                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | Net property and equipment                                                                                                                           |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|INVESTMENT IN AFFILIATE                                               |                                                                                                                                                      |              | 43    
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|OTHER ASSETS:                                                         |                                                                                                                                                      |              |       
|                                                                      | Software development costs, net (Note 7)                                                                                                             |              |       
|                                                                      | Other assets (Note 8)                                                                                                                                |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | Total other assets                                                                                                                                   |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | Total assets                                                                                                                                         |              | $     
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | LIABILITIES AND SHAREHOLDERS
  EQUITY                                                                                                               |              |       
|                                                                      |                                                                                                                                                      |              |       
|CURRENT LIABILITIES:                                                  |                                                                                                                                                      |              |       
|                                                                      | Related parties                                                                                                                                      |              |       
|                                                                      | Trade payables                                                                                                                                       |              |       
|                                                                      | Accrued expenses and other liabilities
  (Note 9)                                                                                                    |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | Total current liabilities                                                                                                                            |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|LONG-TERM LIABILITIES:                                                |                                                                                                                                                      |              |       
|Accrued severance pay (Note 10)                                       |                                                                                                                                                      |              | 2,974 
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|CONTINGENT LIABILITIES AND COMMITMENTS
  (Note 11)                    |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|SHAREHOLDERS EQUITY:                                                 |                                                                                                                                                      |              |       
|                                                                      | Share capital (Note 12):                                                                                                                             |              |       
|                                                                      | Ordinary shares of NIS0.10 par value
  (Authorized - 19,950,000
  shares, issued and outstanding - 8,001,270 shares
  at December 31, 2002 and 2001) |              |       
|                                                                      | Additional paid-in capital                                                                                                                           |              |       
|                                                                      | Other capital surplus                                                                                                                                |              |       
|                                                                      | Accumulated other comprehensive income
  (loss):                                                                                                     |              |       
|                                                                      | Foreign currency translation adjustments                                                                                                             |              |       
|                                                                      | Unrealized gain on available for-sale
  securities                                                                                                   |              |       
|                                                                      | Unrealized gain (loss) on derivative
  instruments                                                                                                   |              |       
|                                                                      | Retained
  earnings (accumulated deficit)                                                                                                            |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              | 14,291
|Treasury stock, at cost; 140,100 shares at December 31, 2002          |                                                                                                                                                      |              | (132  
|                                                                      |                                                                                                                                                      |              |       
|                                                                      | Total shareholders equity                                                                                                                           |              |       
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       
|Total liabilities and shareholders equity                            |                                                                                                                                                      | $            | 21,371
|                                                                      |                                                                                                                                                      |              |       
|                                                                      |                                                                                                                                                      |              |       

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

3

---

---

CIMATRON LIMITED

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

|                                                                        |                              | Year Ended December 31, |       
|----------------------------------------------------------------------- | ---------------------------- | ----------------------- | ------
|                                                                        |                              |                         |       
|                                                                        |                              | 2002                    |       
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|Revenues
  (Note 16a):                                                  |                              |                         |       
|                                                                        | Products                     |                         | $     
|                                                                        | Services                     |                         |       
|                                                                        |                              |                         |       
|                                                                        | Total                        |                         |       
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|Cost of
  revenues (Note 16b):                                          |                              |                         |       
|                                                                        | Products                     |                         |       
|                                                                        | Services                     |                         |       
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|                                                                        | Total                        |                         |       
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|                                                                        | Gross profit                 |                         |       
|                                                                        |                              |                         |       
|Research and
  development costs, net (Note 16c)                        |                              |                         | 5,562 
|Restructuring
  costs (Note 16e)                                        |                              |                         | (250  
|Selling,
  general and administrative expenses
   (Note 16d)            |                              |                         | 11,670
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|                                                                        | Operating
  loss             |                         |       
|                                                                        |                              |                         |       
|Financial
  income (expenses), net                                      |                              |                         | 428   
|Other income
  (expenses)                                               |                              |                         | 1     
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|                                                                        | Income
  (loss) before taxes |                         |       
|Taxes on
  income (Note 13)                                             |                              |                         | (48   
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|                                                                        | Net income
  (loss)          |                         | $     
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|Net loss per
  share (basic and diluted) (Note 2n)                      |                              | $                       | (**)  
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|Weighted
  average number of shares outstanding 
   (basic and diluted) |                              |                         | 7,981 
|                                                                        |                              |                         |       
|                                                                        |                              |                         |       
|(*)    Reclassified.                                                    |                              |                         |       
|(**)  Less
  than $0.01.                                                |                              |                         |       

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

4

---

---

CIMATRON LIMITED

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands)

|                                                |                                | Sharecapital |   | Additionalpaid-in
  capital |  | Other capital
  surplus |     | Accumulated other
  comprehensive
  income (loss) |  | Retained
  earnings
  (accumulated
  deficit) |        | Treasury
  stock |  | Comprehensive
  income (loss) |      | Total
  shareholders
  equity
|----------------------------------------------- | ------------------------------ | ------------ | - | --------------------------- |  | ----------------------- | --- | ------------------------------------------------- |  | --------------------------------------------- | ------ | ---------------- |  | ----------------------------- | ---- | ------------------------------
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Balance at January 1, 2000     |              | $ | 264                         |  |                         | $   | 13,218                                            |  |                                               | $      | 9,957            |  |                               | $    | -                             
|Changes during the year endedDecember 31, 2000: |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|Net loss                                        |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | -    |                               
|Unrealized loss on availablefor-sale securities |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | (19  | )                             
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Total
  comprehensive loss     |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|Exercise of 39,750 stock options                |                                |              | - |                             |  |                         | 199 |                                                   |  |                                               | -      |                  |  |                               | -    |                               
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Balance at December 31,
  2000 |              | $ | 264                         |  |                         | $   | 13,417                                            |  |                                               | $      | 9,957            |  |                               | $    | (19                           
|Changes during the year endedDecember 31, 2001: |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|Net loss                                        |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               |      |                               
|Unrealized gain on availablefor-sale securities |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | 360  |                               
|Unrealized loss on derivativeinstruments        |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               | (50  | )                             
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Total
  comprehensive loss     |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Balance at December 31,
  2001 |              | $ | 264                         |  |                         | $   | 13,417                                            |  |                                               | $      | 9,957            |  |                               | $    | 291                           
|Changes during the year endedDecember 31, 2002: |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|Net income                                      |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | -    |                               
|Unrealized loss on availablefor-sale securities |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | (288 | )                             
|Unrealized gain on derivativeinstruments        |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | 104  |                               
|Foreign currency translation adjustment         |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | (77  | )                             
|Transfer of capital surplus toretained earnings |                                |              |   |                             |  |                         |     |                                                   |  |                                               | (9,957 | )                |  |                               |      |                               
|Investment in treasury stock                    |                                |              | - |                             |  |                         | -   |                                                   |  |                                               | -      |                  |  |                               | -    |                               
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Total
  comprehensive loss     |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               
|                                                | Balance at December 31,
  2002 |              | $ | 264                         |  |                         | $   | 13,417                                            |  |                                               | $      | -                |  |                               | $    | 30                            
|                                                |                                |              |   |                             |  |                         |     |                                                   |  |                                               |        |                  |  |                               |      |                               

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

5

---

---

CIMATRON LIMITED

CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                                         |                                                                                      | Year Ended December 31, |      
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------- | -----
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         |                                                                                      | 2002                    |      
|                                                                                                         |                                                                                      |                         |      
|CASH FLOWS  OPERATING ACTIVITIES                                                                        |                                                                                      |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         | Net income
  (loss)                                                                  |                         | $    
|                                                                                                         |                                                                                      |                         |      
|Adjustments to reconcile net income (loss) to net cash 
     provided by (used in) operating activities: |                                                                                      |                         |      
|                                                                                                         | Depreciation
  and amortization                                                      |                         |      
|                                                                                                         | Decrease
  (increase) in accrued severance pay                                       |                         |      
|                                                                                                         | Loss (gain)
  from sale of property and equipment, net                               |                         |      
|                                                                                                         | Loss (gain)
  from sale of bonds and funds and devaluation of funds                  |                         |      
|                                                                                                         | Deferred
  taxes                                                                     |                         |      
|                                                                                                         |                                                                                      |                         |      
|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
  (decrease) in debts to related parties                                    |                         |      
|                                                                                                         | Increase
  (decrease) in trade payables, accrued expenses
   and other liabilities   |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         | Net cash used in operating activities                                                |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         |                                                                                      |                         |      
|CASH FLOWS  INVESTING ACTIVITIES                                                                        |                                                                                      |                         |      
|                                                                                                         | Investment
  in bonds                                                                |                         |      
|                                                                                                         | Investment
  in funds                                                                |                         |      
|                                                                                                         | Proceeds
  from maturity of bonds                                                    |                         |      
|                                                                                                         | Proceeds
  from sale of funds                                                        |                         |      
|                                                                                                         | Purchase of
  property and equipment                                                 |                         |      
|                                                                                                         | Proceeds
  from sale of property and equipment                                       |                         |      
|                                                                                                         | Investment
  in affiliate                                                            |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         | Net cash provided by investing activities                                            |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         |                                                                                      |                         |      
|CASH FLOWS  FINANCING ACTIVITIES                                                                        |                                                                                      |                         |      
|                                                                                                         | Proceeds
  from exercise of stock options                                            |                         |      
|                                                                                                         | Investment
  in treasury stock                                                       |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         | Net cash provided by (used in) financing activities                                  |                         |      
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         |                                                                                      |                         |      
|Net increase
  (decrease) in cash and cash equivalents                                                   |                                                                                      |                         | (536 
|Effect of
  exchange rate changes on cash                                                                |                                                                                      |                         | 79   
|Cash and
  cash equivalents at beginning of year                                                         |                                                                                      |                         | 4,534
|                                                                                                         |                                                                                      |                         |      
|Cash and cash equivalents at end of year                                                                 |                                                                                      | $                       | 4,077
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         |                                                                                      |                         |      
|Supplemental
  information:                                                                              |                                                                                      |                         |      
|Cash during
  the year for income taxes                                                                  |                                                                                      | $                       | 30   
|                                                                                                         |                                                                                      |                         |      
|                                                                                                         |                                                                                      |                         |      

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

6

---

---

CIMATRON LIMITED

CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)

Appendix A - Non-cash transactions

|   |                                  | Year Ended December 31, |  
|-- | -------------------------------- | ----------------------- | -
|   |                                  |                         |  
|   |                                  | 2002                    |  
|   |                                  |                         |  
|A. | Non cash transactions            |                         |  
|   | Purchase of
  property on credit |                         | $

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

7

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 1  - | GENERAL:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | Cimatron
  Limited (the Company) designs, develops, manufactures, markets and supports
  a family of modular CAD/CAM software products which offer integrated
  design-through-manufacturing solutions for small to medium-sized companies. The
  Companys products have been sold to end-users in numerous industries,
  including automotive, aviation and aerospace, household goods, mold and die
  making, machinery and tools, and telecommunications.  The Company markets its line of products
  through distributors and through its subsidiaries located in different
  countries.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|NOTE 2  - | SIGNIFICANT ACCOUNTING POLICIES:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

8

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 2  - | SIGNIFICANT ACCOUNTING POLICIES:
|--------- | --------------------------------
|          |                                 
|          | D.                              
|          |                                 
|          |                                 
|          | E.                              
|          |                                 
|          |                                 
|          | F.                              
|          |                                 
|          |                                 
|          | G.                              
|          |                                 
|          |                                 
|          |                                 

| |                                  |  | Years         | 
| | -------------------------------- |  | ------------- | 
| |                                  |  |               | 
| | Computers                        |  | 3             | 
| | Furniture
  and office equipment |  | 6.5 - 16.5    | 
| | Vehicles                         |  | 6.5           | 
| | Leasehold
  improvements         |  | term of lease | 

| | The Company periodically assesses the recoverability of the carrying
  amount of property and equipment based on expected undiscounted cash flows.
  If an assets carrying amount is determined to be not recoverable, the
  Company recognizes an impairment loss based upon the difference between the
  carrying amount and the fair value of such assets, in accordance with SFAS
  No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets
  (SFAS No. 144).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands)

|NOTE 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (Cont.):
|--------- | ------------------------------------------
|          | H.                                        
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          | I.                                        
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          | J.                                        
|          |                                           
|          |                                           

10

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

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

11

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (Cont.):
|--------- | ------------------------------------------
|          |                                           
|          | N.                                        
|          |                                           
|          |                                           
|          |                                           

| |                                                                                    |  | Year ended December 31, |      
| | ---------------------------------------------------------------------------------- |  | ----------------------- | -----
| |                                                                                    |  |                         |      
| |                                                                                    |  | 2 0 0 2                 |      
| |                                                                                    |  |                         |      
| | Pro forma net income (loss):                                                       |  |                         |      
| | Net loss for the year, as reported                                                 |  | $                       | 10   
| | Deduct  stock-based compensation determined 
                      under
  APB 25 |  |                         |     
| | Add  -
  stock-based compensation determined                    under
  SFAS 123   |  |                         | 139  
| |                                                                                    |  |                         |      
| |                                                                                    |  | $                       | (129 
| |                                                                                    |  |                         |      
| |                                                                                    |  |                         |      
| | Pro forma loss per share basic
  and diluted                                       |  |                         |      
| | As
  reported                                                                      |  | $                       |     
| |                                                                                    |  |                         |      
| |                                                                                    |  |                         |      
| | Pro forma                                                                          |  | $                       | (0.02
| |                                                                                    |  |                         |      

| | Data inrespect of the stock option plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of each option grant is
  estimated on the date of the grant using the Black-Scholes option pricing
  model with the following assumptions used for grants in 2000: a dividend
  yield of 0.0%; weighted average expected volatility of 86% in 2000; weighted
  average risk-free interest rates of 6% in 2000; and weighted average expected
  lives of 5 years for options granted in 2000. No grants were made
  in 2001 and 2002. Because additional option grants are expected to be made
  each year, and due to the factors described above, the above proforma
  disclosures are not necessarily representative of proforma effects of
  reported net income for future years.

12

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

| | O. | Derivative financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Effective
  the beginning of the first quarter of 2001, the Company adopted SFAS No. 133,
  Accounting for Derivative Instruments and Hedging Activities, as amended,
  which required the Company to recognize all derivative instruments as either
  assets or liabilities on the balance sheet at fair value. 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.                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Fair values
  of currency forward contracts are based on quoted market prices or pricing
  models using current market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Company
  uses derivative instruments to manage interest, currency and certain equity
  market risks. The Companys derivative instruments are recorded at fair value
  and are included in other receivables and other accrued liabilities. 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Currency
  forward contracts and currency options, which generally expire within 12
  months and are used to hedge exposures to variability in expected future
  foreign-denominated cash flows, are designated as cash flows hedges. For
  these derivatives, the effective portion of the gain or loss is reported as a
  component of other comprehensive income in stockholders equity and is
  reclassified into earnings in the same period or periods during which the
  hedged transaction affects earnings, and within the same income statement
  line item.                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The
  ineffective portion of the gain or loss on the derivative in excess of the
  cumulative change in the present or future cash flows of the hedged item, if
  any, is recognized in financial income (expenses) net during the period
  change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | P. | Acquisition- related intangibleassets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In July 2001, the FASB issued SFAS No. 141,
  Business Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all
  business combinations initiated after June 30, 2001 to be accounted for using
  the purchase method. Under SFAS No. 142, goodwill and intangible assets with
  indefinite lives are no longer amortized but are reviewed annually (or more
  frequently if impairment indicators arise) for impairment. Identifiable
  intangible assets that are not deemed to have indefinite lives will continue
  to be amortized over their useful lives (but with no maximum life). The
  Company adopted SFAS No.142 effective January 1, 2002. The adoption of SFAS
  No. 142 resulted in a reduction of amortization expense in the amount of $102
  in 2002.                                                  

13

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

| | P. | Acquisition- related intangibleassets (Cont.)                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | A reconciliation of previously reported net
  loss and loss per share to the amounts adjusted for the exclusion of goodwill
  amortization is as follows:

| |                                           |  | Year ended December 31, |    
| | ----------------------------------------- |  | ----------------------- | ---
| |                                           |  |                         |    
| |                                           |  | 2 0 0 2                 |    
| |                                           |  |                         |    
| |                                           |  |                         |    
| | Net income (loss)                         |  | $                       | 10 
| | Goodwill amortization                     |  |                         |   
| |                                           |  |                         |    
| |                                           |  |                         |    
| | Adjusted net income                       |  | $                       | 10 
| |                                           |  |                         |    
| |                                           |  |                         |    
| | Reported basic and diluted loss per share |  | $                       | (**
| | Goodwill amortization                     |  |                         |   
| |                                           |  |                         |    
| |                                           |  |                         |    
| | Adjusted basic and diluted loss per share |  | $                       | (**
| |                                           |  |                         |    
| | (**)     Less
  than $0.01.               |  |                         |    

| |    | 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.                                                                                                                                                                                 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Q. | Fair Value of Financial Instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The financial instruments of the Company
  consist mainly of cash and cash equivalents, short-term investments, current
  and non-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.                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | R. | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The carrying
  amounts reported in the consolidated balance sheets for short-term
  investments as of December 31, 2002 are classified as available for sale and
  presented at market value, unrealized gains and losses are reflected in other
  comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | S  | Concentrations on 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.

14

---

---

CIMATRON LIMITED

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands)

|NOTE 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (Cont.):
|--------- | ------------------------------------------
|          |                                           
|          | T.                                        
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           
|          |                                           

15

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 3  - | ACCOUNTS RECEIVABLE - TRADE:
|--------- | ----------------------------

| |                                          |  | December 31, |       
| | ---------------------------------------- |  | ------------ | ------
| |                                          |  |              |       
| |                                          |  | 2002         |       
| |                                          |  |              |       
| |                                          |  |              |       
| | Accounts
  receivable                    |  | $            | 7,624 
| | Less -
  allowance for doubtful accounts |  |              | (1,287
| |                                          |  |              |       
| |                                          |  | $            | 6,337 
| |                                          |  |              |       

|NOTE 4  - | OTHER ACCOUNTS RECEIVABLE AND
  PREPAID EXPENSES:
|--------- | -------------------------------------------------

| |                                  |  | December 31, |    
| | -------------------------------- |  | ------------ | ---
| |                                  |  |              |    
| |                                  |  | 2002         |    
| |                                  |  |              |    
| |                                  |  |              |    
| | Government
  institutions        |  | $            | 10 
| | Employees                        |  |              | 8  
| | Prepaid
  expenses               |  |              | 368
| | Interest
  receivable and others |  |              | 211
| |                                  |  |              |    
| |                                  |  | $            | 597
| |                                  |  |              |    

|NOTE 5  - | SHORT-TERM INVESTMENTS:
|--------- | -----------------------
|          |                        
|          | A.                     

| |                                          |  | December 31, |      
| | ---------------------------------------- |  | ------------ | -----
| |                                          |  |              |      
| |                                          |  | 2002         |      
| |                                          |  |              |      
| |                                          |  |              |      
| | Bonds
  (Non-U.S. Government securities) |  | $            | 4,017
| | Funds                                    |  |              | -    
| |                                          |  |              |      
| |                                          |  | $            | 4,017
| |                                          |  |              |      

| | B. | As of
  December 31, 2002 and 2001 all investments in bonds and funds are classified
  as available for sale.                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                     
| | C. | Unrealized
  loss on available for sale securities at December 31, 2002 of $288 (2001 -
  gain of $360) were recorded in other comprehensive income.
| |    |                                                                                                                                                     
| | D. | Aggregate maturities of marketable
  securities are as follows:                                                                                     

| |                     |  | December 31,
  2 0 0 2 |      
| | ------------------- |  | ---------------------- | -----
| |                     |  |                        |      
| | Within one
  year   |  | $                      | -    
| | One to five
  years |  |                        | 4,017
| | Six to ten
  years  |  |                        | -    
| |                     |  | $                      | 4,017

16

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 6  - | PROPERTY AND EQUIPMENT:
|--------- | -----------------------

| |                                  |  | December 31, |      
| | -------------------------------- |  | ------------ | -----
| |                                  |  |              |      
| |                                  |  | 2002         |      
| |                                  |  |              |      
| | Cost                             |  |              |      
| | Computers                        |  | $            | 3,176
| | Office
  furniture and equipment |  |              | 824  
| | Vehicles                         |  |              | 687  
| | Leasehold
  improvements         |  |              | 140  
| |                                  |  |              |      
| |                                  |  | $            | 4,827
| |                                  |  |              |      
| | Accumulated depreciation         |  |              |      
| | Computers
  (see note 2I)        |  |              | 2,809
| | Office
  furniture and equipment |  |              | 497  
| | Vehicles                         |  |              | 400  
| | Leasehold
  improvements         |  |              | 124  
| |                                  |  |              |      
| |                                  |  | $            | 3,830
| |                                  |  |              |      
| |                                  |  |              |      
| | Net property and equipment       |  | $            | 997  
| |                                  |  |              |      

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

| |                                         |  | December 31, |       
| | --------------------------------------- |  | ------------ | ------
| |                                         |  |              |       
| |                                         |  | 2002         |       
| |                                         |  |              |       
| |                                         |  |              |       
| | Capitalized
  software development cost |  | $            | 9,160 
| | Government
  grants                     |  |              | (3,495
| | Accumulated
  amortization (*)          |  |              | (3,658
| |                                         |  |              |       
| |                                         |  | $            | 2,007 
| |                                         |  |              |       

| | (*) All
  capitalized modules are amortized over six years.                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At the end
  of 2001, the Companys management reviewed the modules for impairment and
  reached the conclusion that some of the modules are not saleable.
  Accordingly, the Company recorded a write off of $886 in 2001.
| | Amortization
  expenses for the years ended December 31, 2002, 2001 and 2000, were $401,
  $2,021 and $1,135, respectively, and were charged to operations.                                                                

17

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 8  - | OTHER ASSETS:
|--------- | -------------
|          |              
|          | A.           

| |                            |  | December 31, |      
| | -------------------------- |  | ------------ | -----
| |                            |  |              |      
| |                            |  | 2002         |      
| |                            |  |              |      
| |                            |  |              |      
| | Original
  amounts         |  | $            | 1,021
| | Accumulated
  amortization |  |              | (434 
| |                            |  |              |      
| |                            |  | $            | 587  
| |                            |  |              |      

|          | B.                                        | During
  September 1997, the Company entered into a series of agreements with the
  Companys German distributor, pursuant to which such distributor transferred
  all of its Cimatron-related business (including goodwill, assets and
  employees), other than distribution rights in certain regions of Southern
  Germany, to the Companys newly formed German subsidiary, Cimatron GmbH. The
  cost of the transaction included goodwill in the amount of $1,021.
|--------- | ----------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|NOTE 9  - | ACCRUED EXPENSES AND OTHER
  LIABILITIES:

| |                                     |  | December 31, |      
| | ----------------------------------- |  | ------------ | -----
| |                                     |  |              |      
| |                                     |  | 2002         |      
| |                                     |  |              |      
| |                                     |  |              |      
| | Employees
  and related liabilities |  | $            | 1,883
| | Taxes to
  government institutions  |  |              | 41   
| | Accrued
  royalties                 |  |              | 295  
| | Accrued
  expenses and others       |  |              | 1,217
| |                                     |  |              |      
| |                                     |  | $            | 3,436
| |                                     |  |              |      

|NOTE 10 - | ACCRUED SEVERANCE PAY (DEPOSITS
  WITH INSURANCE COMPANIES AND A SEVERANCE PAY FUND):                                                                                                                                                                                                                                                
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                      
|          | The
  Companys liability for severance pay is calculated pursuant to Israeli
  severance pay law based on the most recent salary of the employees 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, insurance policies and by an accrual.                                                                                                                                                                                   
|          | 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.             

18

---

---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 11 - | CONTINGENT LIABILITIES AND
  COMMITMENTS:
|--------- | -----------------------------------------
|          |                                          
|          | A.                                       
|          |                                          
|          | B.                                       
|          |                                          
|          | C.                                       
|          |                                          
|          |                                          
|          | D.                                       
|          |                                          
|          | E.                                       
|          |                                          

| |      |  | (in thousands) |      
| | ---- |  | -------------- | -----
| |      |  |                |      
| | 2003 |  | $              | 698  
| | 2004 |  |                | 451  
| | 2005 |  |                | 192  
| |      |  |                |      
| |      |  | $              | 1,341
| |      |  |                |      

| |    |                                                                                                                                                                                                                                            | Rent
  expenses for the years ended December 31, 2002, 2001 and 2000, were
  approximately $752, $756 and $823, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                            |                                                                                                                              
| |    | 2.                                                                                                                                                                                                                                         | See Note 16
  E.                                                                                                             
| |    |                                                                                                                                                                                                                                           
| | F. | Foreign currency forward exchange contracts:                                                                                                                                                                                              
| |    | The Company
  enters into forward exchange contracts in order to reduce the impact of
  changes in foreign exchange rates on consolidated results of operations and
  future foreign currency cash flows (see Note 2).                    
| |    | The amount
  of foreign currency forward contracts outstanding at December 31, 2002 and
  2001 is $7,400 and $3,500, respectively. As of the balance sheet dates, the
  fair values of these contracts approximates their carrying amount.

19

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 11 - | CONTINGENT LIABILITIES AND
  COMMITMENTS (Cont.):
|--------- | -------------------------------------------------
|          | G.                                               
|          |                                                  
|          |                                                  
|NOTE 12 - | SHAREHOLDERS: EQUITY                            
|          |                                                  
|          | A.                                               
|          |                                                  
|          |                                                  
|          | B.                                               
|          |                                                  
|          |                                                  
|          |                                                  
|          |                                                  
|          |                                                  
|          |                                                  
|          |                                                  

20

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 12 - | SHAREHOLDERS EQUITY (Cont.):
|--------- | -----------------------------
|          |                              
|          | B.                           
|          |                              
|          |                              
|          |                              
|          |                              
|          |                              
|          |                              
|          |                              

21

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CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 12 - | SHAREHOLDERS EQUITY (Cont.):
|--------- | -----------------------------
|          |                              
|          | B.                           
|          |                              

|                                                                           |  | Year Ended December 31, |        
|-------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                           |  |                         |        
|                                                                           |  | 2002                    |        
|                                                                           |  |                         |        
|                                                                           |  | (in thousands)          |        
|                                                                           |  |                         |        
|                                                                           |  | Number
  of options     |        
|                                                                           |  |                         |        
|Outstanding
  at beginning of
    year                                     |  |                         | 547,000
|Granted                                                                    |  |                         | -      
|Exercised                                                                  |  |                         | -      
|Cancelled                                                                  |  |                         | (27,000
|                                                                           |  |                         |        
|Outstanding
  at year end                                                  |  |                         | 520,000
|Options
  exercisable at year
    end                                      |  |                         | 403,125
|                                                                           |  |                         |        
|Weighted
  average fair value 
    of options granted during 
    the year |  |                         |        
|                                                                           |  |                         |        

22

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 12 - | SHAREHOLDERS EQUITY (Cont.):
|--------- | -----------------------------
|          |                              
|          | B.                           
|          |                              

|                         |  | Options outstanding                           |         | Option exercisable                                  | 
|------------------------ |  | --------------------------------------------- | ------- | --------------------------------------------------- | 
|                         |  |                                               |         |                                                     | 
|Range of exercise prices |  | Number
  outstanding at
  December 31,
  2002 |         | Weighted
  average
  remaining
  contractual
  life | 
|                         |  |                                               |         |                                                     | 
|                         |  |                                               |         |                                                     | 
|$2.00 to
  $3.00         |  |                                               | 160,000 |                                                     | 
|$3.01 to
  $4.00         |  |                                               | 161,500 |                                                     | 
|$4.01 to
  $5.00         |  |                                               | 198,500 |                                                     | 

|NOTE 13 - | INCOME TAXES:
|--------- | -------------
|          |              
|          | A.           
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              
|          |              

23

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 13 - | INCOME TAXES (Cont.):
|--------- | ---------------------
|          |                      
|          | A.                   
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          | B.                   

| |                                 |  | Year Ended December 31, |    
| | ------------------------------- |  | ----------------------- | ---
| |                                 |  |                         |    
| |                                 |  | 2002                    |    
| |                                 |  |                         |    
| |                                 |  |                         |    
| | Current
  taxes                 |  | $                       | (11
| | Deferred
  taxes                |  |                         | -  
| | Tax in
  respect of prior years |  |                         | (37
| |                                 |  |                         |    
| |                                 |  | $                       | (48
| |                                 |  |                         |    

| | C. | Deferred tax assets (liabilities), consist of the following:
| | -- | ------------------------------------------------------------

| | Deferred tax
  assets:                        |  |   |        |   |  |   |        |   |  |   |        |   | 
| | --------------------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - | 
| | Loss
  carryforwards                          |  | $ | 4,366  |   |  | $ | 3,705  |   |  | $ | 3,042  |   | 
| | Other
  cumulative temporary differences, net |  |   | 752    |   |  |   | 465    |   |  |   | 292    |   | 
| |                                               |  |   |        |   |  |   |       
| |                                               |  |   | 5,118  |   |  |   | 4,170  |   |  |   | 3,334  |   | 
| | Less -
  valuation allowance                  |  |   | (4,527 | ) |  |   | (3,726 | ) |  |   | (2,805 | ) | 
| |                                               |  |   |        |   |  |   |       
| |                                               |  |   | 591    |   |  |   | 444    |   |  |   | 529    |   | 
| | Deferred tax
  liabilities:                   |  |   |        |   |  |   |        |   |  |   |        |   | 
| | Software
  development costs                  |  |   | (591   | ) |  |   | (444   | ) |  |   | (529   | ) | 
| |                                               |  |   |        |   |  |   |       
| |                                               |  | $ | -      |   |  | $ | -      |   |  | $ | -      |   | 
| |                                               |  |   |        |   |  |   |       

24

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 13 - | INCOME TAXES (Cont.):
|--------- | ---------------------
|          |                      
|          | C.                   
|          |                      
|          |                      
|          |                      
|          |                      
|          | D.                   

| |                                                                                                           |  | Year Ended December 31, |    
| | --------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---
| |                                                                                                           |  |                         |    
| |                                                                                                           |  | 2002                    |    
| |                                                                                                           |  |                         |    
| |                                                                                                           |  |                         |    
| | Theoretical
  tax expense (benefit)  (*)                                                                  |  | $                       | 21 
| | Increase
  (decrease) in taxes:                                                                           |  |                         |    
| | Disallowed
  deductions, net                                                                              |  |                         | (64
| | Tax
  incentives derived from approved
    enterprise status - for the current year                       |  |                         | -  
| | Tax in respect
  of prior year                                                                            |  |                         | 37 
| | Carryforward
  losses and other deferred taxes
    for which valuation allowance was not
    provided     |  |                         | -  
| | Difference
  between income reported for tax
    purposes and income for financial
    reporting purposes |  |                         | 54 
| |                                                                                                           |  |                         |    
| | Taxes on income in the statements of
    operations                                                       |  | $                       | 48 
| |                                                                                                           |  |                         |    
| |                                                                                                           |  |                         |    
| | (*) Applicable
  tax rate                                                                                 |  |                         | 36 
| |                                                                                                           |  |                         |    

| | E. | The Company
  has final tax assessments up to 1997.                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                        
| | F. | The Company
  has not recorded in its financial statements the benefit of some of the
  income tax losses of its subsidiaries. Losses of $9,397 expire mainly in the
  years 2006-2022.

25

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 14 - | TRANSACTIONS WITH RELATED PARTIES:
|--------- | ----------------------------------
|          |                                   
|          | A.                                
|          |                                   
|          | B.                                

| |                                                                               |  | Year Ended December 31, |    
| | ----------------------------------------------------------------------------- |  | ----------------------- | ---
| |                                                                               |  |                         |    
| |                                                                               |  | 2002                    |    
| |                                                                               |  |                         |    
| | Reimbursement
  of ZCT for joint rental, maintenance
  and other expenses (*) |  |                         | 152
| | Management
  fees to Koonras and DBSI                                         |  |                         | 284

| |    | (*)                                                                                                                                                                          | These costs
  are allocated among the different entities based on square footage of
  facilities, revenues or number of employees, as applicable.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                              | Lease
  payments included in the above amounts are as follows: 2002 - $52, 2001 -
  $377 and 2000 - $394.                                        
| |    |                                                                                                                                                                             
| | C. | Payments to
  independent directors (2002 -3 directors, 2001 and 2000 - 2 directors)
  amounted to $43 for the year ended December 31, 2002 (2001 - $23 and
  2000  -  $19).
| |    |                                                                                                                                                                             
| | D. | The
  following balances with Koonras and DBSI (in 2001 with ZCT) are included in
  the financial statements:                                                               

| |                                 |  | December 31, |   
| | ------------------------------- |  | ------------ | --
| |                                 |  |              |   
| |                                 |  | 2002         |   
| |                                 |  |              |   
| |                                 |  |              |   
| | Other
  current liabilities (*) |  | $            | 84
| |                                 |  |              |   

| | (*) | The balances
  are linked to the C.P.I. and bear no interest.
| | --- | -------------------------------------------------------------

26

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 15 - | SELECTED STATEMENTS OF INCOME DATA:
|--------- | -----------------------------------
|          |                                    
|          | A.                                 

| |                                                                              |  | Year Ended December 31, |       
| | ---------------------------------------------------------------------------- |  | ----------------------- | ------
| |                                                                              |  |                         |       
| |                                                                              |  | 2002                    |       
| |                                                                              |  |                         |       
| | Revenue by
  geographical region:                                            |  |                         |       
| | Israel                                                                       |  | $                       | 2,344 
| | Europe     (1)                                                               |  |                         | 11,648
| | Far
  East   (2)                                                             |  |                         | 4,910 
| | North
  America                                                              |  |                         | 2,599 
| | Others                                                                       |  |                         | 127   
| |                                                                              |  |                         |       
| |                                                                              |  | $                       | 21,628
| |                                                                              |  |                         |       
| | (1)
  Includes:                                                              |  |                         |       
| | Italy                                                                        |  | $                       | 2,579 
| | Germany                                                                      |  |                         | 6,622 
| | (2)
  Includes:                                                              |  |                         |       
| | Japan                                                                        |  |                         | 2,691 
| | Revenue
  through major distributors, as a
    percentage of total revenues: |  |                         |       
| | Distributor
  (A)                                                            |  |                         | 12    
| | Distributor
  (B)                                                            |  |                         | -     
| | Distributor
  (C)                                                            |  |                         | 11    

| | B. | Cost of Revenues:
| | -- | -----------------

| |                                                             |  | Year Ended December 31, |      
| | ----------------------------------------------------------- |  | ----------------------- | -----
| |                                                             |  |                         |      
| |                                                             |  | 2002                    |      
| |                                                             |  |                         |      
| |                                                             |  |                         |      
| | Hardware and
  software                                     |  | $                       | 2,007
| | Salaries and
  employee benefits                            |  |                         | 1,563
| | Amortization
  of capitalized software
    development cost |  |                         | 401  
| | Royalties to
  the chief scientist                          |  |                         | 455  
| | Depreciation                                                |  |                         | 70   
| | Other                                                       |  |                         | 515  
| |                                                             |  |                         |      
| |                                                             |  |                         | 5,011
| | Decrease in
  inventory                                     |  |                         | 6    
| |                                                             |  |                         |      
| |                                                             |  | $                       | 5,017
| |                                                             |  |                         |      

| | C. | Research and Development Costs, net:
| | -- | ------------------------------------

| |                     |  | Year Ended December 31, |      
| | ------------------- |  | ----------------------- | -----
| |                     |  |                         |      
| |                     |  | 2002                    |      
| |                     |  |                         |      
| |                     |  |                         |      
| | R&D
  costs         |  | $                       | 5,562
| | Government
  grants |  |                         | -    
| |                     |  |                         |      
| |                     |  | $                       | 5,562
| |                     |  |                         |      

| | (*) | Reclassified.
| | --- | -------------

27

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---

CIMATRON LIMITED

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

|NOTE 16 - | SELECTED STATEMENTS OF INCOME DATA
  (Cont.):
|--------- | ---------------------------------------------
|          |                                              
|          | D.                                           

| |                                       |  | Year Ended December 31, |       
| | ------------------------------------- |  | ----------------------- | ------
| |                                       |  |                         |       
| |                                       |  | 2002                    |       
| |                                       |  |                         |       
| |                                       |  |                         |       
| | Marketing
  costs                     |  | $                       | 729   
| | Selling
  expenses                    |  |                         | 8,075 
| | General and
  administrative expenses |  |                         | 2,632 
| | Depreciation                          |  |                         | 234   
| |                                       |  |                         |       
| |                                       |  | $                       | 11,670
| |                                       |  |                         |       
| | (*) Reclassified.                     |  |                         |       

|          |                       | Advertising
  expenses for the years ended December 31, 2002, 2001 and 2000 were
  approximately $164, $257 and  $404,
  respectively.                                                                      
|--------- | --------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                       |                                                                                                                                                                                                             
|          | E.                    | Restructuring costs                                                                                                                                                                                         
|          |                       |                                                                                                                                                                                                             
|          |                       | In December
  2001 the Company decided to relocate its headquarters. A restructuring
  provision for $250, recorded in 2001, was reversed in 2002 due to the fact
  that the relocation plans were canceled.
|          |                       |                                                                                                                                                                                                             
|NOTE 17 - | LIST OF SUBSIDIARIES:
|          |                       |                                                                                                                                                                                                             

|                |                                                |  | % Shareholding |     | Country of Incorporation | 
|--------------- | ---------------------------------------------- |  | -------------- | --- | ------------------------ | 
|                |                                                |  |                |     |                          | 
|                |                                                |  |                |     |                          | 
|                | Cimatron Technologies, Inc.                    |  |                | 100 |                          | 
|                | Cimatron Technologies, Inc. (a Michigan corp.) |  |                | 100 |                          | 
|                | Cimatron
  GmbH.                               |  |                | 100 |                          | 
|                | Cimatron SARL                                  |  |                | 100 |                          | 
|                | Cimatron Japan K.K.                            |  |                | 100 |                          | 
|                | Cimatron U.K. Limited                          |  |                | 100 |                          | 
|                | Cimatron (Beijing) Technology Co., Ltd.        |  |                | 100 |                          | 
|                | Korea
  Cimatron Technologies Co., Ltd.        |  |                | 10* |                          | 
|*  In 2003 30%. |                                                |  |                |     |                          | 

28

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---